Landmark Bancorp, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. Landmark Bancorp is a Kansas-focused bank holding company operating Landmark National Bank, with 29 branches in 23 Kansas communities, and a captive insurance subsidiary formed in May 2017.
Financial performance and condition
| Metric | 2017 | 2016 |
|---|---|---|
| Total assets | $929.5 million | $911.4 million |
| Net interest income | $26.1 million | $26.0 million |
| Net interest margin, tax-equivalent | 3.40% | 3.45% |
| Net earnings | $4.4 million | $9.0 million |
| Diluted earnings per share | $1.06 | $2.20 |
| Return on average assets / equity | 0.47% / 4.98% | 1.00% / 10.34% |
| Loans, net | $433.7 million | $420.5 million |
| Deposits | $765.6 million | $741.5 million |
| Borrowings | $66.6 million | $72.9 million |
| Stockholders’ equity | $87.6 million | $85.0 million |
- Interest income rose 1.6% to $29.7 million, while interest expense increased 12.3% to $3.6 million, reflecting higher deposit costs and average interest-bearing deposits.
- Net interest income increased only 0.3%; average interest-earning assets grew 2.4%, but the tax-equivalent margin narrowed five basis points.
- Operating cash flow was $3.1 million; investing activities used $21.2 million and financing activities provided $14.7 million. Cash and cash equivalents declined $3.4 million to $16.6 million.
- Cash and available-for-sale securities totaled $404.6 million, compared with $405.6 million a year earlier. The Bank reported $55.6 million of additional collateral-based FHLB borrowing capacity and $14.5 million of Federal Reserve borrowing capacity.
- At year-end, the Company’s leverage and total risk-based capital ratios were 9.80% and 17.71%; the Bank’s were 9.62% and 17.40%. The Bank was classified as well-capitalized.
Material changes and notable items
- Deposit-related loss: Returned checks deposited by a customer created a $10.3 million overdraft. The Company recovered $2.2 million and recorded an $8.1 million pretax loss, or approximately $5.1 million after tax, in 2017. Investigation and recovery efforts remain ongoing; insurance coverage has not been determined, recoveries are uncertain, and further legal expense is expected.
- The loss drove the 51.2% year-over-year decline in net earnings. Third-quarter 2017 included a $2.7 million net loss; fourth-quarter net earnings were $2.4 million.
- Non-interest expense increased 28.5% to $37.4 million, primarily due to the deposit loss and higher professional fees. Non-interest income increased 2.6% to $15.2 million.
- The 2017 income tax benefit of $897,000 included a $352,000 benefit from remeasuring deferred taxes following the federal corporate tax rate reduction to 21%.
- Non-accrual loans rose to $6.0 million, or 1.38% of gross loans, from $2.7 million, or 0.64%. Non-performing assets increased to $6.5 million, or 0.70% of assets, from $4.0 million, or 0.44%. The increase in non-accrual loans was primarily associated with a $3.6 million commercial and commercial real estate relationship.
- The allowance for loan losses was $5.5 million, or 1.24% of gross loans, versus $5.3 million, or 1.26%. Net charge-offs declined to $335,000 from $1.1 million. Management considered the allowance adequate.
- Deposits increased $24.0 million, with growth in non-interest-bearing, money market/checking, and savings balances; time deposits fell. Borrowings declined $6.3 million.
Outlook, risks and contingencies
- Management said it does not expect near-term improvement in net interest margin and cautioned that margin could decline if asset yields do not keep pace with higher deposit and borrowing costs.
- The company continues to prioritize commercial, commercial real estate, and agricultural lending, while maintaining credit standards. Management cited slow loan demand, subdued regional growth, and pressure on agriculture from low commodity prices.
- Interest-rate simulations indicated estimated one-year net interest income declines of 3.2% under a 100-basis-point rise, 6.4% under a 200-basis-point rise, and 1.4% under a 100-basis-point fall.
- Key risks include credit and collateral deterioration, Kansas agricultural and real-estate conditions, interest-rate and funding-cost changes, municipal-securities valuation, competition, cybersecurity and third-party service disruption, and regulatory change. Municipal securities were $242.7 million, or 62.6% of the securities portfolio.
- Unfunded loan commitments were $87.6 million and standby letters of credit were $806,000. Management expected adequate funding to meet current commitments. Routine litigation was not expected to have a material effect.
- Management anticipated that adoption of CECL, effective for the Company in 2020, would increase the allowance for loan losses; the amount was not yet clear. The filing provides no quantitative earnings guidance.
- The Company paid quarterly cash dividends and a 5% stock dividend. It said it did not then intend to change its historical dividend pattern, subject to earnings, capital, regulatory limits, and debt-payment obligations.
Investor facts to verify
- Progress, legal remedies, insurance coverage, and any additional recoveries relating to the $8.1 million deposit loss.
- Whether the rise in non-accrual and impaired loans signals broader deterioration, especially in the identified commercial relationship and agriculture exposures.
- Deposit retention and repricing costs, margin sensitivity, and the capacity to fund loan growth while preserving liquidity.
- Potential allowance and implementation costs from CECL, as well as compliance with future capital-buffer requirements.
- Sustainability of earnings and dividends after adjusting for the unusual loss and other nonrecurring effects.
Audit and controls: The independent auditor issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective as of December 31, 2017.