Landmark Bancorp, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. The unaudited consolidated results cover Landmark Bancorp and its subsidiaries, including Landmark National Bank. Unless stated otherwise, amounts below are in millions; the filing reports most financial statement amounts in thousands.
Business context
The company is a Kansas-focused bank holding company whose principal activities are gathering deposits and making residential, commercial real estate, commercial, agricultural, construction, municipal and consumer loans. It also operates a captive insurance subsidiary, which exited its insurance pooling relationship in May 2019 and was not then providing coverage. A Prairie Village loan production office opened in May and became a branch during Q3.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Interest income | $9.45 | $8.65 | $27.62 | $24.33 |
| Net interest income | $7.66 | $7.18 | $22.34 | $20.61 |
| Provision for loan losses | $0.40 | $0.45 | $1.00 | $0.90 |
| Non-interest income | $4.56 | $4.57 | $11.80 | $12.22 |
| Non-interest expense | $8.62 | $7.71 | $24.31 | $22.72 |
| Net earnings | $2.61 | $3.02 | $7.39 | $7.96 |
| Diluted earnings per share | $0.60 | $0.69 | $1.69 | $1.83 |
| Net interest margin, tax-equivalent | 3.44% | 3.42% | 3.43% | 3.36% |
- Q3 net earnings fell 13.5%; nine-month net earnings fell 7.2%. Return on average assets was 1.03% for Q3 and 1.00% year to date, versus 1.24% and 1.12% in 2018. Return on average equity was 9.90% and 10.02%, versus 13.73% and 12.39%.
- Net interest income rose as average loan balances and interest-earning assets increased. Higher deposit costs partly offset asset growth: average interest-bearing deposit cost was 0.87% in Q3 versus 0.55% a year earlier; nine-month cost was 0.86% versus 0.45%.
- Q3 non-interest income was nearly flat, but the comparison included $0.888 million of deposit-loss recoveries in Q3 2018. For the first nine months, 2018 included $1.4 million of such recoveries. Higher loan-sale gains and service charges partially offset the resulting year-over-year declines.
- Non-interest expense increased 11.7% in Q3 and 7.0% year to date, particularly from higher compensation and benefits. Deposit insurance credits partly offset expenses.
Balance sheet, cash flow and capital
- At September 30, 2019, assets were $1.009 billion, up 2.3% from year-end 2018. Net loans were $520.1 million, up 6.3%; available-for-sale securities were $369.3 million, down from $388.3 million. Deposits were $833.8 million, up $10.1 million.
- Total borrowings were approximately $55.1 million: $17.2 million of FHLB borrowings, $21.7 million of subordinated debentures and $16.3 million of other borrowings, consisting of repurchase agreements. Stockholders’ equity was $106.0 million, versus $91.9 million at year-end; accumulated other comprehensive income improved to $5.2 million from a $4.0 million loss, largely reflecting securities valuation movements.
- Cash and cash equivalents ended at $21.7 million, up $2.6 million over the first nine months. Operating activities used $1.0 million, investing activities used $2.1 million, and financing activities provided $5.7 million. The filing attributes the operating cash use primarily to originations of loans held for sale.
- Cash and available-for-sale securities totaled $391.1 million, compared with $407.5 million at year-end. The company reported $95.0 million of additional FHLB borrowing capacity, $17.9 million of Federal Reserve discount-window capacity and approximately $30.0 million of other federal funds lines, with no Federal Reserve or correspondent-line borrowings at quarter-end.
- The Bank was categorized as well capitalized. At September 30, its common equity Tier 1, Tier 1, total risk-based and leverage ratios were 15.83%, 15.83%, 16.83% and 10.42%, respectively. The company paid a quarterly cash dividend of $0.20 per share.
Asset quality, outlook and risks
- The allowance for loan losses was $6.279 million, or 1.19% of gross loans, versus $5.765 million, or 1.16%, at year-end. Nine-month net charge-offs were $0.486 million. Classified loans declined to $24.0 million from $31.8 million, while non-accrual loans increased to $5.9 million, or 1.13% of gross loans, from $5.2 million, or 1.06%. Impaired loans were $9.1 million, compared with $8.7 million.
- Management cited economic uncertainty and weakness in the agricultural sector, while describing overall asset quality as generally improved and the portfolio as diversified. It is focusing on agricultural, commercial real estate, and construction and land credits and working to resolve remaining problem loans. Real estate owned increased to $0.473 million from $0.035 million.
- Interest-rate risk is material: the company’s simulation estimated that a 100-basis-point rise would reduce projected 12-month net interest income by 2.3%, and a 200-basis-point rise by 4.7%; falling-rate scenarios increased modeled income. Management cautioned that changes in loan growth, asset yields and funding costs could constrain future net interest income and margin.
- No earnings or other numerical guidance was provided. The company said CECL implementation is planned for January 1, 2023 following the proposed effective-date delay for smaller reporting companies. Initial estimates indicate an increase in the loan-loss allowance may result, but its size is uncertain.
- Commitments included $114.9 million of outstanding loan commitments and $1.8 million of standby letters of credit. Management reported no material change in previously disclosed risk factors, no material pending litigation beyond ordinary routine matters, and effective disclosure controls.
Investor verification points
- Assess whether loan growth can continue to support net interest income as deposit pricing and funding costs rise.
- Review credit trends by loan class, especially agricultural and commercial credits, and reconcile rising non-accrual and impaired balances with the lower classified-loan total.
- Evaluate the sustainability of loan-sale gains and compare earnings with the prior period’s unusual deposit-loss recoveries.
- Check deposit mix, brokered certificate exposure and the $171.8 million of certificates scheduled to mature within one year, alongside available liquidity and borrowing capacity.
- Monitor the allowance methodology and management’s CECL implementation work, including the still-uncertain estimated reserve increase.
- Verify reported interest-rate sensitivity assumptions and the potential effects of changing rates on both loan yields and deposit costs.