Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
LARK > SEC Filings for LARK > Form 10-Q on 10-May-2013All Recent SEC Filings

Show all filings for LANDMARK BANCORP INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for LANDMARK BANCORP INC


10-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview. Landmark Bancorp, Inc. is a one-bank holding company incorporated under the laws of the State of Delaware and is engaged in the banking business through its wholly-owned subsidiary, Landmark National Bank. Landmark Bancorp is listed on the Nasdaq Global Market under the symbol "LARK". Landmark National Bank is dedicated to providing quality financial and banking services to its local communities. Our overall strategy includes continuing a tradition of quality assets while growing our commercial and commercial real estate loan portfolios. We are committed to developing relationships with our borrowers and providing a total banking service.

Landmark National Bank is principally engaged in the business of attracting deposits from the general public and using such deposits, together with borrowings and other funds, to originate one-to-four family residential real estate, construction and land, commercial real estate, commercial, agriculture, municipal and consumer loans. Although not our primary business function, we also invest in certain investment and mortgage-related securities using deposits and other borrowings as funding sources.

Our results of operations depend generally on net interest income, which is the difference between interest income from interest-earning assets and interest expense on interest-bearing liabilities. Net interest income is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows. In addition, we are subject to interest rate risk to the degree that our interest-earning assets mature or reprice at different times, or at different speeds, than our interest-bearing liabilities. Our results of operations are also affected by non-interest income, such as service charges, loan fees and gains from the sale of newly originated loans and gains or losses on investments. Our principal operating expenses, aside from interest expense, consist of compensation and employee benefits, occupancy costs, professional fees, advertising, federal deposit insurance costs, data processing expenses and provision for loan losses.

We are significantly impacted by prevailing economic conditions including federal monetary and fiscal policies and federal regulations of financial institutions. Deposit balances are influenced by numerous factors such as competing investments, the level of income and the personal rate of savings within our market areas. Factors influencing lending activities include the demand for housing and interest rate pricing competition from other lending institutions.

Our business consists of ownership of Landmark National Bank, with its main office in Manhattan, Kansas and twenty one branch offices across the state of Kansas as of March 31, 2013.

Critical Accounting Policies. Critical accounting policies are those which are both most important to the portrayal of our financial condition and results of operations, and require our management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies relate to the allowance for loan losses, valuation of real estate owned, valuation of investment securities and accounting for income taxes, all of which involve significant judgment by our management. Information about our critical accounting policies is included under Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2012.

Summary of Results. During the first quarter of 2013, we recorded net earnings of $1.4 million as compared to net earnings of $1.7 million in the same period of 2012. The decrease in net earnings during the first quarter of 2013 was primarily due to a decrease of $174,000 in gains on sales of loans, as compared to the prior year period, and the first quarter of 2012 including $164,000 of net investment securities gains for which no comparable gains existed in the 2013 period. In addition, our net interest income was $110,000 lower and our non-interest expenses were $152,000 higher in the first quarter of 2013, as compared to the first quarter of 2012.

The following table summarizes earnings and key performance measures for the periods presented.

(Dollars in thousands, except per share amounts)     Three months ended March 31,
                                                       2013                2012
Net earnings:
Net earnings                                       $       1,440       $       1,727
Basic earnings per share (1)                       $        0.49       $        0.59
Diluted earnings per share (1)                     $        0.48       $        0.59
Earnings ratios:
Return on average assets (2)                                0.92 %              1.15 %
Return on average equity (2)                                9.18 %             11.62 %
Equity to total assets                                      9.86 %              9.70 %
Net interest margin (2) (3)                                 3.38 %              3.63 %
Dividend payout ratio                                      39.58 %             30.65 %

(1) Per share values for the periods ended March 31, 2012 have been adjusted to give effect to the 5% stock dividend paid during December 2012.

(2) Ratios have been annualized and are not necessarily indicative of the results for the entire year.

(3) Net interest margin is presented on a fully tax equivalent basis, using a 34% federal tax rate.

