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LANDMARK BANCORP INC - Quarter Report: 2007 September (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

 

FORM 10-Q

 

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the quarterly period ended September 30, 2007

 

 

 

OR

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For transition period from          to         

 

Commission File Number 0-33203

 

 

LANDMARK BANCORP, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware

43-1930755

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification Number)

 

 

 

 

701 Poyntz Avenue, Manhattan, Kansas       66502

(Address of principal executive offices)         (Zip Code)

 

 

 

 

(785) 565-2000

 

(Registrant’s telephone number, including area code)

 

 

 

 

                Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

                Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o                         Accelerated filer  o                        Non-accelerated filer  x

 

                Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

                Indicate the number of shares outstanding of each of the Registrant’s classes of common stock as of the latest practicable date:  as of November 5, 2007, the Registrant had outstanding 2,304,641 shares of its common stock, $.01 par value per share.

 

 

 

 



 

LANDMARK BANCORP, INC.

Form 10-Q Quarterly Report

 

Table of Contents

 

 

 

PART I

 

 

 

 

Item 1.

Financial Statements and Related Notes

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

Item 4.

Controls and Procedures

 

 

 

 

 

PART II

 

 

 

 

Item 1.

Legal Proceedings

 

Item 1A.

Risk Factors

 

Item 2.

Unregistered Sales of Equity Securities and  Use of Proceeds

 

Item 3.

Defaults Upon Senior Securities

 

Item 4.

Submission of Matters to a Vote of  Security Holders

 

Item 5.

Other Information

 

Item 6.

Exhibits

 

 

 

 

Form 10-Q Signature Page

 

 

 

 

 

 

1


 

 

 

 


 

 

ITEM 1. FINANCIAL STATEMENTS AND RELATED NOTES

 

LANDMARK BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

September 30,

2007

 

December 31,

2006

 

ASSETS

 

(Unaudited)

 

 

 

Cash and cash equivalents

 

$

14,034,830

 

$

14,751,914

 

Investment securities available for sale, at fair value

 

155,110,013

 

145,884,168

 

Loans, net

 

380,161,738

 

379,323,581

 

Loans held for sale

 

3,574,597

 

1,364,474

 

Premises and equipment, net

 

14,330,835

 

13,767,075

 

Goodwill

 

13,009,167

 

13,009,167

 

Other intangible assets, net

 

3,351,441

 

4,030,709

 

Bank owned life insurance

 

11,496,047

 

11,144,796

 

Accrued interest and other assets

 

7,275,222

 

7,292,352

 

 

 

 

 

 

 

Total assets

 

$

602,343,890

 

$

590,568,236

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Liabilities:

 

 

 

 

 

Deposits

 

$

450,182,495

 

$

444,485,370

 

Federal Home Loan Bank borrowings

 

65,174,999

 

61,920,421

 

Other borrowings

 

27,468,446

 

28,495,643

 

Accrued expenses, taxes and other liabilities

 

8,312,425

 

6,430,787

 

Total liabilities

 

551,138,365

 

541,332,221

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, $0.01 par, 5,000,000 shares authorized, 2,344,118 and 2,341,744 shares issued, respectively

 

23,441

 

23,417

 

Additional paid-in capital

 

22,746,365

 

22,607,510

 

Retained earnings

 

29,468,003

 

26,758,056

 

Treasury stock, at cost; 39,477 and 5,000 shares, respectively

 

(1,103,400

)

(138,506

)

Accumulated other comprehensive income (loss)

 

71,116

 

(14,462

)

Total stockholders’ equity

 

51,205,525

 

49,236,015

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

602,343,890

 

$

590,568,236

 

 

See accompanying notes to condensed consolidated financial statements.

 

2



 

 

LANDMARK BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Interest income:

 

 

 

 

 

 

 

 

 

Loans

 

$

7,286,877

 

$

7,293,653

 

$

21,635,250

 

$

20,805,168

 

Investment securities

 

1,787,825

 

1,517,481

 

5,247,768

 

4,388,145

 

Other

 

11,203

 

26,337

 

35,498

 

127,731

 

Total interest income

 

9,085,905

 

8,837,471

 

26,918,516

 

25,321,044

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

Deposits

 

3,505,464

 

2,848,151

 

10,117,740

 

7,891,865

 

Borrowed funds

 

1,119,529

 

1,266,940

 

3,374,209

 

3,514,525

 

Total interest expense

 

4,624,993

 

4,115,091

 

13,491,949

 

11,406,390

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

4,460,912

 

4,722,380

 

13,426,567

 

13,914,654

 

 

 

 

 

 

 

 

 

 

 

Provision for loan losses

 

70,000

 

80,000

 

195,000

 

155,000

 

 

 

 

 

 

 

 

 

 

 

Net interest income after provision for loan losses

 

 

 

 

 

 

 

 

 

 

 

4,390,912

 

4,642,380

 

13,231,567

 

13,759,654

 

 

 

 

 

 

 

 

 

 

 

Non-interest income:

 

 

 

 

 

 

 

 

 

Fees and service charges

 

1,047,395

 

1,124,057

 

2,958,910

 

3,259,392

 

Gains on sale of loans

 

300,661

 

347,054

 

740,069

 

933,418

 

Losses on sale of investments, net

 

 

 

 

(300,256

)

Gains (losses) on sale of other assets

 

 

(11,638

)

 

716,815

 

Bank owned life insurance

 

117,468

 

114,689

 

347,435

 

272,343

 

Other

 

109,925

 

108,915

 

372,262

 

434,231

 

Total non-interest income

 

1,575,449

 

1,683,077

 

4,418,676

 

5,315,943

 

 

 

 

 

 

 

 

 

 

 

Non-interest expense:

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

2,120,127

 

2,140,241

 

6,196,685

 

6,388,817

 

Occupancy and equipment

 

671,494

 

705,523

 

2,046,852

 

2,101,545

 

Amortization of intangibles

 

228,259

 

258,732

 

698,356

 

782,904

 

Data processing

 

184,472

 

183,695

 

590,082

 

532,685

 

Professional fees

 

81,124

 

132,080

 

333,443

 

342,806

 

Advertising

 

106,629

 

109,065

 

321,992

 

327,802

 

Other

 

769,349

 

784,234

 

2,289,216

 

2,291,019

 

Total non-interest expense

 

4,161,454

 

4,313,570

 

12,476,626

 

12,767,578

 

 

 

 

 

 

 

 

 

 

 

Earnings before income taxes

 

1,804,907

 

2,011,887

 

5,173,617

 

6,308,019

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

367,341

 

548,240

 

1,137,828

 

1,827,368

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

1,437,566

 

$

1,463,647

 

$

4,035,789

 

$

4,480,651

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.62

 

$

0.63

 

$

1.74

 

$

1.92

 

Diluted

 

$

0.62

 

$

0.62

 

$

1.72

 

$

1.90

 

 

 

 

 

 

 

 

 

 

 

Dividends per share

 

$

0.1900

 

$

0.1619

 

$

0.5700

 

$

0.4857

 

 

 See accompanying notes to condensed consolidated financial statements.

