Landmark Bancorp, Inc. — Q3 2020 Form 10-Q
Business context and period. Landmark Bancorp is a Kansas-based financial holding company operating Landmark National Bank and a captive insurance subsidiary. This unaudited filing covers the three and nine months ended September 30, 2020; balance-sheet comparisons are with December 31, 2019. Dollar amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $9.27 | $7.66 | $26.38 | $22.34 |
| Provision for loan losses | $1.00 | $0.40 | $2.60 | $1.00 |
| Non-interest income | $8.17 | $4.56 | $20.49 | $11.80 |
| Non-interest expense | $9.52 | $8.62 | $26.75 | $24.31 |
| Net earnings | $5.43 | $2.61 | $13.89 | $7.39 |
| Diluted EPS | $1.20 | $0.57 | $3.06 | $1.61 |
| Net interest margin, tax-equivalent | 3.60% | 3.44% | 3.66% | 3.43% |
| Return on average assets | 1.89% | 1.03% | 1.71% | 1.00% |
| Return on average equity | 18.06% | 9.90% | 16.19% | 10.02% |
- Q3 net earnings rose 107.7%; nine-month net earnings rose 87.9%. Management attributed the improvement principally to stronger gains on mortgage loan sales amid low rates, refinancing activity and a robust housing market.
- Net gains on loan sales were $4.94 million in Q3 and $10.96 million for the first nine months, compared with $2.08 million and $4.94 million, respectively, in 2019. Securities sale gains added $0.68 million in Q3 and $2.45 million year to date; these gains are a notable contributor to reported earnings.
- Lower funding costs supported net interest income: Q3 total interest expense fell 72.6% year over year. However, loan yield declined to 4.42% from 5.32%. NIM was down from 3.72% in Q2 2020 to 3.60% in Q3.
Financial position, cash flow and credit
- Total assets were $1.149 billion, up 15.1% from year-end 2019. Net loans increased 36.8% to $728.2 million; gross loans were $739.3 million. Growth included $131.0 million of Paycheck Protection Program (PPP) loans.
- Deposits increased 14.7% to $957.9 million, supported by PPP proceeds, government stimulus payments and customers’ higher liquidity. Non-interest-bearing deposits were $272.9 million, or 28.5% of deposits; time deposits were $127.6 million.
- Cash and cash equivalents were $15.8 million. Cash plus available-for-sale securities totaled $315.4 million, versus $376.7 million at year-end. For the nine months, operating cash flow was $6.4 million, investing cash flow was negative $130.1 million, and financing cash flow was positive $125.8 million; cash increased $2.1 million.
- Total borrowings, including FHLB advances, subordinated debentures and other borrowings, were approximately $50.1 million, versus $42.2 million at year-end. The company reported $21.7 million of subordinated debentures and $8.4 million of repurchase agreements.
- Allowance for loan losses was $8.4 million, or 1.13% of gross loans, versus $6.5 million, or 1.20%, at year-end. The lower ratio reflects, in part, PPP loans guaranteed by the SBA, which had no allowance allocated. Nine-month net charge-offs were $0.70 million, versus $0.49 million in 2019.
- Non-accrual loans were $6.3 million (0.86% of gross loans), compared with $5.5 million (1.03%) at year-end. Classified loans increased to $25.1 million from $18.1 million; impaired loans increased to $10.6 million from $8.7 million. No loans were 90 days or more delinquent and accruing.
- At September 30, the Bank’s regulatory capital ratios included 10.20% leverage, 15.76% common equity Tier 1 and 16.94% total risk-based capital. The Bank was categorized as well capitalized. Management reported additional stated borrowing capacity of $57.2 million from the FHLB, $104.7 million at the Federal Reserve discount window and approximately $30 million under correspondent-bank agreements, subject to applicable terms and requirements.
Changes, outlook and risks
- COVID-19-related modifications covered 33 loans with $22.9 million outstanding at September 30; the company said they were performing under modified terms and were not classified as TDRs under applicable guidance. Another 107 loans totaling $35.7 million had exited their initial deferral periods and resumed contractual payments; three borrowers with $6.8 million had received a second deferral. Eight residential loans totaling $0.98 million were under short-term forbearance or repayment plans.
- The filing reports 12 TDR relationships comprising 22 loans, with $6.17 million in combined non-accrual and accruing balances. Management said all TDR borrowers were experiencing financial difficulties before the pandemic.
- The company expects loan growth in commercial and commercial real estate to slow amid weaker economic conditions. Management anticipated elevated mortgage originations through year-end based on its then-current pipeline, but noted that the pandemic could reduce volumes. No specific earnings or financial guidance was provided.
- Management warned that COVID-19 could lead to higher delinquencies, defaults, provisions and impairments, and could affect deposits, service-charge income, collateral values and operations. It also cited low interest rates as a risk to loan yields and NIM. Accommodations and hotels, restaurants, and agriculture together represented approximately 17.2% of the loan portfolio.
- Management reported no current plans to change its dividend strategy, citing capital and liquidity, and said it declared its 77th consecutive quarterly dividend in October. Future distributions remain dependent on financial performance, capital requirements and the economic outlook.
- CECL implementation was deferred to January 1, 2023, consistent with the company’s smaller-reporting-company status. Initial estimates indicate adoption will increase the allowance, but the amount is uncertain.
- Off-balance-sheet exposure included $139.1 million of outstanding loan commitments and $2.2 million of standby letters of credit. The filing reported no material pending legal proceedings other than routine litigation.
Important facts for investors to verify
- Whether mortgage origination and sale gains remain strong, and how much earnings depend on these gains and securities transactions.
- PPP loan forgiveness, repayment timing and remaining balances, including the effect on loan growth, yields and NIM.
- Trends in classified, impaired, non-accrual and modified loans, particularly agriculture, hospitality and restaurant exposures, and whether the allowance remains adequate.
- Deposit retention and liquidity as stimulus and PPP-related balances change, alongside borrowing levels and available funding capacity.
- Capital, dividend capacity and the effect of the pandemic or CECL adoption on future earnings, reserves and distributions.