‹ LARK Q1 2018 10-Q

Landmark Bancorp Inc (LARK) SEC Quarterly Report (10-Q) for Q2 2018

LARK Q3 2018 10-Q ›
‹ LARK Q1 2018 10-Q LARK Q3 2018 10-Q ›

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2018

OR

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

For the transition period from ________ to ________

Commission File Number 0-33203

LANDMARK BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

701 Poyntz Avenue, Manhattan, Kansas       66502

(Address of principal executive offices)       (Zip code)

(785) 565-2000

(Registrant's telephone number, including area code)

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

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

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

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

Smaller reporting company [  ] Emerging growth company [  ]

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

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

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

LANDMARK BANCORP, INC.

Form 10-Q Quarterly Report

Table of Contents

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

2

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

LANDMARK BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

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

See accompanying notes to consolidated financial statements.

3

LANDMARK BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

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

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

See accompanying notes to consolidated financial statements.

4

LANDMARK BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

(Unaudited)

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

See accompanying notes to consolidated financial statements.

5

LANDMARK BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

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

See accompanying notes to consolidated financial statements.

6

LANDMARK BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

(Continued)

7

LANDMARK BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

(Unaudited)

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

See accompanying notes to consolidated financial statements.

8

LANDMARK BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Interim Financial Statements

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

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

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

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

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

9

2. Investments

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

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

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

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

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

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

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

10

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

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

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

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

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

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

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

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

11

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

3. Loans and Allowance for Loan Losses

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

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

12

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

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

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

13

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

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

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

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

14

The following tables present information on impaired loans:

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

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

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

15

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

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

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

16

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

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

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

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

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

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

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

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

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

17

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

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

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

4. Goodwill and Other Intangible Assets

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

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

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

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

18

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

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

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

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

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

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

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

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

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

19

5. Earnings per Share

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

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

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

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

6. Repurchase Agreements

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

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

As of December 31, 2017
Overnight and Up to Greater
Continuous 30 days 30-90 days than 90 days Total
Repurchase agreements:
U.S. federal agency obligations $ 5,147 $ - $ - $ - $ 5,147
Agency mortgage-backed securities 8,362 - - - 8,362
Total $ 13,509 $ - $ - $ - $ 13,509

Repurchase agreements are comprised of non-insured customer funds, totaling $8.4 million at June 30, 2018, and $13.5 million at December 31, 2017, which were secured by $16.2 million and $16.8 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.

20

7. Revenue from Contracts with Customers

All of the Company's revenue from contracts with customers in the scope of ASC 606 is recognized within non-interest income. Items outside the scope of ASC 606 are noted as such.

Three months ended Six months ended
(Dollars in thousands) June 30, June 30,
2018 2017 2018 2017
Non-interest income:
Service charges on deposits
Overdraft fees $ 783 $ 915 $ 1,580 $ 1,769
Other 135 137 273 282
Interchange income 516 425 958 786
Loan servicing fees (1) 337 320 673 639
Office lease income (1) 156 150 308 300
Gains on sales of loans (1) 1,468 1,692 2,629 3,081
Bank owned life insurance income (1) 162 119 321 236
Gains on sales of investment securities (1) - 177 35 324
Gains on sales of real estate owned - 25 1 10
Other 696 241 876 415
Total non-interest income $ 4,253 $ 4,201 $ 7,654 $ 7,842

(1) Not within the scope of ASC 606.

The increase in other non-interest income during the three and six months ended June 30, 2018 was primarily the result of a $525,000 recovery on a deposit-related loss that occurred in the third quarter of 2017.

A description of the Company's revenue streams within the scope of ASC 606 follows:

Service Charges on Deposit Accounts

The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM usage fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer's request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period during which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer's account balance.

Interchange Income

The Company earns interchange fees from debit cardholder transactions conducted through the interchange payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.

Gains (Losses) on Sales of Real Estate Owned

The Company records a gain or loss from the sale of real estate owned when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of real estate owned to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the real estate owned asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant financing component is present. There were no sales of real estate owned that were financed by the Company during the first six months of 2018 or 2017.

8. 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:

21

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.

