Landmark Bancorp, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Unaudited consolidated results cover Landmark Bancorp, Landmark National Bank and its captive insurance subsidiary. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context and financial performance
The company operates a Kansas-based community bank, funded primarily by deposits and lending across residential, commercial real estate, commercial, agriculture, construction, municipal and consumer categories. It also operates a captive insurance subsidiary.
| Metric | Q2 2018 | Six months 2018 | Comparison |
|---|---|---|---|
| Net interest income | $6.84 million | $13.43 million | Up 4.0% and 3.8%, respectively, year over year |
| Net earnings | $2.85 million | $4.94 million | Up 19.4% and 7.8%, respectively |
| Diluted earnings per share | $0.68 | $1.19 | Compared with $0.58 and $1.11 in 2017 |
| Net interest margin, tax-equivalent | 3.33% | 3.33% | Down from 3.41% and 3.40% |
| Return on average assets | 1.20% | 1.06% | Compared with 1.04% and 1.01% |
| Return on average equity | 13.49% | 11.69% | Compared with 10.78% and 10.62% |
Quarterly net earnings increased despite a higher loan-loss provision and sharply higher deposit interest expense. Lower income tax expense—reflecting the federal corporate tax rate reduction—also supported earnings.
Balance sheet, liquidity and capital
- At June 30, total assets were $978.2 million, up 5.2% from year-end 2017. Net loans were $461.4 million, up 6.4%; gross loans were $467.1 million. Available-for-sale securities were $398.1 million.
- Deposits were $765.3 million, essentially unchanged from December 31, 2017. FHLB borrowings rose to $85.6 million from $31.6 million; total borrowings were $115.6 million, versus $66.6 million at year-end.
- Cash and cash equivalents were $19.9 million. Cash plus available-for-sale securities totaled $418.0 million, compared with $404.6 million at year-end.
- For the first half, operating activities provided $3.4 million, investing activities used $47.6 million and financing activities provided $47.5 million; cash increased $3.3 million.
- Stockholders’ equity was $86.4 million, down from $87.6 million at year-end, including accumulated other comprehensive loss of $5.5 million versus $0.4 million. The Bank was categorized as well capitalized; its total risk-based capital ratio was 17.35%.
- Management reported $8.9 million of additional FHLB borrowing capacity, $14.0 million of Federal Reserve borrowing capacity and approximately $30.0 million of available correspondent-bank credit, subject to applicable requirements.
Material changes and credit quality
- Interest income rose 8.4% in Q2 and 7.1% for the half year, supported by loan growth and higher loan yields. Loan yield increased to 5.10% in Q2 from 4.96% a year earlier.
- Interest expense increased 41.7% in Q2 and 32.6% for the half year. The average cost of interest-bearing deposits rose to 0.42% in Q2 from 0.27%; higher funding costs contributed to margin compression.
- Non-interest income was up 1.2% in Q2 but down 2.4% for the half year. A $525,000 recovery of a deposit-related loss from 2017 boosted other income; lower mortgage-loan sale gains and fewer investment-security gains partly offset it.
- Provision for loan losses was $250,000 in Q2 and $450,000 for the half year, compared with $100,000 and $150,000 in 2017. The allowance was $5.8 million, or 1.25% of gross loans, versus $5.5 million, or 1.24%, at year-end.
- Classified loans increased to $24.4 million from $16.3 million at year-end. Non-accrual loans declined to $5.3 million, or 1.13% of gross loans, from $6.0 million, or 1.38%. Past-due accruing loans of 30–89 days were $1.5 million; none were 90 days past due and accruing. Impaired loans were $9.0 million, down from $9.8 million.
- Management noted continuing uncertainty in the U.S. economy and weakness in the agriculture sector affecting its markets, while describing overall asset quality as improved in recent years. It highlighted attention to commercial real estate and construction and land credits.
Outlook, risks and unusual items
- The filing gives no specific earnings or growth guidance. Management cautioned that net interest income and margin could decline if short-term rates rise and loan repricing or balance growth does not keep pace with higher deposit and borrowing costs.
- Interest-rate simulations estimate one-year net interest income declines of 4.0% for a 100-basis-point rise and 8.1% for a 200-basis-point rise; modeled falling-rate scenarios range from a 0.3% decline at 200 basis points to a 1.5% increase at 100 basis points.
- The company expects adoption of the current expected credit loss standard (CECL) in 2020 to increase the loan-loss allowance, but the amount is uncertain. Management was assessing data and systems needs.
- Available-for-sale securities had $7.8 million of gross unrealized losses at June 30, compared with $3.0 million at year-end. Management considered these impairments temporary and stated it did not intend, and was not likely to be required, to sell the securities before recovery.
- Unfunded loan commitments were $79.8 million and standby letters of credit totaled $859,000. A $7.5 million holding-company credit line matures November 1, 2018; the company reported compliance with its covenants at June 30.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. No material pending litigation or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether the increase in classified loans and the higher provision signal further deterioration, particularly in commercial real estate, commercial and agriculture exposures.
- How deposit pricing, FHLB funding levels and interest-rate movements affect the net interest margin and modeled rate sensitivity.
- How much of Q2’s earnings performance depended on the one-time $525,000 deposit-loss recovery and the lower effective tax rate.
- The duration and potential realization of securities’ unrealized losses, and the effect of the accumulated other comprehensive loss on equity.
- The eventual CECL allowance increase and the company’s ability to meet loan commitments while maintaining liquidity and capital.