Landmark Bancorp, Inc. — Q1 2017 Form 10-Q
Business context and reporting period
Landmark Bancorp is a bank holding company operating Landmark National Bank, with 29 branches in Kansas. The unaudited report covers the three months ended March 31, 2017; balance-sheet comparisons are with December 31, 2016. Unless noted otherwise, financial amounts below are in millions of dollars.
Key financial results
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Interest income | $7.19 | $7.17 |
| Net interest income | $6.37 | $6.40 |
| Provision for loan losses | $0.05 | $0.05 |
| Non-interest income | $3.64 | $3.89 |
| Non-interest expense | $7.06 | $7.16 |
| Net earnings | $2.21 | $2.39 |
| Diluted earnings per share | $0.56 | $0.63 |
| Net interest margin, tax-equivalent | 3.38% | 3.47% |
| Return on average assets / equity | 0.98% / 10.46% | 1.10% / 11.60% |
Net earnings fell about 8%. Lower loan balances and yields reduced loan interest income; growth in investment securities income largely offset this. Higher deposit costs and reduced gains on mortgage loan sales also weighed on results. The filing reports no standalone operating margin or guidance.
Financial position, cash flow and credit
- Total assets were $923.0 million, up from $911.4 million at year-end. Available-for-sale securities were $396.9 million and net loans were $418.0 million, excluding loans held for sale.
- Deposits rose to $752.7 million from $741.5 million. Total borrowings declined to $68.3 million from $72.9 million; this included $33.5 million of FHLB borrowings, $21.3 million of subordinated debentures and $13.5 million of other borrowings.
- Cash and cash equivalents were $20.1 million. Cash plus available-for-sale securities totaled $417.0 million. Management reported $62.0 million of additional FHLB borrowing capacity, $15.8 million of Federal Reserve capacity and about $30.0 million of available correspondent-bank credit.
- Q1 operating cash flow was negative $0.5 million, investing cash flow negative $5.2 million and financing cash flow positive $5.8 million; cash increased $0.1 million. Operating cash use was primarily associated with funding loans held for sale, while investing outflows primarily reflected securities purchases.
- The allowance for loan losses was $5.3 million, or 1.26% of gross loans. Net charge-offs were $0.07 million. Non-accrual loans were $2.7 million (0.63% of gross loans); impaired loans were $6.5 million. Classified loans were $16.3 million, and past-due accruing loans increased to $1.4 million from $0.8 million at year-end.
- The Bank was classified as well capitalized. At March 31, the Bank’s total risk-based capital ratio was 18.41% and leverage ratio was 9.97%; the Company’s corresponding ratios were 18.58% and 10.05%.
Material changes, outlook and risks
- Net interest margin declined 9 basis points year over year. Management warned that it could decline further if short-term rates rise and asset yields do not reprice sufficiently to offset higher funding costs.
- Non-interest income declined 6.5%, mainly because gains on loan sales fell $0.4 million as mortgage origination and sale volumes decreased. A $0.15 million gain on investment-security sales partly offset the decline. Non-interest expense declined 1.4%, although professional fees increased with audit and compliance costs.
- Management described continued economic uncertainty, including weakness in the agriculture sector in its markets, while stating that the portfolio is diversified and asset quality had generally improved over recent years. The Bank was marketing its $1.0 million of real estate owned.
- Interest-rate simulations estimated annual net interest income declines of 1.9% under a 100-basis-point rise and 3.7% under a 200-basis-point rise; a 100-basis-point fall was estimated to reduce it 1.4%. A 200-basis-point fall was deemed not meaningful in the low-rate environment.
- There were 18 loans classified as troubled debt restructurings across 12 relationships; one construction-and-land TDR carried an $84,000 commitment for additional lending. The Company also had one mortgage repurchase request with an estimated loss of about $70,000; its repurchase reserve was $301,000.
- No numerical earnings guidance was provided. Management anticipated that adoption of the expected-credit-loss standard (CECL), effective for the Company in 2020, would increase the allowance, but said the amount was uncertain. The filing identifies interest-rate, credit, economic, regulatory, competitive, technology and cybersecurity risks. No material change to previously disclosed risk factors or material pending litigation was reported.
Important facts for investors to verify
- Whether deposit repricing and loan yields stabilize net interest margin as rates change.
- Whether the rise in 30–89-day past-due loans develops into higher non-accruals, charge-offs or provision needs, particularly in agriculture and commercial real estate.
- Whether mortgage origination volumes, loan-sale gains and servicing income recover or continue to weaken.
- The status and realized loss, if any, on the outstanding mortgage repurchase request, and the outcome of TDRs and real estate owned sales.
- How CECL implementation affects the allowance and capital, and whether liquidity sources and capital remain adequate as deposits, commitments and borrowings change.