Landmark Bancorp, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Financial statements are unaudited. Landmark is a Kansas-focused banking company operating through Landmark National Bank, with 29 branches, and an insurance subsidiary formed in May 2017.
Financial performance and condition
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net interest income | $6.576 million | $6.562 million | $12.944 million | $12.966 million |
| Provision for loan losses | $0.100 million | $0.300 million | $0.150 million | $0.350 million |
| Non-interest income | $4.188 million | $3.948 million | $7.829 million | $7.842 million |
| Non-interest expense | $7.539 million | $7.211 million | $14.600 million | $14.373 million |
| Net earnings | $2.383 million | $2.326 million | $4.588 million | $4.719 million |
| Diluted EPS | $0.60 | $0.60 | $1.16 | $1.23 |
- Q2 earnings increased 2.5% year over year; first-half earnings declined 2.8%. Q2 basic EPS was $0.62 versus $0.61; first-half basic EPS was $1.19 versus $1.25.
- Tax-equivalent net interest margin was 3.41% in both Q2 and the first half, down from 3.46% and 3.47%, respectively, in 2016. Q2 return on average assets was 1.04%; return on average equity was 10.78%.
- At June 30, total assets were $910.8 million, loans net of allowance were $422.7 million, available-for-sale securities were $389.8 million, and stockholders’ equity was $91.0 million. Total assets were nearly unchanged from year-end 2016.
- Deposits were $745.0 million, up $3.5 million from year-end. Total borrowings were $63.8 million, down $9.0 million. Cash and cash equivalents were $10.6 million, down $9.4 million since year-end.
- First-half cash from operations was $0.3 million, compared with $7.3 million in 2016; investing used $2.6 million and financing used $7.2 million. Cash ended the period at $10.6 million.
- The allowance for loan losses was $5.3 million, or 1.24% of gross loans, versus 1.26% at year-end. Bank regulatory capital ratios included 17.73% common equity Tier 1, 18.80% total risk-based capital and 10.08% leverage; the Bank was categorized as well capitalized.
Material changes versus comparable periods
- Q2 net interest income was essentially flat; first-half net interest income decreased slightly. Higher investment-security income was offset by lower loan income and higher deposit costs. Deposit interest expense rose 37.3% in Q2 and 29.8% in the first half.
- Q2 non-interest income increased 6.1%, mainly from higher gains on loan sales; first-half non-interest income was nearly unchanged. Q2 non-interest expense rose 4.6%, including higher professional fees and compensation.
- Credit costs and net charge-offs declined year over year: first-half provision was $0.15 million versus $0.35 million, and net charge-offs were $0.168 million versus $0.620 million.
- Asset quality indicators were mixed. Impaired loans fell to $6.4 million from $6.7 million, and non-accrual loans declined to $2.5 million from $2.7 million. However, loans 30–89 days past due and accruing rose to $4.3 million, or 1.00% of gross loans, from $0.8 million, or 0.18%, primarily due to one $3.1 million commercial and commercial-real-estate relationship.
- Accumulated other comprehensive income improved to $1.6 million from a $1.3 million loss at year-end, reflecting unrealized gains on securities. The company reported $4.5 million of gross unrealized gains and $1.4 million of gross unrealized losses on securities at June 30.
Outlook, risks, contingencies and unusual items
- The filing provides no quantified earnings or revenue guidance. Management cautioned that net interest income and margin could continue to decline if short-term rates rise and asset yields or balances do not adjust sufficiently to higher funding costs.
- Management cited continued uncertainty in the U.S. economy and weakness in the agriculture sector affecting its markets, while describing the loan portfolio as diversified and asset quality as generally improved over recent years.
- Significant subsequent event: On August 8, 2017, the company learned that third-party checks deposited by a customer were returned for uncollected funds, creating a $10.3 million overdraft. After $1.7 million in subsequent wire deposits, the overdraft was $8.6 million as of the filing date. The investigation and recovery efforts were ongoing, and responsibility and insurance coverage had not been determined. In a stated worst case—with no further recovery or insurance—the company estimated an after-tax loss of approximately $5.4 million in Q3 2017, excluding investigation costs.
- Other exposures include $86.7 million of outstanding loan commitments, $0.826 million of standby letters of credit, and one outstanding mortgage repurchase request for which the company expected a loss of approximately $70,000. The mortgage repurchase reserve was $0.301 million.
- The company formed a captive insurance subsidiary in May; associated formation costs contributed to higher professional fees. Management also expected an internal-control audit requirement for 2017 after exceeding a market-capitalization threshold.
- Management anticipated that adoption of the expected-credit-loss standard (CECL), effective for the company beginning in 2020, would increase the loan-loss allowance, but said the amount was uncertain. Disclosure controls were reported effective, with no material change in internal control during the quarter. No material changes to previously disclosed risk factors or material pending legal proceedings were reported.
Most important facts for investors to verify
- Recovery, insurance coverage, legal responsibility and final loss for the $8.6 million customer overdraft—and whether the estimated $5.4 million after-tax downside changes.
- Whether elevated 30–89-day delinquencies, particularly the identified $3.1 million relationship, cure or migrate to non-accrual or classified status.
- Quarterly net interest margin and deposit pricing as rates change, alongside loan growth and portfolio yields.
- Credit quality, charge-offs and reserve adequacy, including exposure to agriculture and commercial real estate.
- Effects of captive-insurance, internal-control audit and other expense increases on ongoing profitability and capital.