LARK

Landmark Bancorp Inc. - Q1 2010 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2010. Landmark Bancorp, Inc. is a bank holding company operating through its wholly-owned subsidiary, Landmark National Bank, providing commercial, real estate, and consumer banking services primarily in Kansas. The company is a smaller reporting company listed on the NASDAQ Global Market under the symbol "LARK".

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability: Net earnings increased by 13.3% ($139,000) compared to Q1 2009. This was driven primarily by a $563,000 gain on the sale of investment securities (mortgage-backed securities) and a 4.0% increase in net interest income.
• Interest Rates: Net interest margin expanded to 3.81% from 3.46% as the company maintained loan yields while deposit and borrowing costs repriced lower. Total interest expense decreased 31.5% year-over-year.
• Provision for Loan Losses: The provision increased to $700,000 from $300,000 in the prior year, reflecting declines in collateral values for impaired loans and difficult economic conditions.
• Asset Quality: Nonperforming assets rose to $15.2 million (2.6% of total assets) from $13.2 million. Real Estate Owned (OREO) increased significantly by $2.0 million to $3.1 million, largely due to the foreclosure of a $1.3 million residential subdivision development.
• Non-Interest Income: Decreased by $135,000, primarily due to a $197,000 decline in gains on sales of loans as residential origination volumes dropped.

Outlook, Risks, and Management Commentary

• Investment Strategy: Management sold high-quality mortgage-backed securities to capitalize on premium pricing and reinvested proceeds into shorter-term, lower-yielding U.S. federal agency securities to reposition the portfolio for rising interest rates.
• Credit Risk: Management anticipates continued pressure on the loan portfolio due to the economic recession. Two specific loans totaling $6.6 million (a construction loan and a commercial agriculture loan) represent a significant portion of non-accrual assets. Management expects to exhaust collection attempts on the $2.3 million agriculture loan in 2010, potentially resulting in a charge-off of approximately $2.1 million.
• Capital Position: Both Landmark Bancorp and Landmark National Bank are rated "well capitalized," exceeding all regulatory minimums. The company paid a quarterly dividend of $0.19 per share.
• Liquidity: The company maintains strong liquidity with $171.0 million in liquid assets. Borrowing capacity includes $45.1 million available through the Federal Home Loan Bank (FHLB) and $14.4 million through the Federal Reserve discount window.
• Market Risk: Simulation models indicate that a 200 basis point rise in interest rates would increase net interest income by 8.4%, while a 100 basis point fall would decrease it by 2.9%.

Investor Verification Checklist

• Impaired Loan Resolution: Verify the status and potential charge-off timing of the $2.3 million commercial agriculture loan and the $4.3 million construction loan.
• Investment Portfolio: Review the valuation and unrealized losses on the $314,000 fair value of pooled trust preferred securities (Level 3 assets) which have significant unrealized losses.
• OREO Disposition: Monitor the sale progress of the $3.1 million in Real Estate Owned assets to assess potential future losses or gains.
• Deposit Stability: Confirm the retention rate of the $133.2 million in certificates of deposit maturing within one year.
• FDIC Premiums: Assess the impact of continued high FDIC assessment rates on future non-interest expenses.