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Landmark Bancorp(LARK) - 2018 Q4 - Annual Report

Part I Business Landmark Bancorp, Inc. is a Delaware-incorporated financial holding company with $985.8 million in consolidated total assets as of December 31, 2018, primarily owning Landmark National Bank which focuses on commercial, real estate, and agricultural lending across 29 branches in Kansas - Landmark Bancorp, Inc. is a financial holding company with $985.8 million in consolidated total assets as of December 31, 2018. Its main subsidiary is Landmark National Bank12 - The Bank's strategy focuses on increasing originations of commercial, commercial real estate, and agricultural loans, diversifying its deposit mix, and expanding its geographical markets through acquisitions and branching14 - The company operates 29 branch offices in 23 communities across central, eastern, southeast, and southwest Kansas, serving diverse economic bases including university towns, government centers, metropolitan suburbs, and agricultural regions1420 - The company and its bank are extensively regulated by various federal agencies, including the Federal Reserve, OCC, and FDIC. Recent legislation like the Economic Growth, Regulatory Relief and Consumer Protection Act (Regulatory Relief Act) has modified some regulatory burdens for smaller institutions4142 Lending Activities The Bank offers a full range of financial products, strategically focusing on growing commercial, commercial real estate, and agriculture loans while adhering to regulatory underwriting standards - The Bank's primary lending focus is on originating commercial, commercial real estate, and agricultural loans to drive growth and diversify its portfolio1440 - Key loan categories include: - One-to-Four Family Residential: Majority of new originations are sold in the secondary market - Commercial Real Estate: Generally amortized over 15-20 years, limited to 80% of appraised value - Commercial Lending: Targets owner-operated businesses, utilizing cash flow and collateral analysis, includes SBA loans - Agriculture Lending: Includes real estate, operating, and equipment loans, with credit decisions based on repayment ability and collateral like federal guarantees and crop insurance29313234 Supervision and Regulation The Company and Bank are subject to comprehensive federal regulation by the Federal Reserve, OCC, and FDIC, requiring compliance with Basel III capital rules and benefiting from recent regulatory relief for community banks - The Company and its subsidiary bank are extensively regulated by the Federal Reserve, OCC, and FDIC, primarily for the protection of depositors416173 - Under the Basel III Rule, the company must meet stringent capital requirements. As of December 31, 2018, both the Company and the Bank were well-capitalized, exceeding all minimum regulatory capital ratios5157 Well-Capitalized Requirements | Capital Ratio | Minimum Requirement to be Well-Capitalized | | :--- | :--- | | Common Equity Tier 1 to risk-weighted assets | 6.5% or more | | Tier 1 Capital to risk-weighted assets | 8.0% or more | | Total Capital to risk-weighted assets | 10.0% or more | | Tier 1 Capital to total adjusted average quarterly assets | 5.0% or greater | - The Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 offers potential regulatory relief, including a proposed single "Community Bank Leverage Ratio" (CBLR) of 9% as an alternative to the complex Basel III risk-based capital rules4259 Statistical Data This section provides detailed statistical data on the company's financial performance and position, including net interest income analysis, portfolio composition, non-performing assets, and key performance ratios Net Interest Income Change Analysis (2018 vs 2017) | (in thousands) | Increase/(Decrease) Attributable to Volume | Increase/(Decrease) Attributable to Rate | Net Change | | :--- | :--- | :--- | :--- | | Total Interest Income | $1,568 | $931 | $2,499 | | Total Interest Expense | $257 | $1,523 | $1,780 | | Net Interest Income | $1,311 | $(592) | $719 | Loan Portfolio Composition (as of Dec 31, 2018) | Loan Type | Balance (in thousands) | Percent of Total | | :--- | :--- | :--- | | One-to-four family residential | $136,895 | 27.6% | | Commercial real estate | $138,967 | 28.1% | | Agriculture loans | $96,632 | 19.5% | | Commercial loans | $74,289 | 15.0% | | Construction and land loans | $20,083 | 4.1% | | Consumer loans | $25,428 | 5.1% | | Municipal loans | $2,953 | 0.6% | | Total Gross Loans | $495,247 | 100.0% | Non-Performing Assets Trend | (in thousands) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Non-accrual loans | $5,236 | $6,041 | $2,746 | | Real estate owned, net | $35 | $436 | $1,279 | | Total Non-performing assets | $5,271 | $6,477 | $4,025 | Key Performance Ratios | Ratio | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Return on average assets | 1.09% | 0.47% | 1.00% | | Return on average equity | 12.09% | 4.98% | 10.34% | | Dividend payout ratio | 31.88% | 71.89% | 32.90% | Risk Factors The company faces significant credit risk from its loan portfolio concentrated in commercial, real estate, and agriculture, alongside economic, competitive, interest rate, regulatory, and operational risks including cybersecurity threats - The company faces significant credit risk, with a loan portfolio concentrated in commercial, real estate, and agriculture loans. A prolonged weakness in the agricultural economy could materially harm business operations136140 - Real estate lending constitutes a large portion of the loan portfolio (59.8% at year-end 2018), making the company vulnerable to fluctuations in real estate market values144 - The business is highly