Landmark Bancorp, Inc. — 2014 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2014. Landmark is a Kansas bank holding company operating through Landmark National Bank, with 29 branches in 23 Kansas communities and $863.5 million in year-end assets. 2014 was the first full year reflecting the November 2013 Citizens Bank acquisition.
Key financial results
| Metric | 2014 | 2013 |
|---|---|---|
| Total assets | $863.5 million | $828.8 million |
| Net loans | $416.2 million | $414.0 million |
| Deposits | $704.6 million | $687.5 million |
| Borrowings | $76.5 million | $68.7 million |
| Net interest income | $24.7 million | $19.0 million |
| Net interest margin, tax-equivalent | 3.47% | 3.40% |
| Provision for loan losses | $0.6 million | $0.8 million |
| Non-interest income | $15.1 million | $10.7 million |
| Non-interest expense | $28.1 million | $23.5 million |
| Net earnings | $8.0 million | $4.7 million |
| Diluted earnings per share | $2.38 | $1.42 |
| Return on average assets / equity | 0.96% / 11.89% | 0.70% / 7.33% |
Operating cash flow was $8.7 million. Investing activities used $48.4 million, principally for securities purchases, while financing activities provided $22.8 million, principally from deposit growth. Cash and cash equivalents declined $17.0 million to $12.8 million. Cash and available-for-sale securities together totaled $361.7 million.
Year-end capital ratios were strong: the Company reported an 8.06% leverage ratio and 15.16% total risk-based capital ratio; the Bank reported 8.53% and 15.21%, respectively. The Bank was classified as well-capitalized under the rules then in effect and management reported compliance with Basel III requirements effective January 1, 2015. The Bank had $13.9 million available for dividends to the parent without prior regulatory approval.
Material changes versus the prior comparable period
- Net earnings rose 72.9%. Management attributed the improvement primarily to the Citizens Bank acquisition, which increased average interest-earning assets by 25.8% and expanded income and operating costs.
- Net interest income increased 29.6%; lower deposit costs helped lift the tax-equivalent margin by 7 basis points. Interest expense nevertheless rose 3.4%, largely due to higher average borrowings.
- Non-interest income grew 40.8%, including higher loan-sale gains and deposit and servicing fees. Non-interest expense increased 19.2%, reflecting acquired branches and higher compensation, occupancy, data-processing and amortization costs; 2013 had included $1.9 million of acquisition costs.
- Asset quality improved: non-accrual loans fell to $6.0 million from $9.8 million, and non-performing assets to $6.3 million from $10.2 million. Net charge-offs were $0.82 million, versus net recoveries of $0.16 million in 2013, primarily reflecting a charge-off tied to an impaired commercial relationship.
- Deposits increased $17.1 million. Non-interest-bearing, money-market/checking and savings balances rose, while time deposits declined $17.1 million. Stockholders’ equity increased to $71.6 million from $62.7 million, including an improvement in accumulated other comprehensive income.
Outlook, risks and unusual items
- Outlook: No numeric earnings or growth guidance is provided. Management said near-term net interest margin is unlikely to increase and could decline as loans and investments reprice to lower yields. Loan demand remained generally weak; the Bank emphasized commercial, commercial real estate and agricultural lending while maintaining credit standards.
- Interest-rate exposure: The company’s simulation estimated net interest income declines of 0.7% for a 100-basis-point rise, 1.5% for a 200-basis-point rise, and 6.9% for a 100-basis-point fall. These are modeled estimates, not forecasts.
- Credit and concentration risk: Real estate loans were approximately 63.6% of gross loans. Agriculture, commercial lending and Kansas market concentration also expose results to local conditions, collateral values and borrower performance. The allowance was $5.32 million, or 1.26% of gross loans, compared with non-performing loans of $6.05 million.
- Other risks: The filing highlights competition, regulatory and compliance costs, cybersecurity and operational risk, mortgage repurchase obligations, securities valuation and interest-rate risk, and the potential for loan losses to exceed estimates. Outstanding unfunded loan commitments were $60.6 million; standby letters of credit were $0.97 million.
- Unusual/subsequent items: A $4.0 million commercial loan relationship was liquidated in 2014, generating a $3.2 million payoff and a $755,000 charge-off. In the first quarter of 2015, the company received a further $1.7 million recovery on a previously charged-off construction loan. The company reported no material pending litigation; routine litigation was not expected to materially affect its financial position or results.
- Reporting and governance: The independent auditor gave an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not provide an internal-control attestation.
Important facts for investors to verify
- How much of 2014’s earnings growth is sustainable absent the acquisition contribution, and how loan-sale gains and other non-interest income may vary.
- Current credit performance, subsequent developments in impaired loans and TDRs, and whether the allowance remains adequate; TDR relationships increased from 7 to 10.
- Deposit retention and repricing, particularly the $112.3 million of certificates of deposit scheduled to mature in 2015, and the cost and availability of wholesale funding.
- Actual performance under changing interest rates versus the filing’s modeled sensitivity, including the impact on margins and available-for-sale securities values.
- Capacity to maintain dividends and capital buffers as Basel III requirements phase in; cash dividends were $0.72 per share for 2014, and the company also issued a 5% stock dividend.
- Unrecognized tax benefits totaled $1.45 million, with accrued interest and penalties of $281,000; management said up to $292,000 of gross benefits could be reduced within 12 months as statutes of limitation lapse.