Landmark Bancorp, Inc. — Q3 2018 Form 10-Q
Business context and reporting period
Unaudited consolidated results for the quarter and nine months ended September 30, 2018; balance-sheet comparisons are against December 31, 2017. Landmark is a Kansas-focused banking holding company, operating through Landmark National Bank and a captive insurance subsidiary. Its lending includes residential, commercial real estate, commercial, agricultural, construction, municipal and consumer loans.
Financial performance and condition
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q3 2018 / Sep. 30, 2018 | Comparison |
|---|---|---|
| Net interest income | $7.18 | Up 8.8% from Q3 2017 |
| Net interest margin, tax-equivalent | 3.42% | Unchanged from Q3 2017 |
| Provision for loan losses | $0.45 | Up from $0.10 in Q3 2017 |
| Non-interest income | $4.57 | Up 15.6% from Q3 2017 |
| Non-interest expense | $7.71 | Down from $15.62 in Q3 2017 |
| Net earnings; diluted EPS | $3.02; $0.72 | Q3 2017 net loss of $2.66; diluted loss per share of $0.65 |
| Total assets | $962.3 | Up 3.5% from year-end 2017 |
| Net loans; allowance | $475.5; $5.9 | Net loans up 9.6%; allowance was 1.22% of gross loans |
| Deposits; total borrowings | $767.3; $95.7 | Deposits up $1.7; borrowings up $29.1 from year-end |
| Stockholders’ equity | $86.8 | Down from $87.6 at year-end |
For the first nine months, net earnings were $7.96 million ($1.92 diluted EPS), versus $1.93 million ($0.47) in 2017. Net interest income rose 5.4% to $20.61 million, while tax-equivalent net interest margin eased to 3.36% from 3.40%. Operating cash flow was $11.1 million; investing activities used $40.1 million, principally reflecting loan growth, and financing activities provided $28.8 million, principally from increased FHLB borrowings. Cash and cash equivalents declined $0.3 million to $16.3 million.
Available-for-sale securities were $376.0 million, down from $388.0 million at year-end. Accumulated other comprehensive loss widened to $7.4 million from $0.4 million, reflecting unrealized securities losses; the portfolio had $10.0 million of gross unrealized losses at September 30. The company reported liquid assets of $392.3 million, including cash and available-for-sale securities.
Material changes versus prior periods
- Q3 earnings improved by $5.7 million year over year, primarily because Q3 2017 included an $8.1 million pretax deposit-related loss ($5.1 million after tax). Landmark reported recoveries on that event of $888,000 in Q3 2018 and $1.4 million for the first nine months. The filing describes the recoveries as third-party payments and insurance proceeds.
- Higher loan balances and yields lifted loan interest income. Rising funding costs partly offset the benefit: Q3 deposit interest expense nearly doubled year over year, and borrowing expense also rose.
- Gross loans increased to $481.4 million from $439.2 million at year-end. Classified loans rose to $27.3 million from $16.3 million, mainly because of two commercial and commercial-real-estate relationships. Non-accrual loans declined to $5.6 million from $6.0 million; impaired loans declined to $9.1 million from $9.8 million.
- Deposit composition shifted: brokered certificates of deposit were $31.7 million, versus none at year-end, while money-market and checking balances fell. FHLB borrowings increased to $60.3 million from $31.6 million to help fund loan growth.
Outlook, commentary, risks and contingencies
- The filing provides no specific earnings or financial guidance. Management described its strategy as growing commercial, commercial-real-estate and agricultural lending while maintaining asset quality. It noted agriculture-sector weakness and identified credit quality, interest rates, competition, economic conditions, technology and cybersecurity among the risks.
- Management warned that net interest income and margin could decline if short-term rates continue rising faster than the company can reprice loans or grow balances. Its simulation shows a 200-basis-point rate increase reducing projected one-year net interest income by $2.117 million (6.9%); a 100-basis-point increase reduces it by $1.046 million (3.4%). The filing’s displayed dollar figure for the 100-basis-point falling-rate scenario is unclear and should be checked.
- Credit costs rose: the nine-month provision was $0.9 million versus $0.25 million, with management citing higher charge-offs, loan growth and increased classified loans. A commercial relationship in foreclosure comprises a $1.8 million commercial-real-estate loan and $1.8 million of commercial loans; $610,000 of allowance was allocated to these loans.
- At September 30, the company had $83.0 million of outstanding loan commitments and $847,000 of standby letters of credit. It reported $43.3 million of additional FHLB borrowing capacity, a $10.0 million Federal Reserve capacity and approximately $30.0 million of unused correspondent-bank credit, subject to applicable terms and requirements.
- The Bank was categorized as well capitalized. The company reported a 10.22% leverage ratio and 17.57% total risk-based capital ratio; the Bank’s corresponding ratios were 10.05% and 17.27%. Management expects adoption of CECL, scheduled for 2020, to increase the allowance, but said the amount is uncertain.
- The company paid a $0.20-per-share quarterly dividend. Approximately $14.8 million was available for Bank dividends to the holding company without prior regulatory approval; distributions remain subject to regulatory and subordinated-debt restrictions. No material legal proceedings or material changes in risk factors were reported. Disclosure controls were assessed as effective.
Most important facts for investors to verify
- How much of the reported earnings improvement and non-interest income depends on recoveries of the 2017 deposit-related loss, and whether further recoveries are expected.
- The status, collateral and resolution prospects for the two significant classified relationships and the commercial relationship in foreclosure; also monitor classified loans, charge-offs and provision levels.
- Whether deposit pricing, brokered-CD usage and increased FHLB funding continue to pressure funding costs and net interest margin.
- The size and timing of the eventual CECL allowance increase, which management had not quantified.
- The securities portfolio’s unrealized losses and accumulated other comprehensive loss, and the company’s ability to maintain liquidity and capital while funding loan commitments and paying dividends.