Landmark Bancorp, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing was signed March 12, 2020. Landmark is a Kansas-focused financial holding company operating Landmark National Bank, with 30 offices in 24 Kansas communities; its captive insurer was dormant at year-end.
Financial performance and position
| Metric | 2019 | 2018 |
|---|---|---|
| Total assets, year-end | $998.5 million | $985.8 million |
| Gross loans, year-end | $538.4 million | $495.2 million |
| Deposits, year-end | $835.0 million | $823.6 million |
| Borrowings, year-end | $42.2 million | $56.9 million |
| Interest income | $37.1 million | $33.2 million |
| Interest expense | $6.8 million | $5.4 million |
| Net interest income | $30.4 million | $27.8 million |
| Provision for loan losses | $1.4 million | $1.4 million |
| Non-interest income | $15.8 million | $15.6 million |
| Non-interest expense | $32.6 million | $30.4 million |
| Net earnings | $10.7 million | $10.4 million |
| Diluted earnings per share | $2.31 | $2.27 |
| Net interest margin, tax-equivalent | 3.48% | 3.37% |
| Return on average assets | 1.07% | 1.09% |
| Return on average equity | 10.58% | 12.09% |
Net interest income plus non-interest income totaled $46.2 million in 2019; the filing does not present this sum as a separate revenue measure. Loan growth drove higher interest income and margin, while deposit costs and operating expenses also rose. The effective tax rate was 12.0%, compared with 10.1% in 2018.
Cash flow and liquidity: Operating activities provided $9.3 million; investing activities used $7.9 million and financing activities used $6.8 million. Cash and cash equivalents declined $5.4 million to $13.7 million. Cash plus available-for-sale securities totaled $376.7 million, down from $407.5 million. The Bank reported $78.8 million of additional FHLB borrowing capacity, subject to collateral and FHLB requirements, plus $17.4 million of Federal Reserve discount-window capacity and approximately $30.0 million of correspondent-bank lines.
Capital and credit: The Bank’s year-end leverage ratio was 10.72% and total risk-based capital ratio was 16.95%; management reported the Bank was well-capitalized and above the capital conservation buffer. The allowance for loan losses was $6.5 million, or 1.20% of gross loans. Non-accrual loans were $5.5 million (1.03% of gross loans), and non-performing assets were $5.8 million (0.58% of assets). Net charge-offs were $698,000, down from $1.1 million in 2018.
Material changes versus 2018
- Net loans rose $42.8 million, with commercial loans increasing $35.3 million to $109.6 million. Commercial lending grew to 20.3% of gross loans from 15.0%.
- Net interest income increased 9.2%; average interest-earning assets grew 5.0% and tax-equivalent net interest margin improved 11 basis points.
- Interest expense increased 25.9%, primarily as deposit costs rose: the average cost of interest-bearing deposits increased to 0.83% from 0.51%. Average time-deposit balances and rates rose.
- Total deposits increased $11.4 million. Brokered time deposits fell to $20.0 million from $61.9 million, while brokered money-market and checking deposits totaled $12.0 million at year-end. Borrowings declined $14.7 million, including a $17.0 million decrease in FHLB line-of-credit borrowings.
- Non-interest expense rose 7.5%, mainly from compensation and benefits, including staffing and the Prairie Village branch. Non-interest income increased only 1.5%; higher loan-sale gains and service charges were partly offset by the absence of the $1.5 million deposit-loss recovery recognized in 2018.
- Classified loans declined to $18.1 million from $31.8 million, though 30–89-day delinquencies increased to $3.4 million from $1.7 million. Non-accrual loans were $5.5 million versus $5.2 million.
Outlook, risks, contingencies, and unusual items
- Management emphasized growth in commercial, commercial real estate, and agriculture lending, alongside core deposit development and potential market expansion. No numerical earnings or growth guidance was provided.
- Management cited Kansas agricultural weakness and low commodity prices as pressures on agricultural borrowers, collateral values, and cash flows; it tightened agricultural underwriting. Other prominent risks include real estate and commercial credit concentrations, competition for deposits, interest-rate and margin sensitivity, cybersecurity and third-party technology, and regulatory change.
- Interest-rate simulations estimated that a 200-basis-point increase would reduce one-year net interest income by 4.9%; a 100-basis-point increase would reduce it by 2.5%, while a 100-basis-point decline would increase it by 2.3%.
- The Company disclosed $125.4 million of unfunded loan commitments and $1.9 million of standby letters of credit at year-end. It expected adequate funds to meet current commitments. These are contingent exposures, not funded loans.
- The 2017 deposit-related fraud loss was $8.1 million pretax; $1.5 million was recovered in 2018. Further recovery, including insurance coverage, remained uncertain and could entail additional legal expenses. The captive insurer had exited its risk-pool relationship in May 2019 and was dormant.
- The Company repurchased no shares during 2019. Subsequent to year-end, it repurchased 81,730 shares in March 2020 under its existing program and approved a further program for up to 225,890 shares.
- CECL implementation was planned for January 1, 2023; management’s initial estimates indicated an increase in the allowance may result, but the amount was uncertain. The filing also identified the anticipated transition away from LIBOR after 2021 as a risk.
- The auditor gave an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective. Management reported no material pending litigation beyond routine matters.
Key facts for investors to verify
- Whether commercial-loan growth and the elevated commercial portfolio risk translate into sustained earnings without higher losses.
- Credit trends in agriculture and real estate, including delinquencies, classified loans, non-accruals, collateral values, and allowance adequacy.
- Deposit pricing and funding mix, particularly the role and maturity of brokered deposits and the $122.9 million of time deposits scheduled to mature in 2020.
- Liquidity available after considering collateral requirements, contingent loan commitments, and repurchase-agreement funding.
- Progress and any further recoveries or legal costs related to the 2017 deposit fraud loss; confirm the status of the dormant captive insurer.
- Effects of the LIBOR transition and CECL adoption on earnings, reserves, systems, and capital.
- Post-year-end share repurchases, dividend capacity, and the effect of any repurchase activity on capital and per-share results.