Fair value estimates of the Company's financial instruments as of June 30, 2018 and December 31, 2017, including methods and assumptions utilized, are set forth below:

(Dollars in thousands) As of June 30, 2018
Carrying
amount Level 1 Level 2 Level 3 Total
Financial assets:
Cash and cash equivalents $ 19,883 $ 19,883 $ - $ - $ 19,883
Investment securities available-for-sale 398,137 1,952 396,185 - 398,137
Bank stocks, at cost 6,034 n/a n/a n/a n/a
Loans, net 461,396 - - 480,331 480,331
Loans held for sale, net 11,764 - 11,764 - 11,764
Derivative financial instruments 695 - 695 - 695
Accrued interest receivable 4,459 20 2,279 2,160 4,459
Financial liabilities:
Non-maturity deposits $ (642,106 ) $ (642,106 ) $ - $ - $ (642,106 )
Time deposits (123,185 ) - (120,775 ) - (120,775 )
FHLB borrowings (85,600 ) - (85,613 ) - (85,613 )
Subordinated debentures (21,584 ) - (19,522 ) - (19,522 )
Other borrowings (8,417 ) - (8,417 ) - (8,417 )
Derivative financial instruments (97 ) - (97 ) - (97 )
Accrued interest payable (349 ) - (349 ) - (349 )

As of December 31, 2017
Carrying
amount Level 1 Level 2 Level 3 Total
Financial assets:
Cash and cash equivalents $ 16,584 $ 16,584 $ - $ - $ 16,584
Investment securities available-for-sale 387,983 1,998 385,985 - 387,983
Bank stocks, at cost 5,423  n/a  n/a  n/a  n/a
Loans, net 433,743 - - 436,910 436,910
Loans held for sale 6,535 - 6,535 - 6,535
Derivative financial instruments 395 - 395 - 395
Accrued interest receivable 4,409 20 2,234 2,155 4,409
Financial liabilities:
Non-maturity deposits (642,281 ) (642,281 ) - - (642,281 )
Time deposits (123,277 ) - (121,298 ) - (121,298 )
FHLB borrowings (31,600 ) - (31,706 ) - (31,706 )
Subordinated debentures (21,484 ) - (19,134 ) - (19,134 )
Other borrowings (13,509 ) - (13,509 ) - (13,509 )
Accrued interest payable (274 ) - (274 ) - (274 )

22

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.

The Company's common stock investments are valued based on quoted exchange prices and classified as Level 1. As of January 1, 2018, the common stocks were transferred out of the available-for-sale classification. The common stock investments were sold during the second quarter of 2018.

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

Effective January 1, 2018, 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 appropriate market inputs to arrive at a discount rate that reflects exit pricing as prescribed in ASC Topic 820. The market inputs utilize market trading information in the calculation of loan fair values and is classified as Level 3. Prior to January 1, 2018, the fair value was 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 and was classified as Level 3. No adjustment was made to the interest rates for changes in credit risk of performing loans where there are no known credit concerns. The fair values of impaired loans were generally based on market prices for similar assets determined through independent appraisals or discounted values of independent appraisals and brokers' opinions of value. The difference in methodologies may make the fair value of loans not comparable between current year and prior year periods.

Mortgage loans originated and intended for sale in the secondary market are carried at fair value. 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 corresponding forward sales contracts on mortgage loans held for sale. The fair values of these derivatives are based on quoted prices for similar loans in the secondary market. The market prices are adjusted by a factor, based on the Company's historical data and its judgment about future economic trends, which considers the likelihood that a commitment will ultimately result in a closed loan. These instruments are classified as Level 2. The amounts are included in other assets or other liabilities on the consolidated balance sheets and gains on sales of loans, net in the consolidated statements of earnings.

23

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 amount 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, 2018 or during the year ended December 31, 2017.

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

The following tables represent the Company's financial instruments that are measured at fair value on a recurring basis at June 30, 2018 and December 31, 2017 allocated to the appropriate fair value hierarchy:

(Dollars in thousands) As of June 30, 2018
Fair value hierarchy
Total Level 1 Level 2 Level 3
Assets:
Available-for-sale investment securities:
U. S. treasury securities $ 1,952 $ 1,952 $ - $ -
U. S. federal agency obligations 13,677 - 13,677 -
Municipal obligations, tax exempt 179,539 - 179,539 -
Municipal obligations, taxable 54,640 - 54,640 -
Agency mortgage-backed securities 140,549 - 140,549 -
Certificates of deposit 7,780 - 7,780 -
Loans held for sale 11,764 - 11,764 -
Derivative financial instruments 695 - 695 -
Liability:
Derivative financial instruments (97 ) - (97 ) -

As of December 31, 2017
Fair value hierarchy
Total Level 1 Level 2 Level 3
Assets:
Available-for-sale investment securities:
U. S. treasury securities $ 1,990 $ 1,990 $ - $ -
U. S. federal agency obligations 16,492 - 16,492 -
Municipal obligations, tax exempt 184,738 - 184,738 -
Municipal obligations, taxable 57,976 - 57,976 -
Agency mortgage-backed securities 117,555 - 117,555 -
Certificates of deposit 9,224 - 9,224 -
Common stocks 8 8 - -
Loans held for sale 6,535 - 6,535 -
Derivative financial instruments 395 - 395 -

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, 2018 December 31, 2017
Aggregate fair value $ 11,764 $ 6,535
Contractual balance 11,484 6,420
Gain $ 280 $ 115

24

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) 2018 2017 2018 2017
Interest income $ 98 $ 79 $ 146 $ 124
Change in fair value 264 60 165 169
Total change in fair value $ 362 $ 139 $ 311 $ 293

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 $9.0 million and $9.8 million, with an allocated allowance of $853,000 and $642,000, at June 30, 2018 and December 31, 2017, respectively.

