Landmark Bancorp, Inc. — Q3 2015 Form 10-Q
Business context and reporting period
Landmark Bancorp is a Kansas-based bank holding company operating through Landmark National Bank, with its main office in Manhattan, Kansas, and 29 offices in Kansas. The filing covers the quarter and nine months ended September 30, 2015; balance-sheet comparisons are to December 31, 2014. Unless otherwise stated, financial figures below are in millions of dollars.
Financial results and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $6.43 | $6.26 | $19.35 | $18.34 |
| Provision for loan losses | $0.10 | $0.15 | $(0.70) | $0.60 |
| Non-interest income | $4.48 | $3.85 | $12.92 | $11.28 |
| Non-interest expense | $7.31 | $6.99 | $21.86 | $20.90 |
| Net earnings | $2.53 | $2.17 | $7.92 | $5.95 |
| Diluted earnings per share | $0.73 | $0.64 | $2.30 | $1.76 |
| Net interest margin, tax-equivalent | 3.48% | 3.47% | 3.50% | 3.48% |
- Q3 net earnings increased $355,000 year over year; nine-month earnings rose about $2.0 million. The company reported return on average assets of 1.15% for Q3 and 1.22% year to date, and return on average equity of 13.12% and 14.14%, respectively.
- At September 30, total assets were $866.9 million, loans net of allowance were $416.8 million, and available-for-sale securities were $352.4 million. Total stockholders’ equity was $79.1 million, or 9.12% of assets.
- Deposits were $687.5 million, down $17.0 million from year-end. Borrowings totaled $84.2 million, including $48.3 million of FHLB borrowings, $21.0 million of subordinated debentures, and $14.9 million of other borrowings. Cash and cash equivalents were $12.7 million; cash plus available-for-sale securities totaled $365.1 million.
- For the first nine months, operating activities provided $10.3 million; investing activities provided $0.9 million; financing activities used $11.2 million. Cash decreased $86,000 to $12.7 million.
- The allowance for loan losses was $5.9 million, or 1.40% of gross loans, versus $5.3 million, or 1.26%, at year-end. The Bank was reported as well capitalized; its September 30 ratios included 14.97% common equity Tier 1, 14.97% Tier 1 capital, and 16.12% total risk-based capital.
Material changes versus comparable periods
- Higher loan-sale gains and net interest income supported earnings growth. Nine-month gains on sales of loans increased to $6.2 million from $4.5 million, reflecting higher mortgage origination and sale volumes; management cited added mortgage lenders and increased refinancing demand.
- Interest income rose, supported by larger average investment balances and higher investment yields. Loan yields declined, partly offsetting the impact of higher average loan balances. Lower deposit costs reduced interest expense, while borrowing expense increased.
- Nine-month provision expense shifted from a $600,000 provision in 2014 to a $700,000 release in 2015. A $1.7 million recovery on a previously charged-off construction loan was the principal factor; the company said it had recovered approximately $2.4 million to date and continued collection efforts.
- Credit indicators were mixed: non-accrual loans fell to $3.7 million from $6.0 million at year-end, and impaired loans fell to $8.6 million from $10.7 million. Classified loans increased to $20.3 million from $18.1 million.
- Non-interest expense increased 4.6% year to date, mainly from compensation and costs associated with expanded mortgage banking, plus a $163,000 impairment of an affordable-housing investment. A $236,000 gain on sale of a closed branch partly contributed to other income.
- Stockholders’ equity rose from $71.6 million at year-end, including higher retained earnings and accumulated other comprehensive income. The company paid dividends of $0.19 per share in Q3.
Outlook, risks, contingencies, and unusual items
- No quantitative earnings or revenue guidance was provided. Management described asset quality as generally improved and the asset base as high quality, while noting lingering problem loans and continuing efforts to resolve them. It cited continued growth and profitability as objectives, not assured outcomes.
- Interest-rate sensitivity modeling estimated that a 100-basis-point rise would reduce projected one-year net interest income by 1.3%, and a 200-basis-point rise by 2.6%. A 100-basis-point decline was estimated to reduce it by 1.2%; a 200-basis-point decline was considered not meaningful in the low-rate environment.
- Risks identified include economic and local-market weakness, borrower and real-estate credit quality, interest-rate and prepayment changes, competition, regulation and capital requirements, cybersecurity and technology, and the ability to maintain adequate loan-loss reserves.
- Available liquidity included $31.8 million of additional potential FHLB borrowing capacity, subject to FHLB requirements, $16.1 million of Federal Reserve borrowing capacity, and about $50.0 million of correspondent-bank lines with no outstanding balance reported. Loan commitments were $76.6 million and standby letters of credit were $948,000.
- The filing reported no outstanding mortgage repurchase requests and no material pending legal proceedings beyond routine litigation. Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether mortgage origination and loan-sale gains remain strong, and how dependent earnings are on that activity.
- Whether the construction-loan recovery is repeatable and whether further recoveries or losses affect future provision levels.
- Trends in classified, non-accrual, impaired, and restructured loans, particularly commercial real estate, construction, and agriculture exposures.
- Deposit retention and funding costs as certificates mature, alongside the company’s increased reliance on borrowings.
- How changes in rates affect net interest income, securities values, and the company’s reported capital and liquidity.
- Progress in absorbing mortgage-banking expenses and any further effects from unusual items, including securities sales and investment impairments.