Landmark Bancorp, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are to December 31, 2014. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context and results
Landmark Bancorp is a bank holding company operating Landmark National Bank, with 29 offices in Kansas. Its business centers on taking deposits and making residential, commercial real estate, commercial, agricultural, municipal and consumer loans.
- Net earnings were $2.777 million, up 63% from $1.699 million in Q1 2014. Diluted earnings per share were $0.81 versus $0.51. The prior-year per-share figures reflect a 5% stock dividend.
- Management attributed the earnings increase primarily to a $1.7 million recovery on a previously charged-off construction loan, which contributed to a $1.0 million negative provision for loan losses. The comparable 2014 quarter had a $150,000 provision.
- Return on average assets was 1.30% versus 0.84%; return on average equity was 15.41% versus 10.81%. These ratios are annualized.
Financial metrics and changes
| Metric | Q1 2015 / March 31, 2015 | Comparison |
|---|---|---|
| Interest income | $7.063 million | Up $258,000, or 3.8%, year over year |
| Interest expense | $769,000 | Down $36,000, or 4.5%, year over year |
| Net interest income | $6.294 million | Up $294,000, or 4.9%, year over year |
| Net interest margin | 3.47% | 3.49% in Q1 2014, on a tax-equivalent basis |
| Non-interest income | $3.763 million | Up $527,000, or 16.3%, year over year |
| Non-interest expense | $7.111 million | Up $300,000, or 4.4%, year over year |
| Total assets | $872.1 million | $863.5 million at December 31, 2014 |
| Net loans, excluding loans held for sale | $417.1 million | $416.2 million at December 31, 2014 |
| Deposits | $713.7 million | Up $9.2 million from December 31, 2014 |
| Total borrowings | $69.3 million | Down $7.2 million from December 31, 2014 |
| Stockholders’ equity | $75.2 million | $71.6 million at December 31, 2014 |
- Higher investment-security balances lifted interest income; loan yields declined to 5.02% from 5.13%. Deposit costs fell to 0.20% from 0.24%.
- Loan-sale gains rose to $1.943 million from $1.116 million, reflecting expanded mortgage banking activity and refinancing demand. The company also recorded a $254,000 net loss on investment-security sales after selling $19.1 million of agency mortgage-backed securities to reduce exposure to rising rates.
- Cash and cash equivalents increased to $26.0 million from $12.8 million. Operating activities used $1.1 million, investing activities provided $13.0 million and financing activities provided $1.3 million. The operating cash outflow primarily reflected increased loans held for sale.
- Cash and available-for-sale securities totaled $363.3 million. The bank reported $35.0 million of FHLB advances, $20.9 million of subordinated debentures and $13.4 million of other borrowings. It also disclosed additional borrowing availability, subject to lender requirements.
- The loan-loss allowance was $5.9 million, or 1.40% of gross loans, versus $5.3 million, or 1.26%, at year-end. Net recoveries were $1.6 million, primarily related to the construction-loan recovery; the company said it continued to pursue collection of the remaining balance.
Credit, capital and liquidity
- Classified loans increased to $28.7 million from $18.1 million at year-end. Non-accrual loans were $5.9 million, or 1.40% of gross loans, compared with $6.0 million, or 1.44%. Past-due loans 30–89 days and still accruing totaled $1.5 million, up from $1.1 million. No loans 90 days or more past due were accruing.
- Impaired loans were $10.5 million, compared with $10.7 million. Troubled debt restructurings comprised 16 loans with $5.2 million outstanding, including $701,000 on non-accrual status.
- Management reported the bank was “well capitalized.” At March 31, the bank’s common equity Tier 1 ratio was 13.88%, total risk-based capital ratio 15.09% and leverage ratio 8.80%. Basel III requirements took effect for the company and bank on January 1, 2015; the capital conservation buffer is scheduled to phase in starting in 2016.
- Interest-rate simulation showed estimated net interest income increasing 0.6% for a 100-basis-point rise and 1.1% for a 200-basis-point rise, but declining 4.1% for a 100-basis-point fall. The 200-basis-point falling-rate scenario was described as not meaningful in the low-rate environment.
Outlook, risks and unusual items
- The filing provides no specific earnings or financial guidance. Management described a generally improving asset-quality trend but noted lingering problem loans and continued uncertainty about economic conditions. It said the company intended to grow commercial, commercial real estate and agricultural lending.
- Management identified interest-rate changes, economic and real-estate conditions, competition, regulation, credit quality, loan-loss estimates, technology and cybersecurity, and the ability to retain customers and employees as risks.
- The company disclosed $64.0 million of outstanding loan commitments and $1.0 million of standby letters of credit. It said it expected sufficient funds to meet current loan commitments.
- The $7.5 million line of credit from an unrelated financial institution matures November 1, 2015; the company reported compliance with its covenants at quarter-end. The company also reported no material pending legal proceedings beyond routine litigation and no material changes to previously disclosed risk factors.
- The company paid a quarterly cash dividend of $0.19 per share. It reported approximately $14.7 million available for dividends from the bank to the holding company without prior regulatory approval, subject to applicable restrictions.
- Management changed its historical loan-loss analysis to a longer-period migration analysis by loan class and risk category. It said this reallocated allowance among loan classes without significantly affecting the total allowance at December 31, 2014.
- The filing’s employment-agreement discussion says the amendment was entered into on May 12, 2014, while the exhibit is identified as dated May 12, 2015. The agreement amendment is stated to be effective January 1, 2015; the inconsistent date should be checked against the exhibit.
Most important facts for investors to verify
- How much of the earnings increase is repeatable given the unusual loan recovery and negative loan-loss provision?
- Whether the increase in classified loans, particularly in commercial real estate, commercial and agricultural lending, signals further credit deterioration or higher future provision needs.
- Whether mortgage-banking gains and refinancing volumes can be sustained, and the effect of further mortgage-rate changes on production and servicing values.
- The impact of the investment-security sale and future rate movements on earnings, liquidity and capital; confirm the assumptions behind the interest-rate sensitivity analysis.
- Near-term deposit retention and funding needs, including certificates of deposit scheduled to mature within one year and the November 2015 line-of-credit maturity.
- The May 2014 versus May 2015 date discrepancy in the employment-agreement disclosure and exhibit.