Landmark Bancorp, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. Amounts are in U.S. dollars; financial statement amounts are in thousands unless noted. Landmark is a Kansas community bank holding company operating through Landmark National Bank.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net interest income | $6.263 million | $4.592 million | $18.339 million | $13.420 million |
| Net earnings | $2.174 million | $1.285 million | $5.950 million | $4.134 million |
| Diluted EPS | $0.67 | $0.41 | $1.85 | $1.32 |
| Net interest margin, tax-equivalent | 3.47% | 3.40% | 3.48% | 3.37% |
| Return on average assets | 1.02% | 0.80% | 0.96% | 0.87% |
| Return on average equity | 12.47% | 8.19% | 11.94% | 8.72% |
For the first nine months, total interest income was $20.738 million, provision for loan losses $600,000, non-interest income $11.237 million, and non-interest expense $20.897 million. Q3 provision was $150,000; non-interest income was $3.854 million and non-interest expense $6.993 million. Dividends were $0.19 per share for Q3 and $0.57 per share for the nine months.
- Balance sheet at September 30: Assets were $851.9 million, up from $828.8 million at year-end 2013. Net loans were $415.9 million; available-for-sale securities were $335.8 million; deposits were $688.3 million; and stockholders’ equity was $70.0 million.
- Cash flow, nine months: Operating activities provided $4.0 million, investing activities used $34.3 million, and financing activities provided $14.0 million. Cash and cash equivalents declined $16.4 million to $13.4 million.
- Liquidity and funding: Cash plus available-for-sale securities totaled $349.2 million. Total borrowings were approximately $83.3 million. Management reported additional borrowing capacity, including $26.0 million of potential FHLB borrowing, $21.1 million at the Federal Reserve, and approximately $50.0 million under correspondent-bank federal funds agreements, subject to applicable conditions.
- Capital: The company reported a 7.87% leverage ratio, 12.77% Tier 1 capital ratio, and 14.74% total risk-based capital ratio; the bank’s corresponding ratios were 8.35%, 13.55%, and 14.69%. Both were reported as well capitalized. Management said they would also have qualified as well capitalized under Basel III rules had those rules been in effect.
Material changes versus comparable periods
- Net earnings rose to $2.2 million in Q3 and $6.0 million for the first nine months. Management attributed the increases principally to the November 2013 Citizens Bank acquisition, which added approximately $195 million of assets and seven branches; the acquired deposits were approximately $181.9 million.
- Average interest-earning assets increased substantially following the acquisition. Higher loan and securities balances lifted interest income and net interest income. Deposit costs declined, while borrowing expense increased.
- Non-interest income growth reflected higher mortgage loan sale gains, deposit and servicing fees, and lease revenue. Operating expense also rose, especially compensation, occupancy, data processing, and intangible amortization, largely reflecting the acquired branches.
- Credit indicators improved in some respects: non-accrual loans declined to $6.1 million, or 1.45% of gross loans, from $9.8 million, or 2.35%, at year-end; impaired loans fell to $10.6 million from $16.8 million. However, nine-month net charge-offs increased to $918,000 from $255,000, and classified loans increased to $30.9 million from $26.3 million.
- The allowance for loan losses was $5.2 million, or 1.24% of gross loans, versus $5.5 million, or 1.32%, at year-end. Gross loans were $420.9 million, compared with $419.4 million at year-end.
- Unrealized gains on available-for-sale securities contributed to other comprehensive income of $2.6 million for the nine months; accumulated other comprehensive income was $1.7 million at September 30, versus a $926,000 loss at year-end.
Outlook, risks, contingencies, and unusual items
- No formal numerical earnings or revenue guidance is provided. Management said it does not expect further near-term net interest margin increases and that margin could decline if asset yields reprice down faster than deposit costs.
- Management described asset quality as generally improved but noted remaining problem credits. It cautioned that economic or real estate deterioration could increase loan losses and require a higher allowance; estimates depend on judgment and uncertain conditions.
- Interest-rate simulations estimated net interest income declines of 0.3% under a 100-basis-point rise, 0.6% under a 200-basis-point rise, and 3.5% under a 100-basis-point fall. A 200-basis-point decline was considered not meaningful in the low-rate environment.
- Investment securities had $1.630 million of gross unrealized losses at September 30. Management considered the impairments temporary, but warned that rate increases, weaker issuer conditions, or reduced market liquidity could cause further declines or other-than-temporary impairments.
- Certificates of deposit totaling $118.3 million were scheduled to mature within one year. Management believed a significant portion would remain, based on historical retention, but this is not assured.
- Off-balance-sheet exposures included $63.1 million in loan commitments and $1.1 million in standby letters of credit. A mortgage repurchase reserve of $454,000 reflected estimated exposure on previously sold loans; actual losses are difficult to estimate.
- The company had seven TDR relationships comprising eleven loans; no new loan modifications were classified as TDRs in the first nine months. The filing reported no material pending litigation beyond routine matters, no material risk-factor changes, and effective disclosure controls. Management disclosed no material internal-control changes during the quarter.
Important facts for investors to verify
- How much of earnings growth reflects ongoing operations versus the Citizens Bank acquisition, and whether acquired-branch expenses or synergies are changing.
- Trends in net interest margin, deposit pricing and retention, upcoming deposit maturities, and funding costs as assets reprice.
- Whether elevated nine-month net charge-offs and higher classified loans lead to further deterioration, and whether the allowance remains adequate.
- Availability and terms of borrowing facilities, including the $7.5 million external line of credit and its capital and financial-ratio covenants; the filing says covenants were satisfied or waived at September 30.
- Changes in investment-security values and impairment assessments, plus actual mortgage repurchase claims and losses against the reserve.
- Execution of the 2015 Basel III capital requirements and the effect of the stated loan commitments if drawn.