Landmark Bancorp(LARK) - 2023 Q4 - Annual Report

Part I Item 1. Business Landmark Bancorp, Inc. operates as a financial holding company with $1.6 billion in assets, focusing on commercial, real estate, and agricultural lending across Kansas through 31 branches Company Overview and Market Areas Landmark Bancorp, Inc., a financial holding company with $1.6 billion in assets, primarily operates through Landmark National Bank, focusing on commercial, real estate, and agricultural loan growth across four distinct Kansas regions and a new Missouri loan production office - As of December 31, 2023, the Company had approximately $1.6 billion in consolidated total assets[13] - The Company's strategy focuses on increasing originations of commercial, commercial real estate, and agricultural loans, and diversifying its core deposit mix[15] - The Company operates 31 branch offices in 24 Kansas communities and one loan production office in Kansas City, Missouri, serving four distinct geographic regions within Kansas[15][20] - On October 1, 2022, the Company completed its acquisition of Freedom Bancshares, Inc., which had total assets of $202.0 million[14] Lending and Deposit Activities The Bank offers a full range of lending products, emphasizing commercial, commercial real estate, and agricultural loans, while diversifying its deposit base with services like ICS and CDARS, despite an increase in brokered deposits - The Bank's lending activities focus on commercial, commercial real estate, and agriculture loans to grow and diversify its portfolio[29][43] - The balance of one-to-four family residential loans increased in 2023 due to higher demand for variable-rate loans, which the Bank retains in its portfolio[31] - The Bank offers Insured Cash Sweep (ICS) and Certificate of Deposit Agreement Registry Service (CDARS) to provide customers with FDIC insurance coverage for balances exceeding the $250,000 limit[45] Brokered Deposit Balances | Date | Brokered Deposits ($M) | % of Total Deposits | | :--- | :--- | :--- | | Dec 31, 2023 | $83.2 | 6.3% | | Dec 31, 2022 | $10.3 | 0.8% | Supervision and Regulation The Company and Bank are extensively regulated by federal agencies, primarily for depositor protection, adhering to Basel III capital requirements and other laws like CRA and BSA/AML, with the Bank being well-capitalized as of December 31, 2023 - The Company and the Bank are regulated by the Federal Reserve, OCC, FDIC, and CFPB, with a primary focus on protecting depositors[48] Well-Capitalized Requirements for the Bank (OCC) | Capital Ratio | Minimum Requirement | | :--- | :--- | | 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 | - As of December 31, 2023, the Bank was well-capitalized as defined by OCC regulations[59] - The Company elected to operate as a financial holding company in May 2017, allowing it to engage in a wider range of nonbanking activities, provided it and the Bank remain well-capitalized and well-managed[65] - The bank regulatory agencies issued a final rule to strengthen and modernize the Community Reinvestment Act (CRA) regulations, effective April 1, 2024, which the Bank is currently assessing for impact[93] Statistical Data This section provides detailed financial statistics, including a decrease in net interest margin to 3.17% in 2023, growth in the loan portfolio, and a reduction in non-performing assets Net Interest Margin and Spread | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Interest Rate Spread | 2.58% | 3.05% | 3.33% | | Net Interest Margin | 3.17% | 3.21% | 3.39% | Loan Portfolio Composition (in thousands) | Loan Type | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | One-to-four family residential | $302,544 | $236,982 | | Commercial real estate | $320,962 | $304,074 | | Commercial loans | $180,942 | $173,415 | | Agriculture loans | $89,680 | $84,283 | | Total gross loans | $948,656 | $850,190 | Non-Performing Assets (in thousands) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Non-accrual loans | $2,391 | $3,326 | $5,230 | | Real estate owned, net | $928 | $934 | $2,551 | | Total Non-performing assets | $3,319 | $4,260 | $7,781 | | Non-performing assets to total assets | 0.21% | 0.28% | 0.59% | Allowance for Credit Losses to Total Gross Loans | Date | Ratio | | :--- | :--- | | Dec 31, 2023 | 1.12% | | Dec 31, 2022 | 1.03% | | Dec 31, 2021 | 1.32% | Item 1A. Risk Factors The company faces significant credit, interest rate, regulatory, operational, and reputational risks, including loan portfolio concentration, sensitivity to Federal Reserve policies, cybersecurity threats, and reliance on key personnel Credit Risks The company faces substantial credit risk from its concentrated real estate and commercial loan portfolios, which are vulnerable to economic