Landmark Bancorp, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are to December 31, 2021. The unaudited consolidated statements cover Landmark Bancorp and its subsidiaries. Dollar amounts below are in millions unless otherwise stated.
Financial performance and condition
| Metric | Q1 2022 / March 31, 2022 | Comparable period / prior date |
|---|---|---|
| Net interest income | $8.65 | $9.59 in Q1 2021; down 9.9% |
| Net interest margin, tax-equivalent | 2.99% | 3.51% in Q1 2021 |
| Net earnings | $3.13 | $5.37 in Q1 2021; down 41.6% |
| Diluted earnings per share | $0.62 | $1.08 in Q1 2021 |
| Assets | $1,306.4 | $1,329.0 at December 31, 2021 |
| Loans, net | $625.1 | $653.2 at December 31, 2021 |
| Deposits | $1,139.6 | $1,148.5 at December 31, 2021 |
| Stockholders’ equity | $123.5 | $135.6 at December 31, 2021 |
| Cash and cash equivalents | $106.3 | $189.2 at December 31, 2021 |
Interest income was $9.0 million, down 10.3%; interest expense fell to $0.32 million from $0.40 million. The company recorded a $0.50 million reversal of loan-loss provision, versus a $0.50 million provision in Q1 2021. Non-interest income declined 47.0% to $3.56 million, while non-interest expense decreased 2.6% to $8.84 million. The effective tax rate was 19.0%, compared with 20.4%.
Operating cash flow was $2.6 million, investing cash flow was negative $75.1 million, and financing cash flow was negative $10.4 million. Cash and cash equivalents decreased $82.9 million, primarily reflecting investment-security purchases and lower deposits. Management reported $579.6 million of cash and available-for-sale securities as liquid assets. Total borrowings were $28.7 million, including $21.7 million of subordinated debentures and $7.0 million of repurchase agreements. The company reported no outstanding borrowings on its available credit lines.
The Bank’s March 31 regulatory capital ratios included 18.07% common equity Tier 1 and 19.21% total risk-based capital; the Bank was categorized as well capitalized. The company paid a $0.21-per-share quarterly dividend and declared another $0.21 dividend for payment in May 2022.
Material changes and drivers
- Net income fell mainly because mortgage-loan sale gains decreased by $2.2 million as originations slowed, and Q1 2021 included $1.1 million of gains from investment-security sales; no securities were sold in Q1 2022.
- Average loans decreased to $636.0 million from $730.2 million, primarily following Paycheck Protection Program loan forgiveness. PPP balances averaged $11.4 million versus $111.0 million a year earlier.
- Lower loan yields and a larger average securities balance, partly offset by lower deposit costs, contributed to the decline in net interest income and margin. Management said lower asset yields and elevated cash balances had weighed on margin.
- Available-for-sale securities increased to $467.0 million from $380.7 million. Their gross unrealized losses rose to $14.9 million from $1.9 million; after tax, other comprehensive loss was $14.3 million. Management considered the losses temporary and said it did not expect to need to sell the securities before cost recovery.
- Credit indicators improved from year-end: classified loans declined to $11.0 million from $18.0 million; non-accrual loans fell to $4.7 million from $5.2 million; and 30–89-day accruing past-due loans fell to $0.85 million from $1.99 million. The allowance was $8.36 million, or 1.32% of gross loans.
- Deposits decreased $8.9 million, which management attributed primarily to seasonal reductions in public-funds accounts. Real estate owned declined to $1.3 million from $2.6 million after property sales.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management said higher market rates could increase net interest income and margin, but competition for loans and deposits and possible reversal of recent deposit growth could offset benefits or require higher-cost funding.
- Interest-rate sensitivity modeling estimated that a 100-basis-point rise would increase one-year net interest income by 1.6%, while a 100-basis-point decline would reduce it by 4.2%. These are modeled estimates, not forecasts.
- Management cited inflation, higher rates, COVID-related effects, supply-chain constraints, labor shortages and geopolitical events as economic headwinds. It noted that further problem assets could arise, while describing overall asset quality as strong.
- The company expects to adopt CECL on January 1, 2023 and said initial estimates indicate an increase in the loan-loss allowance, but the amount remains uncertain. The filing also identifies interest-rate, credit, real-estate, cybersecurity, technology, competition and regulatory risks.
- Off-balance-sheet exposures included $135.5 million in loan commitments and $2.1 million in standby letters of credit. Management reported no material pending litigation, no material changes to previously disclosed risk factors, and effective disclosure controls as of March 31, 2022.
Investor verification priorities
- Assess whether margin and earnings can recover as rates rise, considering deposit pricing, loan competition, asset repricing and the company’s interest-rate sensitivity estimates.
- Review the size, duration and potential capital impact of unrealized securities losses, and whether liquidity needs could lead to sales before recovery.
- Track deposit retention and mix, including the $87.6 million of certificates of deposit scheduled to mature within one year and seasonal public-funds movements.
- Monitor classified, non-accrual and restructured loans, collateral values, and the adequacy of the allowance, including the expected CECL transition effect.
- Verify that regulatory capital remains well above requirements and supports the dividend, while considering the disclosed contingent loan commitments and borrowing facilities.