Landmark Bancorp, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; balance-sheet comparisons are to December 31, 2016. Unaudited consolidated results. Landmark is a Kansas-focused banking company operating through Landmark National Bank and, since May 31, 2017, a captive insurance subsidiary.
Financial performance
Amounts below are in millions except per-share data and ratios.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Interest income | $7.52 | $7.35 | $22.17 | $21.90 |
| Net interest income | $6.60 | $6.55 | $19.55 | $19.52 |
| Provision for loan losses | $0.10 | $0.15 | $0.25 | $0.50 |
| Non-interest income | $3.94 | $3.74 | $11.77 | $11.58 |
| Non-interest expense | $15.62 | $7.39 | $30.22 | $21.77 |
| Net earnings (loss) | $(2.66) | $2.16 | $1.93 | $6.88 |
| Diluted EPS | $(0.69) | $0.55 | $0.49 | $1.78 |
| Net interest margin, tax-equivalent | 3.42% | 3.45% | 3.40% | 3.46% |
- Q3 results included an $8.1 million pretax deposit-related loss, producing an approximately $5.1 million after-tax expense. Excluding this unusual item, reported quarterly profitability would have been materially different; the filing does not present a formal adjusted earnings measure.
- For the first nine months, net income fell 72% year over year. Net interest income was nearly flat as higher average earning assets were offset by lower loan balances and higher deposit funding costs.
- Q3 return on average assets was -1.15% and return on average equity was -11.77%; nine-month figures were 0.28% and 2.93%, respectively. Equity-to-assets was 9.35%.
Financial condition, liquidity, and capital
- At September 30, total assets were $930.1 million, up $18.7 million from year-end. Net loans were $428.4 million, up $8.0 million; available-for-sale securities were $389.4 million.
- Deposits declined $8.5 million to $733.0 million. Non-interest-bearing deposits increased to $165.4 million; money market/checking and time deposits declined.
- Total borrowings rose $24.4 million to $97.3 million, principally as FHLB borrowings increased to $64.4 million, including $39.4 million drawn on the FHLB line of credit. Cash and cash equivalents were $18.8 million; cash plus available-for-sale securities totaled $408.2 million.
- Nine-month operating cash flow was $(1.6) million, investing cash flow $(13.1) million, and financing cash flow $13.5 million. Cash declined $1.2 million to $18.8 million.
- The Bank was categorized as well capitalized. Its September 30 ratios were 9.58% leverage, 16.27% common equity Tier 1, 16.27% Tier 1, and 17.31% total risk-based capital. Management stated the Company and Bank met applicable capital requirements.
Material changes and credit quality
- The allowance for loan losses was $5.4 million, or 1.24% of gross loans, versus $5.3 million, or 1.26%, at year-end. Nine-month net charge-offs were $0.2 million, compared with $0.9 million in 2016.
- Asset-quality measures weakened from year-end: non-accrual loans increased to $5.5 million (1.26% of gross loans) from $2.7 million (0.64%); 30–89 day accruing delinquencies rose to $2.9 million from $0.8 million; impaired loans increased to $9.3 million from $6.7 million. Classified loans declined to $15.4 million from $16.6 million.
- Real estate owned declined to $0.7 million from $1.3 million. Management cited economic uncertainty and weakness in the agriculture sector, while describing the broader asset base as high quality and continuing work to resolve problem credits.
- Professional fees increased, partly due to formation of the captive insurance subsidiary and an internal-control audit expected to be required after the company exceeded a regulatory market-capitalization threshold.
Outlook, risks, and contingencies
- The filing provides no numerical earnings or revenue guidance. Management’s stated strategy is to grow commercial, commercial real estate, and agriculture lending while maintaining asset quality; it expects the nine-month results are not necessarily indicative of full-year results.
- The deposit loss arose after a customer’s deposited third-party checks were returned for uncollected funds, creating a $10.3 million overdraft. Collections recovered $2.2 million; the remaining $8.1 million pretax loss was recognized. Investigation and recovery efforts, including possible insurance coverage, remained unresolved; further legal costs were expected, and ultimate recovery was uncertain.
- Management implemented additional reviews and approvals for deposit accounts with large deposits or negative available balances. It reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
- Interest-rate sensitivity modeling estimated net interest income declines of 2.7% under a 100-basis-point rise and 5.3% under a 200-basis-point rise; a 100-basis-point decline was estimated to increase it 0.5%. The 200-basis-point falling-rate case was deemed not meaningful.
- Other stated risks include economic and agricultural conditions, credit losses, interest rates, deposit competition, regulation, cybersecurity, litigation, and real estate values. Management anticipated CECL adoption would increase the loan-loss allowance, but the amount was uncertain. No material pending litigation or material changes to previously disclosed risk factors were reported.
Key facts investors should verify
- Whether any portion of the $8.1 million deposit loss is recovered or covered by insurance, and the related legal costs and timing.
- Trends in non-accrual, delinquent, impaired, and classified loans, particularly commercial real estate, construction, and agriculture exposures.
- Deposit retention and pricing, FHLB line utilization, and the effect of funding costs on net interest margin.
- Capital ratios, dividend capacity, and the eventual quantified impact of CECL implementation.