Landmark Bancorp, Inc. — Q1 2013 Form 10-Q
Business context and reporting period. Landmark Bancorp is a Kansas-focused bank holding company operating through Landmark National Bank, with 21 branches. The filing covers the three months ended March 31, 2013; income and cash flow comparisons are against Q1 2012, and balance-sheet comparisons are against December 31, 2012. Amounts below are in U.S. dollars; financial statement amounts are generally rounded to millions.
Key financial results
| Metric | Q1 2013 / March 31, 2013 | Comparable period / prior year-end |
|---|---|---|
| Net earnings | $1.44 million | $1.73 million in Q1 2012 |
| Basic / diluted EPS | $0.49 / $0.48 | $0.59 / $0.59 in Q1 2012; prior-period per-share data adjusted for a 5% stock dividend |
| Interest income / expense | $5.18 million / $0.80 million | $5.53 million / $1.04 million in Q1 2012 |
| Net interest income | $4.38 million | $4.49 million in Q1 2012 |
| Net interest margin | 3.38% tax-equivalent | 3.63% in Q1 2012 |
| Provision for loan losses | $300,000 | $300,000 in Q1 2012 |
| Non-interest income | $2.63 million, excluding no securities gains in Q1 2013 | $2.67 million, plus $164,000 net investment securities gains in Q1 2012 |
| Non-interest expense | $4.88 million | $4.73 million in Q1 2012 |
| Return on average assets / equity | 0.92% / 9.18% | 1.15% / 11.62% in Q1 2012 |
| Total assets | $650.6 million | $614.1 million at December 31, 2012 |
| Net loans / gross loans | $314.3 million / $318.7 million | Net loans were $315.9 million at December 31, 2012 |
| Total deposits | $507.6 million | $482.5 million at December 31, 2012 |
| Total borrowings | $58.5 million | $60.0 million at December 31, 2012 |
| Stockholders’ equity | $64.1 million | $63.3 million at December 31, 2012 |
| Cash and cash equivalents | $35.9 million | $14.9 million at December 31, 2012 |
Cash flow, liquidity and capital
- Q1 operating activities provided $15.6 million; investing activities used $17.7 million, principally reflecting $28.4 million of securities purchases; financing activities provided $23.1 million, mainly from deposit growth. Cash and cash equivalents increased $21.0 million during the quarter.
- Cash and available-for-sale securities totaled $267.9 million at quarter-end, versus $228.2 million at year-end. Deposits grew $25.1 million, including growth in demand, money market/NOW and savings balances; time deposits declined.
- Borrowings included $35.7 million of FHLB advances and $22.8 million of other borrowings, including $16.5 million of subordinated debentures and $6.3 million of repurchase agreements. The company reported no FHLB line-of-credit or external $7.5 million line-of-credit balance at quarter-end; additional borrowing availability was subject to lender requirements and policies.
- The company and bank were reported as “well capitalized.” Company ratios were 10.20% leverage, 16.69% Tier 1 risk-based capital and 18.07% total risk-based capital. The quarterly dividend was $0.19 per share.
Material changes and management commentary
- Net earnings declined about 17% year over year. Management attributed the decrease chiefly to $174,000 lower gains on loan sales, the absence of the prior-year $164,000 net securities gain, $110,000 lower net interest income and $152,000 higher non-interest expense.
- Net interest margin fell 25 basis points to 3.38%. Lower loan and investment yields outweighed funding-cost savings; deposit costs declined to 0.37% from 0.59%, while average interest-earning assets increased to $565.3 million from $534.6 million.
- Loan-sale gains were $1.03 million, compared with $1.20 million in Q1 2012. Management said higher mortgage rates could reduce refinance originations and future loan-sale gains. Fees and service charges rose $134,000, partly offsetting lower loan-sale gains.
- Non-interest expense increased 3.2%, with higher compensation, other expense, foreclosure/REO costs, data processing and deposit insurance costs. Management said ongoing operating costs of the 2012 Wellsville Bank deposit acquisition were reflected in the quarter.
- Net loans edged down from year-end as commercial, agricultural, municipal and consumer balances declined, partly offset by growth in residential, commercial real estate, and construction and land loans. Management cited subdued loan demand, seasonal factors and early payoffs, and said it was retaining some residential originations to offset weak commercial demand.
- The allowance for loan losses was $4.63 million, or 1.45% of gross loans, versus $4.58 million, or 1.43%, at year-end. Net charge-offs were $247,000, compared with net recoveries of $7,000 in Q1 2012; management linked the increase principally to liquidation of collateral on a previously identified commercial relationship.
- Non-accrual loans decreased to $7.84 million (2.46% of gross loans) from $9.11 million (2.84%) at year-end; impaired loans declined to $13.23 million from $14.53 million. Loans 30–89 days past due and still accruing rose to $3.12 million from $2.20 million. There were no loans 90 days past due and accruing.
- Real estate owned was $2.21 million, down from $2.44 million. Management said it was marketing the properties and actively working to resolve remaining problem credits. No new TDRs were recorded in Q1; seven TDR relationships comprising 11 loans remained at quarter-end.
Outlook, risks and unusual items
- The filing gives no quantitative earnings or revenue guidance. Management described a strategy of maintaining asset quality while growing commercial and commercial real estate lending, but noted weak commercial loan demand and reliance on investment securities when loan production is insufficient.
- Management cautioned that interim results are not necessarily indicative of full-year results. Key risks include local economic weakness, deterioration in borrower credit quality or real estate values, interest-rate and prepayment changes, competition, regulatory changes, funding and deposit flows, and the ability to maintain adequate loan-loss reserves and capital.
- Interest-rate simulations estimated that a 100-basis-point rise would increase projected one-year net interest income by $607,000 (3.5%), while a 100-basis-point fall would reduce it by $998,000 (5.7%). A 200-basis-point rise was estimated to increase it by $1.15 million (6.6%); the 200-basis-point fall case was deemed not meaningful in the low-rate environment.
- Available-for-sale securities had $256,000 of gross unrealized losses at quarter-end, versus $202,000 at year-end. Management considered the identified securities temporarily impaired and reported no Q1 securities impairment or sale gains; it warned that further fair-value declines could result from rate increases, weaker issuers or reduced market liquidity.
- Off-balance-sheet exposures included $62.7 million of outstanding loan commitments and $1.7 million of standby letters of credit. The filing reported no material pending legal proceedings beyond routine business litigation and no material changes to previously disclosed risk factors.
- Management assessed disclosure controls as effective at March 31, 2013 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the lower net interest margin and loan yields stabilize, and whether deposit growth can be converted into stronger loan growth without further yield pressure.
- Trends in non-accrual, past-due and impaired loans, net charge-offs, TDRs and REO, particularly commercial real estate and construction/land exposures; also monitor whether the allowance remains adequate.
- Deposit retention and repricing, including the $109.4 million of certificates of deposit scheduled to mature within one year, and the company’s reliance on wholesale funding and subordinated debt.
- The sustainability of mortgage origination and loan-sale gains if refinancing activity slows, and any changes in mortgage repurchase claims or the $418,000 repurchase reserve.
- Potential sensitivity of securities values and earnings to interest-rate changes, unrealized losses, and the assumptions underlying management’s impairment assessments and rate simulations.
- Whether commitments, available borrowing capacity, regulatory capital, and dividend constraints remain consistent with liquidity and growth needs.