 

3



 

LANDMARK BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Nine months ended September 30,

 

 

 

2007

 

2006

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

4,518,469

 

$

2,167,704

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Net increase in loans

 

(1,560,689

)

(12,394,045

)

Maturities and prepayments of investments

 

12,582,401

 

35,226,616

 

Purchase of investment securities

 

(21,742,912

)

(41,360,107

)

Proceeds from sale of investment securities

 

 

17,943,322

 

Net cash paid in FMB acquisition

 

 

(9,147,605

)

Proceeds from sales of premises and equipment and foreclosed assets

 

363,961

 

588,422

 

Purchases of premises and equipment, net

 

(1,380,257

)

(2,825,405

)

Net cash used in investing activities

 

(11,737,496

)

(11,968,802

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net increase in deposits

 

5,798,792

 

5,323,486

 

Federal Home Loan Bank advance repayments

 

(27,576

)

(1,027,576

)

Federal Home Loan Bank line of credit, net

 

4,000,000

 

4,400,000

 

Other borrowings, net

 

(1,027,197

)

1,708,858

 

Purchase of treasury stock

 

(964,894

)

 

Proceeds from issuance of common stock under stock option plans

 

41,117

 

9,491

 

Excess tax benefit related to stock option plans

 

7,543

 

2,503

 

Payment of dividends

 

(1,325,842

)

(1,136,695

)

Net cash provided by financing activities

 

6,501,943

 

9,280,067

 

Net decrease in cash and cash equivalents

 

(717,084

)

(521,031

)

Cash and cash equivalents at beginning of period

 

14,751,914

 

21,490,512

 

Cash and cash equivalents at end of period

 

$

14,034,830

 

$

20,969,481

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid during period for interest

 

$

13,319,000

 

$

9,990,000

 

Cash paid during period for taxes

 

$

350,000

 

$

560,000

 

Supplemental schedule of non-cash investing activities:

 

 

 

 

 

Transfer of loans to real estate owned

 

$

368,000

 

$

160,000

 

FMB acquisition:

 

 

 

 

 

Fair value of liabilities assumed

 

$

 

$

123,965,000

 

Fair value of assets acquired, including goodwill

 

$

 

$

133,112,000

 

 

                 See accompanying notes to condensed consolidated financial statements.

 

4



 

LANDMARK BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME

(Unaudited)

 

 

 

Common

stock

 

Additional
paid-in
capital

 

Retained earnings

 

Treasury stock

 

Accumulated other comprehensive income (loss)

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance December 31, 2005

 

$

22,443

 

19,868,567

 

25,322,019

 

(414,514

)

(725,908

)

44,072,607

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

4,480,651

 

 

 

4,480,651

 

 Change in fair value of investment securities available-for-sale and interest rate swap, net of tax

 

 

 

 

 

1,003,806

 

1,003,806

 

Dividends paid ($0.4857 per share)

 

 

 

(1,136,695

)

 

 

(1,136,695

)

Stock-based compensation

 

 

77,153

 

 

 

 

77,153

 

Exercise of stock options, 667 shares, including tax benefit of $2,503

 

7

 

11,987

 

 

 

 

 

 

 

11,994

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance September 30, 2006

 

$

22,450

 

19,957,707

 

28,665,975

 

(414,514

)

277,898

 

48,509,516

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance December 31, 2006

 

$

23,417

 

22,607,510

 

26,758,056

 

(138,506

)

(14,462

)

49,236,015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

4,035,789

 

 

 

4,035,789

 

Change in fair value of investmentsecurities available-for-sale, net of tax

 

 

 

 

 

85,578

 

85,578

 

Dividends paid ($0.57 per share)

 

 

 

(1,325,842

)

 

 

(1,325,842

)

Stock-based compensation

 

 

90,219

 

 

 

 

90,219

 

Exercise of stock options, 2,374 shares, including tax benefit of $7,543

 

24

 

48,636

 

 

 

 

48,660

 

Purchase of 34,477 treasury shares

 

 

 

 

(964,894

)

 

(964,894

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance September 30, 2007

 

$

23,441

 

22,746,365

 

29,468,003

 

(1,103,400

)

71,116

 

51,205,525

 

 

 See accompanying notes to condensed consolidated financial statements.

 

 

5


 


LANDMARK BANCORP, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.          Interim Financial Statements

 

             The condensed consolidated financial statements of Landmark Bancorp, Inc. (the “Company”) and subsidiary have been prepared in accordance with the instructions to Form 10-Q.  To the extent that information and footnotes required by U.S. generally accepted accounting principles for complete financial statements are contained in or consistent with the consolidated audited financial statements incorporated by reference in the Company’s Form 10-K for the year ended December 31, 2006, such information and footnotes have not been duplicated herein.  In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of financial statements have been reflected herein.  The December 31, 2006, condensed consolidated balance sheet has been derived from the audited consolidated balance sheet as of that date.  The results of the interim period ended September 30, 2007 are not necessarily indicative of the results expected for the year ending December 31, 2007.

 

2.                              Income Tax

 

             The Company adopted the provisions of the Financial Accounting Standards Board (“FASB”) Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”) on January 1, 2007.  FIN 48 provides a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns.  Unrecognized tax benefits represent tax positions for which reserves have been established.  The Company’s adoption of FIN 48 did not have any effect on its consolidated financial statements.  As of the date of adoption, our gross unrecognized tax benefits totaled approximately $1.2 million.  The anticipated amount of unrecognized tax benefits that, if recognized, would favorably impact the effective tax rate was $827,000.  Included in this unrecognized tax benefit, are interest and penalties of $245,000.  We recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense in our consolidated statements of earnings.

 

             Tax years that remain open and subject to audit include the years 2003 through 2006 for both federal and state.  During the three months ended September 30, 2007 we recognized $50,000 of previously unrecognized tax benefits.  We anticipate recognizing an additional $290,000 of previously unrecognized tax benefits during the fourth quarter, of which $175,000 will favorably impact the effective tax rate.  We believe that it is reasonably possible that a reduction in unrecognized tax benefits of up to $115,000 is possible during the next 12 months.

 

 

 

6



 

3.          Stock Based Compensation

 

A summary of option activity during the first nine months of 2007 is presented below.

 




 



Shares

 


Weighted
average
exercise
price

 

Weighted
average
remaining
contractual
term

 



Aggregate
intrinsic
value

 

Outstanding at December 31, 2006

 

246,226

 

$

24.18

 

7.77 years

 

$

755,000

 

Granted

 

 

 

 

n/a

 

Cancelled

 

 

 

 

n/a

 

Exercised

 

2,374

 

17.32

 

 

$

22,185

 

Outstanding at September 30, 2007

 

243,852

 

$

24.25

 

7.08 years

 

$

670,000

 

Exercisable at September 30, 2007

 

129,502

 

$

22.95

 

6.18 years

 

$

524,000

 

Vested and expected to vest at September 30, 2007

 

233,822

 

$

24.19

 

7.05 years

 

$

656,000

 

 

                Additional information about stock options exercised is presented below.

 

 

 

Nine months
ended September 30,

 

 

 

2007

 

2006

 

Intrinsic value of options exercised

 

$

22,185

 

$

7,360

 

Cash received from options exercised

 

$

41,117

 

$

9,491

 

Excess tax benefit realized from options exercised

 

$

7,543

 

$

2,503

 

 

As of September 30, 2007, there was $259,000 of total unrecognized compensation cost related to outstanding options.  That cost is expected to be recognized over a weighted-average period of 4 years.  The total fair value (at vest date) of shares vested during the nine month periods ended September 30, 2007 and 2006 was $348,000 and $103,000 respectively.

