Landmark Bancorp, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Landmark is a Kansas-focused bank holding company operating through Landmark National Bank, with its main office in Manhattan and 28 additional Kansas branches. Dollar amounts below are in millions unless noted.
Financial results and key metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net interest income | $6.624 | $6.076 | $12.918 | $12.076 |
| Net earnings | $2.616 | $2.077 | $5.393 | $3.776 |
| Diluted EPS | $0.76 | $0.62 | $1.57 | $1.12 |
| Net interest margin, tax-equivalent | 3.56% | 3.47% | 3.51% | 3.48% |
| Return on average assets | 1.20% | 1.01% | 1.25% | 0.92% |
| Return on average equity | 13.95% | 12.46% | 14.67% | 11.66% |
- Q2 interest income was $7.393 million and interest expense $0.769 million. Net interest income rose 9.0% year over year, reflecting growth in average interest-earning assets and a higher margin.
- Q2 non-interest income was $4.682 million, up 11.9%; gains on loan sales increased and a $0.236 million gain on a closed branch facility contributed. Non-interest expense rose 4.9% to $7.443 million, including higher mortgage-banking compensation and a $0.163 million affordable-housing investment impairment.
- For the first half, non-interest income was $8.445 million, up 13.8%, led by increased mortgage loan sale gains. Non-interest expense was $14.554 million, up 4.7%. The effective tax rate was 28.6% in Q2 and 29.1% for the first half.
- Q2 provision for loan losses was $0.200 million, versus $0.300 million a year earlier. The first-half provision was a negative $0.800 million, versus a $0.450 million provision in 2014, largely due to recoveries on a previously charged-off construction loan.
Financial position, liquidity and capital
- At June 30, total assets were $889.7 million, up from $863.5 million at year-end 2014. Net loans were $421.1 million; loans held for sale were $18.1 million; available-for-sale securities were $358.3 million.
- Deposits were $699.5 million, down $5.0 million from year-end. Total borrowings rose $26.2 million to $102.7 million, principally to fund securities purchases and offset lower deposits. FHLB borrowings were $70.6 million; subordinated debentures $21.0 million; other borrowings $11.1 million.
- Cash and cash equivalents were $15.1 million. Cash plus available-for-sale securities totaled $373.4 million. During the first half, operating cash flow was negative $3.7 million, investing cash flow negative $13.7 million, and financing cash flow positive $19.8 million; cash increased $2.4 million.
- Stockholders’ equity was $75.2 million, or 8.45% of assets. The Bank was categorized as well capitalized; its June 30 ratios included 13.97% common equity Tier 1, 13.97% Tier 1 capital, 15.17% total risk-based capital and 9.00% leverage.
- The company paid a quarterly dividend of $0.19 per share. Management reported $17.3 million of Bank dividend capacity to the parent without prior regulatory approval as of June 30.
Changes, asset quality and unusual items
- Gross loans increased to $426.9 million from $421.2 million at year-end. The allowance for loan losses rose to $6.0 million, or 1.41% of gross loans, from $5.3 million, or 1.26%.
- Classified loans increased to $26.7 million from $18.1 million. Non-accrual loans were $6.4 million, or 1.50% of gross loans, versus $6.0 million, or 1.44%; loans 30–89 days past due and accruing were $1.7 million versus $1.1 million. Impaired loans were $10.8 million, broadly stable with year-end.
- First-half net loan recoveries were $1.5 million, mainly a $1.7 million recovery on a construction loan charged off in 2010–2011. The company had recovered about $2.4 million cumulatively and continued collection efforts. Management said it was addressing remaining problem credits.
- There were 21 loans classified as troubled debt restructurings across 11 relationships, compared with 15 loans at year-end. One $2.7 million commercial real estate and land relationship was restructured following a bankruptcy plan; management reported no related charge-offs or impairments at quarter-end.
- Available-for-sale securities had $1.879 million of gross unrealized losses at June 30. Q2 other comprehensive loss was $2.034 million, reducing accumulated other comprehensive income to $1.149 million. The company said the securities in loss positions were temporarily impaired and it did not expect to need to sell them before recovery.
- Management attributed earnings growth to higher net interest income, loan-sale gains and the first-half loan recovery. First-half securities sales produced a $0.254 million net loss, primarily from sales intended to reduce exposure to rising interest rates.
Outlook, risks and contingencies
- No specific earnings or financial guidance was provided. Management cited expectations for continued growth and profitability, while noting economic uncertainty and lingering problem loans.
- Interest-rate simulation estimated that a 100-basis-point rise would reduce projected one-year net interest income by 1.5%, and a 200-basis-point rise by 3.0%. A 100-basis-point decline would reduce it by 3.2%; a 200-basis-point decline was considered not meaningful in the low-rate environment.
- Key stated risks include local and national economic weakness, credit quality and real-estate values, interest-rate and prepayment changes, competition, regulatory changes, technology and cybersecurity, litigation, and the adequacy of loan-loss reserves. Management noted that results for the interim period are not necessarily indicative of full-year results.
- At June 30, outstanding loan commitments were $66.8 million and standby letters of credit totaled $0.971 million. The company also had $7.5 million of holding-company line-of-credit capacity, maturing November 1, 2015; it was in compliance with its covenants. Management reported no material pending legal proceedings beyond routine business litigation and no material change in previously disclosed risk factors.
- Disclosure controls were judged effective at June 30, 2015; no material change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- Whether classified loans and non-accrual balances stabilize or continue to rise, and how the loan-loss allowance responds.
- The sustainability of mortgage origination and sale gains, including the related staffing costs and refinancing-driven volumes.
- Whether the construction-loan recovery continues and whether any further recoveries or charge-offs occur.
- Funding and liquidity trends: deposit retention, the higher reliance on borrowings, and maturities of certificates of deposit and credit lines.
- Interest-rate exposure and the impact of securities valuation changes on comprehensive income and capital.
- Execution under the phased-in Basel III capital conservation buffer and the company’s capacity to maintain dividends.