Landmark Bancorp, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Amounts are in U.S. dollars; financial statement amounts are in thousands unless noted. The interim financial statements are unaudited. Landmark Bancorp operates Landmark National Bank and a captive insurance subsidiary, with banking operations concentrated in Kansas. The October 2022 acquisition of Freedom Bancshares contributed to asset and expense growth.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net interest income | $10.6 million | $9.5 million | $32.4 million | $27.0 million |
| Provision for credit losses | $0 | $0.5 million | $0.3 million | $0 |
| Non-interest income | $3.7 million | $3.5 million | $11.0 million | $10.9 million |
| Non-interest expense | $10.7 million | $9.5 million | $31.4 million | $27.3 million |
| Net earnings | $2.9 million | $2.5 million | $9.6 million | $8.7 million |
| Diluted EPS | $0.55 | $0.48 | $1.84 | $1.65 |
| Net interest margin, tax-equivalent | 3.06% | 3.21% | 3.19% | 3.08% |
Quarterly net earnings rose 15.1%; nine-month earnings rose 10.7%. Higher loan and securities yields and larger average earning-asset balances lifted interest income, while deposit and borrowing costs rose sharply. Q3 loan yield increased to 5.93% from 4.63%, while the cost of interest-bearing deposits rose to 1.93% from 0.39%. Higher funding costs compressed the quarterly margin; nine-month margin improved modestly. Q3 return on average assets was 0.74% and return on average equity 9.87%; nine-month figures were 0.84% and 11.13%, respectively.
For the first nine months, operating activities provided $11.4 million in cash, investing activities used $63.4 million, and financing activities provided $52.7 million. Cash and cash equivalents increased $0.7 million from year-end to $23.8 million.
Financial condition, funding and capital
- Total assets were $1.558 billion, up $54.7 million (3.5%) from December 31, 2022. Gross loans increased to $937.4 million from $850.2 million; net loans were $926.1 million.
- Deposits totaled $1.308 billion, up $7.4 million. The mix shifted toward higher-cost funding: certificates of deposit increased to $169.2 million from $93.3 million, while non-interest-bearing demand deposits declined to $395.0 million from $410.1 million.
- Borrowings, including FHLB and other borrowings, subordinated debentures and repurchase agreements, totaled approximately $116.8 million, versus $68.3 million at year-end. FHLB and other borrowings on the balance sheet were $82.6 million. The Bank had $128.4 million in available FHLB borrowing capacity and $57.2 million in Federal Reserve discount-window capacity, subject to applicable conditions.
- Cash, interest-bearing bank deposits and available-for-sale securities totaled approximately $486.6 million. Available-for-sale securities had $42.8 million of gross unrealized losses; accumulated other comprehensive loss was $32.3 million, compared with $25.1 million at year-end. Management characterized securities impairments as temporary and said it did not expect to be required to sell before recovery of cost.
- Stockholders’ equity was $109.6 million, down from $111.4 million at year-end, largely reflecting other comprehensive losses. The Bank reported well-capitalized status: common equity Tier 1 ratio 12.68%, Tier 1 ratio 12.68%, total risk-based capital ratio 13.67%, and leverage ratio 8.67%.
Material changes, risks and outlook
- Credit quality: The loan allowance was $11.0 million, or 1.17% of gross loans, versus $8.8 million, or 1.03%, at year-end; the increase primarily reflects adoption of CECL. Classified loans declined to $9.9 million from $13.0 million. Non-accrual loans rose to $4.4 million (0.47% of gross loans) from $3.3 million (0.39%). Loans 30–89 days past due and still accruing increased to $6.2 million from $0.7 million; management attributed much of the increase to two relationships that returned to performing status after quarter-end. No loans were 90 days past due and still accruing.
- CECL: Adoption on January 1, 2023 increased the loan allowance by $1.5 million and established a $72,000 allowance for held-to-maturity securities; retained earnings decreased $1.2 million after tax.
- Interest-rate exposure: The company’s one-year simulation estimated net interest income would decline 12.0% under a 300-basis-point rate increase, versus a 6.6% decline in the December 2022 simulation. Management cautioned that further rate increases may not improve margin and could increase funding costs or deposit outflows.
- Deposit and liquidity exposure: Estimated uninsured deposits were $202.8 million, or 15.5% of deposits; brokered deposits increased to $72.4 million from $10.3 million at year-end. Management described deposits as predominantly core and retail-based, and stated it maintained strong capital and liquidity.
- Operations and outlook: Management cited inflation, higher rates, competition for deposits, local economic conditions and potential credit deterioration as risks. Loan growth and Freedom Bank-related purchase accounting accretion supported income; acquisition-related costs and expenses increased. Mortgage loan-sale gains fell amid higher mortgage rates and limited housing inventory. No quantitative earnings guidance was provided.
- Other matters: The IRS proposed regulations that could classify certain captive insurers with claims loss ratios below 65% as listed transactions; Landmark was assessing possible effects, which remain uncertain. The company declared a $0.21-per-share cash dividend payable November 29, 2023, and a 5% stock dividend for December 15, 2023. Management said it had no current plans to change its dividend strategy, subject to performance and capital conditions. No material pending legal proceedings or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether deposit pricing, brokered funding and borrowing costs continue to pressure net interest margin and liquidity.
- Whether the increase in past-due and non-accrual loans persists, and whether CECL reserves remain adequate as economic forecasts change.
- How interest-rate movements affect available-for-sale securities, accumulated other comprehensive loss and modeled net interest income.
- Whether the proposed IRS captive-insurance regulations apply to Landmark Risk Management and what any resulting tax or operational impact may be.
- Whether capital, liquidity and earnings support the declared cash and stock dividends, given regulatory and subordinated-debt restrictions.