downturns and commodity price fluctuations, with the CECL adoption introducing new complexities in loss estimation - Real estate lending (commercial, construction, residential) constituted approximately 67.9% of the total loan portfolio as of December 31, 2023, exposing the company to risks specific to real estate values[146] - Commercial real estate loans represented 36.1% of the total loan portfolio and 237% of the Bank's total capital at December 31, 2023[148] - The allowance for credit losses may be insufficient, as future losses are susceptible to economic changes beyond the company's control; the adoption of CECL on January 1, 2023, changes the methodology to a lifetime expected loss model[142][143] - The business is concentrated in Kansas, making it dependent on local economic conditions, including the agricultural economy, which could be adversely affected by declines in commodity prices[139][140][154] Interest Rate and Market Risks The company's profitability is highly sensitive to interest rate changes and Federal Reserve policy, which can impact net interest margin, investment portfolio value, and borrower repayment ability, potentially leading to further unrealized losses in fixed-rate securities - Profitability is significantly affected by the spread between interest earned on assets and interest paid on liabilities, which is influenced by Federal Reserve policies and market interest rates[157][160] - Continued high interest rates may cause a further decline in the value of the company's fixed-rate debt securities, with unrealized losses recognized in other comprehensive income, reducing total stockholders' equity[162] - As of December 31, 2023, the company held $199.7 million in municipal securities (44.1% of the total securities portfolio), which are at risk of valuation declines if their credit enhancement insurers are downgraded[165] Operational, Strategic and Reputational Risks The company faces intense competition, rapid technological changes, and significant cybersecurity threats, while also relying heavily on third-party IT systems and the retention of key management personnel in a competitive labor market - The company faces intense competition from national and community banks, credit unions, and fintech companies, which could compress margins and market share[174] - The business is susceptible to fraudulent activity and cybersecurity incidents; a breach of information security controls could lead to financial losses, litigation, and reputational damage[184][186] - The business depends heavily on third-party information technology and telecommunications systems; failures or interruptions in these systems could adversely affect operations[187] - The unexpected loss of key managers or the inability to attract and retain qualified employees in a competitive labor market could adversely affect operations[180][181] Item 1C. Cybersecurity The company maintains a comprehensive cybersecurity risk management program, overseen by management and the Board, to identify, assess, and mitigate threats, acknowledging potential material adverse effects from future incidents - The Company has a dedicated information security program to identify, assess, and manage cybersecurity risks, which is integrated into its broader risk management framework[201][202] - Cybersecurity governance involves day-to-day management by the CEO and CFO, with oversight from the Board of Directors and the Bank's Enterprise Risk Management (ERM) Committee[204][205] - The company utilizes independent consultants, legal advisors, and audit firms to evaluate the effectiveness of its risk management systems and respond to potential cybersecurity incidents[202] Item 2. Properties The company owns its main office and 27 branch offices in Kansas, while leasing three additional branch offices in Kansas and one loan production office in Missouri - The Company owns its main office and 27 branch offices, and leases three branch offices in Kansas and one loan production office in Missouri[206] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under "LARK", with a history of consistent quarterly cash and annual stock dividends, and an active stock repurchase plan with 174,684 shares remaining as of year-end 2023 - The company's common stock trades on the Nasdaq Global Market under the symbol "LARK"[211] - In January 2024, the company declared its 90th consecutive quarterly cash dividend; it also distributed a 5% stock dividend for the 23rd consecutive year in December 2023[212] - A stock repurchase plan from March 2020 had 174,684 shares remaining for repurchase as of December 31, 2023[213] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion highlights a 23.9% increase in 2023 net earnings to $12.2 million, driven by