Real estate owned includes assets acquired through, or in lieu of, foreclosure and land previously acquired for expansion. Real estate owned is initially recorded at the fair value of the collateral less estimated selling costs. Subsequent valuations are updated periodically and are based upon independent appraisals, third party price opinions or internal pricing models. 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. Real estate owned is reviewed and evaluated at least annually for additional impairment and adjusted accordingly, based on the same factors identified above.

The following tables represent the Company's financial instruments that are measured at fair value on a non-recurring basis as of June 30, 2018 and December 31, 2017 allocated to the appropriate fair value hierarchy:

(Dollars in thousands)
As of June 30, 2018 Total
Fair value hierarchy (losses)/
Total Level 1 Level 2 Level 3 gains
Assets:
Impaired loans:
One-to-four family residential real estate $ 171 $ - $ - $ 171 $ (15 )
Commercial real estate 1,779 - - 1,779 2
Commercial 1,301 - - 1,301 (338 )
Agriculture 233 - - 233 (1 )

As of December 31, 2017 Total
Fair value hierarchy (losses)/
Total Level 1 Level 2 Level 3 gains
Assets:
Impaired loans:
One-to-four family residential real estate $ 171 $ - $ - $ 171 $ (73 )
Construction and land 1,499 - - 1,499 (102 )
Commercial real estate 33 - - 33 12
Commercial 1,600 - - 1,600 (304 )
Agriculture 264 - - 264 65
Real estate owned:
One-to-four family residential real estate 325 - - 325 (68 )
Commercial real estate 85 - - 85 (50 )

25

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, 2018 and December 31, 2017.

(Dollars in thousands)
Fair value Valuation technique Unobservable inputs Range
As of June 30, 2018
Impaired loans:
One-to-four family residential real estate $ 171 Sales comparison Adjustment to appraised value 7%-50 % 
Commercial real estate 1,799 Sales comparison Adjustment to appraised value 7%-25 %
Commercial 1,301 Sales comparison Adjustment to comparable sales 10%-25 % 
Agriculture 233 Sales comparison Adjustment to appraised value 0%-50 % 
As of December 31, 2017
Impaired loans:
One-to-four family residential real estate $ 171 Sales comparison Adjustment to appraised value 16%-50 %
Construction and land 1,499 Sales comparison Adjustment to appraised value 0%-25 %
Commercial real estate 33 Sales comparison Adjustment to appraised value 0%-91 %
Commercial 1,600 Sales comparison Adjustment to comparable sales 15%-50 %
Agriculture 264 Sales comparison Adjustment to appraised value 0%-50 %
Real estate owned:
One-to-four family residential real estate 325 Sales comparison Adjustment to appraised value 10 %
Commercial real estate 85 Sales comparison Adjustment to appraised value 10 %

9. 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 believed that as of June 30, 2018, the Company and the Bank met 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, was 1.875% effective on January 1, 2018, and will increase to 2.5% on January 1, 2019.

As of June 30, 2018 and December 31, 2017, 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.

26

The following is a comparison of the Company's regulatory capital to minimum capital requirements at June 30, 2018 and December 31, 2017:

(Dollars in thousands) For capital
Actual adequacy purposes
Amount Ratio Amount Ratio (1)
As of June 30, 2018
Leverage $ 94,793 10.10 % $ 37,556 4.0 %
Common Equity Tier 1 Capital 73,860 12.93 % 36,426 6.4 %
Tier 1 Capital 94,793 16.59 % 44,996 7.9 %
Total Risk Based Capital 100,768 17.64 % 56,424 9.9 %
As of December 31, 2017
Leverage $ 88,605 9.80 % $ 36,180 4.0 %
Common Equity Tier 1 Capital 68,269 12.83 % 30,590 5.8 %
Tier 1 Capital 88,605 16.65 % 38,571 7.3 %
Total Risk Based Capital 94,208 17.71 % 49,211 9.3 %

(1) The required ratios for capital adequacy purposes include a capital conservation buffer of 1.875% for June 30, 2018 and 1.25% for December 31, 2017

The following is a comparison of the Bank's regulatory capital to minimum capital requirements at June 30, 2018 and December 31, 2017:

