Landmark Bancorp, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. The unaudited consolidated statements cover the company and its subsidiaries, including Landmark National Bank. Amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net interest income | $7.48 | $6.84 | $14.68 | $13.43 |
| Provision for loan losses | $0.40 | $0.25 | $0.60 | $0.45 |
| Non-interest income | $3.99 | $4.25 | $7.24 | $7.65 |
| Non-interest expense | $7.97 | $7.57 | $15.69 | $15.01 |
| Net earnings | $2.60 | $2.85 | $4.78 | $4.94 |
| Diluted EPS | $0.59 | $0.65 | $1.09 | $1.14 |
| Net interest margin, tax-equivalent | 3.43% | 3.33% | 3.42% | 3.33% |
- Q2 net earnings fell 8.7%; first-half earnings fell 3.3%. Higher loan balances and yields lifted interest income, but deposit repricing increased interest expense. Net interest income rose 9.4% in Q2 and 9.3% for the first half.
- Q2 non-interest income declined 6.2%, partly because Q2 2018 included $0.525 million of recoveries from a prior deposit-related loss. Q2 2019 also included $0.146 million of net losses on investment-security sales. Higher loan-sale gains and service charges partly offset these items.
- Non-interest expense rose 5.3% in Q2 and 4.6% in the first half, primarily due to employee additions and higher compensation costs. The effective tax rate was 16.3% in Q2 and 15.0% for the first half, versus 13.1% and 12.2%, respectively, in 2018; prior-year rates benefited from excess tax benefits related to stock-option exercises.
Balance sheet, cash flow and capital
- Total assets were $1.002 billion at June 30, up 1.6% from year-end 2018. Net loans were $510.2 million, up 4.3%; gross loans were $516.4 million. Commercial loans increased to $94.4 million from $74.3 million at year-end.
- Deposits totaled $829.5 million, up $5.9 million from year-end. Non-interest-bearing deposits were $180.8 million; time deposits were $183.3 million, including $156.8 million scheduled to mature within one year.
- Total borrowings were $58.3 million: $22.4 million of FHLB borrowings, $21.7 million of subordinated debentures and $14.3 million of other borrowings. Stockholders’ equity was $102.9 million.
- Cash and cash equivalents were $14.3 million, down $4.8 million in the first half. Operating activities used $5.3 million; investing activities used $5.1 million; financing activities provided $5.6 million. Cash plus available-for-sale securities totaled $396.6 million.
- Management reported $85.5 million of additional FHLB borrowing capacity, subject to FHLB requirements, $10.3 million of Federal Reserve borrowing capacity, and approximately $30.0 million of available correspondent-bank credit. The company also had a $7.5 million credit line maturing November 1, 2019 and said it was in compliance with its covenants.
- The Bank was categorized as well capitalized. At June 30, its total risk-based capital ratio was 17.00%, common equity Tier 1 ratio 15.98%, and leverage ratio 10.27%. The company paid a quarterly dividend of $0.20 per share.
Material changes, outlook and risks
- Credit-quality measures weakened in several areas: non-accrual loans increased to $7.8 million, or 1.51% of gross loans, from $5.2 million, or 1.06%, at year-end; loans 30–89 days past due and accruing rose to $3.3 million from $1.7 million; and impaired loans increased to $11.0 million from $8.7 million. One relationship involving $2.3 million of loans moved to non-accrual status in the first half.
- Classified loans declined to $27.5 million from $31.8 million at year-end. The allowance for loan losses increased to $6.3 million, or 1.21% of gross loans, from $5.8 million, or 1.16%. First-half net charge-offs were $0.099 million versus $0.074 million a year earlier.
- Management cited continuing uncertainty in the U.S. economy and a downturn in the agriculture sector affecting its markets, while describing the portfolio as diversified and asset quality as generally improved over recent years. It noted that growth in net interest income and margin could be constrained by slower loan growth or rising funding costs. No specific earnings or financial guidance was provided.
- Interest-rate simulations estimated that a 200-basis-point rise would reduce one-year net interest income by 5.1%; a 100-basis-point rise would reduce it by 2.5%. A 100- or 200-basis-point decline was estimated to increase it by 1.6% or 1.7%, respectively.
- The company adopted lease accounting guidance in 2019; management said the effect was not material to earnings. CECL implementation was underway. Initial estimates indicated an increase in the loan-loss allowance at adoption, but its size was uncertain; a proposed delay for smaller reporting companies was not yet approved.
- Landmark Risk Management exited its insurance pooling relationship effective May 31, 2019 and was evaluating alternatives; it was not then providing insurance coverage to the company or the Bank. The company opened a Prairie Village loan production office in May and received regulatory approval in July to convert it to a branch, with transition expected in Q3.
- Off-balance-sheet commitments included $99.9 million of outstanding loan commitments and $1.2 million of standby letters of credit. Management reported no material pending legal proceedings beyond routine litigation and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether higher loan growth and yields can continue to offset rising deposit costs, and how net interest margin responds to rate movements.
- Whether non-accrual, past-due and impaired loans—particularly the relationship moved to non-accrual—lead to further provisions or charge-offs.
- The expected CECL adoption date and the eventual impact on the allowance for credit losses and capital.
- Deposit retention and pricing as $156.8 million of time deposits mature within one year, alongside the company’s funding needs and available borrowing capacity.
- Whether the Prairie Village office transition and Landmark Risk Management’s replacement arrangements proceed as described.