 

4.             Earnings per Share

 

                Basic earnings per share have been computed based upon the weighted average number of common shares outstanding during each period.  Diluted earnings per share include the effect of all potential common shares outstanding during each period.  Earnings and dividends per share for prior periods have been adjusted to give effect to the 5% stock dividend paid by the Company in December 2006.

 

The shares used in the calculation of basic and diluted earnings per share are shown below:

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Net earnings available to common stockholders

 

$

1,437,566

 

$

1,463,647

 

$

4,035,789

 

$

4,480,651

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding (basic)

 

2,310,736

 

2,340,544

 

2,324,016

 

2,339,214

 

Dilutive stock options

 

17,464

 

9,730

 

18,934

 

13,252

 

Weighted average common shares (diluted)

 

2,328,200

 

2,350,274

 

2,342,950

 

2,352,466

 

 

 

 

 

 

 

 

 

 

 

Net earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.62

 

$

0.63

 

$

1.74

 

$

1.92

 

Diluted

 

$

0.62

 

$

0.62

 

$

1.72

 

$

1.90

 

 

7



 

5.             Other Comprehensive Income

 

                The Company’s other comprehensive income consists of the unrealized holding gains and losses on available-for-sale securities and an unrealized gain on an interest rate swap, which was terminated in December 2006, as shown below.

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Unrealized holding gains on securities and interest rate swap

 

$

1,931,323

 

$

2,779,301

 

$

138,029

 

$

1,318,785

 

Less reclassification adjustment for net losses included in income

 

 

 

 

(300,256

)

Net unrealized gains

 

1,931,323

 

2,779,301

 

138,029

 

1,619,041

 

Income tax benefit

 

733,902

 

1,056,135

 

52,451

 

615,235

 

Other comprehensive income

 

$

1,197,421

 

$

1,723,166

 

$

85,578

 

$

1,003,806

 

                                                                    

                Accumulated other comprehensive income related entirely to investment securities, classified as available for sale, at September 30, 2007.  The components at September 30, 2006 were unrealized gains of $73,000 in cash flow hedging activities and $205,000 in available for sale investment securities, net of taxes.

 

6.             Other Intangible Assets

 

The following is an analysis of changes in the core deposit intangible assets:

 

 

 

Nine months ended September 30,

 

 

 

2007

 

2006

 

 

 

Fair value at acquisition

 

Accumulated Amortization

 

Fair value at acquisition

 

Accumulated Amortization

 

Balance at beginning of period

 

$

5,396,065

 

$

(1,667,478

)

$

2,818,602

 

$

(774,588

)

Additions

 

 

 

2,577,463

 

 

Amortization

 

 

(603,774

)

 

(677,358

)

Balance at end of period

 

$

5,396,065

 

$

(2,271,252

)

$

5,396,065

 

$

(1,451,946

)

 

The following is an analysis of changes in the mortgage servicing rights:

 

 

 

Nine months ended September 30,

 

 

 

2007

 

2006

 

 

 

Cost

 

Accumulated Amortization

 

Cost

 

Accumulated Amortization

 

Balance at beginning of period

 

$

791,840

 

$

(489,718

)

$

775,666

 

$

(401,467

)

Additions

 

19,088

 

 

49,133

 

 

Prepayments/maturities

 

(40,304

)

40,304

 

(40,358

)

40,358

 

Amortization

 

 

(94,582

)

 

(105,546

)

Balance at end of period

 

$

770,624

 

$

(543,996

)

$

784,441

 

$

(466,655

)

 

The Company adopted the provisions of FASB Statement of Financial Accounting Standards (“SFAS”) No. 156, “Accounting for Servicing of Financial Assets — an amendment of FASB Statement No. 140” on January 1, 2007 and elected to maintain the amortized cost method and carry the mortgage servicing rights at the lower of cost or market value.  The balance of the mortgage servicing rights can

 

8



 

fluctuate based on the performance of the underlying loans serviced.  The mortgage servicing rights correspond to loans serviced by the Company for unrelated third parties with outstanding principal balances of $93.0 million and $101.8 million at September 30, 2007 and December 31, 2006, respectively.  Gross service fee income related to such loans was $60,000 and $66,000 for the quarters ended September 30, 2007 and September 30, 2006, respectively, which is included in fees and service charges in the condensed consolidated statements of earnings.  Gross service fee income related to such loans was $185,000 and $201,000 for the nine months ended September 30, 2007 and September 30, 2006, respectively.

 

Aggregate amortization expense for the quarters ended September 30, 2007 and 2006, was $228,000 and $259,000, respectively and $698,000 and $783,000 for the nine months ended September 30, 2007 and 2006, respectively.  The following depicts estimated amortization expense for the remainder of 2007 and in successive years ending December 31:

 

Year

 

Amount

 

2007

 

$

222,000

 

2008

 

822,000

 

2009

 

669,000

 

2010

 

500,000

 

2011

 

402,000

 

Thereafter

 

736,000

 

 

7.             Impact of Recent Accounting Pronouncements

 

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140”.  SFAS No. 155 permits fair value remeasurement for certain hybrid financial instruments containing embedded derivatives, and clarifies the derivative accounting requirements for interest and principal-only strip securities and interests in securitized financial assets.  It also clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives and eliminates a previous prohibition on qualifying special-purpose entities from holding certain derivative financial instruments.  SFAS No. 155 became effective for all financial instruments acquired or issued after January 1, 2007.  The adoption of SFAS No. 155 did not have any effect on our consolidated financial statements.

 

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets — an amendment of FASB Statement No. 140”.  SFAS No. 156 specifies situations in which servicing assets and servicing liabilities must be recognized.  It requires these assets and liabilities to be initially measured at fair value and specifies acceptable measurement methods subsequent to their recognition.  Separate presentation in the financial statements and additional disclosures are also required.  The Company adopted SFAS No. 156 effective January 1, 2007.  The adoption of SFAS No. 156 did not have a material effect on our consolidated financial statements.

 

Also in March 2006, the FASB issued Staff Position 85-4-1, “Accounting for Life Settlement Contracts by Third Party Investors”.  The Staff Position provides initial and subsequent measurement guidance and financial statement presentation and disclosure guidance for investments by third-party investors in life settlement contracts.  The investments must be accounted for by either (a) recognizing the initial investment at transaction price plus direct external costs and capitalizing continuing costs, with no gain recognized in earnings until the insured event occurs, or (b) recognizing the initial investment at transaction price and remeasuring the investment at fair value at each reporting period,

 

 

 

9



 

with fair value changes recognized in earnings as they occur.  The Company began applying the guidance in the Staff Position beginning January 1, 2007.  The adoption of the Staff Position did not have any effect on our consolidated financial statements.

 

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”.  SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements.  It does not require any new fair value measurements for existing financial instruments.  For calendar year companies, SFAS No. 157 is effective beginning January 1, 2008.  We do not expect that adoption of SFAS No. 157 will have a material effect on our consolidated financial statements.

 

In September 2006, the Emerging Issues Task Force (“EITF”) Issue 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements”, was ratified.  The EITF Issue 06-4 addresses accounting for separate agreements that split life insurance policy benefits between an employer and employee.  The EITF Issue 06-4 requires the employer to recognize a liability for future benefits payable to an employee under these agreements.  The effects of applying EITF Issue 06-4 must be recognized through either a change in accounting principle through an adjustment to equity or through the retrospective application to all prior periods. For calendar year companies, the EITF Issue 06-4 is effective beginning January 1, 2008.  We do not expect that adoption of the EITF Issue 06-4 will have a material effect on our consolidated financial statements.

