Landmark Bancorp, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Financial statements are unaudited; amounts below are in millions of dollars unless noted.
Business context and reporting period
Landmark is a Kansas-based bank holding company operating through Landmark National Bank and a captive insurance subsidiary. Its banking business focuses on community deposits and residential, commercial real estate, commercial, agricultural, municipal and consumer lending. On October 1, 2022, after quarter-end, Landmark completed its acquisition of Freedom Bancshares, whose bank reported $201.9 million of assets, $118.0 million of gross loans and $150.4 million of deposits at September 30.
Financial results and condition
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $9.45 | $9.61 | $26.99 | $29.18 |
| Non-interest income | $3.53 | $5.47 | $10.89 | $17.66 |
| Net earnings | $2.50 | $4.52 | $8.67 | $14.86 |
| Diluted EPS | $0.50 | $0.90 | $1.73 | $2.97 |
| Net interest margin, tax-equivalent | 3.21% | 3.36% | 3.08% | 3.47% |
- Q3 interest income was $10.59 million and interest expense was $1.14 million. The $0.50 million loan-loss provision brought net interest income after provision to $8.95 million. Non-interest expense was $9.46 million.
- Q3 return on average assets was 0.76% and return on average equity was 8.33%; equity was 7.78% of assets. For the first nine months, those returns were 0.89% and 9.33%, respectively.
- At September 30, total assets were $1.355 billion, up 2.0% from year-end 2021. Net loans were $702.1 million; gross loans were $711.3 million. Deposits were $1.117 billion, down $31.3 million. Total borrowings were $112.9 million, versus $29.1 million at year-end, including $74.9 million of FHLB borrowings and $21.7 million of subordinated debentures.
- Cash and cash equivalents were $49.2 million, down $140.0 million from year-end. Cash plus available-for-sale securities totaled $542.2 million. Nine-month operating cash flow was $14.5 million, investing cash flow was negative $202.8 million and financing cash flow was positive $48.3 million.
- The allowance for loan losses was $8.86 million, or 1.25% of gross loans. Non-accrual loans were $4.8 million (0.68% of gross loans); loans 30–89 days past due and accruing were $0.66 million (0.09%). Classified loans were $16.2 million.
- Available-for-sale securities had a fair value of $484.1 million and gross unrealized losses of $41.0 million at quarter-end. Accumulated other comprehensive loss was $31.0 million; stockholders’ equity declined to $105.5 million from $135.6 million at year-end, principally reflecting the securities-related loss recorded in OCI.
- The Bank was categorized as well capitalized. Its September 30 ratios included 8.78% leverage, 13.71% common equity Tier 1 and 14.79% total risk-based capital. Management reported compliance with applicable capital requirements.
Material changes versus comparable periods
- Net earnings declined 44.7% in Q3 and 41.7% year to date. Lower PPP loan income and reduced gains on mortgage loan sales were primary causes; year-to-date earnings were also affected by lower investment-security gains and a Q3 provision for loan losses.
- Q3 net interest income fell 1.7%, while the tax-equivalent margin declined 15 basis points year over year. Higher interest rates increased deposit and borrowing costs, partly offset by higher investment-security income and asset repricing. Margin rose sequentially from 2.99% in Q1 to 3.21% in Q3.
- Non-interest income fell 35.4% in Q3 and 38.4% year to date, chiefly as residential mortgage originations and related sale gains weakened. Landmark recorded a $0.35 million securities-sale loss in Q3; year-to-date securities-sale results were also a $0.35 million loss versus $1.14 million of gains in 2021.
- Gross loans increased $48.9 million from year-end, while deposits decreased, partly reflecting seasonal public-fund outflows. Borrowings rose to support acquisition funding and offset deposit declines.
- Unrealized securities losses increased sharply amid market-rate changes, driving the substantial negative OCI and equity movement. Management said it did not intend, and did not expect to be required, to sell impaired securities before recovery of cost.
Outlook, risks and unusual items
- No numerical earnings or margin guidance was provided. Management expects higher market rates to support net interest income and margin if asset yields rise faster than funding costs, but cautioned that deposit and loan competition, higher-cost funding and deposit outflows could offset improvement.
- Interest-rate sensitivity modeling at September 30 estimated a 6.0% decrease in one-year net interest income under a 300-basis-point rate increase and a 2.4% decrease under a 300-basis-point decrease. The model differs materially from the prior year’s rising-rate estimates.
- The Freedom Bancshares acquisition closed October 1. Landmark borrowed $10.0 million at a fixed 6.15% rate, maturing in 2027, to fund part of the acquisition; acquisition-related costs were $0.36 million during the first nine months. Integration and acquired-asset performance remain relevant considerations.
- Landmark planned to adopt CECL on January 1, 2023. Management expected the transition to increase the loan-loss allowance, but said the amount was uncertain and implementation work remained ongoing.
- Management cited inflation, supply-chain and labor constraints, geopolitical events, interest-rate changes, credit quality, real-estate values, cybersecurity and technology, competition, regulatory changes, and acquisition integration among relevant risks. It reported no material pending litigation or material changes to previously disclosed risk factors.
- The Board declared a $0.21-per-share cash dividend and a 5% stock dividend. Landmark repurchased 19,691 shares in Q3 for approximately $0.50 million. Management stated it had no current plans to change its dividend strategy, subject to capital, liquidity and economic conditions.
Important facts for investors to verify
- Post-close Freedom Bank results, purchase accounting, integration costs and the effect on capital and funding.
- Deposit retention and pricing, seasonal public-fund flows, borrowing levels and liquidity after the acquisition.
- Margin trends as loans and securities reprice relative to deposits and other funding costs; compare sensitivity assumptions with realized outcomes.
- Available-for-sale securities valuation, accumulated OCI losses and whether liquidity needs could require securities sales.
- Loan growth, classified and non-accrual credits, recoveries, allowance adequacy and the eventual CECL allowance adjustment.
- Dividend capacity and capital ratios after acquisition accounting and any further share repurchases.