Landmark Bancorp, Inc. — Q2 2012 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and six months ended June 30, 2012. Landmark Bancorp is a Kansas-focused bank holding company operating through Landmark National Bank. On April 1, it acquired The Wellsville Bank for $3.7 million cash, adding one branch and approximately $35.0 million in deposits, $14.2 million in investments, and $15.0 million in loans.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net interest income | $4.714 million | $4.535 million | $9.206 million | $8.849 million |
| Provision for loan losses | $300,000 | $700,000 | $600,000 | $1.100 million |
| Non-interest income | $3.028 million | $2.108 million | $5.700 million | $4.145 million |
| Net earnings | $1.818 million | $722,000 | $3.545 million | $1.700 million |
| Diluted earnings per share | $0.65 | $0.26 | $1.27 | $0.61 |
| Net interest margin, tax-equivalent | 3.50% | 3.81% | 3.56% | 3.81% |
Q2 net earnings increased primarily on a $962,000 increase in gains on loan sales, a $400,000 decline in loan-loss provision, and lower professional fees. Six-month earnings growth similarly reflected higher loan-sale gains and lower provision and professional fees. Q2 included $132,000 of investment-security sale gains; the six-month period included $359,000 of such gains and a $63,000 credit-related impairment loss on pooled trust preferred securities. Loan-sale gains are a material contributor to reported income.
Q2 non-interest expense was $5.130 million, down from $5.227 million. Six-month non-interest expense was $9.859 million, down from $10.058 million. The six-month effective tax rate was 25.3%, versus 7.4% in 2011; Q2 rates were 25.6% and a tax benefit in the prior-year quarter.
At June 30, total assets were $660.5 million, up from $598.2 million at December 31, 2011. Net loans were $304.1 million, down from $310.1 million; available-for-sale securities were $254.2 million, up from $198.2 million. Deposits rose to $533.9 million from $454.1 million, while total borrowings declined to $57.4 million from $76.6 million. Stockholders’ equity was $61.5 million. Cash and cash equivalents were $31.5 million, and cash plus available-for-sale securities totaled $285.6 million.
For the six months, operating activities provided $6.7 million of cash, investing activities used $17.2 million, and financing activities provided $24.5 million; cash increased $14.0 million to $31.5 million. The allowance for loan losses was $5.3 million, or 1.71% of gross loans, versus $4.7 million, or 1.50%, at year-end. Non-accrual loans were $907,000 (0.30% of gross loans), impaired loans were $2.0 million, and real estate owned was $2.6 million.
The Company and its bank subsidiary were reported as well capitalized. At June 30, the Company’s leverage, Tier 1 risk-based, and total risk-based capital ratios were 9.27%, 15.53%, and 17.15%, respectively. The bank’s corresponding ratios were 9.62%, 16.13%, and 17.37%.
Changes, outlook, and risks
- Deposit growth, including the Wellsville acquisition, supported increased investment securities and repayment of borrowings. Management reported lower loan demand and declines in commercial real estate, commercial, and agriculture loan balances.
- The tax-equivalent net interest margin declined as asset yields fell and a greater share of assets was held in lower-yielding securities and cash. Management cited a low interest-rate environment and loan-sale volumes as important earnings influences.
- No specific earnings or financial guidance was provided. Management expressed confidence in asset quality and core earnings but cautioned that economic weakness and real-estate value declines could increase problem loans and require additional loss provisions.
- In August 2012, after quarter-end, a commercial real estate and land loan relationship of approximately $4.4 million matured without principal repayment. The Company was evaluating renewal or foreclosure; based on current appraisals, management did not anticipate a significant loss in the event of foreclosure.
- Other risks include interest-rate movements, competition, regulatory changes and proposed Basel III capital requirements, integration of acquisitions, investment-security valuation and impairment, and the accuracy of loan-loss estimates. A 100-basis-point rate decline was modeled to reduce one-year net interest income by 1.9%; a 200-basis-point decline was deemed not meaningful in the low-rate environment.
- Outstanding loan commitments were $59.0 million and standby letters of credit were $2.2 million. The $7.5 million external line of credit had $1.9 million outstanding and matured November 5, 2012; the Company reported compliance with its covenants.
Most important facts for investors to verify
- Whether loan-sale gains and elevated mortgage origination/sale activity are sustainable, and how earnings perform without those gains.
- Loan quality, collateral values, allowance adequacy, and developments on the approximately $4.4 million matured loan relationship.
- Deposit retention and pricing, loan growth, securities reinvestment yields, and the resulting net interest margin.
- Integration and financial contribution of the Wellsville acquisition, including related expenses and deposit stability.
- Liquidity and capital needs, including the upcoming line-of-credit maturity, dividend constraints, and the eventual impact of Basel III rules.