Landmark Bancorp, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise. The company operates Landmark National Bank and Landmark Risk Management, primarily in Kansas.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $9.98 | $9.02 | $19.57 | $17.12 |
| Provision for loan losses | $0 | $0.40 | $0.50 | $1.60 |
| Non-interest income | $5.47 | $6.97 | $12.20 | $12.33 |
| Non-interest expense | $9.19 | $9.12 | $18.26 | $17.22 |
| Net earnings | $4.98 | $5.10 | $10.35 | $8.46 |
| Diluted EPS | $1.04 | $1.08 | $2.17 | $1.77 |
| Net interest margin, tax-equivalent | 3.54% | 3.72% | 3.53% | 3.69% |
- Q2 net earnings fell 2.4% year over year, while first-half earnings rose 22.3%. Management attributed the first-half improvement mainly to higher net interest income and lower loan-loss provision.
- Q2 net interest income increased 10.7%; for the first half it increased 14.3%. Average interest-earning assets grew, while the net interest margin declined 18 basis points in Q2 and 16 basis points for the first half.
- Q2 non-interest income declined 21.5%, primarily because gains on mortgage loan sales fell $2.0 million as originations slowed. First-half non-interest income was down 1.0%, including lower securities-sale gains.
- Return on average assets and equity were 1.59% and 15.40% for Q2, and 1.68% and 16.22% for the first half, respectively. The quarterly dividend was $0.20 per share.
Financial position, cash flow and capital
- At June 30, 2021, total assets were $1.250 billion, up $62.4 million from year-end 2020. Cash and cash equivalents were $131.0 million; available-for-sale securities were $343.9 million; and net loans were $673.7 million.
- Total deposits were $1.078 billion, up $61.7 million from December 31, 2020. Non-interest-bearing deposits were $307.1 million. Total borrowings were approximately $26.2 million, comprising $21.7 million of subordinated debentures and $4.5 million of other borrowings. Stockholders’ equity was $132.4 million.
- Cash and available-for-sale securities totaled $475.0 million. First-half operating cash flow was $14.5 million, investing cash flow was negative $26.3 million, and financing cash flow was positive $58.0 million; cash increased $46.2 million to $131.0 million.
- The Bank was reported well capitalized. At June 30, its common equity Tier 1 ratio was 17.14%, total risk-based capital ratio 18.39%, and leverage ratio 10.31%. The company reported it and the Bank met applicable capital requirements.
- Available borrowing capacity included $102.9 million from the FHLB, $81.8 million at the Federal Reserve discount window, and approximately $30.0 million under correspondent-bank agreements; none was drawn at quarter-end.
Material changes and asset quality
- Gross loans declined to $685.2 million from $713.5 million at year-end, principally reflecting lower PPP balances: $61.2 million remained outstanding versus $100.1 million. The company had originated approximately $186.0 million of PPP loans through May 31, 2021.
- The allowance for loan losses increased to $9.2 million, or 1.34% of gross loans, from $8.8 million, or 1.23%, at year-end. Excluding SBA-guaranteed PPP loans, the allowance ratio was 1.47%, compared with 1.43%.
- Non-accrual loans rose to $13.3 million, or 1.94% of gross loans, from $10.5 million, or 1.47%. Impaired loans increased to $14.8 million from $12.5 million. Classified loans declined to $23.1 million from $25.2 million. There were no loans 90 days or more delinquent and still accruing.
- Net charge-offs were $0.11 million in the first half, down from $0.32 million in the comparable 2020 period. Management recorded no Q2 provision, citing improving economic conditions, while increasing reserves allocated to impaired loans.
Outlook, risks and unusual items
- The filing provides no numerical earnings or revenue guidance. Management said continued low rates could pressure net interest income and margin as loans and securities reprice lower; PPP forgiveness and fee recognition can also cause PPP yields to vary.
- COVID-19 remains a material uncertainty. Management identified possible borrower repayment stress, higher delinquencies and credit losses, deposit and fee-income effects, and impairment risks for goodwill, mortgage servicing rights and real estate. The company had one pandemic-related loan modification of $3.8 million and one short-term residential forbearance or repayment arrangement totaling $56,000.
- Subsequent to quarter-end, the company negotiated a deed in lieu of foreclosure on a $1.7 million impaired commercial real estate loan; a $421,000 allowance had been recorded against it at June 30.
- At quarter-end, outstanding loan commitments were $138.8 million and standby letters of credit totaled $1.5 million. The company stated it expected sufficient funds to meet current commitments.
- CECL adoption is planned for January 1, 2023. Management’s initial estimates indicate an increase in the allowance may result, but the amount is uncertain. Interest-rate simulation showed estimated net interest income increases of 2.2% and 4.2% under +100 and +200 basis-point scenarios, and a 3.0% decline under a −100 basis-point scenario; a −200 basis-point scenario was not meaningful.
- The company reported no material changes to risk factors, no material pending legal proceedings beyond ordinary routine litigation, and effective disclosure controls as of June 30, 2021.
Important facts for investors to verify
- Whether rising non-accrual and impaired loan balances, particularly in commercial real estate and agriculture, lead to higher provisions or charge-offs.
- How quickly PPP balances run off and whether loan growth and mortgage-sale income offset ongoing margin pressure.
- Deposit retention and pricing, including the $98.1 million of certificates of deposit scheduled to mature within one year, and the availability of contingent funding.
- The eventual CECL allowance impact and whether capital and dividend capacity remain adequate under adverse economic conditions.
- The outcome and recovery value of the $1.7 million commercial real estate loan transferred through the post-quarter-end deed in lieu.