Landmark Bancorp, Inc. — Q3 2012 Form 10-Q
Business context and reporting period
Regional bank holding company operating through Landmark National Bank in Kansas. This unaudited filing covers the quarter and nine months ended September 30, 2012; balance-sheet comparisons are with December 31, 2011. Unless noted, amounts below are in millions. Landmark acquired Wellsville Bank effective April 1, adding one branch and approximately $35.0 million of deposits.
Financial and operating performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net interest income | $4.53 | $4.55 | $13.73 | $13.40 |
| Provision for loan losses | $1.00 | $0.50 | $1.60 | $1.60 |
| Non-interest income | $3.22 | $2.38 | $8.92 | $6.53 |
| Net earnings | $1.21 | $1.49 | $4.75 | $3.19 |
| Diluted EPS | $0.43 | $0.54 | $1.70 | $1.15 |
| Net interest margin, tax-equivalent | 3.35% | 3.77% | 3.49% | 3.79% |
Loan-sale gains were $1.63 million in Q3 and $4.26 million year to date, up from $0.84 million and $1.92 million, respectively. Net securities gains were zero in Q3 2012 and $0.30 million year to date. Q3 return on average assets and equity were 0.74% and 7.69%; year-to-date figures were 1.00% and 10.40%.
At September 30, assets were $644.2 million, deposits $514.8 million, net loans $307.3 million, and stockholders’ equity $62.9 million. Total borrowings were approximately $59.0 million, down from $76.6 million at year-end. Cash and cash equivalents were $23.1 million; cash plus available-for-sale securities totaled $262.1 million. Nine-month operating cash flow was $4.6 million, investing cash use was $5.5 million, financing cash flow was $6.6 million, and cash increased $5.6 million.
Material changes versus comparable periods
- Q3 earnings fell 19% year over year as the $0.50 million increase in loan-loss provision and higher non-interest expense outweighed increased loan-sale gains. Nine-month earnings rose 49%, principally from higher loan-sale gains.
- Q3 net interest margin declined 42 basis points year over year; nine-month margin declined 30 basis points. Lower asset yields were partly offset by lower deposit costs and higher average earning assets.
- Assets increased about 7.7% from year-end, reflecting the Wellsville acquisition and organic growth. Deposits rose $60.7 million; net loans declined $2.8 million. Available-for-sale securities increased to $239.0 million from $198.2 million.
- Credit quality weakened: non-accrual loans rose to $4.6 million (1.46% of gross loans) from $1.4 million (0.45%); impaired loans increased to $5.2 million from $2.5 million. The allowance rose to $6.2 million, or 1.97% of gross loans, from $4.7 million, or 1.50%.
Outlook, commentary, risks and unusual items
- Management provided no formal earnings guidance. It cited weak commercial loan demand, and said low mortgage rates supported mortgage originations and loan-sale gains; higher rates could reduce that volume. Management said it was working to resolve problem credits and considered the allowance appropriate, while warning that further economic or real-estate deterioration could require additional provision.
- A $3.3 million land loan was classified non-accrual and impaired in Q3 after an appraisal showed a significant collateral-value decline; restructuring discussions were ongoing. Six TDR relationships totaled $1.34 million at quarter-end.
- Non-interest expense included a $212,000 valuation allowance on mortgage servicing rights, attributed to lower mortgage rates. The company also reported a $63,000 credit-related impairment on a pooled trust preferred security year to date; remaining pooled trust preferred unrealized losses were assessed as non-credit-related.
- Interest-rate simulation estimated net interest income would rise 1.2% for a 100-basis-point increase and 2.0% for a 200-basis-point increase; a 100-basis-point decline would reduce it 2.1%. A 200-basis-point decline was considered not meaningful in the low-rate environment.
- Landmark and its bank subsidiary were reported well capitalized. The company’s September 30 total risk-based capital ratio was 17.43%. A $7.5 million credit line was extended to November 5, 2013, with certain financial covenants amended; the company reported compliance at September 30. Management was assessing proposed Basel III rules and their potential capital impact.
Important facts for investors to verify
- Progress, collateral value and expected loss exposure for the $3.3 million impaired land loan; trends in non-accrual loans, TDRs and the allowance.
- Sustainability of loan-sale gains and mortgage origination volumes, alongside continued margin compression.
- Deposit retention and pricing, including $122.8 million of certificates of deposit scheduled to mature within one year, and the terms/covenant implications of the amended credit line.
- Potential effects of Basel III, interest-rate changes, investment-security valuations and any further mortgage-servicing-rights or credit impairments.