Landmark Bancorp, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Unless otherwise noted, amounts are in millions of dollars. Landmark is a Kansas-focused bank holding company operating through Landmark National Bank.
Business context
Results include the November 2013 acquisition of Citizens Bank, which added seven branches and approximately $195 million in assets at acquisition. Management attributes much of the year-over-year growth in earnings, interest income, and expenses to the acquisition, while noting organic growth in mortgage sales and fee income.
Financial and operating results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net interest income | $6.08 | $4.45 | $12.08 | $8.83 |
| Provision for loan losses | $0.30 | $0.30 | $0.45 | $0.60 |
| Non-interest income | $4.15 | $2.54 | $7.38 | $5.18 |
| Non-interest expense | $7.09 | $4.86 | $13.90 | $9.74 |
| Net earnings | $2.08 | $1.41 | $3.78 | $2.85 |
| Diluted earnings per share | $0.65 | $0.45 | $1.18 | $0.91 |
| Net interest margin, tax-equivalent | 3.47% | 3.34% | 3.48% | 3.36% |
Quarterly net earnings rose 47% year over year; first-half earnings rose 33%. The acquisition expanded average interest-earning assets, while lower deposit costs also supported margin. Higher operating expenses partly offset the revenue growth. Q2 return on average assets was 1.01% versus 0.88%, and return on average equity was 12.46% versus 8.79%.
Balance sheet, cash flow, debt and liquidity
- At June 30, total assets were $836.0 million, up from $828.8 million at December 31, 2013. Net loans were $412.7 million, slightly below $414.0 million; available-for-sale securities were $318.5 million.
- Deposits were $684.5 million, down $3.0 million from year-end. Total borrowings were $68.6 million, approximately unchanged. These included $35.7 million of FHLB advances and $32.9 million of other borrowings, including $20.8 million of subordinated debentures.
- Six-month operating cash flow was $4.5 million; investing used $12.3 million and financing used $3.9 million. Cash and equivalents declined $11.7 million to $18.0 million. Cash plus available-for-sale securities totaled $336.5 million.
- Management reported additional borrowing capacity of $29.9 million from the FHLB, $12.7 million from the Federal Reserve, and approximately $50 million under correspondent-bank agreements; none of these facilities was drawn at period-end. The company also had a $7.5 million line of credit maturing November 1, 2014; its covenants were met or waived at June 30.
- Company and Bank were classified as well capitalized. Company ratios included a 7.76% leverage ratio and 14.43% total risk-based capital ratio. Management believed the company would also have met well-capitalized standards under Basel III had they applied at June 30.
Material changes and credit quality
- Loan-related interest income and investment income rose primarily because of the Citizens Bank acquisition. Non-interest income increased 63% in Q2, including higher mortgage-sale gains and deposit and servicing fees. Compensation, occupancy, data processing, and other expenses also increased with the added branches.
- The allowance for loan losses fell to $5.15 million, or 1.23% of gross loans, from $5.54 million, or 1.32%, at year-end. First-half net charge-offs rose to $0.84 million from $0.28 million, principally involving previously identified impaired commercial relationships; Q2 net charge-offs were $0.79 million.
- Non-accrual loans declined to $6.55 million, or 1.57% of gross loans, from $9.84 million, or 2.35%. Impaired loans declined to $11.1 million from $16.8 million. However, potential problem loans outside the non-performing-asset measure increased to $21.8 million from $14.6 million.
- Deposits declined mainly because of seasonal reductions in municipal money-market and NOW balances. Certificates of deposit totaling $129.3 million mature within one year; management said historically most maturing deposits remained with the Bank.
- Unrealized losses on available-for-sale securities were $1.56 million, down from $4.69 million at year-end. Management considered the securities temporarily impaired and disclosed that further market-rate increases or deterioration in issuer or market conditions could cause additional declines or impairment.
Outlook, risks and contingencies
No quantified earnings or growth guidance was provided. Management does not expect near-term net interest margin expansion and warned that margin could decline if asset yields reprice downward more quickly than deposit costs can be reduced. A 100-basis-point rate decline was modeled to reduce one-year net interest income by 3.6%; the 200-basis-point decline scenario was not meaningful in the low-rate environment.
Key stated risks include local and national economic weakness, borrower and real-estate deterioration, interest-rate and securities-market changes, competition, regulatory changes including Basel III, acquisition integration, technology and cybersecurity, and the accuracy of loan-loss estimates. Outstanding loan commitments were $67.8 million and standby letters of credit were $1.2 million. The filing reported no material pending litigation beyond routine matters and no material change in previously disclosed risk factors.
Unusual comparison item: 2013 amortization expense was lower partly because a $212,000 mortgage-servicing-rights valuation allowance was reversed. Management reported no goodwill impairment trigger in the first half of 2014. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of earnings growth and fee generation is sustainable without the Citizens Bank acquisition contribution, and how integration costs evolve.
- Whether the increase in potential problem loans leads to further losses, and whether the reduced allowance remains adequate given higher charge-offs.
- Deposit retention and pricing as $129.3 million of certificates mature within one year, alongside the company’s reliance on wholesale borrowings.
- Net interest margin sensitivity to falling rates and asset repricing, as well as the value and impairment risk of the securities portfolio.
- The November 1, 2014 maturity and covenant terms of the $7.5 million credit line, and the availability of stated contingent borrowing capacity.