dependent on the economic health of its operating markets in Kansas. Adverse local economic conditions could reduce growth and affect customers' ability to repay loans149 - Operational risks include intense competition, the need for technological adaptation, and the threat of fraudulent activity and cybersecurity incidents, which could lead to financial losses and reputational damage155169170 - A new accounting standard, Current Expected Credit Loss (CECL), effective after December 15, 2019, is expected to require an increase in the allowance for loan losses, potentially affecting financial condition and results182 Unresolved Staff Comments The company reports no unresolved staff comments - None194 Properties The company operates 29 offices in 23 Kansas communities, owning 27 locations and leasing two branch offices and a new loan production office space - The company owns 27 of its 29 office locations and leases the remaining two194 Legal Proceedings The company is not a party to any material pending legal proceedings beyond ordinary routine litigation incidental to its business - There are no material pending legal proceedings against the Company or the Bank outside of ordinary business litigation195 Mine Safety Disclosures This item is not applicable to the company - Not applicable196 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the Nasdaq Global Market under "LARK", with an active stock repurchase program that saw no shares repurchased in 2018 - The company's common stock trades on the Nasdaq Global Market under the ticker symbol "LARK"199 - A stock repurchase program is active, with 108,006 shares remaining for repurchase as of December 31, 2018. No shares were repurchased in 2018200 Selected Financial Data This section summarizes five years of key financial and operational data from 2014 to 2018, highlighting trends in assets, loans, deposits, earnings, and performance ratios Selected Financial Data (2016-2018) | (in thousands, except per share) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Total assets | $985,784 | $929,454 | $911,382 | | Loans, net | $489,373 | $433,743 | $420,461 | | Deposits | $823,648 | $765,558 | $741,521 | | Stockholders' equity | $91,901 | $87,622 | $84,951 | | Net interest income | $27,788 | $26,115 | $26,039 | | Net earnings | $10,426 | $4,369 | $8,961 | | Diluted EPS | $2.39 | $1.01 | $2.10 | | Return on average assets | 1.09% | 0.47% | 1.00% | | Return on average equity | 12.09% | 4.98% | 10.34% | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, including a significant 2017 deposit-related loss and 2018 recovery, loan growth, net interest margin compression, and asset quality trends Comparison of Operating Results for 2018 and 2017 Net earnings surged 138.6% in 2018 to $10.4 million, recovering from a significant 2017 deposit-related loss, while net interest income grew and net interest margin slightly compressed - A significant event was a $10.3 million overdraft in 2017, resulting in an $8.1 million pre-tax loss for that year. The company recovered $1.5 million of this loss in 2018217 Key Operating Results (2018 vs. 2017) | (in millions) | 2018 | 2017 | % Change | | :--- | :--- | :--- | :--- | | Net Earnings | $10.4 | $4.4 | 138.6% | | Net Interest Income | $27.8 | $26.1 | 6.4% | | Provision for Loan Losses | $1.4 | $0.45 | 211.1% | | Non-interest Income | $15.6 | $15.3 | 2.2% | | Non-interest Expense | $30.4 | $37.4 | (18.9)% | - The net interest margin decreased slightly from 3.40% in 2017 to 3.37% in 2018, primarily due to the reduction in the federal corporate income tax rate (which affects tax-equivalent yields) and a higher cost of deposits219 Comparison of Operating Results for 2017 and 2016 Net earnings declined 51.2% in 2017 to $4.4 million due to an $8.1 million pre-tax deposit-related loss, despite a modest increase in net interest income - The primary driver for the 51.2% decrease in net earnings in 2017 was the $8.1 million pre-tax deposit-related loss232239 Key Operating Results (2017 vs. 2016) | (in millions) | 2017 | 2016 | % Change | | :--- | :--- | :--- | :--- | | Net Earnings | $4.4 | $9.0 | (51.2)% | | Net Interest Income | $26.1 | $26.0 | 0.3% | | Provision for Loan Losses | $0.45 | $0.50 | (10.0)% | | Non-interest Income | $15.2 | $14.9 | 2.6% | | Non-interest Expense | $37.5 | $29.1 | 28.5% | Financial Condition Total assets grew to $985.8 million in 2018 driven by loan growth, with mixed asset quality signals, increased deposits, and strong liquidity and capital positions exceeding regulatory thresholds - Total assets increased to $985.8 million at year-end 2018, up from $929.5 million in 2017, primarily due to growth in the net loan portfolio, which rose to $489.4 million245 - Asset quality showed mixed signals: classified loans increased from $16.3 million to $31.8 million, but non-accrual loans decreased from $6.0 million to $5.2 million247248 - Total deposits grew by $58.0 million to $823.6 million in 2018, with a notable increase in time deposits, including $61.9 million in brokered certificates of deposits255 - The Bank maintained a strong capital position, with a leverage ratio of 10.15% and a total risk-based capital ratio of 17.32% as of December 31, 2018, exceeding well-capitalized standards265 Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, which it manages through its Asset/Liability Management Committee using simulation models and interest rate "gap" analysis. Simulation results as of December 31, 2018, indicate that a 200 basis point rise in interest rates would decrease net interest income by 7.5% over a one-year horizon, while a 100 basis point fall would increase it by 2.7%. The gap analysis shows the company is