Landmark Bancorp, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are to December 31, 2022. Financial statements are unaudited. Landmark operates Landmark National Bank and a captive insurance subsidiary. The October 2022 acquisition of Freedom Bancshares expanded the company and affects year-over-year comparability.
Financial performance and condition
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $10.9 million | $8.6 million; +26.6% year over year |
| Net interest margin, tax-equivalent | 3.31% | 2.99% |
| Net earnings | $3.36 million; $0.64 diluted EPS | $3.13 million; $0.59 diluted EPS |
| Non-interest income | $3.50 million | $3.56 million |
| Non-interest expense | $10.34 million | $8.84 million |
| Total assets | $1.521 billion | $1.503 billion |
| Gross loans | $869.8 million | $850.2 million |
| Total deposits | $1.294 billion | $1.301 billion |
| Total borrowings | $88.2 million | $68.3 million |
| Cash and cash equivalents | $23.8 million | $23.2 million |
| Stockholders’ equity | $117.7 million | $111.4 million |
Interest income rose 62.6% to $14.6 million, reflecting higher asset yields and larger average balances, including loans. Interest expense increased to $3.6 million from $0.3 million, as deposit and borrowing costs rose. The average cost of interest-bearing deposits increased to 1.18% from 0.10%. Net interest margin improved, while the reported interest-rate spread narrowed to 2.87% from 2.94%.
Net interest income after provision for credit losses was $10.9 million. The quarter included a $49,000 credit-loss provision, versus a $500,000 reversal in Q1 2022. Return on average assets was 0.90% (0.97% prior year); return on average equity was 12.04% (9.59% prior year). Equity to total assets was 7.74%, down from 9.45% at the comparable prior-year reporting date.
Operating activities provided $3.4 million of cash; investing activities used $15.1 million, primarily for loan growth; financing activities provided $12.3 million, primarily from borrowing activity. Cash and cash equivalents increased $608,000 during the quarter. Available-for-sale securities had $26.9 million of gross unrealized losses at quarter-end, compared with $33.4 million at year-end; accumulated other comprehensive loss improved to $20.0 million from $25.1 million.
Material changes and credit quality
- Q1 net earnings increased 7.1% year over year. Higher interest income was partly offset by sharply higher funding costs and increased non-interest expense, including costs associated with Freedom Bank.
- Deposits declined $6.6 million, or 0.5%, from year-end, mainly due to seasonal public-funds outflows. Certificates of deposit increased to $114.2 million, including brokered CDs of $9.4 million. Uninsured deposits were $224.7 million, less than 18% of deposits; the company reported that more than 99% of deposits were core deposits.
- Borrowings increased $20.0 million to $88.2 million, including FHLB borrowings of $37.8 million. The company reported $151.1 million of available FHLB borrowing capacity, subject to collateral, credit requirements and policies, plus $64.6 million of Federal Reserve borrowing capacity and approximately $30.0 million of correspondent-bank credit availability.
- Loans past due 30–89 days and still accruing were $1.5 million, or 0.18% of gross loans, versus $738,000, or 0.09%, at year-end. Non-accrual loans were $3.3 million, or 0.38% of gross loans, roughly unchanged as a percentage. There were no loans 90 days or more delinquent and still accruing. Net loan charge-offs were $47,000, versus net recoveries of $82,000 a year earlier.
- The loan allowance was $10.3 million, or 1.18% of gross loans, compared with $8.8 million, or 1.03%, at year-end. Classified loans declined to $10.9 million from $13.0 million.
Outlook, risks and unusual items
No earnings or financial guidance was provided. Management said continued rate increases may not improve margins because of competition for loans and deposits, and warned that deposit growth could reverse, requiring higher-cost funding. Management described capital and liquidity as strong, noted the primarily retail and FDIC-insured deposit base, and said it monitors interest-rate and concentration risks. The Bank was categorized as well capitalized; its March 31, 2023 total risk-based capital ratio was 14.12% and leverage ratio was 8.69%.
The company adopted CECL on January 1, 2023. Adoption increased the loan allowance by $1.5 million, established a $72,000 allowance for held-to-maturity securities, increased deferred tax assets by $391,000 and reduced retained earnings by $1.2 million. Management said the new expected-loss estimates are sensitive to economic forecasts.
An April 2023 IRS proposal could classify certain 831(b) captive insurers with claims-loss ratios below 65% as listed transactions. Landmark is assessing the proposal; it estimated that approximately $1.1 million of federal tax benefits since 2017 could potentially be subject to the rule, with repayment, interest and penalties possible. The outcome and impact are uncertain.
Management identified interest-rate and securities-value exposure, deposit competition and potential uninsured-deposit withdrawals, credit and real-estate risks, economic conditions, and acquisition integration among key risks. It also disclosed potential market and liquidity effects if the U.S. government defaulted amid the debt-ceiling issue. The interest-rate simulation reported a 6.5% decline in projected one-year net interest income under a 300-basis-point rise and a 3.5% increase under a 300-basis-point decline. The company declared a $0.21-per-share dividend for payment May 31, 2023 and said it had no current plans to change its dividend strategy, subject to capital and other constraints. No material pending legal proceedings were reported.
Important facts for investors to verify
- Deposit trends, uninsured balances, funding costs and the company’s capacity to replace deposit outflows.
- Realized-loss risk in the securities portfolio, collateral needs, and the assumptions behind reported liquidity and rate-sensitivity measures.
- Credit performance, especially commercial real estate, construction and land, and classified or non-accrual loans; also assess the CECL allowance assumptions.
- The final IRS rules and any resulting tax, interest or penalty exposure for the captive insurance subsidiary.
- Freedom Bank’s continuing contribution to earnings and expenses, and the company’s ability to sustain margins and dividends as funding costs change.