Business Context and Reporting Period
Company: Landmark Bancorp, Inc. (LARK)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2024
Overview: Landmark Bancorp is a financial holding company operating primarily through its subsidiary, Landmark National Bank, in Kansas and Missouri. The company focuses on commercial, commercial real estate, and agriculture lending. It also owns a captive insurance subsidiary, Landmark Risk Management, Inc.
Key Financial Metrics
| Metric | Q2 2024 | Q2 2023 | 6M 2024 | 6M 2023 |
|---|---|---|---|---|
| Net Earnings | $3.01 million | $3.36 million | $5.79 million | $6.72 million |
| Earnings Per Share (Diluted) | $0.55 | $0.61 | $1.06 | $1.23 |
| Net Interest Income | $10.97 million | $10.83 million | $21.72 million | $21.78 million |
| Net Interest Margin (TE) | 3.21% | 3.21% | 3.16% | 3.26% |
| Total Assets | $1.56 billion | $1.53 billion | $1.56 billion | $1.52 billion |
| Total Loans (Net) | $969.09 million | $937.62 million | $969.09 million | $937.62 million |
| Total Deposits | $1.25 billion | $1.32 billion | $1.25 billion | $1.32 billion |
| Allowance for Credit Losses | $10.90 million | $10.45 million | $10.90 million | $10.45 million |
| Non-Performing Loans | $5.01 million (0.51%) | $2.39 million (0.25%) | $5.01 million (0.51%) | $2.39 million (0.25%) |
| Stockholders' Equity | $128.25 million | $117.35 million | $128.25 million | $117.35 million |
Material Changes vs. Prior Period
- Profitability Decline: Net earnings decreased 10.4% in Q2 and 13.8% for the six-month period compared to 2023. The primary driver was a significant increase in non-interest expense due to a valuation allowance of $979,000 recorded against real estate held for sale in Q2 2024.
- Interest Rate Impact: Interest income increased 14.9% in Q2 due to higher loan yields (6.33% vs 5.80%) and loan balances. However, interest expense rose 44.3% in Q2 as the cost of interest-bearing deposits increased to 2.44% from 1.57% due to competitive rate pressures.
- Asset Quality Deterioration: Non-accrual loans increased to $5.01 million (0.51% of gross loans) from $2.39 million (0.25%) at year-end 2023. Classified loans rose to $17.6 million from $7.5 million.
- Deposit Outflow: Total deposits decreased $65.8 million (5.0%) year-to-date, primarily due to seasonal declines in public funds and a reduction in brokered deposits.
- Liquidity Management: To offset deposit declines and fund loan growth, FHLB borrowings increased significantly, with total borrowings rising $62.7 million to $161.7 million.
Guidance, Outlook, and Risks
- Dividend Policy: The company declared its 92nd consecutive quarterly dividend of $0.21 per share. Management stated no plans to change the dividend strategy given the strong capital position, though future payments depend on economic performance.
- Capital Position: The Bank is categorized as "well capitalized" under prompt corrective action regulations. Common Equity Tier 1 Capital ratio was 12.72% as of June 30, 2024, well above the 7.0% requirement including the conservation buffer.
- Market Risk: The company faces interest rate risk. Simulation models indicate that a 300 basis point rise in rates would decrease net interest income by 15.0% over the next 12 months, while a 100 basis point fall would increase it by 1.2%.
- Key Risks:
- Real Estate Valuation: Continued pressure on real estate values impacting collateral-dependent loans and real estate owned (REO).
- Deposit Competition: Rising costs of funds as competition for deposits intensifies.
- Asset Quality: Potential for further deterioration in credit quality due to economic headwinds, specifically in commercial real estate and agriculture sectors.
Investor Verification Checklist
- REO Valuation: Verify the specific properties included in the $979,000 valuation allowance and the timeline for their disposition.
- Non-Performing Loan Composition: Review the breakdown of the $5.01 million in non-accrual loans to assess concentration risk in specific sectors (e.g., Commercial Real Estate vs. Agriculture).
- Deposit Stability: Monitor the trend of uninsured deposits ($389.7 million, or 31.2% of total) and the potential for further outflows in a high-rate environment.
- Loan Growth vs. Funding Cost: Assess whether loan yield growth can continue to outpace the rising cost of deposits to maintain net interest margin.
- Capital Ratios: Confirm that the "well capitalized" status is maintained as non-performing assets potentially increase.