Interest Income. Interest income for the quarter ended March 31, 2013 decreased $354,000 to $5.2 million, a decrease of 6.4% as compared to the same period of 2012. Interest income on loans decreased $280,000, or 6.6%, to $4.0 million for the quarter ended March 31, 2013, due to lower tax equivalent yields earned on loans. Our average tax equivalent yield on loans decreased to 5.04% in the first quarter of 2013 from 5.48% in the same period of 2012. Partially offsetting the lower tax equivalent yields was an increase in our average loan balances, which increased to $321.7 million from $314.6 million over the same periods. Interest income on investment securities decreased $74,000, or 5.7%, to $1.2 million for the first quarter of 2013, as compared to the same period of 2012. The decrease in interest income on investment securities was due to a decline in the tax equivalent yield on our investment portfolio from 3.10% during the first quarter of 2013 to 2.76% during the first quarter of 2012. The yield on our investment securities declined as the current interest rate environment resulted in the purchase of lower yielding investment securities with funds from the maturities, prepayments and sales of higher yielding investment securities. Partially offsetting the effects of the lower yields was higher average balances of investment securities, which increased from $205.4 million during the first quarter of 2012 to $220.2 million during the first quarter of 2013, resulting in part from our purchases of additional investment securities with excess liquidity and in part from our acquisition of The Wellsville Bank.

Interest Expense. Interest expense during the quarter ended March 31, 2013 decreased $244,000, or 23.5%, to $795,000 as compared to the same period of 2012. For the first quarter of 2013, interest expense on interest-bearing deposits decreased $206,000, or 34.8%, to $386,000 as a result of lower rates paid on our certificates of deposit, money market, NOW and savings accounts. Our total cost of deposits declined from 0.59% during the first quarter of 2012 to 0.37% during the same period of 2013 as we were able to reprice our deposits lower in the current low rate environment. Our average interest-bearing deposit balances increased from $402.5 million for the first quarter of 2012 to $424.1 million for the first quarter of 2013 due both to organic growth and our acquisition of The Wellsville Bank. For the first quarter of 2013, interest expense on borrowings decreased $38,000, or 8.5%, to $409,000 due to lower outstanding balances and a lower average rate on our borrowings. Our average outstanding borrowings declined from $61.7 million in the first quarter of 2012 to $57.8 million in the same period of 2013 and our average cost of borrowings decreased from 2.91% in the first quarter of 2012 to 2.87% in the same period of 2013.

Net Interest Income. Net interest income decreased $110,000, or 2.4%, for the first quarter of 2013 to $4.4 million compared to the same period of 2012. The lower net interest income resulted from a decline in our net interest margin, on a tax equivalent basis, to 3.38% during the first quarter of 2013 compared to 3.63% during the same period of 2012. Net interest margin declined as deposit growth outpaced loan demand, resulting in higher levels of investment securities and cash and cash equivalents, which typically earn lower yields than loans. Generally lower asset yields were partially offset by an increase in average interest-earning assets from $534.6 million during the first quarter of 2012 to $565.3 million during the same period of 2013. Average interest-earning asset balances increased primarily as a result of the acquisition of The Wellsville Bank.

See the Average Assets/Liabilities and Rate/Volume tables at the end of Item 2 "Management's Discussion and Analysis of Financial Condition" for additional details on asset yields, liability rates and net interest margin.

Provision for Loan Losses. We maintain, and our Board of Directors monitors, an allowance for losses on loans. The allowance is established based upon management's periodic evaluation of known and inherent risks in the loan portfolio, review of significant individual loans and collateral, review of delinquent loans, past loss experience, adverse situations that may affect the borrowers' ability to repay, current and expected market conditions, and other factors management deems important. Determining the appropriate level of reserves involves a high degree of management judgment and is based upon historical and projected losses in the loan portfolio and the collateral value of specifically identified problem loans. Additionally, allowance policies are subject to periodic review and revision in response to a number of factors, including current market conditions, actual loss experience and management's expectations.

We recorded $300,000 of provision for loan losses during the first quarters of both 2013 and 2012. We recorded net loan charge-offs of $247,000 during the first quarter of 2013 compared to net loan recoveries of $7,000 during the same period of 2012. The increase in charge-offs in the first quarter of 2013 was principally associated with liquidating the assets securing a previously identified and impaired $1.1 million commercial loan relationship, which was fully reserved as of December 31, 2012.

For further discussion of the allowance for loan losses, refer to the "Asset Quality and Distribution" section.

Non-interest Income. Total non-interest income decreased $38,000, or 1.4%, to $2.6 million in the first quarter of 2013 compared to the same period of 2012. The decrease in non-interest income was primarily the result of a $174,000 decrease in our gains on sales of loans, as the volume of loans sold in the secondary market was lower in the first quarter of 2013 compared to a year earlier. An increase in mortgage rates may further reduce our gains on sales of loans in future periods as the origination volumes associated with refinancing slows. Partially offsetting the decline in gains on sales of loans, was a $134,000 increase in our fees and service charges as a result of additional fees and service charges received on our deposit accounts and fee income on servicing one-to-four family residential real estate loans for others.

