Landmark Bancorp, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Landmark is a Kansas-focused bank holding company operating Landmark National Bank, with 21 branches. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net interest income | $4.45 | $4.71 | $8.83 | $9.21 |
| Provision for loan losses | $0.30 | $0.30 | $0.60 | $0.60 |
| Non-interest income | $2.54 | $3.03 | $5.18 | $5.70 |
| Non-interest expense | $4.86 | $5.13 | $9.74 | $9.86 |
| Net earnings | $1.41 | $1.82 | $2.85 | $3.55 |
| Diluted EPS | $0.47 | $0.62 | $0.96 | $1.21 |
| Tax-equivalent net interest margin | 3.34% | 3.51% | 3.36% | 3.57% |
Net earnings fell about 23% year over year in Q2 and 20% in the first half. Management attributed the decline mainly to lower mortgage loan-sale gains and a narrower net interest margin; 2012 also included investment-security sale gains. Q2 return on average assets was 0.88% (1.12% prior year) and return on average equity was 8.79% (12.00%).
Financial position, cash flow, and liquidity
- At June 30, total assets were $641.9 million, versus $614.1 million at year-end 2012. Net loans were $321.3 million, up from $315.9 million; available-for-sale securities were $238.5 million, up from $213.3 million.
- Deposits rose to $500.2 million from $482.5 million. Total borrowings increased to $68.8 million from $60.0 million, including $45.8 million of FHLB borrowings and $23.0 million of other borrowings. Stockholders’ equity was $62.4 million, down from $63.3 million.
- For the first half, operating activities provided $6.1 million; investing used $36.5 million, largely reflecting securities purchases and loan growth; financing provided $25.7 million. Cash and cash equivalents declined $4.7 million to $10.2 million.
- Cash and available-for-sale securities totaled $248.7 million. Management reported additional borrowing capacity, subject to lender requirements, including $16.7 million from the FHLB, $14.9 million at the Federal Reserve discount window, and approximately $50 million under correspondent-bank agreements.
- Both the company and bank were reported “well capitalized.” Company ratios were 10.29% leverage, 16.73% Tier 1 risk-based capital, and 18.03% total risk-based capital.
Credit quality, changes, and unusual items
- Non-accrual loans declined to $6.1 million (1.88% of gross loans) from $9.1 million (2.84%) at year-end; impaired loans fell to $13.3 million from $14.5 million. Past-due accruing loans were $2.1 million, or 0.65% of gross loans.
- The allowance for loan losses increased to $4.9 million, or 1.50% of gross loans, from $4.6 million, or 1.43%. First-half net charge-offs were $276,000 versus $35,000 a year earlier, principally tied to liquidation of collateral for a previously reserved commercial loan relationship. Troubled debt restructurings totaled $8.2 million across 12 loans.
- Unrealized losses on available-for-sale securities reduced accumulated other comprehensive income by $2.9 million during the first half; securities fair-value changes contributed to a $90,000 comprehensive loss despite positive net earnings. Management said the securities losses were temporary, but warned further interest-rate increases or market deterioration could reduce values and potentially lead to material impairment charges.
- Higher mortgage rates reduced the estimated fair value of loans held for sale, producing a $325,000 valuation allowance in Q2 that management expected to reverse when the loans were sold in Q3. The same rate increase improved mortgage-servicing-rights valuations, leading to reversal of a prior $212,000 allowance.
- Management cited persistent low interest rates, reduced mortgage refinancing/origination activity, and soft loan demand as pressures. It said asset quality had generally improved and described a strategy of maintaining asset quality while growing commercial and commercial real estate lending. No formal earnings or financial guidance was provided.
Outlook, risks, and contingencies
Management’s forward-looking discussion is subject to uncertainty, not a quantified forecast. Key risks include local and national economic weakness, borrower and real-estate deterioration, interest-rate and prepayment changes, competition, regulation and FDIC costs, technology and cybersecurity, integration and growth, litigation, and the ability to estimate loan losses and maintain capital. The filing reports $63.3 million of unfunded loan commitments and $1.8 million of standby letters of credit. A $7.5 million external credit line, maturing November 5, 2013, was undrawn and in covenant compliance. The company reported no material pending legal proceedings beyond routine litigation and no material change to previously disclosed risk factors.
Most important facts for investors to verify
- Whether net interest margin and core earnings stabilize as asset yields remain under pressure and mortgage-related gains decline.
- Whether the expected Q3 reversal of the $325,000 loans-held-for-sale valuation allowance occurs as management anticipated.
- Whether non-accrual loans, impaired credits, TDRs, and charge-offs continue to improve, and whether the $4.9 million allowance remains adequate.
- How further interest-rate movements affect securities’ fair values, accumulated other comprehensive income, mortgage servicing rights, and liquidity.
- Deposit retention and funding costs, planned use of borrowings, and maintenance of regulatory capital and dividend capacity.