Landmark Bancorp, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are with December 31, 2018. Landmark is a Kansas-focused bank holding company operating Landmark National Bank and a captive insurance subsidiary. Financial statements are unaudited.
Key financial results
| Metric | Q1 2019 | Q1 2018 / prior date | Change |
|---|---|---|---|
| Interest income | $8.884 million | $7.601 million | Up 16.9% |
| Interest expense | $1.688 million | $1.007 million | Up 67.6% |
| Net interest income | $7.196 million | $6.594 million | Up 9.1% |
| Net interest margin, tax-equivalent | 3.41% | 3.34% | Up 7 basis points |
| Provision for loan losses | $200,000 | $200,000 | No change |
| Non-interest income | $3.256 million | $3.401 million | Down 4.3% |
| Non-interest expense | $7.728 million | $7.440 million | Up 3.9% |
| Net earnings | $2.183 million | $2.099 million | Up $84,000, or 4.0% |
| Diluted EPS | $0.50 | $0.48 | Up $0.02 |
| Return on average assets / equity | 0.91% / 9.52% | 0.92% / 9.91% | Both lower |
Loan growth and improved loan and securities yields lifted interest income. Higher deposit costs—especially on money-market/checking and time deposits—more than offset some of the benefit, while net interest margin nevertheless improved. Compensation and benefits increased $354,000, partly reflecting additional employees and higher compensation costs. The effective tax rate rose to 13.5% from 10.9%, partly because Q1 2018 included $64,000 of excess tax benefits from stock-option exercises.
Financial position, liquidity and capital
- Assets: $981.0 million at March 31, down from $985.8 million at year-end. Net loans were $490.7 million, versus $489.4 million; available-for-sale securities were $387.4 million, versus $388.3 million.
- Deposits: $821.8 million, down $1.8 million. Non-interest-bearing deposits rose to $184.2 million; brokered certificates of deposit fell $8.0 million to $53.9 million.
- Borrowings: Total borrowings were approximately $48.8 million, down from $56.9 million, including $10.3 million of FHLB borrowings, $21.7 million of subordinated debentures and $16.8 million of repurchase agreements.
- Cash and liquid assets: Cash and cash equivalents were $14.3 million, down from $19.1 million. Cash plus available-for-sale securities totaled $401.7 million, versus $407.5 million. The company reported additional potential funding capacity, including $98.3 million of FHLB collateral-based borrowing capacity, $10.2 million at the Federal Reserve, and approximately $30.0 million of correspondent-bank lines, subject to applicable requirements.
- Cash flows: Operating activities used $1.0 million; investing activities provided $7.1 million; financing activities used $10.9 million. Cash decreased $4.8 million during the quarter.
- Equity and capital: Stockholders’ equity was $96.8 million, up from $91.9 million, primarily reflecting $3.6 million of other comprehensive income. The Bank was classified as well capitalized; its common equity Tier 1 ratio was 16.31% and total risk-based capital ratio was 17.32%.
- Dividend: $0.20 per share paid in the quarter. The filing states approximately $9.3 million was available for Bank dividends to the holding company without prior regulatory approval.
Material changes and asset quality
- Average loans increased to $491.7 million from $438.1 million year over year, and the average loan yield rose to 5.33% from 4.99%. Average interest-bearing deposits increased to $649.0 million from $602.4 million; their average cost rose to 0.83% from 0.36%.
- The allowance for loan losses increased to $5.938 million, or 1.20% of gross loans, from $5.765 million, or 1.16%. Net charge-offs were $27,000, compared with $15,000 a year earlier.
- Non-accrual loans increased to $6.7 million, or 1.35% of gross loans, from $5.2 million, or 1.06%, at year-end. Impaired loans increased to $10.0 million from $8.7 million. Past-due accruing loans of 30–89 days were $2.2 million, up from $1.7 million; there were no loans 90 days or more delinquent and accruing.
- Classified loans declined to $30.8 million from $31.8 million. Management cited continuing economic uncertainty and weakness in the agriculture sector, while describing the portfolio as diversified and asset quality as generally improved over recent years. Nine TDR relationships, comprising 13 loans, remained at quarter-end.
- Other comprehensive income was $3.6 million, mainly reflecting improved fair values of available-for-sale securities; the related accumulated other comprehensive loss narrowed to $422,000 from $4.0 million at year-end. Gross unrealized losses on securities were $3.0 million, down from $6.1 million.
Outlook, risks and unusual items
- The filing provides no formal earnings or revenue guidance. Management cautioned that the interim results are not necessarily indicative of full-year results.
- Management said further net interest income and margin improvement may be constrained if loan growth slows or short-term rates and deposit costs rise faster than asset yields. Competition could also limit loan repricing.
- Interest-rate simulations estimate that a 100- or 200-basis-point rise would reduce one-year net interest income by 2.1% or 4.3%, respectively; modeled declines in rates would increase it by 1.2% or 0.6%.
- The company adopted lease accounting standard Topic 842 on January 1, 2019, recording lease assets and liabilities. It also recorded a right-of-use asset and liability for a new five-year office lease; the adoption did not materially affect earnings. The company expects CECL adoption in 2020 to increase the loan-loss allowance, but the amount is uncertain.
- Outstanding loan commitments were $100.0 million and standby letters of credit totaled $1.4 million. The filing describes ordinary-course litigation but no material pending legal proceedings, and reports no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether higher deposit funding costs continue to pressure margins as rates and competitive deposit pricing change.
- Trends in non-accrual and impaired loans, particularly commercial real estate, commercial and agriculture exposures, and the adequacy of the allowance.
- The sustainability of loan growth and mortgage-sale income, given lower loan-sale gains and the company’s dependence on loan and deposit activity.
- Liquidity and funding resilience, including deposit retention, brokered-CD maturities, borrowing availability and the $100.0 million in loan commitments.
- The ultimate CECL transition impact and sensitivity of securities values and net interest income to market-rate changes.