Landmark Bancorp, Inc. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; filed March 29, 2013. This is an annual report, not a standalone fourth-quarter filing. Landmark Bancorp is a Kansas bank holding company operating through Landmark National Bank. It completed the acquisition of The Wellsville Bank on April 1, 2012, adding a branch and approximately $35.0 million of deposits.
Financial performance and condition
| Metric | 2012 | 2011 |
|---|---|---|
| Total assets at year-end | $614.1 million | $598.2 million |
| Net loans at year-end | $315.9 million | $310.1 million |
| Deposits at year-end | $482.5 million | $454.1 million |
| Borrowings at year-end | $60.0 million | $76.6 million |
| Interest income | $22.1 million | $22.6 million |
| Net interest income | $18.1 million | $17.9 million |
| Net interest margin, tax-equivalent | 3.47% | 3.77% |
| Provision for loan losses | $1.9 million | $2.0 million |
| Non-interest income | $12.0 million | $8.9 million |
| Non-interest expense | $20.5 million | $20.0 million |
| Net earnings | $6.4 million | $4.5 million |
| Diluted earnings per share | $2.16 | $1.54 |
- Net earnings rose 42.0%. The principal driver was a $2.9 million increase in gains on mortgage loan sales, supported by low rates and refinancing activity. Fees and service charges also grew; higher taxes and operating expenses partly offset these gains.
- Net interest income increased modestly, but margin narrowed as deposits grew faster than loans and excess liquidity was invested in lower-yielding securities and cash. Deposit costs declined to 0.50% from 0.72%; average loan yield fell to 5.37% from 5.61%.
- Net cash provided by operating activities was $12.4 million; investing activities provided $10.4 million; financing activities used $25.3 million. Cash and cash equivalents decreased $2.6 million to $14.9 million. Acquisition-related cash received was $4.0 million.
- Year-end stockholders’ equity was $63.3 million, up from $59.1 million. Return on average assets was 1.01% and return on average equity was 10.34%, compared with 0.78% and 7.98%, respectively, in 2011.
- Company and Bank regulatory capital ratios remained well above minimums. Company leverage and total risk-based capital ratios were 10.09% and 17.83%; Bank ratios were 9.90% and 17.33%. The Bank was classified as well-capitalized.
Material changes and asset quality
- Total gross loans increased to $320.5 million from $314.6 million. Residential, commercial and construction/land lending grew, while commercial real estate and agricultural balances declined. Investment securities rose to $213.3 million from $198.2 million.
- Non-accrual loans increased sharply to $9.1 million, or 2.84% of gross loans, from $1.4 million, or 0.45%. Non-performing assets were $11.6 million, or 1.88% of assets, versus $4.8 million, or 0.80%.
- The increase in non-accrual loans included a $4.4 million commercial real estate and land relationship after the borrower entered bankruptcy, a $2.2 million restructured land loan, and a $1.1 million commercial loan. Impaired loans increased to $14.5 million from $2.5 million. Management said collateral evaluations did not require a higher specific allowance for the new non-accrual balances.
- The allowance for loan losses was $4.6 million, or 1.43% of gross loans, versus $4.7 million, or 1.50%. Net charge-offs were $2.0 million, primarily associated with restructured land loans. The filing reports eight troubled-debt-restructuring relationships and $8.4 million in TDR balances at year-end.
- The acquisition added $15.0 million of loans and $14.2 million of investments, and generated $181,000 of goodwill. Acquisition-related expenses were $147,000.
Liquidity, debt, outlook and risks
- Cash and available-for-sale securities totaled $228.2 million at year-end. The Bank reported $13.5 million of additional FHLB borrowing capacity, $15.8 million of Federal Reserve discount-window capacity and approximately $109.2 million of correspondent-bank federal funds capacity, subject to collateral, credit requirements and policies.
- Borrowings included $35.7 million of FHLB term advances, $2.7 million drawn on the FHLB line, $16.5 million of subordinated debentures and $5.0 million of repurchase agreements. The Company also had a $7.5 million credit line, undrawn at year-end and maturing November 2013.
- Outstanding loan commitments were $53.5 million; standby letters of credit totaled $1.8 million. The Company guaranteed trust preferred securities with maximum potential future payments of approximately $25.3 million; recorded principal and accrued interest were $16.6 million.
- Management said near-term net interest margin may remain under pressure, citing expected reinvestment of cash flows at lower yields and possible inability to renew loans at current rates. No numerical earnings or growth guidance was provided.
- Key risks include deteriorating Kansas economic or real estate conditions, concentration in real estate and commercial lending, higher non-performing loans and uncertain collateral values, interest-rate and refinancing sensitivity, competition, regulatory changes and capital requirements. Mortgage-sale gains may decline if refinancing volumes fall. Basel III implementation in the United States had been delayed, with final requirements and timing uncertain.
- The Company paid $0.72 per share in cash dividends and issued a 5% stock dividend in 2012. The Bank had approximately $2.0 million available for dividends to the parent without prior regulatory approval; actual distributions remain subject to regulatory and capital constraints.
- KPMG LLP issued an unqualified audit opinion on the consolidated financial statements. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an internal-control attestation.
Important facts for investors to verify
- Whether the 2012 increase in non-accrual and impaired loans, TDRs and real estate owned leads to additional charge-offs or provision expense.
- How much of earnings growth depended on mortgage refinancing and loan-sale gains, and whether those gains are sustainable as rates and refinancing volumes change.
- Whether deposit growth, loan demand and asset repricing stabilize net interest margin, which declined 30 basis points year over year.
- The collateral values, borrower progress and recovery prospects for the major troubled commercial and land credits.
- Available liquidity and dividend capacity after considering deposit maturities, borrowing collateral requirements, commitments and regulatory capital needs.