Landmark Bancorp, Inc. — Q3 2013 Form 10-Q
Business context and reporting period. Landmark Bancorp is a Kansas bank holding company operating through Landmark National Bank. This unaudited quarterly report covers the three and nine months ended September 30, 2013; balance-sheet comparisons are to December 31, 2012. Dollar amounts below are in millions unless otherwise stated.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net interest income | $4.592 | $4.525 | $13.420 | $13.731 |
| Provision for loan losses | $0.200 | $1.000 | $0.800 | $1.600 |
| Non-interest income | $2.779 | $3.215 | $7.956 | $8.915 |
| Non-interest expense | $5.544 | $5.268 | $15.288 | $15.127 |
| Net earnings | $1.285 | $1.205 | $4.134 | $4.750 |
| Diluted EPS | $0.43 | $0.41 | $1.39 | $1.61 |
| Net interest margin, tax-equivalent | 3.40% | 3.35% | 3.37% | 3.49% |
- Q3 return on average assets was 0.80% (0.74% a year earlier); return on average equity was 8.19% (7.69%). Nine-month figures were 0.87% and 8.72%, respectively, versus 1.00% and 10.40%.
- At September 30, total assets were $630.1 million, up from $614.1 million at year-end 2012. Net loans were $319.5 million versus $315.9 million; available-for-sale securities were $232.9 million versus $213.3 million.
- Deposits rose to $499.1 million from $482.5 million. Non-interest-bearing deposits increased to $87.4 million; time deposits declined to $157.1 million.
- Total borrowings were approximately $60.2 million: $35.7 million of FHLB borrowings and $24.5 million of other borrowings. Stockholders’ equity was $63.2 million, compared with $63.3 million at year-end.
- Cash and cash equivalents were $12.1 million. Cash plus available-for-sale securities totaled $245.0 million. Nine-month operating cash flow was $9.5 million, investing cash outflow $27.8 million, and financing cash inflow $15.5 million; cash declined $2.8 million over the period.
- The company and bank were reported as well capitalized. At September 30, company regulatory capital ratios were 10.41% leverage, 17.28% Tier 1, and 18.59% total risk-based capital. The quarterly dividend was $0.19 per share.
Material changes versus comparable periods
- Q3 net earnings increased 6.6% year over year, helped by a lower loan-loss provision and modestly higher net interest income. Nine-month net earnings declined 13.0%, and diluted EPS fell to $1.39 from $1.61.
- Nine-month net interest income fell 2.3% as the tax-equivalent margin narrowed to 3.37% from 3.49%; management attributed this to asset yields falling faster than funding costs could be reduced. Q3 margin improved modestly year over year.
- Lower mortgage origination and secondary-market sale volumes reduced gains on loan sales to $2.956 million for the first nine months, from $4.255 million. There were no investment-security gains in 2013, compared with net gains of $0.296 million in the first nine months of 2012.
- The allowance for loan losses increased to $5.126 million, or 1.58% of gross loans, from $4.581 million, or 1.43%. Nine-month net charge-offs were $0.255 million versus $0.140 million.
- Credit indicators improved: non-accrual loans fell to $6.520 million (2.01% of gross loans) from $9.108 million (2.84%); impaired loans declined to $13.6 million from $14.6 million; and real estate owned fell to $0.455 million from $2.444 million.
- Unrealized losses on available-for-sale securities were $2.446 million at September 30, compared with $0.202 million at year-end 2012. Nine-month other comprehensive income included a $4.568 million unrealized loss before tax effects, contributing to lower accumulated other comprehensive income.
Outlook, risks, contingencies and unusual items
- Outlook: The filing gives no specific earnings or revenue guidance. Management cited a low-rate environment, continued pressure on asset yields, and potential further declines in mortgage refinancing and loan-sale gains if mortgage rates rise. Management described the loan portfolio as diversified and asset quality as generally improved, while continuing efforts to resolve remaining problem credits.
- Acquisition after quarter-end: Landmark National Bank acquired Citizens Bank effective November 1, 2013, for $1.3 million in cash. Citizens had approximately $56.5 million of investments, $100.6 million of loans, and $177.0 million of deposits as of October 31. Preliminary estimated goodwill and other intangible assets were approximately $6.6 million; final fair values were pending. The acquisition added eight branches. Pro forma information was not available in the filing.
- Internal-control material weakness and fraud: Management concluded disclosure controls were not effective as of September 30 because cash-reconciliation and accounting controls did not consistently prevent or detect unauthorized transactions. An employee fraud caused a gross vault-cash loss of $390,000; the company recorded a $75,000 net loss after $315,000 of expected insurance proceeds. Remedial controls were introduced, but management said their effectiveness still needed to be validated over time.
- Credit and securities risks: Management warned that weaker local economic conditions or real-estate values could increase loan losses and require changes to the allowance. It also noted that rising interest rates or deteriorating issuer conditions could further reduce securities fair values and potentially lead to material impairment charges. The company considered the reported securities losses temporary and said it did not intend, and was not more likely than not required, to sell the securities before recovery.
- Other exposures: Mortgage repurchase reserve was $418,000. Outstanding loan commitments were $58.1 million and standby letters of credit totaled $1.1 million. The company had $100.3 million of certificates of deposit scheduled to mature within one year. It reported no material pending legal proceedings beyond routine litigation.
- Funding and regulation: The company had no balance outstanding on its $7.5 million third-party credit line, which matured November 1, 2014 after a November 5 amendment; certain financial covenants were amended, and the company reported compliance at September 30. Management was assessing the impact of Basel III rules, generally effective beginning January 1, 2015.
Most important facts for investors to verify
- Whether the cash-control remediation proves effective and whether the expected $315,000 insurance recovery is collected.
- Final purchase accounting, integration costs, and subsequent performance of the Citizens Bank acquisition.
- Whether loan-sale gains and net interest margin remain under pressure, and how deposit pricing and loan growth evolve.
- Trends in non-accrual and impaired loans, charge-offs, real estate owned, and the adequacy of the loan-loss allowance.
- Changes in available-for-sale securities marks, interest-rate sensitivity, and any resulting impairment or capital effects.
- Deposit retention and liquidity as certificates mature, alongside the company’s borrowing capacity and capital position.