Landmark Bancorp, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Landmark Bancorp is a Kansas-focused bank holding company operating through Landmark National Bank. Financial statements are unaudited.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Interest income | $7.37m | $7.39m | $14.55m | $14.46m |
| Net interest income | $6.56m | $6.62m | $12.97m | $12.92m |
| Provision for loan losses | $0.30m | $0.20m | $0.35m | ($0.80m) credit |
| Non-interest income | $3.95m | $4.68m | $7.84m | $8.45m |
| Non-interest expense | $7.21m | $7.44m | $14.37m | $14.55m |
| Net earnings | $2.25m | $2.62m | $4.52m | $5.39m |
| Diluted EPS | $0.61 | $0.72 | $1.24 | $1.50 |
- Q2 net interest margin was 3.46%, down from 3.56%; first-half margin was 3.47%, down from 3.51%. Q2 return on average assets/equity was 1.00%/10.48%, versus 1.20%/13.95% a year earlier.
- At June 30, assets were $896.3m, up from $878.4m at year-end. Net loans were $430.1m, available-for-sale securities $366.6m, and cash and equivalents $14.3m.
- Deposits were $715.6m, nearly flat with year-end. Total borrowings were $80.7m, up from $70.7m; this included $48.0m of FHLB borrowings, $21.2m of subordinated debentures, and $11.5m of other borrowings. Stockholders’ equity was $89.4m, versus $80.6m.
- Cash and available-for-sale securities totaled $380.9m. First-half operating cash flow was $7.1m, investing cash flow was negative $17.1m, financing cash flow was positive $10.8m, and cash increased $0.7m.
- The Bank was categorized as well capitalized. Its June 30 ratios included 9.53% leverage, 15.50% common equity Tier 1, and 16.57% total risk-based capital.
Changes versus comparable periods
- Net earnings fell 14% in Q2 and 16% in the first half. Management attributed the main pressure to lower gains on loan sales, associated with the departure of several mortgage lenders; loan-sale gains declined $846,000 in Q2 and $995,000 in the first half.
- First-half 2015 results benefited from a $1.7m recovery on a previously charged-off construction loan, contributing to an $800,000 provision credit. In 2016, the Company recorded a $350,000 provision and $620,000 of net charge-offs.
- Q2 net interest income decreased 0.9%, while first-half net interest income increased 0.4%. Lower loan yields and higher deposit costs weighed on margin; growth in average earning assets partly offset these effects.
- First-half non-interest income also included $297,000 of net securities-sale gains, compared with a $254,000 net loss in 2015. Q2 included a $285,000 securities-sale gain.
- Net unrealized gains on securities contributed $4.32m of first-half other comprehensive income; accumulated other comprehensive income rose to $6.50m from $2.18m at year-end.
Outlook, risks and unusual items
- No specific earnings or financial guidance was provided. Management described a strategy of growing commercial, commercial real estate, and agriculture lending, and said it continued working to resolve problem credits.
- Asset quality showed mixed movement: risk-classified loans rose to $21.9m from $15.3m at year-end; non-accrual loans increased to $2.6m from $2.2m; impaired loans increased to $7.1m from $6.8m. The allowance was $5.7m, or 1.30% of gross loans, compared with $5.9m, or 1.39%.
- Second-quarter charge-offs were primarily tied to liquidation of collateral for a previously identified impaired commercial loan. Management said the allowance was sufficient, while noting continuing work on identified problem assets.
- At June 30, loan commitments were $73.2m and standby letters of credit were $1.7m. The filing reported additional potential borrowing capacity, subject to lender requirements, including $37.4m through the FHLB, $17.1m at the Federal Reserve, and approximately $50m under correspondent-bank agreements.
- Interest-rate simulations estimated net interest income declines of 1.8% for a 100-basis-point rise and 3.4% for a 200-basis-point rise; a 200-basis-point fall was deemed not meaningful in the low-rate environment. Key risks include economic and real estate conditions, credit losses, interest rates, competition, regulation, and cybersecurity.
- The Company recorded no material legal proceedings beyond routine litigation and reported effective disclosure controls. Management said there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether mortgage-lending staffing and loan-sale gains recovered after the Q2 decline.
- Trends in classified, non-accrual, impaired, and restructured loans, particularly commercial and agriculture exposures, and whether further charge-offs or provisions are needed.
- Whether deposits remain stable as $98.9m of certificates of deposit mature within one year, and how borrowing-funded asset growth affects funding costs.
- The sustainability of net interest margin under changing rates and the sensitivity of securities values and regulatory capital to unrealized gains or losses.
- Whether management’s allowance judgments and available borrowing capacity remain adequate as economic conditions and credit quality evolve.