Landmark Bancorp, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; comparisons are primarily with fiscal 2014. Landmark is a Kansas bank holding company whose sole business is ownership of Landmark National Bank, operating 29 branches in 23 Kansas communities. The filing is an annual report, not a standalone fourth-quarter report.
Financial performance and condition
| Metric | 2015 | 2014 | Change / context |
|---|---|---|---|
| Total assets | $878.4 million | $863.5 million | Up $14.9 million |
| Net loans | $419.9 million | $416.2 million | Up $3.7 million |
| Total deposits | $714.7 million | $704.6 million | Up $10.2 million; growth came mainly from non-interest-bearing, checking, money-market and savings balances |
| Total borrowings | $70.7 million | $76.5 million | Down $5.9 million |
| Net interest income | $25.9 million | $24.7 million | Up 5.1% |
| Net interest margin, tax-equivalent | 3.51% | 3.47% | Up 4 basis points |
| Non-interest income | $17.0 million | $15.1 million | Up 12.9%, primarily higher gains on mortgage loan sales |
| Non-interest expense | $29.2 million | $28.1 million | Up 4.1%, including higher mortgage banking compensation and other costs |
| Net earnings | $10.5 million | $8.0 million | Up 30.5% |
| Diluted earnings per share | $2.91 | $2.27 | Per-share amounts reflect 5% stock dividends |
| Return on average assets / equity | 1.21% / 13.81% | 0.96% / 11.89% | Both improved |
| Operating cash flow | $7.0 million | $8.7 million | Investing activities used $8.4 million; financing activities provided $2.1 million. Cash and equivalents increased $0.8 million to $13.6 million. |
Credit quality: The allowance for loan losses was $5.9 million, or 1.39% of gross loans, versus $5.3 million, or 1.26%, in 2014. The company recorded a $700,000 credit provision (a release), compared with a $600,000 provision in 2014, and reported $1.3 million of net recoveries, principally a $1.7 million recovery on a previously charged-off construction loan. Non-accrual loans fell to $2.2 million from $6.0 million; non-performing assets declined to $3.2 million, or 0.36% of assets, from $6.3 million, or 0.73%. Classified loans decreased to $15.3 million from $18.1 million. Real estate owned rose to $1.0 million from $255,000.
Liquidity, funding and capital: Cash and available-for-sale securities totaled $367.0 million, up from $361.7 million. The Bank had $29.2 million of available FHLB borrowing capacity, $14.8 million of Federal Reserve discount-window capacity and about $50 million of correspondent-bank federal funds availability, subject to applicable collateral and credit requirements. Consolidated capital ratios were 9.43% leverage, 11.05% common equity Tier 1, 14.72% Tier 1 and 15.96% total risk-based capital; the Bank was also well-capitalized. Stockholders’ equity was $80.6 million, compared with $71.6 million. The Company paid $0.72 per share in cash dividends and distributed a 5% stock dividend.
Material changes versus 2014
- Earnings rose on higher net interest income, increased mortgage loan sale gains and the credit provision release; growth was partly offset by higher non-interest expenses.
- Average interest-earning assets increased 4.4% to $785.6 million. Deposit costs declined, while average borrowing balances increased; the average cost of interest-bearing deposits fell to 0.19% from 0.22%.
- Mortgage loan sale gains rose to $8.0 million from $5.9 million, supported by additional mortgage lenders and refinancing demand. Loans held for sale increased to $14.5 million from $10.7 million.
- The Bank sold $30.6 million of agency mortgage-backed securities to reduce exposure to rising rates, recognizing a net $119,000 loss on investment security sales.
- Construction and land loans declined to $15.0 million from $22.0 million; agriculture loans rose to $71.0 million from $64.3 million. Commercial real estate loans were broadly unchanged.
Outlook, risks and unusual items
- Outlook: No numerical earnings or growth guidance is provided. Management said it does not expect near-term net interest margin expansion and warned the margin could decline if asset yields do not offset higher funding costs. It intends to pursue commercial, commercial real estate and agricultural lending while maintaining credit standards; weak loan demand and local economic conditions remain constraints.
- Interest-rate exposure: The company’s one-year simulation estimated net interest income decreases of 1.5% with rates up 100 basis points, 4.7% up 200 basis points, and 1.1% with rates down 100 basis points. Management also highlights potential valuation and capital effects from rising rates on fixed-rate securities.
- Concentrations and credit risks: Real estate lending represented about 62.4% of gross loans. Municipal securities were $219.8 million, or 62.2% of the securities portfolio. Kansas market concentration, agriculture-related weather and commodity risks, commercial borrower cash flows, and collateral values could affect credit quality.
- Unusual items: 2015 earnings included the construction-loan recovery noted above, a $236,000 gain from sale of a closed branch facility, and a $163,000 impairment of an affordable-housing investment. The year also included the $119,000 net securities-sale loss.
- Contingencies and oversight: Loan commitments were $70.0 million and standby letters of credit were $1.9 million. Management said routine litigation was not expected to have a material effect. The Company reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an internal-control attestation.
- Regulatory and operating risks: Basel III capital requirements and the phased-in capital conservation buffer, potential FDIC assessment increases, deposit competition, cyber and third-party security incidents, mortgage repurchase claims, and the ability to manage growth could affect results. Five mortgage loans were repurchased in 2015; no repurchase requests were outstanding at year-end.
Important facts for investors to verify
- Whether the significant 2015 loan recovery is repeatable, and how the allowance performs against future losses.
- Trends in non-accrual, classified and restructured loans, including the increase in real estate owned and agricultural credit exposure.
- Whether mortgage origination and sale gains can be sustained, and the effect of associated staffing, servicing and repurchase costs.
- The sensitivity of net interest income and securities values to rate changes, alongside deposit repricing and funding needs.
- Municipal securities credit and valuation exposures, liquidity availability under collateral requirements, and the impact of capital-buffer phase-in on distributions.