Investment Securities Gains, Net. During the first quarter of 2012, we recognized $227,000 in gains on sales of investment securities as a result of selling approximately $5.5 million of mortgage-backed investment securities. Partially offsetting the gains on sales of investment securities was a credit-related, other-than-temporary impairment loss of $63,000 recognized during the first quarter of 2012 on one of our investments in a pooled trust preferred security. We sold our portfolio of pooled trust preferred investment securities during the fourth quarter of 2012. No such gains or losses were realized during the first quarter of 2013.

Non-interest Expense. Non-interest expense increased $152,000, or 3.2%, to $4.9 million for the first quarter of 2013 compared to a year earlier. The increase in non-interest expense was primarily the result of increases of $67,000 in compensation and benefits, $67,000 in other non-interest expense, $30,000 in foreclosure and real estate owned expense, $22,000 in data processing and $16,000 in federal deposit insurance premiums. These expenses primarily increased in the first quarter of 2013 as the period fully reflected the ongoing operating costs relating to the acquisition of The Wellsville Bank. Partially offsetting those increases was a decline of $48,000 in professional fees as the first quarter of 2012 included expenses associated with the acquisition of The Wellsville Bank.

Income Tax Expense. During the first quarter of 2013, we recorded income tax expense of $395,000, compared to $572,000 during the same period of 2012. Our effective tax rate decreased from 24.9% in the first quarter of 2012 to 21.5% in the first quarter of 2013 as a result of lower earnings before income taxes, while tax-exempt income remained stable between the periods.

Financial Condition. Our asset quality and performance have been affected by the general economic conditions in the United States, including difficult credit markets, depressed residential and commercial real estate values, generally depressed consumer confidence, heightened unemployment and decreased consumer spending. Even though the geographic markets in which the Company operates have been impacted by these economic conditions in recent years, the effect has not been as severe as those experienced in some areas of the United States. In addition, our loan portfolio is diversified across various types of loans and collateral throughout the markets in which we operate. Despite a few lingering problem loans that management is working to resolve, our asset quality has generally improved over the past few years. Outside of identified problem assets, management believes that it continues to have a high quality asset base and solid core earnings, and anticipates that its efforts to run a high quality financial institution with a sound asset base will continue to create a strong foundation for continued growth and profitability in the future.

Asset Quality and Distribution. Our primary investing activities are the origination of commercial real estate, commercial and consumer loans and the purchase of investment and mortgage-backed securities. Total assets increased to $650.6 million at March 31, 2013, compared to $614.1 million at December 31, 2012. Net loans, excluding loans held for sale, decreased to $314.3 million at March 31, 2013 from $315.9 million at December 31, 2012. The $1.6 million decrease in loans was primarily the result of lower balances in our commercial, agriculture, municipal and consumer loans. The decline in these loan balances is the result of multiple factors, including reduced loan demand from our customers, seasonal factors and early payoffs. Partially offsetting those decreases were higher outstanding balances of one-to-four family residential real estate, commercial real estate and construction and land loans. Generally, we originate fixed-rate, residential mortgage loans with maturities in excess of ten years for sale in the secondary market. These loans are typically sold soon after the loan closing. We also retain some of our newly originated one-to-four family residential real estate loans that meet internal criteria as well as secondary market qualifications. We typically only retain loans with maturities of 15 years or less. While we do not intend to continue to increase our one-to-four family residential real estate loan portfolio, we are currently slowing the normal runoff of the portfolio by retaining some of the new loan originations to offset weak commercial loan demand; however, most of the new loan originations will still be sold. We do not originate and warehouse these fixed-rate residential loans for resale in order to speculate on interest rates.

The allowance for loan losses is established through a provision for loan losses based on our evaluation of the risk inherent in the loan portfolio and changes in the nature and volume of our loan activity. This evaluation, which includes a review of all loans with respect to which full collectability may not be reasonably assured, considers the fair value of the underlying collateral, economic conditions, historical loan loss experience, level of classified loans and other factors that warrant recognition in providing for an appropriate allowance for loan losses. At March 31, 2013, our allowance for loan losses totaled $4.6 million, or 1.45% of gross loans outstanding, as compared to $4.6 million, or 1.43% of gross loans outstanding, at December 31, 2012.