 

In September 2006, the EITF Issue 06-5, “Accounting for Purchases of Life Insurance — Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4”, was ratified.  The EITF Issue 06-5 addresses accounting for what could be realized as an asset and provides clarification regarding additional amounts included in the contractual terms of an individual policy in determining the amount that could be realized under the insurance contract.  The effects of applying this issue must be recognized through an adjustment to equity or through the retrospective application to all prior periods.  The Company adopted the EITF Issue 06-5 effective beginning January 1, 2007.  The adoption of EITF Issue 06-5 did not have any effect on our consolidated financial statements.

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.”  SFAS No. 159 allows companies to elect fair-value measurement of specified financial instruments and warranty and insurance contracts when an eligible asset or liability is initially recognized or when an event, such as a business combination triggers a new basis of accounting for that asset or liability.  The election, called the “fair-value option,” will enable companies to reduce the volatility in reported earnings caused by measuring related assets and liabilities differently.  The election is available for eligible assets or liabilities on a contract-by-contract basis without electing it for identical assets or liabilities under certain restrictions.  For calendar year companies, SFAS No. 159 is effective beginning January 1, 2008.  We do not expect that adoption of SFAS No. 159 will have a material effect on our consolidated financial statements.

 

 

10



 

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

 

                Overview.  Landmark Bancorp, Inc. is a 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.  Landmark National Bank originates commercial, commercial real estate, one-to-four family residential mortgage loans, consumer loans, multi-family residential mortgage loans and home equity loans.

 

                Our results of operations depend primarily 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 and losses from the sale of newly originated loans and investments.  Our principal operating expenses, aside from interest expense, consist of compensation and employee benefits, occupancy costs, 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 personal investments, the level of personal income and the personal rate of savings within our market areas.  Factors influencing lending activities include the demand for housing and commercial loans as well as the interest rate pricing competition from other lending institutions.

 

                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, the valuation of investment securities, accounting for income taxes and the accounting related to business acquisitions, all of which involve significant judgment by our management.

 

                We perform periodic and systematic detailed reviews of our lending portfolio to assess overall collectability.  The level of the allowance for loan losses reflects our estimate of the collectability of the loan portfolio as of each reporting date.  While these estimates are based on substantive methods for determining allowance requirements, nevertheless, actual outcomes may differ significantly from estimated results.  Additional explanation of the methodologies used in establishing this reserve is provided in the “Asset Quality and Distribution” section.

 

                We report our investment securities at estimated fair values based on published market ascertainable values, which are obtained from independent sources.  We perform periodic reviews of the fair value of investment securities to determine if any declines in value might be considered other than temporary.  Our most recent review showed that the securities that had experienced decreases in fair value, resulting in unrealized loss positions, were related to changes in interest rates and not to a

 

11



 

credit deterioration.  The Company has the ability and intent to hold these securities until market values recover, including up to the maturity date.  Although we believe that our estimates of the fair values of investment securities to be reasonable, economic and market factors may affect the amounts that will ultimately be realized from these investments.

 

The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns.  Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns.  Under FIN 48, an income tax position will be recognized if it is more likely than not that it will be sustained upon IRS examination, based upon its technical merits.  Once that status is met, the amount recorded will be the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.  Changes in estimates regarding the actual outcome of these future tax consequences, including the effects of IRS examinations and examinations by other state agencies, could materially impact our financial position and results of operations.

 

                We have completed several business and asset acquisitions which have generated significant amounts of goodwill and intangible assets and related amortization. The values assigned to goodwill and intangibles, as well as their related useful lives, are subject to judgment and estimation by the Company.  Goodwill and intangibles related to acquisitions are determined and based on purchase price allocations.  Valuation of intangible assets is generally based on the estimated cash flows related to those assets, while the initial value assigned to goodwill is the residual of the purchase price over the fair value of all identifiable assets acquired and liabilities assumed. Performing such a discounted cash flow analysis involves the use of estimates and assumptions.  Useful lives are determined based on the expected future period of the benefit of the asset, the assessment of which considers various characteristics of the asset, including the historical cash flows.  Due to the number of estimates involved related to the allocation of purchase price and determining the appropriate useful lives of intangible assets, we have identified purchase accounting as a critical accounting policy.  If the carrying value of the goodwill and other intangible assets exceeds the implied fair value of the goodwill, an impairment loss is recorded.

 

Summary of Results.  During 2007 we experienced a decline in earnings as compared to 2006.  This decline is primarily attributable to certain items recognized during 2006 that did not occur in 2007, as well as a decline in net interest margin.  During 2006 we recognized $717,000 in gains on the sale of certain assets, primarily the sale of our previous headquarters at 800 Poyntz.  These gains were partially offset by $444,000 in losses on sale of investments as we restructured our investment portfolio by selling lower yielding, shorter-term investments and purchasing higher yielding, longer-term investments during the second quarter of 2006.  Our net interest margin also declined from 3.58% during the first nine months of 2006 to 3.52% during the same period of 2007.  This decline in net interest margin was primarily driven by increases in our cost of funding.  Our cost of funding increased because of higher short-term interest rates and fed funds rate, as well as increased competition for our deposits.  Also contributing to the lower net interest margin was the increased percentage of investment securities as a portion of our interest bearing assets, which typically have a lower yield than loans.

 

Net earnings for the three months ended September 30, 2007, decreased $26,000, or 1.8%, to $1.4 million as compared to the three months ended September 30, 2006.  The three months ended September 30, 2007 and 2006, both resulted in diluted earnings per share of $0.62.  Return on average assets, on an annualized basis, was 0.95% for the period ended September 30, 2007 compared to 0.98%

 

12



 

for the same period in 2006.  Return on average stockholders’ equity, on an annualized basis, was 11.53% for the period compared to 12.60% for the same period in 2006.

 

                Net earnings for the nine months ended September 30, 2007, decreased $445,000, or 9.9%, to $4.0 million as compared to the nine months ended September 30, 2006.  The nine months ended September 30, 2007 resulted in diluted earnings per share of $1.72 compared to $1.90 for the same period in 2006.  Return on average assets, on an annualized basis, was 0.90% for the period ended September 30, 2007 compared to 1.00% for the same period in 2006.  Return on average stockholders’ equity, on an annualized basis, was 10.85% for the period compared to 13.22% for the same period in 2006.

 

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

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Net earnings:

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.62

 

$

0.63

 

$

1.74

 

$

1.92

 

Diluted earnings per share

 

$

0.62

 

$

0.62

 

$

1.72

 

$

1.90

 

Earnings ratios:

 

 

 

 

 

 

 

 

 

Return on average assets (1)

 

0.95

%

0.98

%

0.90

%

1.00

%

Return on average equity (1)

 

11.53

%

12.60

%

10.85

%

13.22

%

Dividend payout ratio

 

30.65

%

26.15

%

33.14

%

25.37

%

Net interest margin (1) (2)

 

3.47

%

3.66

%

3.52

%

3.58

%


(1)                                     The ratio has been annualized and is not necessarily indicative of the results for the entire year.