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, 2018
Leverage $ 92,978 9.93 % $ 37,451 4.0 % $ 46,814 5.0 %
Common Equity Tier 1 Capital 92,978 16.30 % 36,355 6.4 % 37,068 6.5 %
Tier 1 Capital 92,978 16.30 % 44,909 7.9 % 45,622 8.0 %
Total Risk Based Capital 98,953 17.35 % 56,314 9.9 % 57,027 10.0 %
As of December 31, 2017
Leverage $ 86,808 9.62 % $ 36,097 4.0 % $ 44,105 5.0 %
Common Equity Tier 1 Capital 86,808 16.35 % 30,529 5.8 % 33,222 6.5 %
Tier 1 Capital 86,808 16.35 % 38,493 7.3 % 40,888 8.0 %
Total Risk Based Capital 92,407 17.40 % 49,112 9.3 % 51,110 10.0 %

(1) The required ratios for capital adequacy purposes include a capital conservation buffer of 1.875% for June 30, 2018 and 1.25% for December 31, 2017.

10. Impact of Recent Accounting Pronouncements

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.

27

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 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 a shorter amortization period for investment security premiums; however, the impact will not be material to interest income on investment securities.

28

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 total 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., which was formed and began operations on May 31, 2017, is a Nevada-based captive insurance company which provides 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 the 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, gains from the sale of newly originated loans, gains or losses on investments and certain other non-interest related items. 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, provision for loan losses, and certain other non-interest expenses.

We are significantly impacted by prevailing economic conditions, including federal monetary and fiscal policies, and federal regulations of financial institutions. Deposit balances are influenced by numerous factors such as competing investments, the level of income and the personal rate of savings within our market areas. Factors influencing lending activities include the demand for housing and the interest rate pricing competition from other lending institutions.

Currently, our business consists of ownership of the Bank, with its main office in Manhattan, Kansas and twenty- eight additional branch offices in central, eastern, southeast and southwest Kansas, and our ownership of Landmark Risk Management, Inc.

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, 2017.

Summary of Results. During the second quarter of 2018, we recorded net earnings of $2.8 million, which was an increase of $462,000, or 19.4%, from the $2.4 million of net earnings in the second quarter of 2017. During the first six months of 2018, we recorded net earnings of $4.9 million, which was an increase of $356,000, or 7.8%, from the $4.6 million of net earnings in the first six months of 2017.

29

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,
2018 2017 2018 2017
Net earnings:
Net earnings $ 2,845 $ 2,383 $ 4,944 $ 4,588
Basic earnings per share (1) $ 0.69 $ 0.59 $ 1.20 $ 1.13
Diluted earnings per share (1) $ 0.68 $ 0.58 $ 1.19 $ 1.11
Earnings ratios:
Return on average assets (1) 1.20 % 1.04 % 1.06 % 1.01 %
Return on average equity (1) 13.49 % 10.78 % 11.69 % 10.62 %
Equity to total assets 8.83 % 10.00 % 8.83 % 10.00 %
Net interest margin (2) (3) 3.33 % 3.41 % 3.33 % 3.40 %
Dividend payout ratio 29.41 % 33.33 % 33.61 % 34.48 %

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

(2) Ratios have been annualized and are not necessarily indicative of the results for the entire year.

(3) Net interest margin is presented on a fully tax equivalent basis, using a 21% federal tax rate for the three and six months ended June 30, 2018 and a 34% rate for the three and six months ended June 30, 2017

Interest Income. Interest income of $8.1 million for the quarter ended June 30, 2018 increased $627,000, or 8.4%, as compared to the same period of 2017. Interest income on loans increased $464,000, or 8.8%, to $5.7 million for the quarter ended June 30, 2018, compared to the same period of 2017 due primarily to an increase in our average loan balances, which increased from $428.4 million in the second quarter of 2017 to $452.5 million in the second quarter of 2018. Also contributing to the increase in interest income were higher yields on loans, which increased from 4.96% in the second quarter of 2017 to 5.10% in the second quarter of 2018. Interest income on investment securities increased $163,000, or 7.5%, to $2.3 million for the second quarter of 2018, as compared to $2.2 million in the same period of 2017. The increase in interest income on investment securities was primarily the result of an increase in our average balance of investment securities from $398.3 million during the second quarter of 2017 to $402.3 million during the second quarter of 2018.

Interest income of $15.7 million for the six months ended June 30, 2018 increased $1.0 million, or 7.1%, as compared to the same period of 2017. Interest income on loans increased $789,000, or 7.6%, to $11.1 million for the six months ended June 30, 2018, compared to the same period of 2017 due primarily to an increase in our average loan balances, which increased from $424.5 million during the first six months of 2017 to $445.3 million during the first six months of 2018. Also contributing to the increase in interest income were higher yields on loans, which increased from 4.93% in the first six months of 2017 to 5.04% in the first six months of 2018. Interest income on investment securities increased $251,000, or 5.8%, to $4.6 million for the first six months of 2018, as compared to $4.3 million in the same period of 2017. The increase in interest income on investment securities was primarily the result of an increase in our average balance of investment securities from $395.9 million during the first six months of 2017 to $398.5 million during the first six months of 2018.

