Landmark Bancorp, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed March 14, 2019. Landmark is a Kansas-focused bank holding company operating Landmark National Bank and a captive insurance subsidiary, with 29 branches in 23 communities.
Financial performance and condition
| Metric | 2018 | 2017 |
|---|---|---|
| Total assets | $985.8 million | $929.5 million |
| Net interest income | $27.8 million | $26.1 million |
| Net interest margin, tax-equivalent | 3.37% | 3.40% |
| Net earnings | $10.4 million | $4.4 million |
| Diluted earnings per share | $2.39 | $1.01 |
| Return on average assets / equity | 1.09% / 12.09% | 0.47% / 4.98% |
| Gross loans / allowance for loan losses | $495.2 million / $5.8 million | $439.2 million / $5.5 million |
| Deposits | $823.6 million | $765.6 million |
| Cash and cash equivalents | $19.1 million | $16.6 million |
| Total stockholders’ equity | $91.9 million | $87.6 million |
- Interest income rose 11.6% to $33.2 million, while interest expense increased 49.7% to $5.4 million. Deposit expense rose sharply as the average cost of interest-bearing deposits increased from 0.27% to 0.51%.
- Non-interest income was $15.6 million, up 2.2%; non-interest expense fell 18.9% to $30.4 million, mainly because 2017 included an $8.1 million deposit-related loss.
- Provision for loan losses increased to $1.4 million from $450,000. Net charge-offs rose to $1.1 million from $335,000, primarily due to one commercial relationship.
- Operating activities provided $21.4 million of cash; investing activities used $64.3 million, principally reflecting loan growth; financing activities provided $45.4 million, primarily from deposit growth. Cash and cash equivalents increased $2.5 million.
- Cash plus available-for-sale investment securities totaled $407.5 million. The Bank reported a 10.15% leverage ratio and 17.32% total risk-based capital ratio and was categorized as well-capitalized.
- Quarterly results for Q4 2018: net earnings of $2.5 million and diluted EPS of $0.56; net interest income was $7.2 million and provision for loan losses was $500,000.
Material changes and credit quality
- Net earnings increased 138.6% year over year, substantially reflecting the absence of the 2017 deposit-loss charge and recovery of $1.5 million of that loss in 2018. The recovery remains incomplete and further recovery is uncertain.
- Net loans grew to $489.4 million from $433.7 million. Growth was concentrated in commercial real estate, commercial and agricultural lending; commercial loans increased to $74.3 million from $54.6 million.
- Classified loans increased to $31.8 million from $16.3 million, primarily due to several larger commercial and commercial real estate relationships. Non-accrual loans declined to $5.2 million from $6.0 million; non-performing assets were 0.53% of total assets versus 0.70%.
- Deposits grew $58.1 million, including $61.9 million of brokered time deposits, all scheduled to mature in 2019. Total borrowings declined to $56.9 million from $66.6 million.
- Unrealized losses on available-for-sale securities were $6.1 million at year-end, versus $3.0 million in 2017; other comprehensive loss was $3.6 million for 2018.
Outlook, risks and unusual items
- Management did not provide quantified earnings guidance. It said near-term net interest margin increases are not expected and margin could decline if higher funding costs outpace asset-yield increases.
- Management cited weak agricultural conditions and low commodity prices as pressures on borrower cash flows and collateral values; underwriting requirements for agricultural loans were increased.
- The 2017 deposit fraud arose from returned third-party checks and created a $10.3 million overdraft; the company recorded an $8.1 million pretax loss. It recovered $1.5 million in 2018, but the investigation, legal recovery efforts and insurance coverage remain unresolved, with further legal expense likely.
- Other key risks include commercial real estate and agricultural credit concentrations, rising deposit costs, interest-rate and securities valuation risk, competition, cybersecurity and third-party technology risks, and possible higher reserves under CECL. Management estimated CECL would increase the allowance upon adoption, but said the amount was uncertain.
- The company reported no material pending litigation and stated that its financial reporting controls were effective. Its auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification priorities
- Track recovery of the remaining deposit-fraud loss, including insurance coverage, legal costs and any additional proceeds.
- Review classified and non-accrual loan trends, especially commercial real estate, commercial and agricultural exposures, and whether the allowance remains adequate.
- Monitor renewal or replacement of the $61.9 million of brokered deposits maturing in 2019 and the resulting funding costs.
- Assess sensitivity to further interest-rate changes, including management’s modeled 7.5% decline in one-year net interest income under a 200-basis-point rate increase.
- Verify the eventual CECL adoption impact and the effect of unrealized securities losses on equity and liquidity.