loan growth and higher interest rates, despite rising interest expenses, with total assets reaching $1.6 billion and strong asset quality and capital positions maintained Comparison of Operating Results for 2023 and 2022 Net earnings for 2023 increased by 23.9% to $12.2 million, primarily due to a $21.5 million surge in interest income, largely offset by a $17.0 million rise in interest expense, resulting in a modest $4.4 million net interest income growth Key Operating Results (in millions) | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Net Earnings | $12.2 | $9.9 | +23.9% | | Net Interest Income | $43.3 | $38.9 | +11.3% | | Interest Income | $64.7 | $43.2 | +49.6% | | Interest Expense | $21.4 | $4.3 | +392.2% | | Non-Interest Income | $13.2 | $13.7 | -3.4% | | Non-Interest Expense | $42.0 | $41.3 | +1.7% | - The net interest margin (tax-equivalent basis) decreased to 3.17% in 2023 from 3.21% in 2022, as the cost of interest-bearing liabilities rose faster than the yield on interest-earning assets[230] - A provision for credit losses of $349,000 was recorded in 2023, compared to no provision in 2022, including provisions for loans, unfunded commitments, and held-to-maturity securities under the new CECL standard[232] Financial Condition and Asset Quality As of December 31, 2023, total assets increased by 3.9% to $1.6 billion, driven by an 11.5% growth in net loans, while asset quality remained strong with non-accrual loans decreasing and the allowance for credit losses increasing due to CECL adoption Key Balance Sheet Items (in millions) | Item | Dec 31, 2023 | Dec 31, 2022 | Change | | :--- | :--- | :--- | :--- | | Total Assets | $1,600.0 | $1,500.0 | +3.9% | | Net Loans | $937.6 | $841.1 | +11.5% | | Investment Securities (AFS) | $452.8 | $489.3 | -7.5% | Asset Quality Metrics | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Non-accrual loans to gross loans | 0.25% | 0.39% | | Allowance for credit losses to gross loans | 1.12% | 1.03% | - Loans past due 30-89 days and still accruing interest increased to $1.6 million (0.17% of gross loans) at year-end 2023, from $738,000 (0.09%) at year-end 2022[240] Liability Distribution, Liquidity, and Capital Total deposits increased by 1.2% to $1.3 billion in 2023, while borrowings rose 45.1% to $99.0 million to support loan growth, with the company maintaining strong liquidity and capital positions well above regulatory minimums Key Liability and Capital Metrics (in millions) | Item | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Deposits | $1,300.0 | $1,100.0 | | Total Borrowings | $99.0 | $68.3 | | Liquid Assets | $484.8 | $521.5 | - The Bank had available borrowing capacity of $153.1 million from the FHLB and $60.7 million from the Federal Reserve discount window at year-end 2023[248] Bank Capital Ratios (Dec 31, 2023) | Ratio | Actual | Minimum Required (w/ buffer) | | :--- | :--- | :--- | | Leverage Ratio | 8.7% | 4.0% | | Common Equity Tier 1 Ratio | 12.7% | 7.0% | | Total Risk-Based Capital Ratio | 13.7% | 10.5% | Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company actively manages interest rate risk, showing short-term liability sensitivity where a 100 basis point rate increase is projected to decrease net interest income by 4.9% over the next twelve months Net Interest Income Sensitivity Analysis (as of Dec 31, 2023) | Interest Rate Scenario | Change in Net Interest Income ($000's) | % Change | | :--- | :--- | :--- | | +300 basis points | $(5,924) | (13.8)% | | +200 basis points | $(4,012) | (9.3)% | | +100 basis points | $(2,122) | (4.9)% | | -100 basis points | $17 | 0.0% | - The interest sensitivity gap analysis as of December 31, 2023, shows a cumulative negative gap of $703.7 million in the '3 months or less' repricing period, indicating short-term liability sensitivity[266] Item 8. Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2023, including an unqualified auditor's opinion from Crowe LLP, noting the adoption of the CECL accounting standard, and highlights asset growth and increased net earnings Report of Independent Registered Public Accounting Firm Crowe LLP issued an unqualified audit opinion on Landmark Bancorp, Inc.'s 2023 consolidated financial statements, noting the adoption of ASC Topic 326 (CECL) and identifying the qualitative factors for the Allowance for Credit Losses on Loans as a critical audit matter - The auditor, Crowe LLP, issued an unqualified opinion, stating the financial statements present fairly, in all material respects, the financial position of the Company[267] - The auditor's report includes an explanatory paragraph noting the Company changed its method of accounting for credit losses in 2023 by adopting ASC Topic 326 (CECL)[268] - A critical audit matter was identified concerning