Interest Expense . Interest expense during the quarter ended June 30, 2018 increased $367,000, or 41.7%, to $1.2 million as compared to the same period of 2017. Interest expense on interest-bearing deposits increased $237,000, or 60.2%, to $631,000 for the quarter ended June 30, 2018 as compared to the same period of 2017. 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 $590.1 million in the second quarter of 2017 to $597.5 million in the second quarter of 2018. The average rate of interest-bearing deposits increased 0.15% for the second quarter of 2018 to 0.42% as compared to 0.27% in the same period of 2017. For the second quarter of 2018, interest expense on borrowings increased $130,000, or 26.7%, to $616,000 as compared to the same period of 2017, due to an increase in our average outstanding borrowings, which increased from $68.5 million in the second quarter of 2017 to $91.6 million in the same period of 2018. Partially offsetting the higher average outstanding borrowings were lower average rates on our borrowings which decreased to 2.70% for the second quarter of 2018 compared to 2.84% for the same period of 2017, due to maturity of higher interest borrowings.

30

Interest expense during the six months ended June 30, 2018 increased $554,000, or 32.6%, to $2.3 million as compared to the same period of 2017. Interest expense on interest-bearing deposits increased $440,000, or 60.1%, to $1.2 million for the six months ended June 30, 2018 as compared to the same period of 2017. 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 $588.8 million in the first six months of 2017 to $599.9 million in the same period of 2018. The average rate of interest-bearing deposits increased 0.14% for the first six months of 2018 to 0.39% as compared to 0.25% in the same period of 2017. For the first six months of 2018, interest expense on borrowings increased $114,000, or 11.8%, to $1.1 million as compared to the same period of 2017, due to an increase in our average outstanding borrowings, which increased from $70.1 million in the first six months of 2017 to $79.5 million in the first six months of 2018. Partially offsetting the higher average outstanding borrowings were lower average rates on our borrowings which decreased to 2.74% for the first six months of 2018 compared to 2.78% for the same period of 2017.

Net Interest Income . Net interest income increased $260,000, or 4.0%, to $6.8 million for the second quarter of 2018 compared to the same period of 2017. The increase in net interest income was primarily a result of an increase of 2.9% in average interest-earning assets, from $831.3 million in the second quarter of 2017 to $855.4 million for the same period of 2018. Our net interest margin, on a tax-equivalent basis, decreased from 3.41% during the second quarter of 2017 to 3.33% in the same period of 2018. The decrease in net interest margin was primarily a result of the reduction of federal corporate income tax rates from 34% in 2017 to 21% in 2018 following enactment of the federal tax reform legislation in December 2017. The lower income tax rate reduced the tax equivalent yield on our tax exempt municipal investments and loans.

Net interest income increased $486,000, or 3.8%, to $13.4 million for the first six months of 2018 compared to the same period of 2017. The increase was primarily a result of a 2.1% increase in average interest-earning assets, from $827.1 million in the first six months of 2017 to $844.9 million in the first six months of 2018. Net interest margin, on a tax-equivalent basis, decreased from 3.40% in the first six months of 2017 to 3.33% in the same period of 2018. The decrease in net interest margin was primarily a result of the reduction in 2018 federal corporate income tax rates and the related effect on our tax equivalent adjustment.

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 continue 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 2018, we recorded a provision for loan losses of $250,000 compared to $100,000 in the second quarter of 2017. We recorded net loan charge-offs of $59,000 during the second quarter of 2018 compared to net loan charge-offs of $101,000 during the second quarter of 2017.

During the first six months of 2018, we recorded a provision for loan losses of $450,000 compared to $150,000 during the same period of 2017. We recorded net loan charge-offs of $74,000 during the six months ended June 30, 2018 compared to $168,000 during the same period of 2017.

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 $4.3 million in the second quarter of 2018, an increase of $52,000, or 1.2%, compared to the second quarter of 2017. This was primarily the result of an increase of $519,000 in other non-interest income, which reflects $525,000 of recoveries on a deposit-related loss that occurred in the third quarter of 2017. Partially offsetting those recoveries were decreases of $224,000 in gains on sale of loans, $177,000 of gains on sales of investment securities and $109,000 in fees and service charges. Our gains on sales of loans were impacted by lower volumes of one-to-four family residential real estate loans originated for sale while a decline in overdraft fees impacted our fees and service charges.

