Landmark Bancorp, Inc. — Q3 2011 Form 10-Q
Business and period: Landmark Bancorp is a Kansas bank holding company operating Landmark National Bank, with 20 branches. This unaudited filing covers the quarter and nine months ended September 30, 2011; balance-sheet comparisons are to December 31, 2010. Amounts are in U.S. dollars unless stated otherwise.
Financial performance and condition
- Q3 earnings: Net earnings were $1.489 million, up from $1.103 million a year earlier; diluted EPS was $0.56 versus $0.42. Nine-month net earnings were $3.189 million versus $1.199 million; diluted EPS was $1.21 versus $0.46.
- Revenue and margins: Q3 net interest income rose 1.8% to $4.551 million, while total interest income fell 5.8% to $5.691 million. Nine-month net interest income declined 1.5% to $13.400 million. Tax-equivalent net interest margin was 3.77% in Q3 and 3.79% for nine months, essentially unchanged year over year. Non-interest income was $2.381 million for Q3 and $6.526 million year to date.
- Profit drivers and expenses: Q3 results included $167,000 of net investment securities gains, compared with a $251,000 net loss a year earlier. Nine-month provision for loan losses fell to $1.6 million from $5.2 million, primarily reflecting improved asset quality and lower charge-offs. Nine-month non-interest expense rose 2.7% to $14.731 million, including a $757,000 increase in professional fees largely for process-review consultants.
- Assets, loans and deposits: Total assets increased to $580.2 million from $561.5 million. Net loans were nearly flat at $307.1 million; available-for-sale securities rose to $185.0 million. Deposits increased to $451.2 million from $431.3 million, while total borrowings declined to $63.0 million from $70.3 million.
- Credit quality: The allowance for loan losses was $4.323 million, or 1.39% of gross loans, versus $4.967 million, or 1.60%, at year-end. Non-accrual loans declined to $863,000 (0.28% of gross loans) from $4.817 million (1.55%); impaired loans fell to $1.9 million from $5.3 million. However, loans 30–89 days past due and accruing rose to $3.525 million (1.13% of gross loans) from $1.374 million (0.44%). Nine-month net charge-offs were $2.2 million, down from $6.1 million.
- Cash flow and liquidity: For the first nine months, operating activities provided $11.758 million, investing activities used $17.476 million and financing activities provided $11.150 million. Cash and cash equivalents increased $5.432 million to $15.167 million. Cash and available-for-sale securities totaled $200.2 million. The bank reported $65.5 million of additional FHLB borrowing capacity, $17.1 million of Federal Reserve discount-window capacity and about $60.3 million of correspondent-bank fed-funds capacity, with no borrowings against those facilities at quarter-end.
- Capital and dividends: Stockholders’ equity was $58.0 million, and equity was 10.00% of assets. The company and bank were reported as “well capitalized”; company total risk-based capital was 16.53%, and bank total risk-based capital was 17.57%. The quarterly dividend was $0.19 per share.
Changes, outlook and risks
- Management attributed the nine-month earnings improvement chiefly to the lower loan-loss provision. Q3 earnings also benefited from the year-over-year swing in securities results. Lower loan balances and yields reduced interest income, while lower deposit and borrowing costs reduced interest expense.
- The company retained some newly originated residential mortgages to slow portfolio runoff amid weak commercial loan demand; most new originations continued to be sold. Management described its local markets as affected by economic and real-estate pressures, while stating that asset quality had improved and the allowance was appropriate. No numerical earnings or operating guidance was provided.
- Key risks include deterioration in local economic conditions or property values, further credit losses and allowance adjustments, interest-rate changes, competition, regulatory costs including Dodd-Frank implementation, and declines in investment-security values. The company identified $792,000 of gross unrealized losses on available-for-sale securities at September 30, including $684,000 on pooled trust preferred securities; it judged the latter losses non-credit-related. Management warned that future impairment charges could be material.
- At quarter-end, the company had $50.6 million of outstanding loan commitments and $2.0 million of standby letters of credit. It reported three troubled-debt-restructuring relationships, including a newly restructured land-secured loan with a remaining $200,000 non-accrual balance. No material pending legal proceedings were reported.
- After quarter-end, on November 4, 2011, the company amended its $7.5 million revolving credit agreement, extending maturity to November 5, 2012, reducing the interest-rate floor to 4.00% and revising certain financial covenants. The filing reports a $4.4 million outstanding balance on this line at September 30.
Important facts for investors to verify
- Whether the rise in 30–89-day delinquencies signals renewed credit deterioration, and how the identified commercial real estate exposure performs.
- Whether lower non-accrual loans and charge-offs persist, and whether the allowance remains adequate as economic and collateral conditions change.
- How loan growth, securities reinvestment at lower yields and interest-rate movements affect future net interest income and margin.
- The quality and liquidity of the securities portfolio, particularly pooled trust preferred holdings and the potential for further impairment.
- Compliance with the amended credit-line covenants, refinancing needs, and the retention behavior of the $123.7 million of certificates of deposit scheduled to mature within one year.
- The sustainability of earnings improvement given the lower loan-loss provision, higher professional fees and absence of formal forward guidance.