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

 

Interest Income.  Interest income for the three months ended September 30, 2007, increased $248,000, or 2.9%, to $9.1 million from $8.8 million in the same period of 2006, resulting from increased interest income on investment securities.  Average loans for the quarter ended September 30, 2007 decreased to $386.5 million from $396.8 million for the quarter ended September 30, 2006.  Offsetting the decline in average loans was the rise in the yield we earned on those loans.  As a result, interest income on loans only decreased $7,000, or 0.1%, to $7.3 million for the quarter ended September 30, 2007.  Average investment securities increased from $136.5 million for the quarter ended September 30, 2006, to $156.3 million for the quarter ended September 30, 2007.  Along with the increase in average investments for the comparable periods, and despite the increased holdings of tax exempt investments, interest income on investment securities increased $270,000, or 17.8%, to $1.8 million for the third quarter of 2007, as compared to the same period of 2006.

 

Interest income for the nine months ended September 30, 2007, increased $1.6 million, or 6.3%, to $26.9 million from $25.3 million in the same period of 2006, resulting from increased interest income on both investment securities and loans.  Average loans for the nine months ended September 30, 2007 decreased to $384.7 million from $393.8 million for the nine months ended September 30, 2006.  Offsetting the decline in average loans was the rise in interest rates experienced during the first half of 2006, which contributed to the increased interest income.  As a result, interest income on loans increased $830,000, or 4.0%, to $21.6 million for the nine months ended September 30, 2007.  Average investment securities increased from $144.8 million for the nine months ended September 30, 2006, to $156.6 million for the nine months ended September 30, 2007.  Along with the increase in average investments for the comparable periods, and despite the increased holdings of tax exempt

 

 

13



 

 

investments, interest income on investment securities increased $860,000, or 19.6%, to $5.2 million for the first nine months of 2007, as compared to the same period of 2006.  The increase in interest rates, which resulted in yields on our investments purchased being higher than the yields on the investments which either matured or were sold during the past year, was responsible for the increase in interest income on investments.

 

                Interest Expense.  Interest expense during the three months ended September 30, 2007, increased $510,000, or 12.4%, as compared to the same period of 2006.  For the three months ended September 30, 2007, interest expense on deposits increased $657,000, or 23.1%.  Average deposits increased from $383.4 million during the quarter ended September 30, 2006 to $399.7 million for the quarter ended September 30, 2007.  The increase in interest expense on deposits resulted from higher rates on deposit balances as well as higher deposit balances.  Average borrowings for the quarter ended September 30, 2007 decreased to $94.5 million from $107.8 million for the quarter ended September 30, 2006.  Interest expense on borrowings decreased $147,000, or 11.6%, to $1.1 million for the three months ended September 30, 2007 as compared to the same period in 2006.

 

Interest expense during the nine months ended September 30, 2007, increased $2.1 million, or 18.3%, as compared to the same period of 2006.  For the nine months ended September 30, 2007, interest expense on deposits increased $2.2 million, or 28.2%.  Average deposits increased from $389.5 million during the nine months ended September 30, 2006 to $398.3 million for the nine months ended September 30, 2007.  The increase in interest expense on deposits resulted from higher deposit balances as well as higher rates on those balances.  Average borrowings for the nine months ended September 30, 2007 decreased to $95.8 million from $105.0 million for the nine months ended September 30, 2006.  Interest expense on borrowings decreased $140,000, or 4.0%, to $3.4 million.

 

Net Interest Income.  Net interest income for the three months ended September 30, 2007, totaled $4.5 million, decreasing $261,000, or 5.5%, as compared to the three months ended September 30, 2006.  This decline in net interest income was due primarily to the increases in our cost of funding outpacing the increases in our yields on interest earning assets.  Average interest-earning assets increased during the third quarter of 2007 to $542.8 million from $533.3 million for the third quarter of 2006.  Our net interest margin, on a tax equivalent basis, declined to 3.47% for the three months ending September 30, 2007 from 3.66%.

 

Net interest income for the nine months ended September 30, 2007, totaled $13.4 million, decreasing $488,000, or 3.5%, as compared to the nine months ended September 30, 2006.  This decline in net interest income was due primarily to the increases in our cost of funding outpacing the increases in our yields on interest earning assets.  Average interest-earning assets increased during the first nine months of 2007 to $541.2 million from $538.6 million for the first nine months of 2006.  Our net interest margin, on a tax equivalent basis, declined to 3.52% from 3.58% over the same time period.

 

                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 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. Allowance policies are subject to periodic review and revision in response to

 

 

 

14



 

 

a number of factors, including current market conditions, actual loss experience and management’s expectations.

 

The provision for loan losses for the three months ended September 30, 2007, was $70,000, compared to a provision of $80,000 during the three months ended September 30, 2006.  The provision for loan losses for the nine months ended September 20, 2007, was $195,000, compared to a provision of $155,000 during the nine months ended September 30, 2006.  One measure of the adequacy of the allowance for estimated losses on loans is the ratio of the allowance to the total loan portfolio.  At September 30, 2007, and December 31, 2006, the allowance for loan losses was $4.1 million and $4.0 million, or 1.1% of gross loans outstanding.  For further discussion of the allowance for loan losses, refer to the “Asset Quality and Distribution” section.

 

                Non-interest Income.  Non-interest income decreased $108,000, or 6.4%, for the three months ended September 30, 2007, to $1.6 million, as compared to the three months ended September 30, 2006.  Contributing to this decline was a decrease in gain on sale of loans of $46,000, which was the result of lower volumes of loans originated for sale in 2007 as compared to 2006.

 

Non-interest income decreased $897,000, or 16.9%, for the nine months ended September 30, 2007, to $4.4 million compared to the nine months ended September 30, 2006.  This decrease in 2007 was attributable primarily due to certain items recognized during the first nine months of 2006.  During the first nine months of 2006, we recognized $717,000 in gains on the sale of certain assets, primarily the 800 Poyntz facility.  These gains were partially offset by $444,000 in losses on sale of investments as we restructured our investment portfolio by selling lower yielding, shorter-term investments and purchasing higher yielding, longer-term investments during the second quarter of 2006.  Furthering the decline in 2007 was a decrease in gains on sale of loans of $193,000, or 13.4%, as well as a decline of $66,000 in deposit related income.  Offsetting these declines was a $144,000 gain on sale of investments during the first quarter of 2007 as well as a $75,000 increase in the cash surrender value of bank owned life insurance, which resulted from the purchase of additional policies totaling $7.5 million in March 2006.

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Non-interest income:

 

 

 

 

 

 

 

 

 

Fees and service charges

 

$

1,047,395

 

$

1,124,057

 

$

2,958,910

 

$

3,259,392

 

Gains on sale of loans

 

300,661

 

347,054

 

740,069

 

933,418

 

Losses on sale of investments, net

 

 

 

 

(300,256

)

Gains (losses) on sale of other assets

 

 

(11,638

)

 

716,815

 

Bank owned life insurance

 

117,468

 

114,689

 

347,435

 

272,343

 

Other

 

109,925

 

108,915

 

372,262

 

434,231

 

Total non-interest income

 

$

1,575,449

 

$

1,683,077

 

$

4,418,676

 

$

5,315,943

 

 

Non-interest Expense.  Non-interest expense decreased $152,000, or 3.5%, to $4.2 million for the three months ended September 30, 2007, as compared to the three months ended September 30, 2006.  Contributing to the reduction in non-interest expense was a $51,000 decrease in professional fees, a $34,000 decrease in occupancy and equipment, and a $30,000 decrease in amortization of intangibles.