31

Total non-interest income was $7.7 million in the first six months of 2018, a decrease of $188,000, or 2.4%, compared to the same period of 2017. This change was primarily the result of a decline of $452,000 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 2018 was lower than in the same period of 2017. Also contributing to the decline in non-interest income were lower gains on sales of investment securities during the first six months of 2018 of $35,000 compared to $324,000 in the same period of 2017. Partially offsetting the declines was an increase of $536,000 in other non-interest income which reflects $525,000 of recoveries on the deposit-related loss.

Non-interest Expense . Non-interest expense totaled $7.6 million for the second quarter of 2018, an increase of $14,000, or 0.2%, from $7.6 million for the second quarter of 2017. The increase was primarily due to increases of $82,000 in other non-interest expense and $48,000 in compensation and benefits in the second quarter of 2018 as compared to the second quarter of 2017. Those increases were partially offset by decreases of $46,000 in professional fees and $45,000 in amortization expense.

Non-interest expense totaled $15.0 million for the first six months of 2018, an increase of $393,000, or 2.7%, from $14.6 million for the first six months of 2017. The increase was primarily related to an increase of $301,000 in other non-interest expense which was impacted by the accrual of loss reserves at our captive insurance subsidiary and increases in various other expense categories. Also contributing to higher non-interest expense were increases of $80,000 in compensation and benefits, $74,000 in data processing and $52,000 in professional fees. Those increases were partially offset by decreases of $76,000 in foreclosure and other real estate expense and $66,000 in amortization expense.

Income Tax Expense . During the second quarter of 2018, we recorded income tax expense of $428,000, compared to $742,000 during the same period of 2017. Our effective tax rate decreased from 23.7% in the second quarter of 2017 to 13.0% in the second quarter of 2018 primarily as a result of the reduction of federal corporate income tax rates from 34% in 2017 to 21% in 2018 following the enactment of the federal tax reform legislation in December 2017.

We recorded income tax expense of $684,000 for the first six months of 2018 compared to $1.4 million in the same period of 2017. Our effective tax rate decreased from 23.8% in the first half of 2017 to 12.2% in the first half of 2018 primarily as a result of the reduction in 2018 federal corporate income tax rates.

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 increased $48.7 million, or 5.2%, to $978.2 million at June 30, 2018, compared to $929.5 million at December 31, 2017. Net loans increased $27.7 million, or 6.4%, to $461.4 million at June 30, 2018, compared to $433.7 million at year-end 2017. Investment securities increased $10.8 million, or 2.7%, to $404.2 million at June 30, 2018, from $393.4 million at December 31, 2017.

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, 2018 our allowance for loan losses totaled $5.8 million, or 1.25% of gross loans outstanding, compared to $5.5 million, or 1.24% of gross loans outstanding, at December 31, 2017.

As of June 30, 2018 and December 31, 2017, approximately $24.4 million and $16.3 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, 2018 and December 31, 2017, respectively.

32

Loans past due 30-89 days and still accruing interest totaled $1.5 million, or 0.33% of gross loans, at June 30, 2018, compared to $1.4 million, or 0.31% of gross loans, at December 31, 2017. At June 30, 2018, $5.3 million in loans were on non-accrual status, or 1.13% of gross loans, compared to $6.0 million, or 1.38% of gross loans, at December 31, 2017. 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, 2018 or December 31, 2017. Our impaired loans totaled $9.0 million at June 30, 2018 compared to $9.8 million at December 31, 2017. The difference in the Company's non-accrual loan balances and impaired loan balances at June 30, 2018 and December 31, 2017 was related to 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, 2018, we had $452,000 of real estate owned compared to $436,000 at December 31, 2017. As of June 30, 2018, 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 a decrease of $267,000 in total deposits during the first six months of 2018, to $765.3 million at June 30, 2018, from $765.6 million at December 31, 2017. The decrease in deposits was primarily due to decreased balances of money market and checking and time deposit accounts. This decrease was partially offset by higher balances of non-interest bearing and savings accounts.

Non-interest-bearing deposits at June 30, 2018, were $172.1 million, or 22.5% of deposits, compared to $160.5 million, or 21.0% of deposits, at December 31, 2017. Money market and checking deposit accounts were 48.8% of our deposit portfolio and totaled $373.8 million at June 30, 2018, compared to $388.3 million, or 50.7% of deposits, at December 31, 2017. Savings accounts increased to $96.2 million, or 12.6% of deposits, at June 30, 2018, from $93.5 million, or 12.2% of deposits, at December 31, 2017. Certificates of deposit totaled $123.2 million, or 16.1% of deposits, at June 30, 2018, compared to $123.3 million, or 16.1% of deposits, at December 31, 2017.

Certificates of deposit at June 30, 2018, scheduled to mature in one year or less, totaled $86.7 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 increased $49.0 million to $115.6 million at June 30, 2018, from $66.6 million at December 31, 2017. The increase in total borrowings was primarily due to an increase in our FHLB borrowings from $31.6 million at December 31, 2017 to $85.6 million at June 30, 2018, which was primarily the result of funding our growth in loans and investment securities during the first six months of 2018.