Loans past due 30-89 days and still accruing interest totaled $3.1 million, or 0.98% of gross loans at March 31, 2013 compared to $2.2 million, or 0.69% of gross loans, at December 31, 2012. At March 31, 2013, $7.8 million in loans were on non-accrual status, or 2.46% of gross loans, compared to a balance of $9.1 million, or 2.84% of gross loans, at December 31, 2012. Non-accrual loans consist of loans 90 or more days past due and certain impaired loans. The decrease in non-accrual loans was principally associated with the pay down of a portion of a $1.1 million commercial loan that was placed on non-accrual status during the fourth quarter of 2012 funded through the liquidation of the borrower's assets in the first quarter of 2013. The remaining loan balance of $192,000 was charged off during the first quarter of 2013. There were no loans 90 days delinquent and still accruing interest at March 31, 2013 or December 31, 2012. Our impaired loans totaled $13.2 million at March 31, 2013 compared to $14.5 million at December 31, 2012. The difference in the Company's non-accrual loan balances and impaired loan balances at March 31, 2013 was related to troubled debt restructurings that are current but still classified as impaired. We recorded net loan charge-offs of $247,000 during the first quarter of 2013 compared to net loan recoveries of $7,000 during the same period of 2012.

At March 31, 2013, we had seven loan relationships consisting of eleven outstanding loans that were classified as TDRs compared to eight relationships consisting of thirteen outstanding loans at December 31, 2012. During 2012, a commercial loan relationship consisting of two commercial loans was classified as a TDR after we agreed to extend the maturity of the loans while the borrower liquidated the business assets securing the loans. The loans were repaid in the first quarter of 2013 and resulted in a net charge-off of $6,000. We did not classify any loan restructurings as TDRs during the first quarter of 2013.

As part of our credit risk management, we continue to aggressively manage the loan portfolio to identify problem loans and have placed additional emphasis on commercial real estate and construction and land relationships. We are aggressively working to resolve the remaining problem credits or move the non-performing credits out of the loan portfolio. At March 31, 2013, we had $2.2 million of real estate owned as compared to $2.4 million at December 31, 2012. Real estate owned primarily consists of a residential subdivision development we took possession of after the development slowed and the borrower was unable to comply with the contractual terms of the loan, a commercial real estate building resulting from a loan settlement, land previously acquired by Landmark National Bank for expansion and a few residential real estate properties. The Company is currently marketing all of the properties in real estate owned.

Many financial institutions, including us, experienced a general increase in non-performing assets during recent years, as even well-established business borrowers developed cash flow, profitability and other business-related problems as a result of economic conditions. While we believe that our allowance for loan losses at March 31, 2013 and December 31, 2012 was appropriate, there can be no assurances that loan losses will not exceed the estimated amounts. We believe that we use the best information available to determine the allowance for loan losses; however, unforeseen market conditions could result in adjustment to the allowance for loan losses. In addition, net earnings could be significantly affected if circumstances differ substantially from the assumptions used in establishing the allowance for loan losses. Further deterioration in the local economy or real estate values may create additional problem loans for us and require further adjustment to our allowance for loan losses.

Liability Distribution. Our primary ongoing sources of funds are deposits, FHLB borrowings, proceeds from principal and interest payments on loans and investment securities and proceeds from the sale of mortgage loans and investment securities. While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates and economic conditions. We experienced a $25.1 million increase in total deposits during the first quarter of 2013, to $507.6 million at March 31, 2013, from $482.5 million at December 31, 2012. The growth occurred in our non-interest-bearing demand, money market and NOW and savings accounts, while our time deposit balances declined. Total borrowings decreased $1.5 million to $58.5 million at March 31, 2013, from $60.0 million at December 31, 2012. The decrease was the result of a decrease in borrowings on our FHLB line of credit.

Non-interest-bearing deposits at March 31, 2013 were $80.5 million, or 15.9% of deposits, compared to $75.9 million, or 15.7%, at December 31, 2012. Money market and NOW deposit accounts were 41.6% of our deposit portfolio and totaled $211.3 million at March 31, 2013, compared to $190.3 million, or 39.5%, at December 31, 2012. Savings accounts increased to $49.6 million, or 9.8% of deposits, at March 31, 2013, from $45.4 million, or 9.4%, at December 31, 2012. Certificates of deposit decreased to $166.2 million, or 32.7% of deposits, at March 31, 2013, from $170.9 million, or 35.4%, at December 31, 2012.

