Landmark Bancorp, Inc. — Q1 2020 Form 10-Q
Business context and reporting period. Landmark Bancorp is a Kansas-focused bank holding company operating through Landmark National Bank and a captive insurance subsidiary. This unaudited report covers the three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019. Amounts are in U.S. dollars unless stated otherwise.
Financial performance and condition
- Earnings: Net earnings were $3.36 million, up from $2.18 million in Q1 2019; diluted EPS was $0.73 versus $0.47. Return on average assets was 1.35% and return on average equity was 12.21%.
- Interest income and margins: Interest income was $9.32 million, up 4.9%. Net interest income increased 12.6% to $8.10 million, while fully tax-equivalent net interest margin rose to 3.67% from 3.41%. Interest expense declined 28.0% to $1.22 million.
- Provision and credit costs: Provision for loan losses rose to $1.20 million from $0.20 million. Net charge-offs were $188,000, compared with $27,000. The allowance was $7.48 million, or 1.33% of gross loans, versus $6.47 million, or 1.20%, at year-end.
- Non-interest items and expenses: Non-interest income increased to $5.35 million from $3.26 million, including $1.77 million of net gains on investment-security sales (none in Q1 2019). Non-interest expense rose 4.9% to $8.11 million, primarily reflecting higher compensation and benefits. The effective tax rate was 18.9%, up from 13.5%.
- Assets and loans: Total assets were $989.1 million, down from $998.5 million. Net loans were $553.7 million, up from $532.2 million; available-for-sale securities declined to $314.5 million from $363.0 million, reflecting strategic sales. Gross loans were $561.0 million.
- Asset quality: Non-accrual loans were $7.56 million, or 1.35% of gross loans, versus $5.55 million, or 1.03%, at year-end. Impaired loans increased to $10.60 million from $8.68 million; classified loans rose to $20.39 million from $18.12 million.
- Funding and liquidity: Deposits totaled $830.5 million, down $4.6 million from year-end. Cash and cash equivalents increased to $28.8 million from $13.7 million. Cash plus available-for-sale securities totaled $343.3 million, compared with $376.7 million. Management reported $71.6 million of potential FHLB borrowing capacity, $17.5 million of Federal Reserve discount-window capacity at quarter-end, and about $30 million of unused correspondent-bank federal funds lines.
- Debt and capital: Total borrowings were approximately $30.9 million, down from $42.2 million; this included $21.7 million of subordinated debentures and $9.0 million of repurchase agreements. The Bank was categorized as well capitalized; its total risk-based capital ratio was 16.89% and leverage ratio was 10.77%. Stockholders’ equity was $111.1 million, or 11.24% of assets.
- Cash flow and shareholder returns: Operating activities provided $4.8 million, investing activities provided $29.1 million, and financing activities used $18.8 million. Cash increased $15.1 million. The company paid a $0.20-per-share dividend and repurchased 91,137 shares for $2.02 million during the quarter.
Material changes versus the prior comparable period
- Net earnings increased 54%, with management attributing the improvement mainly to investment-security sale gains and higher net interest income, partly offset by the larger loan-loss provision.
- Average loan balances rose to $546.9 million from $491.7 million, supporting loan interest income growth; loan yield eased to 5.24% from 5.33%. Deposit cost declined to 0.61% from 0.83%.
- Credit indicators weakened from year-end: non-accrual and impaired loans, classified loans, and the allowance all increased. Past-due accruing loans of 30–89 days were $2.67 million, down from $3.44 million.
- Investment-security sales generated $44.5 million of proceeds and $1.77 million in net realized gains. The portfolio’s fair value declined by $48.5 million from year-end, while accumulated other comprehensive income increased to $7.23 million from $5.24 million.
Outlook, commentary, and risks
- Management warned that COVID-19 could materially adversely affect the economy, borrowers, asset quality, capital, and results. It expects higher delinquencies and defaults and said loan-loss provisions may remain elevated or rise further; the full impact was uncertain.
- At March 31, 12 COVID-related loan modifications covered $8.4 million of loans. By April 30, the company reported 111 modifications totaling $43.5 million and 739 PPP loans totaling $123.6 million. The modifications were not classified as TDRs under applicable guidance.
- Management expected lower market rates to pressure loan and securities yields and potentially reduce net interest income and margin. PPP lending could add interest income but, given its lower spread, was expected to weigh on margin. Non-PPP loan origination growth could also slow.
- Management stated that it had no current plans to change its dividend strategy, while noting that sustained distributions depend on capital and the depth and duration of the downturn. It declared its 75th consecutive quarterly dividend in May.
- The company planned to adopt CECL on January 1, 2023, following the delay applicable to smaller reporting companies. Initial estimates indicated an increase in the allowance at adoption, but the size was uncertain.
- Interest-rate sensitivity modeling estimated net interest income declines of 1.8% for a 100-basis-point rise and 2.2% for a 200-basis-point rise; a 200-basis-point decline scenario was deemed not meaningful in the low-rate environment.
- The filing reports no material pending legal proceedings apart from routine litigation. Management said disclosure controls were effective and reported no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether COVID-related borrower stress, payment modifications, and PPP exposure lead to further deterioration in delinquencies, non-accruals, classified loans, charge-offs, or required reserves.
- How much of the quarter’s earnings improvement is repeatable, given the $1.77 million one-time net gain on investment-security sales.
- Whether lower interest rates and PPP loan mix reduce net interest margin and earnings in subsequent quarters.
- Deposit trends, maturing certificates of deposit, borrowing capacity and use, and the company’s ability to maintain liquidity if customer deposits decline.
- Capital levels and capacity to sustain dividends and repurchases if credit losses rise; confirm applicable capital-conservation-buffer constraints.
- The timing and eventual quantified impact of CECL adoption; the filing does not provide a clear estimate of the expected allowance increase.