Landmark Bancorp, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The company is a Kansas-focused bank holding company operating through Landmark National Bank. The 10-K includes full-year results and quarterly data; the fourth quarter is not a separate reporting period.
Financial performance and condition
| Metric | 2013 | 2012 |
|---|---|---|
| Total assets | $828.8 million | $614.1 million |
| Net interest income | $19.0 million | $18.1 million |
| Net interest margin, tax-equivalent | 3.40% | 3.47% |
| Net earnings | $4.7 million | $6.4 million |
| Diluted earnings per share | $1.49 | $2.06 |
| Provision for loan losses | $0.8 million | $1.9 million |
| Return on average assets / equity | 0.70% / 7.33% | 1.01% / 10.34% |
- Interest income was $22.1 million and interest expense was $3.1 million. Non-interest income was $10.7 million; non-interest expense was $23.5 million.
- Net cash from operating activities was $12.1 million. Cash and cash equivalents increased $14.8 million to $29.7 million.
- Deposits rose to $687.5 million, mainly reflecting the Citizens Bank acquisition. Total borrowings were $68.7 million; stockholders’ equity was $62.7 million.
- Cash and available-for-sale securities totaled approximately $330.0 million. The Bank reported unused borrowing capacity of $12.5 million at the FHLB, $14.8 million at the Federal Reserve, and approximately $50.0 million under correspondent-bank agreements, subject to applicable requirements.
- Company and Bank regulatory capital ratios exceeded minimum requirements. The Bank was reported as well-capitalized.
- Gross loans were $419.4 million; the allowance for loan losses was $5.5 million, or 1.32% of gross loans. Real estate-related loans were approximately 64% of gross loans.
Changes versus the prior year
- Citizens Bank was acquired effective November 1, 2013, adding eight branches and approximately $195 million of assets. The transaction drove much of the growth in assets, loans and deposits.
- Net earnings declined 26.9%. Management attributed the decrease chiefly to $1.9 million in Citizens acquisition costs and a $1.9 million reduction in gains on mortgage-loan sales as higher mortgage rates reduced origination and sale volumes. Lower loan-loss provision partly offset these effects.
- Net interest income increased 4.9%, supported by higher average earning assets, while net interest margin declined to 3.40% from 3.47%. Lower asset yields were not fully offset by reductions in funding costs.
- Asset-quality measures were mixed: non-performing assets fell to $10.2 million from $11.6 million, and real estate owned declined to $0.4 million from $2.4 million; non-accrual loans increased to $9.8 million from $9.1 million. The allowance increased in dollars but fell as a share of gross loans, partly because acquired loans were recorded at fair value without an acquisition-date allowance.
- Unrealized losses on available-for-sale securities reduced accumulated other comprehensive income from $3.5 million to a $0.9 million loss. Total comprehensive income was $0.3 million despite net earnings of $4.7 million.
- Fourth-quarter net earnings were $521,000, compared with $1.6 million in fourth-quarter 2012; 2013 fourth-quarter non-interest expense included a substantial portion of acquisition costs.
Outlook, risks and unusual items
- Management said it did not expect near-term improvement in net interest margin and cautioned that margin could decline as assets reprice or are reinvested at lower yields. No quantified earnings or revenue guidance was provided.
- Management described asset quality as generally improved but highlighted continuing problem credits and potential sensitivity to Kansas economic conditions, real estate values, commercial and agricultural borrowers, and loan concentrations.
- Interest-rate sensitivity modeling estimated a 0.7% increase in one-year net interest income under a 200-basis-point rate rise, a 0.4% increase under a 100-basis-point rise, and a 3.9% decline under a 100-basis-point fall. These are model estimates, not forecasts.
- The company disclosed $69.1 million of unfunded loan commitments and $1.6 million of standby letters of credit. Management expected sufficient funds to meet current commitments.
- A $390,000 employee vault-cash fraud exposed a material weakness in cash reconciliation and accounting controls during 2013. Management reported remedial measures and concluded internal control over financial reporting was effective at year-end; the auditor did not provide an internal-control attestation.
- Citizens acquisition accounting included $4.5 million of goodwill and a $1.7 million core deposit intangible. The annual goodwill impairment test found no impairment. The company incurred $1.9 million of acquisition-related expense.
- The company reported no material pending litigation beyond ordinary routine matters. KPMG issued an unqualified opinion on the consolidated financial statements.
Important facts for investors to verify
- Whether the Citizens integration delivers expected earnings and cost benefits, and how much of future results reflects ongoing operating costs versus acquisition expenses.
- Trends in non-accrual and impaired loans, troubled debt restructurings, potential problem loans, and the adequacy of the allowance, particularly following the fair-value accounting for acquired loans.
- Whether net interest margin stabilizes, including deposit pricing, loan yields, mortgage refinancing activity, and the effect of changing interest rates.
- The composition, valuation and interest-rate exposure of the $300.2 million available-for-sale securities portfolio, including the effect of unrealized losses on equity.
- Progress in sustaining the cash-control remediation and preventing recurrence of fraud; the filing does not include an auditor attestation on internal controls.
- Capacity to maintain dividends and capital levels as Basel III requirements phase in; dividends depend substantially on distributions from the Bank and remain subject to regulatory limits.