Landmark Bancorp, Inc. — 2020 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2020; it is not a standalone fourth-quarter filing. Landmark is a Kansas-focused bank holding company operating Landmark National Bank, with 30 offices in 24 Kansas communities, and a captive insurance subsidiary. Results are primarily driven by net interest income, lending and mortgage activity.
Financial results and condition
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total assets at year-end | $1.188 billion | $998.5 million | +19.0% |
| Net interest income | $36.5 million | $30.4 million | +20.2% |
| Net interest margin, tax-equivalent | 3.72% | 3.48% | +0.24 percentage points |
| Net earnings | $19.5 million | $10.7 million | +82.8% |
| Diluted earnings per share | $4.10 | $2.20 | Up |
| Return on average assets / equity | 1.77% / 16.70% | 1.07% / 10.58% | Improved |
| Operating cash flow | $14.8 million | $9.1 million | +$5.7 million |
Income drivers and margins. Total interest income was $39.3 million, up 5.8%; interest expense fell 59.0% to $2.8 million, chiefly as deposit costs declined. Average loan yield fell to 4.76% from 5.35%, while average cost of interest-bearing deposits declined to 0.31% from 0.83%. Non-interest income rose 73.1% to $27.4 million, including $15.2 million in loan-sale gains (up $8.8 million) and $2.4 million in investment-security gains. Non-interest expense increased 11.1% to $36.3 million. Provision for loan losses rose to $3.3 million from $1.4 million; income tax expense was $4.8 million, with an effective rate of 19.7% versus 12.0%.
Balance sheet, funding and liquidity. Net loans reached $702.8 million, up 32.1%, including $100.1 million of SBA Paycheck Protection Program (PPP) loans. Deposits increased 21.7% to $1.016 billion; non-interest-bearing deposits were $264.9 million, or 26.1% of deposits. Available-for-sale securities declined to $297.3 million from $363.0 million. Cash and securities totaled $382.1 million. Year-end cash and cash equivalents increased $71.1 million to $84.8 million; investing activities used $104.6 million, principally reflecting loan growth, and financing activities provided $160.9 million, mainly from deposit growth.
Year-end borrowings totaled $28.0 million: $21.7 million in subordinated debentures and $6.4 million in repurchase agreements; there were no FHLB advances. The Bank reported $56.4 million of available FHLB borrowing capacity, $103.8 million of Federal Reserve discount-window capacity, and approximately $30.0 million of correspondent-bank capacity, subject to applicable requirements. The Bank’s year-end total risk-based capital ratio was 17.50%, leverage ratio 10.47%, and it was classified as well-capitalized. The Company reported a 17.89% total risk-based capital ratio.
Material changes and credit quality
- Net earnings rose sharply, primarily because of higher mortgage origination and sale activity amid low rates and refinancing demand, alongside lower funding costs. These gains and lower rates may not persist.
- Gross loans rose to $713.5 million from $538.4 million. Commercial real estate loans increased to $172.3 million, commercial loans to $134.0 million, and PPP loans added $100.1 million. Investment securities fell by $65.7 million.
- Classified loans increased to $25.2 million from $18.1 million. Non-accrual loans rose to $10.5 million from $5.5 million; non-performing assets were $12.3 million, or 1.03% of assets, versus $5.8 million, or 0.58%.
- Allowance for loan losses increased to $8.8 million, or 1.23% of gross loans, from $6.5 million, or 1.20%. Net charge-offs were $992,000 versus $698,000. The allowance excludes PPP loans, which are SBA-guaranteed.
- Year-end real estate owned increased to $1.8 million from $290,000. Six COVID-related loan modifications totaling $7.2 million had not returned to contractual terms; three residential forbearance or repayment plans totaled $366,000.
Outlook, risks and unusual items
Management provided no specific quantitative earnings or growth guidance. It said it had no current plans to change its dividend strategy, citing capital and liquidity, while emphasizing uncertainty over the pandemic’s duration and economic effects. The Company paid quarterly cash dividends of $0.19 per share in 2020 and distributed its 20th consecutive 5% stock dividend. The Bank could distribute $19.9 million to the parent without prior regulatory approval at year-end.
Management warned that COVID-19 could increase defaults, delinquencies, credit losses and collateral impairment, especially among borrowers exposed to retail, restaurants, hospitality and agriculture. Kansas unemployment was 4.7% in December 2020, compared with 3.1% a year earlier. Further risks include real-estate and agricultural concentration, interest-rate and securities valuation changes, deposit competition, cybersecurity and third-party systems, and the transition away from LIBOR. The portfolio included $192.2 million of municipal securities, 64.7% of the securities portfolio. The Company expects to adopt CECL on January 1, 2023; management’s initial estimates indicate an allowance increase, but the amount is uncertain.
Unusual or potentially less recurring items include elevated gains on mortgage loan sales, $2.4 million of investment-security gains from sales of about $61 million of mortgage-backed securities, and $3.0 million of PPP interest income. The Company reported no material pending litigation. The auditor issued an unqualified opinion on the financial statements and identified the allowance’s qualitative factors as a critical audit matter; the auditor did not opine on internal-control effectiveness. Management reported effective disclosure controls and internal control over financial reporting.
Key investor verification points
- Assess how much 2020 earnings depended on mortgage-sale gains and securities sales, and whether mortgage volume and margins are sustainable.
- Track PPP forgiveness, remaining fee accretion, second-round originations and the effect on loan yields, balances and net interest margin.
- Monitor non-accrual, classified and modified loans, particularly commercial real estate and agriculture, and compare subsequent losses with the allowance.
- Review deposit growth and mix for persistence as pandemic-related liquidity and stimulus effects recede; assess reliance on available borrowing capacity.
- Evaluate interest-rate sensitivity, municipal-security credit and valuation exposure, and the LIBOR transition, including subordinated debt pricing.
- Confirm the eventual CECL adoption impact and whether capital, dividends and repurchases remain supportable under adverse credit conditions.