Landmark Bancorp, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet comparisons are to December 31, 2011. Dollar amounts are in millions unless stated otherwise. Landmark Bancorp is a Kansas-focused bank holding company operating through Landmark National Bank.
Financial performance
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Net interest income | $4.492 | $4.314 |
| Provision for loan losses | $0.300 | $0.400 |
| Non-interest income | $2.672 | $2.037 |
| Net investment securities gain | $0.164 | — |
| Non-interest expense | $4.729 | $4.831 |
| Net earnings | $1.727 | $0.978 |
| Diluted earnings per share | $0.62 | $0.35 |
| Net interest margin, tax-equivalent | 3.62% | 3.80% |
| Return on average assets / equity | 1.15% / 11.62% | 0.70% / 7.32% |
Net earnings increased about 77%. Management attributed the improvement chiefly to a $0.585 million increase in gains on loan sales and the $0.164 million net securities gain. Net interest income rose 4.1% even as the net interest margin declined 18 basis points. Lower deposit and borrowing costs helped: total deposit cost fell to 0.59% from 0.80%, while average earning assets grew to $534.6 million from $496.6 million. Interest income was nearly flat; loan yields and securities yields declined.
Financial position, cash flow and liquidity
- Assets: $619.5 million, up from $598.2 million. Available-for-sale securities were $217.4 million; net loans were $298.9 million, down from $310.1 million.
- Deposits and borrowings: Deposits increased to $492.3 million from $454.1 million, led by non-interest-bearing, money-market/NOW and savings balances. Total borrowings declined to about $59.3 million from $76.6 million. Stockholders’ equity was $60.1 million, versus $59.1 million.
- Cash flow: Operating activities provided $0.1 million; investing activities used $9.2 million; financing activities provided $20.4 million. Cash and cash equivalents rose $11.3 million to $28.8 million. The filing notes that deposit growth funded securities purchases and debt reduction.
- Liquidity: Cash and available-for-sale securities totaled $246.2 million. The bank had $35.8 million of FHLB advances outstanding and no FHLB line-of-credit borrowings; disclosed additional FHLB collateral borrowing capacity was $66.5 million. It also reported $16.9 million of Federal Reserve discount-window capacity and approximately $59.3 million of correspondent-bank capacity, with no balances drawn under those facilities.
- Capital and shareholder distributions: The company and bank were reported as well capitalized. Company total risk-based capital was 17.36%, compared with a 10.00% well-capitalized threshold. The quarterly dividend was $0.19 per share, versus $0.18 a year earlier.
Material changes, credit quality and unusual items
- Gross loans declined to $303.7 million from $314.6 million, which management attributed to weaker customer demand, seasonality, payoffs and ordinary runoff. The allowance for loan losses rose to $5.0 million, or 1.65% of gross loans, from $4.7 million, or 1.50%.
- Non-accrual loans were $1.951 million (0.64% of gross loans), up from $1.419 million (0.45%) at year-end; management said two commercial relationships drove the increase. One was paid in full after quarter-end. Past-due accruing loans totaled $1.488 million, down from $2.219 million.
- Impaired loans increased to $3.0 million from $2.5 million. There were four troubled debt restructurings totaling $1.171 million, compared with five totaling $1.730 million at year-end. No TDR-modified loans had subsequently defaulted by March 31.
- The $0.164 million net securities gain comprised $0.227 million of realized sale gains, partly offset by a $0.063 million credit-related impairment on a pooled trust preferred security. Pooled trust preferred securities had $0.599 million of total unrealized losses at quarter-end; management said further impairment could result if economic, issuer or market conditions worsen.
- After quarter-end, Landmark completed its acquisition of The Wellsville Bank effective April 1, 2012, for $3.7 million cash. The acquired bank had $14.2 million in investments, $14.8 million in loans and $34.9 million in deposits. Goodwill was preliminarily estimated below $0.5 million; purchase accounting remained subject to finalization.
Outlook, risks and contingencies
No numerical earnings or revenue guidance was provided. Management described its strategy as maintaining asset quality while growing commercial and commercial real estate lending, and said lower loan demand and yields, economic conditions and competition affect results. It stated that it was actively working to resolve problem credits and believed the allowance was appropriate, while warning that further economic or real-estate deterioration could increase losses and require additional provisions.
- Interest-rate simulations estimated net interest income would increase 2.4% under a 200-basis-point rise and 1.3% under a 100-basis-point rise, but decrease 4.4% under a 100-basis-point fall; the 200-basis-point decline scenario was marked not meaningful.
- Outstanding loan commitments, excluding standby letters of credit, were $80.1 million; standby letters of credit had a $2.2 million maximum contractual amount. Management expected sufficient funds to meet current loan commitments.
- A $0.5 million mortgage repurchase reserve was unchanged. Management noted that repurchase losses are difficult to estimate and depend on changing external conditions.
- Management cited local economic and property-value conditions, credit losses, interest rates, securities valuations, competition, deposit retention, regulation including Dodd-Frank, technology and acquisition integration among the principal risks. It reported no material change to the risk factors in the 2011 Form 10-K.
- The filing reported no material pending legal proceedings beyond routine litigation. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the improvement in earnings is sustainable without the quarter’s higher mortgage-sale gains and securities transactions.
- Trends in loan demand, net interest margin, deposit mix and funding costs following the Wellsville acquisition.
- Subsequent performance and resolution of non-accrual and impaired commercial credits, and adequacy of the loan-loss allowance.
- Final acquisition accounting, including goodwill, and the acquired bank’s integration and contribution to earnings.
- Exposure to pooled trust preferred securities and potential future impairment, alongside the sensitivity of earnings to falling rates.
- Liquidity and capital after acquisition, scheduled time-deposit maturities, commitments, and the terms and compliance requirements of borrowings.