Landmark Bancorp, Inc. — Q1 2016 Form 10-Q
Business and period. The filing covers the three months ended March 31, 2016; the interim financial statements are unaudited. Landmark is a Kansas-focused bank holding company operating through Landmark National Bank, with 29 branches. Amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q1 2016 / March 31, 2016 | Comparison |
|---|---|---|
| Net interest income | $6.404 | $6.294 in Q1 2015; up 1.8% |
| Net interest margin | 3.47% | 3.47% in Q1 2015 |
| Net earnings | $2.277; diluted EPS $0.62 | $2.777; diluted EPS $0.77 in Q1 2015 |
| Non-interest income / expense | $3.894 / $7.162 | $3.763 / $7.111 in Q1 2015 |
| Provision for loan losses | $0.050 | $1.000 credit (negative provision) in Q1 2015 |
| Total assets | $892.454 | $878.376 at December 31, 2015 |
| Loans, net / allowance | $419.879 / $5.869 | Allowance was 1.38% of gross loans, versus 1.39% at year-end |
| Deposits / total borrowings | $708.392 / approximately $81.4 | Deposits down $6.3; borrowings up $10.7 from year-end |
| Cash and cash equivalents | $9.853 | Down $3.716 during the quarter |
| Shareholders’ equity | $85.200 | $80.570 at December 31, 2015 |
Operating cash flow was $0.936; investing activities used $9.206, mainly for securities purchases; financing activities provided $4.554, including net FHLB borrowing. Cash and available-for-sale securities totaled $383.5 at quarter-end, according to management. The Bank was categorized as well capitalized; its reported total risk-based capital ratio was 16.44% and leverage ratio 9.49%.
Material changes and asset quality
- Net earnings fell about 18% year over year. Management attributed the decline principally to the prior-year $1.7 million recovery on a previously charged-off construction loan, which contributed to the $1.0 million credit provision in Q1 2015; Q1 2016 instead included a $50,000 provision.
- Net interest income increased $110,000, while margin was unchanged. Higher investment-security balances and yields supported interest income; average loan yield declined to 4.94% from 5.02%.
- Non-interest income rose 3.5%, partly because securities sales produced a $12,000 gain versus a $254,000 loss in Q1 2015. Loan-sale gains decreased $149,000 as mortgage origination and sale volumes declined.
- Non-accrual loans were $2.7 million (0.64% of gross loans), up from $2.2 million (0.51%) at year-end. Impaired loans increased to $7.3 million from $6.8 million. Past-due accruing loans of 30–89 days declined to $0.957 million from $1.402 million; none were 90 days past due and accruing.
- Net charge-offs were $103,000, compared with net recoveries of $1.6 million in Q1 2015. Classified loans totaled $15.6 million versus $15.3 million at year-end. Real estate owned declined to $0.310 million from $1.0 million.
- Available-for-sale securities increased to $373.6 million from $353.4 million at year-end. Unrealized losses were $249,000, down from $1.075 million; other comprehensive income was $2.125 million.
Outlook, risks, and contingencies
- The filing provides no quantified earnings or revenue guidance. Management described its strategy as maintaining asset quality while growing commercial, commercial real estate, and agricultural lending. It cited lingering problem loans and continuing economic uncertainty, but said it believed the company had a high-quality asset base and solid core earnings.
- Interest-rate simulation estimated one-year net interest income declines of 0.6% under a 100-basis-point rise and 1.1% under a 200-basis-point rise; a 100-basis-point fall implied a 1.3% decline. The 200-basis-point fall case was considered not meaningful in the low-rate environment.
- Liquidity sources included $31.9 million of additional FHLB borrowing capacity, $16.9 million of Federal Reserve borrowing capacity, and approximately $50 million of unused correspondent-bank credit. These facilities are subject to applicable requirements and policies. Certificates of deposit totaling $97.9 million mature within one year.
- Outstanding commitments included $72.5 million of loan commitments and $1.8 million of standby letters of credit. A $7.5 million outside-bank credit line was undrawn and matures November 1, 2016; the company reported compliance with its covenants.
- The company reported no material pending legal proceedings beyond routine litigation, no material change in previously disclosed risk factors, and effective disclosure controls. Management identified economic and real-estate conditions, credit quality, interest rates, competition, regulation, technology and cyber risks, and capital availability as potential risks.
- Management was evaluating the effects of recently issued accounting standards, including revenue recognition, financial instruments, leases, and share-based compensation. No material goodwill impairment trigger was identified during the quarter.
Investor verification priorities
- Reconcile the earnings decline with the unusual Q1 2015 construction-loan recovery and assess the remaining collection prospects on that loan.
- Review migration in non-accrual, impaired, classified, and TDR loans, particularly construction, commercial real estate, and commercial credits, and evaluate allowance adequacy.
- Check deposit trends, the seasonal public-fund explanation, near-term certificate maturities, and the increased reliance on FHLB borrowing.
- Assess securities portfolio valuation, interest-rate sensitivity, pledged collateral, and the effect of unrealized gains and losses on equity and regulatory capital.
- Confirm the basis for the reported capital ratios and available liquidity facilities, and monitor the $72.5 million of loan commitments and other off-balance-sheet exposures.
- Note that Q1 2015 per-share figures were adjusted for a 5% stock dividend paid in December 2015; the filing reports a Q1 2016 dividend of $0.20 per share.