 

Non-interest expense decreased $291,000, or 2.3%, to $12.5 million for the nine months ended September 30, 2007, as compared to the nine months ended September 30, 2006.  Contributing to the reduction in non-interest expense was a $192,000 decrease in compensation and benefits and a $85,000

 

 

15



 

 

decrease in amortization expense and a $55,000 decrease in occupancy and equipment.  Offsetting those reductions was an increase of $57,000 in data processing.

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Non-interest expense:

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

$

2,120,127

 

$

2,140,241

 

$

6,196,685

 

$

6,388,817

 

Occupancy and equipment

 

671,494

 

705,523

 

2,046,852

 

2,101,545

 

Amortization of intangibles

 

228,259

 

258,732

 

698,356

 

782,904

 

Data processing

 

184,472

 

183,695

 

590,082

 

532,685

 

Professional fees

 

81,124

 

132,080

 

333,443

 

342,806

 

Advertising

 

106,629

 

109,065

 

321,992

 

327,802

 

Other

 

769,349

 

784,234

 

2,289,216

 

2,291,019

 

Total non-interest expense

 

$

4,161,454

 

$

4,313,570

 

$

12,476,626

 

$

12,767,578

 

 

Income Tax Expense.  Income tax expense decreased $181,000, or 33.0%, from $548,000 for the three months ended September 30, 2006, to $367,000 for the three months ended September 30, 2007.  The decrease in income tax expense was the result of a $207,000 decrease in earnings before income taxes for the third quarter of 2007 as compared to the third quarter of 2006, increased purchases of tax exempt municipal bonds, and the recognition of $50,000 of previously unrecognized tax benefits.  The effective tax rate for the third quarter of 2007, decreased to 20.4% from 27.3% in the second quarter of 2006, primarily as a result of the tax exempt income on municipal bonds.

 

Income tax expense decreased $690,000, or 37.7%, from $1.8 million for the nine months ended September 30, 2006, to $1.1 million for the nine months ended September 30, 2007.  The decrease in income tax expense was the result of a $1.1 million decrease in earnings before income taxes for the first nine months of 2007 as compared to the nine months of 2006, increased purchases of tax exempt municipal bonds and bank owned life insurance, and the recognition of $50,000 of previously unrecognized tax benefits.  The effective tax rate for the nine months of 2007 decreased to 22.0% from 29.0% in the first nine months of 2006.

 

Asset Quality and Distribution.  Our primary investing activities are the origination of commercial, mortgage, consumer loans and the purchase of investment and mortgage-backed securities.  We have concentrated on generating commercial loans over the past few years and are pleased with the growth in this segment of our loan portfolio.  We also originate fixed-rate, residential mortgage loans with maturities in excess of ten years for sale in the secondary market.  While the January 1, 2006 First Manhattan Bancorporation, Inc. acquisition increased our one-to-four family residential loan totals, as the majority of the acquired loans were residential, we plan to continue our strategy to expand our commercial lending activities.  Total assets increased to $602.3 million at September 30, 2007, compared to $590.6 million at December 31, 2006.  While net loans, excluding loans held for sale, increased $838,000 to $380.2 million during the nine months ended September 30, 2007 as compared to December 31, 2006, the composition of loans changed more substantially as our commercial and commercial real estate loans increased by $22.9 million and our one-to-four family residential loans decreased by $22.0 million.

 

16


 


 

 

Loans consist of the following:

 

 

 

September 30, 2007

 

December 31, 2006

 

Real estate loans:

 

 

 

 

 

One-to-four family residential

 

$

129,295,120

 

$

151,299,911

 

Commercial

 

115,341,149

 

98,314,119

 

Construction

 

29,065,415

 

33,600,313

 

Commercial loans

 

101,197,366

 

90,758,185

 

Consumer loans

 

9,525,037

 

9,595,428

 

Total

 

384,424,087

 

383,567,956

 

 

 

 

 

 

 

Less: Deferred loan fees and loans in process

 

144,425

 

214,665

 

Less: Allowance for loan losses

 

4,117,924

 

4,029,710

 

Loans, net

 

$

380,161,738

 

$

379,323,581

 

 

                The allowance for loan losses is established through a provision for losses on loans based on our evaluation of the risk inherent in the loan portfolio and changes in the nature and volume of its loan activity.  Such evaluation, which includes a review of all loans with respect to which full collectibility 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 adequate allowance for loan losses.  We believe that we use the best information available to determine the allowance for loan losses, 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.

 

A summary of the activity in the allowance for loan losses is as follows:

                               

 

 

Nine months ended
September 30,

 

 

 

2007

 

2006

 

Beginning balance

 

$

4,029,710

 

$

3,151,373

 

Allowance of acquired bank

 

 

891,374

 

Provision for loan losses

 

195,000

 

155,000

 

Charge-offs

 

(166,280

)

(182,226

)

Recoveries

 

59,494

 

71,311

 

Ending balance

 

$

4,117,924

 

$

4,086,832

 

 

We believe that the quality of the loan portfolio continues to be strong.  Given the recent subprime mortgage lending concerns within the industry, it is worth noting that we have continued our practice of not offering subprime loan products.  As of September 30, 2007, loans with a balance of $4.8 million were on non-accrual status, which was 1.3% of total loans, compared to loan balances totaling $3.6 million on non-accrual status, or 0.9% of total loans, as of December 31, 2006.  In addition, the ratio of non-performing assets as a percentage of total assets was 0.9% as of September 30, 2007 compared to 0.7% as of December 31, 2006.  Net loan charge-offs for the nine months ended September 30, 2007 were $107,000 compared to $111,000 for the comparable period of 2006.  Residential home loans comprised 53.9% of the $4.8 million non-accrual balance at September 30, 2007.  These loans have been underwritten according to our residential lending policies and are secured by real estate collateral, and in many instances, private mortgage insurance or government guarantees.  We have historically incurred minimal losses on mortgage loans based upon collateral values and

 

 

17



 

underlying insurance or guarantees.  We are aggressively pursuing collection activity of these loans which should enable the collection of outstanding principal.

 

                Liability Distribution.  Our primary ongoing sources of funds are deposits, 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, economic conditions, competition and the restructuring of the financial services industry.  Total deposits increased $5.7 million to $450.2 million at September 30, 2007, from $444.5 million at December 31, 2006.  Borrowings increased $2.2 million to $92.6 million at September 30, 2007, from $90.4 million at December 31, 2006.

 

                Non-interest bearing demand accounts at September 30, 2007, were $54.7 million, or 12.2% of deposits, compared to $48.4 million, or 10.9% of deposits, at December 31, 2006.  Certificates of deposit increased to $245.9 million, or 54.6% of deposits, at September 30, 2007, from $231.1 million, or 52.0% of deposits at December 31, 2006.  Money market and NOW demand accounts decreased to $123.9 million at September 30, 2007, or 27.5% of deposits, from $137.3 million, or 30.9% of deposits, at December 31, 2006. Savings accounts decreased to $25.7 million at September 30, 2007, or 5.7% of deposits, from $27.7 million, or 6.2% of deposits, at December 31, 2006.

 

                Certificates of deposit at September 30, 2007, which were scheduled to mature in one year or less, totaled $211.6 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.

 

                Contractual Obligations and Commercial Commitments.  The following table presents our contractual obligations, defined as operating lease obligations and principal payments due on non-deposit obligations with maturities in excess of one year as of September 30, 2007, for the periods indicated.  Unrealized tax benefits related to tax uncertainties which are not classified as more likely than not, are excluded in the following table as the timing and resolution of these unrealized benefits can not be reasonably estimated.