Cash Flows. During the six months ended June 30, 2018, our cash and cash equivalents increased by $3.3 million. Our operating activities provided cash of $3.4 million during the first six months of 2018. Our investing activities used net cash of $47.6 million during the first six months of 2018, primarily as a result of the purchase of investment securities and an increase in our loan balances. Financing activities provided net cash of $47.5 million during the first six months of 2018, primarily as a result of increased FHLB 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 period. These liquid assets totaled $418.0 million at June 30, 2018 and $404.6 million at December 31, 2017. 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.

33

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, 2018, we had an outstanding FHLB advance of $5.0 million and $80.6 million of borrowings against our line of credit with the FHLB. At June 30, 2018, we had collateral pledged to the FHLB that would allow us to borrow an additional $8.9 million, subject to FHLB credit requirements and policies. At June 30, 2018, we had no borrowings through the Federal Reserve discount window, while our borrowing capacity with the Federal Reserve was $14.0 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, 2018. At June 30, 2018, we had subordinated debentures totaling $21.6 million and other borrowings of $8.4 million, which consisted of $8.4 million in repurchase agreements. The Company has a $7.5 million line of credit from an unrelated financial institution maturing on November 1, 2018, with an interest rate that adjusts daily based on the prime rate less 0.25%. This line of credit has covenants specific to capital and other financial ratios, which the Company was in compliance with at June 30, 2018.

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 $859,000 at June 30, 2018.

At June 30, 2018, we had outstanding loan commitments, excluding standby letters of credit, of $79.8 million. We anticipate that sufficient funds will be available to meet current loan commitments. These commitments consist of unfunded lines of credit and commitments to finance real estate loans.

Capital . 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, was 1.875% effective on January 1, 2018, and will increase to 2.5% on January 1, 2019. As of June 30, 2018 and December 31, 2017, the Bank was rated "well capitalized," which is the highest rating available under the regulatory capital regulations framework for prompt corrective action. Management believed that as of June 30, 2018, the Company and the Bank met all capital adequacy requirements to which we are subject.

Dividends . During the quarter ended June 30, 2018, 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 have to maintain 2.5% in common equity Tier 1 capital attributable to the capital conservation buffer in order to pay dividends and do other capital distributions. As described above, the Bank exceeded its minimum capital requirements under applicable guidelines as of June 30, 2018. 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, 2018, approximately $12.7 million was available to be paid as dividends to the Company by the Bank without prior regulatory approval.

34

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, 2018 June 30, 2017
Average balance Interest Average yield/rate Average balance Interest Average yield/rate
Assets
Interest-earning assets:
Interest-bearing deposits at banks $ 645 $ 3 1.87 % $ 4,566 $ 9 0.79 %
Investment securities (1) 402,266 2,599 2.59 % 398,328 2,651 2.67 %
Loans receivable, net (2) 452,462 5,752 5.10 % 428,424 5,297 4.96 %
Total interest-earning assets 855,373 8,354 3.92 % 831,318 7,957 3.84 %
Non-interest-earning assets 95,646 91,856
Total $ 951,019 $ 923,174
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Money market and checking $ 378,682 $ 436 0.46 % $ 360,528 $ 236 0.26 %
Savings accounts 96,454 7 0.03 % 94,047 7 0.03 %
Time deposit 122,381 188 0.62 % 135,512 151 0.45 %
Total deposits 597,517 631 0.42 % 590,087 394 0.27 %
FHLB advances and other borrowings 91,612 616 2.70 % 68,549 486 2.84 %
Total interest-bearing liabilities 689,129 1,247 0.73 % 658,636 880 0.54 %
Non-interest-bearing liabilities 177,271 175,859
Stockholders' equity 84,619 88,679
Total $ 951,019 $ 923,174
Interest rate spread (3) 3.19 % 3.30 %
Net interest margin (4) $ 7,107 3.33 % $ 7,077 3.41 %
Tax-equivalent interest - imputed 271 501
Net interest income $ 6,836 $ 6,576
Ratio of average interest-earning assets to average interest-bearing liabilities 124.1 % 126.2 %

(1) Income on tax exempt securities is presented on a fully tax-equivalent basis, using a 21% federal tax rate for 2018 and a 34% federal tax rate for 2017.
(2) Includes loans classified as non-accrual. Income on tax-exempt loans is presented on a fully tax-equivalent basis, using a 21% federal tax rate for 2018 and a 34% federal tax rate for 2017.
(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.

