Landmark Bancorp, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet comparisons are to December 31, 2013. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context
Landmark Bancorp is a Kansas bank holding company operating through Landmark National Bank. The quarter’s year-over-year results include Citizens Bank, acquired November 1, 2013, which added approximately $195 million in assets and eight branches. Management identifies net interest income, credit performance, and interest-rate conditions as important drivers of results.
Key financial metrics
| Metric | Q1 2014 / March 31, 2014 | Comparable / prior balance |
|---|---|---|
| Net earnings | $1.699 million | $1.440 million in Q1 2013 |
| Basic / diluted EPS | $0.54 / $0.53 | $0.47 / $0.46 in Q1 2013 |
| Net interest income | $6.000 million | $4.382 million in Q1 2013 |
| Net interest margin | 3.49% tax-equivalent | 3.38% in Q1 2013 |
| Total non-interest income | $3.236 million | $2.634 million in Q1 2013 |
| Total non-interest expense | $6.811 million | $4.881 million in Q1 2013 |
| Provision for loan losses | $150,000 | $300,000 in Q1 2013 |
| Operating cash flow | $691,000 provided | $15.573 million provided in Q1 2013 |
| Total assets | $825.4 million | $828.8 million at Dec. 31, 2013 |
| Loans, net; deposits | $411.6 million; $678.2 million | $414.0 million; $687.5 million at Dec. 31, 2013 |
| Borrowings | $71.5 million | $68.7 million at Dec. 31, 2013 |
| Stockholders’ equity | $65.5 million | $62.7 million at Dec. 31, 2013 |
Net earnings rose 18.0% year over year. Return on average assets was 0.84% versus 0.92%; return on average equity was 10.81% versus 9.18%. Equity to total assets was 7.94%. The company paid a quarterly dividend of $0.19 per share.
Cash and cash equivalents decreased $3.4 million to $26.3 million. Available-for-sale securities were $301.9 million; cash plus those securities totaled $328.2 million. Financing activities used $6.6 million, principally reflecting lower deposits. The allowance for loan losses was $5.64 million, or 1.35% of gross loans.
Material changes and management commentary
- Management attributed much of the year-over-year increase in net interest income and earnings to the Citizens Bank acquisition and its larger average loan and securities balances. Net interest income increased 36.9%; average interest-earning assets rose to $736.9 million from $565.3 million.
- Higher acquisition-related operating costs contributed to a 39.5% increase in non-interest expense, including higher compensation, occupancy, and data-processing costs.
- Deposit costs declined: the average cost of interest-bearing deposits fell to 0.24% from 0.37%. Investment securities yield declined to 2.49% from 2.76%, partly offsetting balance growth.
- Deposits decreased $9.3 million during the quarter, mainly from seasonal declines in municipal accounts and lower time deposits. Loans, net of allowance, declined $2.4 million, with lower commercial and agricultural balances partly offset by growth in other categories.
- Non-accrual loans improved to $8.5 million (2.05% of gross loans) from $9.8 million (2.35%) at year-end. However, loans past due 30–89 days increased to $2.6 million, and $3.8 million was at least 90 days past due but still accruing. Management linked the latter to a land-loan relationship and expected property liquidation in Q2 or early Q3 2014.
- Impaired loans were $15.4 million, down from $16.8 million. Potential problem loans outside non-performing assets increased to approximately $17.5 million from $14.6 million. Management said asset quality had generally improved but acknowledged that future losses could exceed estimates.
Outlook, risks, and contingencies
- No specific earnings or revenue guidance was provided. Management said interim results are not necessarily indicative of full-year results and expressed an expectation of continued growth and profitability, subject to risks.
- Interest-rate simulation estimated net interest income would increase 2.6% under a 200-basis-point rise and 1.4% under a 100-basis-point rise, and decline 3.7% under a 100-basis-point fall. A 200-basis-point fall was deemed not meaningful in the low-rate environment.
- The company and Bank were reported well capitalized. At March 31, the company’s total risk-based capital ratio was 14.25%; the Bank’s was 13.98%. Management was evaluating Basel III requirements effective beginning January 1, 2015 and believed the company would have been well capitalized under the new rules at quarter-end.
- Available additional borrowing capacity included $38.2 million against pledged FHLB collateral, $13.7 million at the Federal Reserve, and approximately $50 million under correspondent-bank agreements. A $7.5 million line of credit was undrawn; the company reported compliance with its covenants.
- Off-balance-sheet exposures included $74.4 million of loan commitments and $1.2 million of standby letters of credit. The company also disclosed a $454,000 mortgage repurchase reserve and the judgment involved in estimating potential repurchase losses.
- Investment securities had $2.98 million of gross unrealized losses, which the company considered temporary. Management cautioned that higher rates, weaker issuer or economic conditions, or reduced market liquidity could cause further fair-value declines or impairment.
- Management identified risks including local and national economic weakness, credit and real-estate deterioration, interest-rate changes, competition, regulatory changes, acquisition integration, technology and cybersecurity, and the ability to maintain adequate capital and loan-loss reserves. No material pending legal proceedings or material risk-factor changes were reported.
Important facts for investors to verify
- How much of the earnings and balance growth is attributable to the Citizens Bank acquisition, and whether acquired operations can sustain earnings after integration costs.
- Trends in non-interest expense, deposit balances and costs, loan demand, and net interest margin.
- Credit developments in the land-loan relationship, past-due accruing loans, and the $17.5 million of identified potential problem loans; also assess allowance adequacy.
- Liquidity and funding resilience if deposits decline or loan commitments are drawn, and the terms and availability of contingent borrowing sources.
- Exposure to interest-rate increases and decreases, unrealized investment losses, and the effect of Basel III requirements on capital and dividends.