 

Contractual cash
obligations

 


Total

 

One year
or less

 

One to
three years

 

Four to
five years

 

More than
five years

 

Operating leases

 

$

141,487

 

$

64,884

 

$

76,603

 

$

 

$

 

Service contracts

 

4,305,000

 

1,260,000

 

2,520,000

 

525,000

 

 

FHLB borrowings

 

65,174,999

 

4,000,000

 

50,614,375

 

6,141,400

 

4,419,224

 

Other borrowings

 

27,468,446

 

6,832,446

 

4,140,000

 

 

16,496,000

 

Total contractual obligations

 

$

97,089,932

 

$

12,157,330

 

$

57,350,978

 

$

6,666,400

 

$

20,915,224

 

 

18



 

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 $169.1 million at September 30, 2007, and $160.6 million at December 31, 2006.  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 U. S. Government and agency securities or high-grade municipal securities.

 

                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 Federal Home Loan Bank (“FHLB”) advances, a line of credit with the FHLB, or other borrowings or through sales of securities.  At September 30, 2007, we had outstanding FHLB advances of $61.2 million and $4.0 million of borrowings against our line of credit with the FHLB.  At September 30, 2007, our total borrowing capacity with the FHLB was $123.0 million.  We also had other borrowings of $27.5 million at September 30, 2007, which included $16.5 million of subordinated debentures, $4.0 million of long-term debt and $7.0 million in repurchase agreements.

 

                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 bank 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 originated by us. Most of the standby letters of credit are secured, and in the event of nonperformance by the customer, 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 $2.3 million at September 30, 2007.

 

                At September 30, 2007, we had outstanding loan commitments, excluding standby letters of credit, of $74.8 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.

 

19



 

Capital.  The Federal Reserve Board has established capital requirements for bank holding companies which generally parallel the capital requirements for national banks under the Office of the Comptroller of the Currency regulations.  The regulations provide that such standards will generally be applied on a consolidated (rather than a bank-only) basis in the case of a bank holding company with more than $150 million in total consolidated assets.  Banks and bank holding companies are generally expected to operate at or above the minimum capital requirements.  Our ratios are well in excess of regulatory minimums and should allow us to operate without capital adequacy concerns.

 

At September 30, 2007, we continued to maintain a sound leverage ratio of 8.68% and a total risk based capital ratio of 13.10%.  As shown by the following table, our capital exceeded the minimum capital requirements at September 30, 2007 (dollars in thousands):

 

 

 


Actual

 

For capital
adequacy purposes

 

To be well-
capitalized

 

Company

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Leverage

 

$

50,978

 

8.68

%

$

23,494

 

4.0

%

$

29,368

 

5.0

%

Tier 1 Capital

 

$

50,978

 

12.12

%

$

16,825

 

4.0

%

$

25,238

 

6.0

%

Total Risk Based Capital

 

$

55,096

 

13.10

%

$

33,650

 

8.0

%

$

42,063

 

10.0

%

 

                At September 30, 2007, Landmark National Bank continued to maintain a sound leverage ratio of 9.09% and a total risk based capital ratio of 13.65%.  As shown by the following table, the bank’s capital exceeded the minimum capital requirements at September 30, 2007 (dollars in thousands):

 

 

 


Actual

 

For capital
adequacy purposes

 

To be well-
capitalized

 

Landmark National Bank

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Leverage

 

$

53,190

 

9.09

%

$

23,415

 

4.0

%

$

29,268

 

5.0

%

Tier 1 Capital

 

$

53,190

 

12.67

%

$

16,791

 

4.0

%

$

25,187

 

6.0

%

Total Risk Based Capital

 

$

57,308

 

13.65

%

$

33,582

 

8.0

%

$

41,978

 

10.0

%

 

 

20



 

Average Assets/Liabilities.  The following table sets forth information relating to average balances of interest-earning assets and liabilities for the three and nine months ended September 30, 2007 and the same period for 2006.  The following table reflects the average tax equivalent yields on assets and average costs of liabilities for the periods indicated (derived by dividing income or expense by the monthly average balance of assets or liabilities, respectively) as well as “net interest margin” (which reflects the effect of the net earnings balance) for the periods shown:

 

 

 

Three months ended

 

Three months ended

 

 

 

September 30, 2007

 

September 30, 2006

 

(Dollars in thousands)

 

Average
balance

 

Interest

 

Average
annual
yield/rate

 

Average
balance

 

Interest

 

Average
annual
yield/rate

 

ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities (1)

 

$

156,338

 

$

2,063

 

5.24

%

$

136,521

 

$

1,729

 

5.02

%

Loans (2)

 

386,481

 

7,307

 

7.50

%

396,776

 

7,310

 

7.31

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-earning assets

 

542,819

 

9,370

 

6.85

%

533,297

 

9,039

 

6.72

%

Non-interest-earning assets

 

60,688

 

 

 

 

 

61,778

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

603,507

 

 

 

 

 

$

595,075

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

242,774

 

$

2,809

 

4.59

%

$

226,375

 

$

2,248

 

3.94

%

Money market and NOW accounts

 

130,109

 

676

 

2.06

%

127,385

 

578

 

1.80

%

Savings accounts

 

26,863

 

20

 

0.30

%

29,647

 

22

 

0.29

%

FHLB advances and other borrowings

 

94,525

 

1,120

 

4.70

%

107,756

 

1,267

 

4.66

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

494,271

 

4,625

 

3.71

%

491,163

 

4,115

 

3.32

%

Non-interest-bearing liabilities

 

59,762

 

 

 

 

 

57,825

 

 

 

 

 

Stockholders’ equity

 

49,474

 

 

 

 

 

46,087

 

 

 

 

 

Total

 

$

603,507

 

 

 

 

 

$

595,075

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate spread (3)

 

 

 

 

 

3.14

%

 

 

 

 

3.40

%

Net interest margin (4)

 

 

 

4,745

 

3.47

%

 

 

4,924

 

3.66

%

Tax equivalent interest - imputed

 

 

 

284

 

 

 

 

 

202

 

 

 

Net interest income

 

 

 

$

4,461

 

 

 

 

 

$

4,722

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ratio of average interest-earning assets to average interest-bearing liabilities

 

 

 

109.8

%

 

 

 

 

108.6

%

 

 

 

 

21


 


 

 

 

 

Nine months ended

 

Nine months ended

 

 

 

September 30, 2007

 

September 30, 2006

 

(Dollars in thousands)

 

Average
balance

 

Interest

 

Average
annual
yield/rate

 

Average
balance

 

Interest

 

Average
annual
yield/rate

 

ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities (1)

 

$

 156,552

 

$

 6,045

 

5.16

%

$

 144,844

 

$

 4,978

 

4.60

%

Loans (2)

 

384,658

 

21,686

 

7.54

%

393,804

 

20,847

 

7.08

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-earning assets

 

541,210

 

27,731

 

6.85

%

538,645

 

25,825

 

6.41

%

Non-interest-earning assets

 

60,726

 

 

 

 

 

58,835

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

 601,936

 

 

 

 

 

$

 597,480

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

 237,245

 

$

 7,919

 

4.46

%

$

 225,840

 

$

 6,119

 

3.62

%

Money market and NOW accounts

 

