Landmark Bancorp, Inc. — Q2 2022 Form 10-Q
Business context and period. Landmark Bancorp is a Kansas-focused bank holding company operating Landmark National Bank and a captive insurance subsidiary. This unaudited quarterly report covers the three and six months ended June 30, 2022; balance-sheet comparisons are to December 31, 2021. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $8.90 | $9.98 | $17.54 | $19.57 |
| Non-interest income | $3.80 | $5.47 | $7.36 | $12.20 |
| Non-interest expense | $9.02 | $9.19 | $17.86 | $18.26 |
| Net earnings | $3.03 | $4.98 | $6.17 | $10.35 |
| Diluted earnings per share | $0.61 | $0.99 | $1.23 | $2.07 |
- Margins and returns: Tax-equivalent net interest margin was 3.05% in Q2, down from 3.54%; first-half margin was 3.02%, down from 3.53%. Q2 return on average assets was 0.93% and return on average equity was 10.04%, compared with 1.59% and 15.40%, respectively, a year earlier.
- Balance sheet: Total assets were $1.292 billion, down 2.8% from year-end. Net loans were $661.8 million, versus $653.2 million; deposits were $1.131 billion, down $17.0 million. Total borrowings were $27.9 million, versus $29.1 million.
- Cash flow and liquidity: Cash and cash equivalents fell $158.8 million in the first half to $30.4 million. Operating activities provided $5.5 million; investing activities used $143.5 million, mainly for investment-security purchases; financing activities used $20.8 million, primarily reflecting lower deposits. Cash plus available-for-sale securities totaled $525.4 million. The company reported no borrowings against its FHLB line, Federal Reserve discount window, correspondent-bank facilities, or $7.5 million external line of credit.
- Credit and capital: The allowance for loan losses was $8.3 million, or 1.24% of gross loans, down from $8.8 million and 1.32% at year-end. Classified loans declined to $10.9 million from $18.0 million; non-accrual loans were $4.9 million, or 0.73% of gross loans. The Bank was categorized as well capitalized; its reported total risk-based capital ratio was 18.34%.
- Equity and securities: Stockholders’ equity declined to $117.3 million from $135.6 million, primarily reflecting a $22.0 million first-half other comprehensive loss, largely from unrealized losses on available-for-sale securities. The portfolio’s fair value was $486.6 million, with $24.2 million of gross unrealized losses at June 30.
Material changes versus prior periods
- Q2 net earnings fell 39.1%; first-half earnings fell 40.4%. Management attributed the declines chiefly to lower PPP loan interest and reduced gains on residential mortgage-loan sales as higher mortgage rates and limited housing inventory reduced originations and refinancing.
- Q2 interest income declined 9.0%, while net interest income declined 10.8%. Investment-security interest income increased, but did not offset lower loan income. Interest expense rose 39.0% in Q2 as deposit and borrowing costs increased.
- Non-interest income fell 30.6% in Q2 and 39.7% in the first half. Loan-sale gains fell $1.8 million in Q2 and $4.0 million in the first half; first-half 2021 also included $1.1 million of securities-sale gains, with none in 2022.
- Loan balances increased modestly overall, with growth in residential, commercial real estate, and commercial lending partly offset by declines in PPP and agriculture loans. Savings deposits increased, while demand, money-market/checking, and certificate balances declined from year-end.
Outlook, risks, and unusual items
- Management expects rising rates to support net interest income and margin as earning assets reprice, and reported margin improvement from 2.99% in Q1 to 3.05% in Q2. It cautioned that loan and deposit competition, higher funding costs, or reversal of recent deposit growth could offset gains. The filing provides no specific earnings or margin guidance.
- Interest-rate modeling at June 30 estimated a 1.7% decline in one-year net interest income under a 300-basis-point rate increase and a 10.4% decline under a 200-basis-point decrease. This differs from the modeled positive impact of rising rates at year-end 2021.
- On June 28, Landmark agreed to acquire Freedom Bancshares, Inc., whose bank reported $216.2 million in assets, $121.0 million in net loans, and $162.4 million in deposits. Closing was expected in Q4 2022, subject to regulatory and shareholder approvals and other customary conditions. Q2 included $221,000 of acquisition costs.
- Management cited inflation, rising rates, COVID-related and supply-chain effects, labor shortages, geopolitical events, credit quality, competition, cybersecurity, technology, and integration risks. It said asset quality remained strong overall but acknowledged problem credits and continued resolution efforts; real estate owned was $1.3 million at quarter-end.
- Available-for-sale securities had significant unrealized losses. Management considered them temporary and said it did not intend, and was not more likely than not required, to sell them before cost recovery. Interest-rate changes may nevertheless affect reported equity and liquidity if securities need to be sold.
- CECL adoption is planned for January 1, 2023. Initial estimates indicate an increase in the allowance for loan losses, but its amount is uncertain. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
- The Board declared a $0.21-per-share dividend payable August 24, 2022. Management said it had no current plans to change its dividend strategy, while noting that capital requirements, bank dividend restrictions, and subordinated-debt terms can constrain distributions.
Important facts for investors to verify
- Whether Freedom Bancshares’ acquisition received approvals, closed as expected, and produced results or costs consistent with the announced plan.
- How subsequent rate moves affected net interest margin, funding costs, deposit retention, and the company’s interest-rate sensitivity.
- Whether unrealized securities losses, liquidity needs, or any securities sales changed reported equity or capital.
- Whether credit quality, classified and non-accrual loans, and the allowance remained consistent with management’s assessment.
- The eventual CECL allowance impact, alongside the company’s ability to maintain capital buffers and its dividend and repurchase plans.