Landmark Bancorp, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unaudited consolidated results cover Landmark Bancorp, Landmark National Bank, and its insurance subsidiary. Unless noted otherwise, dollar amounts below are in millions.
Business context and reporting period
Landmark is a Kansas-focused banking company with 31 branches and a captive insurance subsidiary. Its lending includes residential real estate, commercial real estate, commercial, agriculture, municipal, and consumer loans. The October 2022 acquisition of Freedom Bancshares contributed to asset and loan growth and affects year-over-year comparisons.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net interest income | $10.8 | $8.9 | $21.8 | $17.5 |
| Provision (benefit) for credit losses | $0.25 | — | $0.30 | ($0.50) |
| Non-interest income | $3.8 | $3.8 | $7.3 | $7.4 |
| Non-interest expense | $10.3 | $9.0 | $20.7 | $17.9 |
| Net earnings | $3.36 | $3.03 | $6.72 | $6.17 |
| Diluted earnings per share | $0.64 | $0.58 | $1.29 | $1.17 |
| Net interest margin, tax-equivalent | 3.21% | 3.05% | 3.26% | 3.02% |
Q2 net earnings rose 10.8%; first-half earnings rose 9.0%. Q2 return on average assets was 0.88% and return on average equity was 11.52%; first-half figures were 0.89% and 11.77%, respectively. The filing does not provide a conventional operating-margin measure.
- Balance sheet at June 30: Assets were $1.539 billion, up 2.4% from year-end 2022. Gross loans were $893.3 million, up $43.1 million; net loans were $882.5 million.
- Deposits and funding: Deposits were $1.281 billion, down $19.7 million from year-end. Total borrowings rose to $120.1 million from $68.3 million, including $76.2 million of FHLB borrowings, $21.7 million of subordinated debentures, and $22.3 million of other borrowings.
- Credit: The loan allowance was $10.45 million, or 1.17% of gross loans, versus $8.79 million, or 1.03%, at year-end. Non-accrual loans were $2.78 million (0.31% of gross loans); loans 30–89 days past due and accruing totaled $0.61 million. Net loan charge-offs were $68,000 in Q2 and $115,000 for the first half.
- Capital and liquidity: Stockholders’ equity was $117.4 million, or 7.62% of assets. The Bank’s CET1 ratio was 12.97% and total risk-based capital ratio was 13.94%; it was categorized as well capitalized. Cash and available-for-sale securities totaled $512.8 million. Available FHLB borrowing capacity was $129.0 million, subject to collateral and FHLB requirements; additional disclosed capacity included $60.8 million at the Federal Reserve discount window and approximately $30 million under correspondent-bank arrangements.
- Cash flow, first half: Operating activities provided $5.2 million; investing activities used $38.4 million, primarily reflecting loan growth; financing activities provided $30.0 million, mainly from net FHLB borrowing. Cash and cash equivalents decreased $3.1 million to $20.0 million.
Material changes versus comparable periods
- Higher asset yields and larger average loan and securities balances drove interest income growth. Q2 loan yield increased to 5.80% from 4.40%; average loan balances increased to $873.9 million from $653.0 million.
- Funding costs rose sharply: Q2 interest expense was $5.0 million versus $0.5 million, and the cost of interest-bearing deposits increased to 1.57% from 0.18%. Higher deposit competition and increased borrowings partly offset asset-yield gains.
- Net interest margin improved, but the interest-rate sensitivity analysis indicates greater exposure to rising rates: a 300-basis-point rise was estimated to reduce one-year net interest income by 12.1%, compared with 6.6% at December 31, 2022.
- Non-interest expense increased 14.7% in Q2, mainly from compensation, occupancy, data processing, and other costs associated with Freedom Bank and purchase-accounting amortization. First-half loan-sale gains fell $455,000 as higher mortgage rates and low housing inventory reduced secondary-market originations.
- Deposits declined 1.5% from year-end, including lower non-interest-bearing balances; certificates of deposit increased to $131.7 million. Estimated uninsured deposits were $193.1 million, approximately 15% of deposits, and brokered CDs rose to $11.2 million.
- Adoption of CECL on January 1 increased the loan allowance by $1.5 million, established a $72,000 allowance for held-to-maturity securities, and reduced retained earnings by $1.2 million after tax.
Outlook, commentary, risks, and unusual items
Management gave no quantified earnings or revenue guidance. It said it currently has no plans to change its dividend strategy, citing capital and liquidity, while noting profitability depends on economic performance. The board declared a $0.21-per-share dividend payable September 6, 2023.
- Management described its deposit base as stable and conservative, with most deposits retail-based and FDIC-insured, and stated that it monitors interest-rate and concentration risks. It also warned that higher rates may not improve margins if funding costs rise or deposits leave.
- Available-for-sale securities had $30.2 million of gross unrealized losses at June 30; accumulated other comprehensive loss was $22.7 million. Management said it did not intend, and did not expect to be required, to sell the securities before recovery, but sales in the current rate environment could realize losses.
- The IRS proposed regulations that could classify certain 831(b) captive insurers with claims loss ratios below 65% as listed transactions. Landmark is evaluating the proposal with tax advisers; approximately $1.1 million of estimated federal tax benefits since 2017 could potentially be subject to repayment, interest, and penalties. The ultimate effect is uncertain.
- Other key risks include rate and deposit competition, economic and inflation conditions, credit quality and collateral values, concentrations in commercial real estate and other loans, cybersecurity and technology, and successful integration of acquisitions.
- Management reported no material pending legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls as of June 30, 2023.
Most important facts for investors to verify
- Whether deposit outflows and higher deposit costs persist, and how the $117.8 million of CDs maturing within one year renews.
- Whether the increased FHLB funding and available contingent borrowing capacity remain sufficient and economical under stress.
- How interest-rate changes affect net interest margin, securities values, and realized-loss risk, given the disclosed negative rate-rise sensitivity.
- Whether credit quality, classified loans, and the CECL allowance remain adequate as economic forecasts and loan growth evolve.
- The final IRS treatment of the captive-insurance proposal and any resulting tax, interest, or penalty exposure.
- Progress integrating Freedom Bank and the effects of acquisition-related expenses and purchase-accounting accretion on reported earnings.