Certificates of deposit at March 31, 2013, which are scheduled to mature in one year or less, totaled $109.4 million. Historically, maturing deposits have generally remained with our bank and we believe that a significant portion of the deposits maturing in one year or less will remain with us upon maturity.

Cash Flows. During the three months ended March 31, 2013, our cash and cash equivalents increased by $21.0 million. Our operating activities provided net cash of $15.6 million during the first three months of 2013. Our investing activities used net cash of $17.7 million during the first quarter of 2013 as we purchased investment securities with our excess liquidity. Financing activities provided net cash of $23.1 million during the first three months of 2013, mostly as a result of increased deposits, which were primarily used to purchase investment securities and reduce our borrowings on our FHLB line of credit.

Liquidity. Our most liquid assets are cash and cash equivalents and investment securities available for sale. The levels of these assets are dependent on the operating, financing, lending and investing activities during any given period. These liquid assets totaled $267.9 million at March 31, 2013 and $228.2 million at December 31, 2012. During periods in which we are not able to originate a sufficient amount of loans and/or periods of high principal prepayments, we increase our liquid assets by investing in short-term, high-grade investments.

Liquidity management is both a daily and long-term function of our strategy. Excess funds are generally invested in short-term investments. In the event we require funds beyond our ability to generate them internally, additional funds are generally available through the use of FHLB advances, a line of credit with the FHLB, other borrowings or through sales of investment securities. At March 31, 2013, we had outstanding FHLB advances of $35.7 million and no borrowings against our line of credit with the FHLB. At March 31, 2013, we had collateral pledged to the FHLB that would allow us to borrow an additional $12.7 million, subject to FHLB credit requirements and policies. At March 31, 2013, we had no borrowings through the Federal Reserve discount window, while our borrowing capacity was $15.7 million. We also have various other fed funds agreements, both secured and unsecured, with correspondent banks totaling approximately $109.2 million under which we had no outstanding borrowings at March 31, 2013. We had other borrowings of $22.8 million at March 31, 2013, which included $16.5 million of subordinated debentures and $6.3 million in repurchase agreements. The Company has a $7.5 million line of credit from an unrelated financial institution maturing on November 5, 2013, with an interest rate that adjusts daily based on the prime rate plus 0.25%, but not less than 4.00%. This line of credit has covenants specific to capital and other financial ratios, which the Company was in compliance with at March 31, 2013. There was no outstanding balance on the line of credit at March 31, 2013.

Off Balance Sheet Arrangements. As a provider of financial services, we routinely issue financial guarantees in the form of financial and performance standby letters of credit. Standby letters of credit are contingent commitments issued by us generally to guarantee the payment or performance obligation of a customer to a third party. While these standby letters of credit represent a potential outlay by us, a significant amount of the commitments may expire without being drawn upon. We have recourse against the customer for any amount the customer is required to pay to a third party under a standby letter of credit. The letters of credit are subject to the same credit policies, underwriting standards and approval process as loans made by us. Most of the standby letters of credit are secured, and in the event of nonperformance by the customers, we have the right to the underlying collateral, which could include commercial real estate, physical plant and property, inventory, receivables, cash and marketable securities. The contract amount of these standby letters of credit, which represents the maximum potential future payments guaranteed by us, was $1.7 million at March 31, 2013.

At March 31, 2013, we had outstanding loan commitments, excluding standby letters of credit, of $62.7 million. We anticipate that sufficient funds will be available to meet current loan commitments. These commitments consist of unfunded lines of credit and commitments to finance real estate loans.

Capital. Current regulatory capital regulations require financial institutions (including banks and bank holding companies) to meet certain regulatory capital requirements. Institutions are required to have minimum leverage capital equal to 4% of total average assets and total qualifying capital equal to 8% of total risk weighted assets in order to be considered "adequately capitalized." As of March 31, 2013 and December 31, 2012, both the Company and Landmark National Bank were rated "well capitalized," which is the highest rating available under the regulatory capital regulations framework for prompt corrective action. Management believes that as of March 31, 2013, the Company and Landmark National Bank met all capital adequacy requirements to which we are subject.

The following is a comparison of the Company's regulatory capital to minimum capital requirements at March 31, 2013 and December 31, 2012:

                                                                                            To be well-capitalized
                                                                                                 under prompt
(Dollars in thousands)                                          For capital                       corrective
. . .
  Add LARK to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for LARK - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.