Landmark Bancorp, Inc. — Q1 2018 Form 10-Q
Business context and period. Landmark Bancorp is a Kansas-focused bank holding company operating Landmark National Bank and a captive insurance subsidiary. The unaudited report covers the three months ended March 31, 2018; balance-sheet comparisons are with December 31, 2017. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q1 2018 / March 31, 2018 | Comparable / prior period |
|---|---|---|
| Interest income | $7.60 million | $7.19 million in Q1 2017 |
| Net interest income | $6.59 million | $6.37 million in Q1 2017 |
| Net interest margin, tax-equivalent | 3.34% | 3.38% in Q1 2017 |
| Provision for loan losses | $200,000 | $50,000 in Q1 2017 |
| Non-interest income | $3.40 million | $3.64 million in Q1 2017 |
| Non-interest expense | $7.44 million | $7.06 million in Q1 2017 |
| Net earnings / diluted EPS | $2.10 million / $0.51 | $2.21 million / $0.54 in Q1 2017 |
| Operating cash flow | Provided $3.12 million | Used $496,000 in Q1 2017 |
| Cash and cash equivalents | $13.04 million | $16.58 million at December 31, 2017 |
| Total assets | $938.99 million | $929.45 million at December 31, 2017 |
| Net loans, excluding loans held for sale | $436.18 million | $433.74 million at December 31, 2017 |
| Total deposits | $769.56 million | $765.56 million at December 31, 2017 |
| Total borrowings | $74.02 million | $66.59 million at December 31, 2017 |
| Stockholders’ equity | $84.45 million | $87.62 million at December 31, 2017 |
- Net earnings fell about 4.8% year over year. Higher net interest income and lower income tax expense were outweighed by lower non-interest income, higher operating expense, and a larger loan-loss provision.
- Interest income rose as average loans and loan yields increased. Deposit interest expense rose 60% to $541,000, reflecting higher rates—especially on public funds—and increased average interest-bearing deposits. The company cautioned that margin could decline further if rates rise faster than asset yields can reprice.
- The effective tax rate fell to 10.9% from 23.9%, primarily following the Tax Cuts and Jobs Act’s reduction in the federal corporate rate to 21%.
- Other comprehensive loss was $4.84 million, largely reflecting unrealized losses on available-for-sale securities. The portfolio’s fair value was $398.10 million, with $7.52 million of gross unrealized losses; management described the impairments as temporary and said it did not expect to be required to sell the securities before cost recovery.
- Cash declined $3.54 million during the quarter: investing activities used $17.56 million, primarily for securities purchases, while financing activities provided $10.90 million. Cash plus available-for-sale securities totaled $411.2 million at quarter-end.
- Funding included $39.75 million of FHLB borrowings, $21.53 million of subordinated debentures, and $12.74 million of other borrowings. The company reported $57.0 million of additional FHLB borrowing capacity, $14.2 million of Federal Reserve capacity, and approximately $30.0 million of available correspondent-bank lines; none of those latter two sources was drawn. The company also had an undrawn $7.5 million line with an unrelated lender.
Material changes and asset quality
- Gross loans increased to $442.22 million from $439.24 million at year-end. Construction and land loans increased by about $5.0 million; residential, commercial, and agriculture balances declined.
- The allowance for loan losses rose to $5.64 million, or 1.28% of gross loans, from $5.46 million, or 1.24%. The filing attributes the higher quarterly provision mainly to increased specific reserves on impaired loans. Net charge-offs were $15,000 in Q1 2018 versus $67,000 in Q1 2017.
- Non-accrual loans decreased to $5.76 million, or 1.30% of gross loans, from $6.04 million, or 1.38%. Impaired loans declined to $9.41 million from $9.76 million. Classified loans increased to $21.91 million from $16.28 million, including increases in commercial and agriculture classifications.
- There were no loans 90 days or more delinquent and still accruing. Troubled debt restructurings totaled 18 loans, with $1.02 million non-accrual and $3.64 million accruing; no new TDRs were classified in Q1 2018.
- Non-interest expense included a $219,000 increase in other expense related to loss reserves at the captive insurance subsidiary. Professional fees rose $98,000, partly for the internal-control audit required after becoming an accelerated filer.
Outlook, risks and contingencies
- No specific earnings or financial guidance was provided. Management cited generally improving asset quality, while noting economic uncertainty and weakness in the agriculture sector in its markets; it said it was working to resolve remaining problem credits and expected its focus on asset quality to support future growth and profitability.
- Interest-rate simulations showed a decline in projected one-year net interest income under each modeled shift: down 4.6% with rates up 200 basis points, down 2.3% with rates up 100 basis points, down 1.6% with rates down 100 basis points, and down 4.5% with rates down 200 basis points.
- Key stated risks include local and national economic conditions, agriculture and real estate markets, credit losses, competition, interest-rate changes, cybersecurity and technology, regulation, and the ability to maintain adequate capital and liquidity.
- Outstanding loan commitments were $83.6 million and standby letters of credit had a maximum contractual amount of $810,000. Management expected sufficient funds to meet current loan commitments. The filing reported no material pending litigation apart from routine matters.
- The company adopted ASC 606 and other accounting updates effective January 1, 2018 without material impact. It expects adoption of CECL in 2020 to increase the loan-loss allowance, but the amount is uncertain. Management expected the new lease standard and callable-debt premium guidance to have no material impact.
- The Bank was classified as well capitalized. At March 31, 2018, its total risk-based capital ratio was 17.77%; the company reported no material change to risk factors from its 2017 Form 10-K. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether classified commercial and agriculture loans, and the related specific reserves, change materially in subsequent quarters.
- Whether deposit pricing continues to rise faster than loan and securities yields, pressuring net interest margin.
- How the unrealized securities losses affect accumulated other comprehensive loss, capital, and liquidity if securities must be sold.
- The trend in captive-insurance loss reserves and related non-interest expense.
- The eventual CECL implementation impact on the allowance, earnings, and regulatory capital.
- Deposit retention and refinancing needs, including the $90.6 million of certificates of deposit scheduled to mature within one year.