Landmark Bancorp, Inc. — Q2 2011 Form 10-Q
Business context and reporting period
Landmark Bancorp is a bank holding company operating Landmark National Bank, with 20 branches in Kansas. This unaudited quarterly report covers the three and six months ended June 30, 2011; balance-sheet comparisons are to December 31, 2010. Amounts below are in millions of dollars unless otherwise stated.
Financial performance and condition
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Interest income | $5.707 | $6.219 | $11.268 | $12.511 |
| Net interest income | $4.535 | $4.572 | $8.849 | $9.140 |
| Provision for loan losses | $0.700 | $4.000 | $1.100 | $4.700 |
| Net earnings (loss) | $0.722 | $(1.047) | $1.700 | $0.096 |
| Diluted earnings (loss) per share | $0.27 | $(0.40) | $0.64 | $0.04 |
- Margins and costs: Tax-equivalent net interest margin was 3.81% in both Q2 and the first half, slightly above the respective prior-year periods (3.79% and 3.80%). Net interest income declined 0.8% in Q2 and 3.2% in the first half. Lower deposit and borrowing costs helped offset lower asset yields and loan balances.
- Non-interest items: Q2 non-interest income was $2.108 million, down 7.4%, chiefly because loan-sale gains fell. First-half non-interest income was $4.145 million, up 2.6%. Non-interest expense rose 9.5% in Q2 to $5.227 million and 5.0% in the first half to $10.058 million, mainly from higher professional fees for consultants reviewing processes and performance.
- Assets and funding: Total assets were $577.4 million, up from $561.5 million at year-end. Net loans were $307.5 million, broadly stable; available-for-sale securities were $185.8 million. Deposits rose $17.1 million to $448.4 million, while total borrowings declined $5.5 million to $64.8 million. Stockholders’ equity was $56.3 million, or 9.75% of assets.
- Cash flow and liquidity: For the first half, operating cash flow was $10.0 million, investing cash flow was $(19.7) million, and financing cash flow was $10.6 million. Cash and equivalents increased $0.9 million to $10.6 million. Cash and available-for-sale securities totaled $196.4 million. The company reported $60.7 million of additional FHLB borrowing capacity, $13.2 million of Federal Reserve discount-window capacity, and approximately $59.7 million of correspondent-bank fed funds capacity, subject to applicable requirements.
- Credit quality: The allowance for loan losses was $4.0 million, 1.29% of gross loans, versus $5.0 million, or 1.60%, at year-end. Non-accrual loans fell to $0.807 million (0.26% of gross loans) from $4.817 million (1.55%); impaired loans declined to $1.875 million from $5.348 million. First-half net charge-offs were $2.062 million versus $5.795 million.
- Capital and dividends: The company and bank were reported as “well capitalized.” Company total risk-based capital was 16.33%; the bank’s was 17.24%. The quarterly dividend was $0.19 per share; first-half dividends totaled $1.005 million.
Material changes, outlook, and risks
- Earnings improved substantially year over year, primarily because loan-loss provisions declined as asset quality improved. Management cautioned that interim results are not necessarily indicative of full-year results.
- Management attributed lower interest income mainly to lower average loan balances and weaker investment yields. Loan demand remained soft; the company said it was retaining some newly originated residential loans to moderate portfolio runoff while continuing to sell most such originations.
- A previously impaired construction loan had its remaining $1.0 million balance charged off in Q2 2011 amid further litigation delays in collection from a guarantor. Other first-half charge-offs principally involved a commercial relationship written down after the bank took possession of collateral.
- The investment portfolio included pooled trust preferred securities with $0.647 million of unrealized losses at June 30. Management judged those losses non-credit-related, but disclosed that further market, issuer-credit, or liquidity deterioration could lead to additional impairment charges. A separate pooled security had previously been written down to zero.
- Management cited ongoing exposure to economic and real-estate conditions, borrower credit deterioration, interest-rate and prepayment changes, and regulatory changes. It said Dodd-Frank’s effects remained difficult to assess. The filing gave no quantitative earnings guidance or specific full-year forecast.
- A $7.5 million external line of credit matured November 4, 2011; $4.5 million was outstanding at quarter-end. The company reported compliance with its covenants. It also had $53.5 million in outstanding loan commitments and $2.0 million in standby letters of credit.
- Management reported effective disclosure controls as of June 30, 2011, and no material quarterly change in internal control over financial reporting. No material legal proceedings or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether the sharp reduction in non-accrual and impaired loans is sustained, and how remaining troubled credits, collateral values, and guarantor litigation resolve.
- Whether further charge-offs or economic deterioration require a higher loan-loss allowance, notwithstanding the lower current provision.
- Whether deposit growth and liquidity capacity remain available, including the refinancing or repayment of the $4.5 million external line due in November 2011.
- Whether core earnings can withstand lower loan balances and yields, elevated consultant-related professional fees, and changes to fee income or regulation.
- Whether pooled trust preferred securities or other investments incur additional impairment, and whether unrealized gains in available-for-sale securities persist.
- Whether regulatory capital, dividend capacity, and the $0.19 quarterly dividend remain supportable; the filing reported approximately $2.3 million of bank dividends available to the holding company without prior regulatory approval.