Landmark Bancorp, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Balance-sheet comparisons are with December 31, 2015. The interim financial statements are unaudited. Dollar amounts are in millions unless otherwise noted.
Business context and financial performance
Landmark Bancorp is a Kansas bank holding company operating Landmark National Bank, with 29 branches. Its core activities are community banking, lending, deposit gathering, and investment securities.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net interest income | $6.552 | $6.427 | $19.518 | $19.345 |
| Provision for loan losses | $0.150 | $0.100 | $0.500 | $(0.700) credit |
| Non-interest income | $3.742 | $4.476 | $11.584 | $12.921 |
| Non-interest expense | $7.394 | $7.308 | $21.767 | $21.862 |
| Net earnings | $2.094 | $2.529 | $6.616 | $7.922 |
| Diluted EPS | $0.56 | $0.70 | $1.80 | $2.19 |
| Net interest margin, tax-equivalent | 3.45% | 3.48% | 3.46% | 3.50% |
| Return on average assets | 0.93% | 1.15% | 0.99% | 1.22% |
| Return on average equity | 9.29% | 13.12% | 10.24% | 14.14% |
Financial position, cash flow and liquidity
- At September 30, 2016, total assets were $907.7 million, up from $878.4 million at year-end 2015. Net loans were $430.1 million versus $419.9 million; available-for-sale securities were $374.4 million versus $353.4 million.
- Deposits were $715.7 million, nearly unchanged from $714.7 million. Total borrowings rose to $86.5 million from $70.7 million, including $52.7 million of FHLB borrowings, $21.2 million of subordinated debentures and $12.5 million of other borrowings.
- Cash and cash equivalents were $17.7 million, compared with $13.6 million at year-end. Cash plus available-for-sale securities totaled $392.1 million. Nine-month cash flows: operating activities provided $14.9 million; investing activities used $27.2 million; financing activities provided $16.4 million; cash increased $4.1 million.
- Stockholders’ equity was $89.8 million, up from $80.6 million. The company paid $0.20 per share in Q3 dividends; nine-month dividends were $0.60 per share.
- Management reported the Bank was well capitalized. At September 30, the Bank’s ratios included 9.81% leverage, 16.01% common equity Tier 1 and 17.07% total risk-based capital; the company’s total risk-based capital ratio was 17.31%.
- Available funding included $36.6 million of additional FHLB capacity, $17.0 million of Federal Reserve borrowing capacity and approximately $30.0 million of correspondent-bank lines, subject to applicable requirements.
Material changes and asset quality
- Net earnings fell 17% in Q3 and 16% for the nine-month period. Management attributed the decline mainly to lower gains on mortgage loan sales after several mortgage lenders left the company. Gains on loan sales declined $0.8 million in Q3 and $1.8 million year to date.
- Nine-month results also faced a $1.2 million year-over-year swing in loan-loss provision: a $0.7 million credit in 2015 versus a $0.5 million provision in 2016. The 2015 credit reflected a $1.7 million recovery on a previously charged-off construction loan.
- Gross loans increased to $435.6 million from $425.8 million, led by agriculture lending. The allowance for loan losses declined to $5.5 million, or 1.26% of gross loans, from $5.9 million, or 1.39%.
- Net charge-offs were $0.9 million for the first nine months of 2016, versus net recoveries of $1.3 million in 2015. 2016 charge-offs primarily involved an agriculture loan restructuring and liquidation of collateral on a commercial loan.
- Classified loans rose to $20.5 million from $15.3 million, primarily from downgrades in agriculture, commercial and commercial real estate relationships. Non-accrual loans declined to $1.8 million (0.41% of gross loans) from $2.2 million (0.51%); impaired loans declined to $6.1 million from $6.8 million. No loans were 90 days or more delinquent and still accruing.
- The securities portfolio’s fair value increased to $374.4 million from $353.4 million. At September 30, gross unrealized losses were $0.2 million, all on securities in a loss position for less than 12 months. Q3 other comprehensive income was a loss of $1.5 million, reflecting securities valuation movements.
Outlook, risks and contingencies
- The filing provides no specific earnings or financial guidance. Management described uncertainty in the economy and agriculture sector, while saying it believed the company maintained a high-quality asset base and solid core earnings. Management anticipated sufficient funds to meet current loan commitments and expected a significant portion of certificates of deposit maturing within one year to remain at the Bank.
- Interest-rate modeling showed estimated one-year net interest income declines of 1.3% for a 100-basis-point rise and 2.4% for a 200-basis-point rise; a 100-basis-point fall was estimated to reduce it 0.9%. A 200-basis-point fall was deemed not meaningful in the prevailing low-rate environment.
- Key stated risks include local and national economic conditions, agricultural and real estate markets, credit losses and allowance estimates, interest-rate changes, competition, regulatory requirements, technology and cybersecurity, and the value of investment securities.
- Outstanding loan commitments were $72.7 million and standby letters of credit were $1.9 million. A TDR loan carried an $84,000 commitment for additional lending. Management disclosed a $361,000 mortgage repurchase reserve and no outstanding repurchase requests at quarter-end.
- The company reported no material pending litigation beyond routine matters and no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective; no material quarterly change in internal control over financial reporting was reported.
- Management was evaluating the effects of several new accounting standards, including CECL, which was expected to become effective January 1, 2020. Management did not expect adoption of the described cash-flow classification update to have a material impact.
Important facts for investors to verify
- Whether mortgage-lending staffing and loan-sale gains recover, given their substantial contribution to the year-over-year earnings decline.
- Developments in the agriculture and other downgraded credits, including the adequacy of the $5.5 million allowance as classified loans increased.
- Funding costs and dependence on FHLB and other borrowings as assets and loans grow, and the effect of rate changes on net interest margin.
- Liquidity and capital implications of loan commitments, deposit maturities, securities collateralization and the phased-in capital conservation buffer.
- Potential effects of securities valuation changes and CECL adoption on earnings, capital and credit-loss reserves.