the qualitative factors for the Allowance for Credit Losses on Loans, which involved significant management judgment and a high degree of auditor subjectivity[271][273][274] Consolidated Financial Statements The consolidated financial statements show total assets grew to $1.56 billion in 2023, driven by a $96.5 million increase in net loans, with net earnings rising to $12.2 million despite a significant increase in interest expense, and cash flows reflecting loan growth funded by FHLB borrowings Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | $1,561,672 | $1,502,867 | | Loans, net | $937,619 | $841,149 | | Total Deposits | $1,316,251 | $1,300,649 | | Total Borrowings (FHLB, Sub. Debentures, etc.) | $99,027 | $68,253 | | Total Stockholders' Equity | $126,914 | $111,433 | Consolidated Earnings Highlights (in thousands) | Account | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net Interest Income | $43,292 | $38,880 | $38,320 | | Provision for credit losses | $349 | $0 | $500 | | Non-interest Income | $13,230 | $13,700 | $22,261 | | Non-interest Expense | $41,983 | $41,270 | $37,256 | | Net Earnings | $12,236 | $9,878 | $18,011 | - Net cash used in investing activities was $50.6 million in 2023, primarily for net loan growth, while net cash provided by financing activities was $42.0 million, largely from increased FHLB borrowings[288] Notes to Consolidated Financial Statements The notes detail accounting policies and financial statement items, including the CECL adoption's impact on retained earnings, goodwill from the Freedom Bank acquisition, loan portfolio composition, and confirmation of the company's well-capitalized status - The adoption of CECL on Jan 1, 2023, resulted in a $1.5 million increase in the allowance for credit losses on loans and a corresponding $1.2 million after-tax decrease in retained earnings[300] - The October 2022 acquisition of Freedom Bancshares, Inc. for $33.4 million in cash resulted in goodwill of $14.8 million and a core deposit intangible of $4.2 million[346][350] - As of Dec 31, 2023, non-accrual loans totaled $2.4 million; the allowance for credit losses on loans was $10.6 million[366][373] - The Company and the Bank met all capital adequacy requirements as of December 31, 2023, with the Bank being categorized as well capitalized[447][450] Item 9A. Controls and Procedures As of December 31, 2023, management, including the CEO and CFO, concluded that the company's disclosure controls and procedures, as well as internal control over financial reporting (based on COSO 2013), were effective, with no material changes during the fourth quarter - Management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of December 31, 2023[462] - Based on an assessment using the COSO framework, management concluded that the Company's internal control over financial reporting was effective as of December 31, 2023[465] Part III Items 10, 11, 13, and 14 Information for these items is incorporated by reference from the 2024 Proxy Statement, covering executive officers (including the upcoming CEO transition), executive compensation, related party transactions, director independence, and principal accountant fees - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the Company's 2024 Proxy Statement[470][472][473][478][479] - Abigail M. Wendel was appointed to serve as President and CEO of the Company and the Bank, effective March 29, 2024, succeeding Michael E. Scheopner, who is retiring[471] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section provides information on the company's equity compensation plans as of December 31, 2023, detailing 228,408 securities to be issued upon option exercise at a weighted-average price of $20.58, with 55,849 additional securities available for future issuance Equity Compensation Plan Information (as of Dec 31, 2023) | Plan Category | Securities to be Issued Upon Exercise (a) | Weighted-Average Exercise Price (b) | Securities Remaining for Future Issuance (c) | | :--- | :--- | :--- | :--- | | Approved by security holders | 228,408 | $20.58 | 55,849 | | Not approved by security holders | - | - | - | | Total | 228,408 | $20.58 | 55,849 | Part IV Item 15. Exhibits and Financial Statement Schedules This section lists the audited Consolidated Financial Statements included in Item 8 and provides a comprehensive list of exhibits filed with the Form 10-K, including key agreements, corporate governance documents, and XBRL data files - This section lists the audited Consolidated Financial Statements included in Item 8 and all exhibits filed with the Form 10-K[482][483] - Filed exhibits include key agreements such as the merger agreement with Freedom Bancshares, employment agreements for executives, and the 2015 Stock Incentive Plan[484][485]