133,649

 

2,138

 

2.14

%

133,222

 

1,705

 

1.17

%

Savings accounts

 

27,403

 

61

 

0.30

%

30,455

 

68

 

0.30

%

FHLB advances and other borrowings

 

95,836

 

3,374

 

4.71

%

105,032

 

3,514

 

4.47

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

494,133

 

13,492

 

3.65

%

494,549

 

11,406

 

3.08

%

Non-interest-bearing liabilities

 

57,092

 

 

 

 

 

57,611

 

 

 

 

 

Stockholders’ equity

 

49,711

 

 

 

 

 

45,320

 

 

 

 

 

Total

 

$

 601,936

 

 

 

 

 

$

 597,480

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate spread (3)

 

 

 

 

 

3.20

%

 

 

 

 

3.33

%

Net interest margin (4)

 

 

 

14,239

 

3.52

%

 

 

14,420

 

3.58

%

Tax equivalent interest - imputed

 

 

 

812

 

 

 

 

 

505

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

$

13,427

 

 

 

 

 

$

 13,915

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ratio of average interest-earning assets to average interest-bearing liabilities

 

 

 

109.5

%

 

 

 

 

108.9

%

 

 


(1)          Income on investment securities includes all securities and interest bearing deposits in other financial institutions.  Income on tax exempt securities is presented on a fully taxable equivalent basis, using a 34% federal tax rate.

(2)          Includes loans classified as non-accrual.  Income on tax exempt loans is presented on a fully taxable equivalent basis, using a 34% federal tax rate.

(3)          Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities

(4)          Net interest margin represents annualized net interest income divided by average interest-earning assets.

 

 

22



 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

                Our assets and liabilities are principally financial in nature and the resulting net interest income thereon is subject to changes in market interest rates and the mix of various assets and liabilities.  Interest rates in the financial markets affect our decision on pricing our assets and liabilities, which impacts net interest income, a significant cash flow source for us.  As a result, a substantial portion of our risk management activities relates to managing interest rate risk.

 

                Our Asset/Liability Management Committee monitors the interest rate sensitivity of our balance sheet using earnings simulation models and interest sensitivity gap analysis.  We have set policy limits of interest rate risk to be assumed in the normal course of business and monitor such limits through our simulation process.

 

                We have been successful in meeting the interest rate sensitivity objectives set forth in our policy.  Simulation models are prepared to determine the impact on net interest income for the coming twelve months, including one using rates at September 30, 2007, and forecasting volumes for the twelve-month projection.  This position is then subjected to a shift in interest rates of 100 and 200 basis points rising and falling with an impact to our net interest income on a one year horizon as follows:

 

Scenario

 

$ Change in Net Interest Income

 

% of Net Interest Income

 

100 basis point rising

 

($92,000

)

(0.5%

)

200 basis point rising

 

($516,000

)

(2.9%

)

100 basis point falling

 

($ 22,000

)

(0.1%

)

200 basis point falling

 

($296,000

)

(1.7%

)

 

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 - Forward-Looking Statements.  This document contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company.  Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company’s management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” or other similar expressions.  Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.

 

Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain.  Factors which could have a material adverse effect on operations and future prospects by us and our subsidiaries include, but are not limited to, the following:

 

                    The strength of the United States economy in general and the strength of the local economies in which we conduct our operations which may be less favorable than expected and may result in, among other things, a deterioration in the credit quality and value of our assets.

                  The economic impact of past and any future terrorist attacks, acts of war or threats thereof, and the response of the United States to any such threats and attacks.

                  The effects of, and changes in, federal, state and local laws, regulations and policies affecting banking, securities, insurance and monetary and financial matters.

 

 

23



 

                  The effects of changes in interest rates (including the effects of changes in the rate of prepayments of our assets) and the policies of the Board of Governors of the Federal Reserve System.

                  Our ability to compete with other financial institutions as effectively as we currently intend due to increases in competitive pressures in the financial services sector.

                  Our inability to obtain new customers and to retain existing customers.

                  The timely development and acceptance of products and services, including products and services offered through alternative delivery channels such as the Internet.

                  Technological changes implemented by us and by other parties, including third party vendors, which may be more difficult or more expensive than anticipated or which may have unforeseen consequences to us and our customers.

                  Our ability to develop and maintain secure and reliable electronic systems.

                  Our ability to retain key executives and employees and the difficulty that we may experience in replacing key executives and employees in an effective manner.

                  Consumer spending and saving habits which may change in a manner that affects our business adversely.

                  Business combinations and the integration of acquired businesses which may be more difficult or expensive than expected.

                  The costs, effects and outcomes of existing or future litigation.

                  Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies and the Financial Accounting Standards Board.

                  Our ability to manage the risks associated with the foregoing as well as anticipated.

 

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.  Additional information concerning us and our business, including other factors that could materially affect our financial results, is included in our filings with the Securities and Exchange Commission, including the “Risk Factors” section in our Form 10-K.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2007.  Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2007.

 

There were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2007 that materially affected or were likely to materially affect the Company’s internal control over financial reporting.

 

24



 

LANDMARK BANCORP, INC. AND SUBSIDIARY

PART II — OTHER INFORMATION

 

 

ITEM 1.  LEGAL PROCEEDINGS

 

                There is no material pending legal proceedings to which the Company or its subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses.

 

ITEM 1A.  RISK FACTORS

 

There have been no material changes in the risk factors applicable to the Company from those disclosed in Part I, Item 1A. “Risk Factors,” in the Company’s 2006 Annual Report on Form 10-K.  Please refer to that section of the Company’s Form 10-K for disclosures regarding the risks and uncertainties related to the Company’s business.

 

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

                The following table provides information about purchases by the Company and its affiliated purchases during the quarter ended September 30, 2007, of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act.

 

Period

 

Total
Number of
Shares
Purchased

 

Average
Price Paid
per Share

 

Total Number of Shares Purchased as
Part of a Publicly
Announced Plan (1)

 

Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans (1)

 

July 1-31, 2007

 

 

 

 

47,265

 

August 1-31, 2007

 

2,000

 

$

27.30

 

2,000

 

45,265

 

September 1-30, 2007

 

7,706

 

$

27.20

 

7,706

 

37,559

 

Total

 

20,251

 

$

27.22

 

9,706

 

37,559

 


(1) In November 2004, our Board of Directors approved the repurchase by us of up to 5%, or 101,700 shares, of our common stock.  Unless terminated earlier by resolution of the Board of Directors, the current repurchase program will expire when we have repurchased all shares authorized for repurchase thereunder.

 

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

 

                None

 

25



 

ITEM 4.  SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

 

None

 

ITEM 5.  OTHER INFORMATION

 

                None

 

ITEM 6.  EXHIBITS

 

 

Exhibits

 

 

 

Exhibit 31.1

Certificate of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)

 

Exhibit 31.2

Certificate of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)

 

Exhibit 32.1

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Exhibit 32.2

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

26



 

SIGNATURES

 

                Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

LANDMARK BANCORP, INC.

 

 

 

 

 

Date: November 9, 2007

/s/ Patrick L. Alexander

 

 

Patrick L. Alexander

 

 

President and Chief Executive Officer

 

 

 

 

 

 

Date: November 9, 2007

/s/ Mark A. Herpich

 

 

Mark A. Herpich

 

 

Vice President, Secretary, Treasurer

 

 

 and Chief Financial Officer

 

 

27