35

Six months ended Six months ended
(Dollars in thousands) June 30, 2018 June 30, 2017
Average balance Interest Average yield/rate Average balance Interest Average yield/rate
Assets
Interest-earning assets:
Interest-bearing deposits at banks $ 1,024 $ 9 1.77 % $ 6,676 $ 27 0.82 %
Investment securities (1) 398,536 5,076 2.57 % 395,947 5,237 2.67 %
Loans receivable, net (2) 445,301 11,140 5.04 % 424,495 10,369 4.93 %
Total interest-earning assets 844,861 16,225 3.87 % 827,118 15,633 3.81 %
Non-interest-earning assets 94,417 91,448
Total $ 939,278 $ 918,566
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Money market and checking $ 379,335 $ 804 0.43 % $ 357,950 $ 417 0.23 %
Savings accounts 95,708 14 0.03 % 92,670 14 0.03 %
Time deposit 124,900 354 0.57 % 138,228 301 0.44 %
Total deposits 599,943 1,172 0.39 % 588,848 732 0.25 %
FHLB advances and other borrowings 79,532 1,082 2.74 % 70,135 968 2.78 %
Total interest-bearing liabilities 679,475 2,254 0.67 % 658,983 1,700 0.52 %
Non-interest-bearing liabilities 174,544 172,486
Stockholders' equity 85,259 87,097
Total $ 939,278 $ 918,566
Interest rate spread (3) 3.20 % 3.29 %
Net interest margin (4) $ 13,971 3.33 % $ 13,933 3.40 %
Tax-equivalent interest - imputed 541 989
Net interest income $ 13,430 $ 12,944
Ratio of average interest-earning assets to average interest-bearing liabilities 124.3 % 125.5 %

(1) Income on tax exempt securities is presented on a fully tax-equivalent basis, using a 21% federal tax rate for 2018 and a 34% federal tax rate for 2017.
(2) Includes loans classified as non-accrual. Income on tax-exempt loans is presented on a fully tax-equivalent basis, using a 21% federal tax rate for 2018 and a 34% federal tax rate for 2017.
(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.

36

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,
2018 vs 2017 2018 vs 2017
Increase/(decrease) attributable to Increase/(decrease) attributable to
Volume Rate Net Volume Rate Net
Interest income:
Interest-bearing deposits at banks $ 10 $ (16 ) $ (6 ) $ 49 $ (67 ) $ (18 )
Investment securities 26 (78 ) $ (52 ) 34 (195 ) $ (161 )
Loans 303 152 $ 455 530 241 $ 771
Total 339 58 397 613 (21 ) 592
Interest expense:
Deposits 5 232 237 14 426 440
Borrowings 152 (22 ) 130 128 (14 ) 114
Total 157 210 367 142 412 554
Net interest income $ 182 $ (152 ) $ 30 $ 471 $ (433 ) $ 38

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, 2018, 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 $ (2,393 ) (8.1 )%
100 basis point rising $ (1,198 ) (4.0 )%
100 basis point falling $ 450 1.5 %
200 basis point falling $ 81 (0.3 )%

37

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

Forward-Looking Statements

This document (including information incorporated by reference) contains, and future oral and written statements by us and our management may contain, forward-looking statements, within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to our financial condition, results of operations, plans, objectives, future performance and business. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of our management and on information currently available to management, are generally identifiable by the use of words such as "believe," "expect," "anticipate," "plan," "intend," "estimate," "may," "will," "would," "could," "should" or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and we undertake no obligation to update any statement in light of new information or future events.

Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on operations and future prospects by us and our subsidiaries include, but are not limited to, the following:

● The strength of the United States economy in general and the strength of the local economies in which we conduct our operations, which may be less favorable than expected and may result in, among other things, a deterioration in the credit quality and value of our assets.
● The effects of, and changes in, federal, state and local laws, regulations and policies affecting banking, securities, insurance, tax, trade and monetary and financial matters.
● 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 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 FASB.
● 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.
● The effects of fraudulent activity on the part of our employees, customers, vendors, or counterparties.

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, 2017.

38

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, 2018. 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, 2018.

There were no changes in the Company's internal control over financial reporting during the quarter ended June 30, 2018 that materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.

39

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 2017 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, 2018 and December 31, 2017; (ii) Consolidated Statements of Earnings for the three and six months ended June 30, 2018 and June 30, 2017; (iii) Consolidated Statements of Comprehensive Income/(Loss) for the three and six months ended June 30, 2018 and June 30, 2017; (iv) Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and June 30, 2017; (v) Consolidated Statements of Stockholders' Equity for the six months ended June 30, 2018 and June 30, 2017; and (vi) Notes to Consolidated Financial Statements

40

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 8, 2018 /s/ Michael E. Scheopner
Michael E. Scheopner
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 8, 2018 /s/ Mark A. Herpich
Mark A. Herpich
Vice President, Secretary, Treasurer
and Chief Financial Officer
(Principal Financial and Accounting Officer)

41