liability-sensitive in the short-term (under 3 months) but becomes asset-sensitive in longer-term repricing periods Net Interest Income Sensitivity Analysis | Scenario | $ Change in Net Interest Income (in thousands) | % Change in Net Interest Income | | :--- | :--- | :--- | | 200 basis point rising | $(2,306) | (7.5)% | | 100 basis point rising | $(1,139) | (3.7)% | | 100 basis point falling | $815 | 2.7% | - The company's interest rate gap analysis as of December 31, 2018, shows a negative gap of ($12.5 million) for assets and liabilities repricing in 3 months or less, indicating short-term liability sensitivity. The cumulative gap becomes positive in longer repricing periods279 Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements for the years ended December 31, 2018, 2017, and 2016, along with the report of the independent registered public accounting firm, Crowe LLP. The statements include the Consolidated Balance Sheets, Statements of Earnings, Statements of Comprehensive Income, Statements of Stockholders' Equity, and Statements of Cash Flows, accompanied by detailed notes explaining significant accounting policies and providing further detail on financial statement components Consolidated Financial Statements The consolidated financial statements present the company's financial position with $985.8 million in total assets and $10.4 million in net earnings for 2018, along with cash flow details Consolidated Balance Sheet Highlights (as of Dec 31) | (in thousands) | 2018 | 2017 | | :--- | :--- | | Total Assets | $985,784 | $929,454 | | Loans, net | $489,373 | $433,743 | | Investment securities available-for-sale | $388,345 | $387,983 | | Total Liabilities | $893,883 | $841,832 | | Total deposits | $823,648 | $765,558 | | Total Stockholders' Equity | $91,901 | $87,622 | Consolidated Statement of Earnings Highlights (Year ended Dec 31) | (in thousands) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net Interest Income | $27,788 | $26,115 | $26,039 | | Provision for Loan Losses | $1,400 | $450 | $500 | | Non-interest Income | $15,571 | $15,284 | $14,850 | | Non-interest Expense | $30,365 | $37,477 | $29,114 | | Net Earnings | $10,426 | $4,369 | $8,961 | Notes to Consolidated Financial Statements The notes detail accounting policies, portfolio breakdowns, allowance for loan losses, goodwill, deposit structures, income taxes, employee benefits, regulatory capital, and the 2017 deposit-related loss - The upcoming CECL accounting standard, effective January 1, 2020, is expected to increase the allowance for loan losses upon adoption, though the exact impact is still uncertain347 - As of December 31, 2018, the company had $8.7 million in impaired loans, a decrease from $9.8 million in 2017. The allowance for loan losses allocated to these impaired loans was $310,000365 - The company's goodwill of $17.5 million was tested for impairment as of December 31, 2018, and no impairment was found376 - The company and the Bank are subject to Basel III capital rules and were categorized as well-capitalized under the regulatory framework as of December 31, 2018434436 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None450 Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of December 31, 2018. Management also assessed the internal control over financial reporting using the COSO framework and concluded it was effective. The independent registered public accounting firm, Crowe LLP, also issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting - Management concluded that the Company's disclosure controls and procedures were effective as of December 31, 2018450 - Based on the COSO framework, management concluded that the Company's internal control over financial reporting was effective as of December 31, 2018453 Other Information The company reports no other information for this item - None455 Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's Proxy Statement for the annual meeting of stockholders to be held on May 22, 2019. The report lists the current executive officers of the Company and the Bank - Information for this item is incorporated by reference from the 2019 Proxy Statement457 Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2019 Proxy Statement - Information for this item is incorporated by reference from the 2019 Proxy Statement459 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the 2019 Proxy Statement. A table provides details on the company's equity compensation plans as of December 31, 2018, showing securities to be issued upon exercise of outstanding options and securities available for future issuance Equity Compensation Plan Information (as of Dec 31, 2018) | Plan Category | Securities to be issued upon exercise (Shares) | Weighted-average exercise price | Securities remaining for future issuance (Shares) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 68,706 | $17.97 | 240,480 | Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's 2019 Proxy Statement - Information for this item is incorporated by reference from the 2019 Proxy Statement463 Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's 2019 Proxy Statement - Information for this item is incorporated by reference from the 2019 Proxy Statement464 Part IV Exhibits and Financial Statement Schedules This section lists the financial statements included in Item 8 and the exhibits filed with the Form 10-K. Key exhibits include merger agreements, corporate governance documents, employment agreements, stock incentive plans, and CEO/CFO certifications - This section lists all financial statements, schedules, and exhibits filed as part of the annual report467 Form 10-K Summary The company reports that there is no Form 10-K summary - None475