Landmark Bancorp(LARK) - 2019 Q2 - Quarterly Report

FORM 10-Q Filing Information This section details the filing information for LANDMARK BANCORP, INC.'s Quarterly Report (Form 10-Q) for the period ended June 30, 2019 - This is a Quarterly Report (Form 10-Q) for the period ended June 30, 2019, filed by LANDMARK BANCORP, INC.[2] Registrant Information | Registrant Information | Details | | :--------------------- | :------ | | State of Incorporation | Delaware | | IRS Employer ID Number | 43-1930755 | | Principal Executive Offices | 701 Poyntz Avenue, Manhattan, Kansas 66502 | | Telephone Number | (785) 565-2000 | | Trading Symbol | LARK | | Exchange | Nasdaq Global Market | | Filer Status | Accelerated filer, Smaller reporting company | | Common Stock Outstanding (as of Aug 6, 2019) | 4,375,532 shares | | Shell Company | No | Table of Contents This section outlines the Form 10-Q's structure, detailing its division into financial and other information with corresponding page ranges - The table of contents outlines the structure of the Form 10-Q, dividing it into Part I (Financial Information) and Part II (Other Information), detailing the page ranges for each item[6][7] PART I – FINANCIAL INFORMATION ITEM 1. Financial Statements This section presents the unaudited consolidated financial statements and notes for the quarter and six months ended June 30, 2019 Consolidated Balance Sheets Consolidated balance sheets reflect increased total assets and equity from December 2018 to June 2019, primarily due to loan and deposit growth | Metric (in thousands) | June 30, 2019 | December 31, 2018 | | :-------------------- | :------------ | :---------------- | | Total Assets | $1,001,889 | $985,784 | | Loans, net | $510,205 | $489,373 | | Total Deposits | $829,532 | $823,648 | | Total Liabilities | $899,010 | $893,883 | | Total Stockholders' Equity | $102,879 | $91,901 | Consolidated Statements of Earnings Net earnings decreased for both periods ending June 30, 2019, due to higher loan loss provisions and lower non-interest income, despite increased net interest income | Metric (in thousands, except per share) | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :------------------------------------ | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Total Interest Income | $9,293 | $8,083 | $18,177 | $15,684 | | Total Interest Expense | $1,812 | $1,247 | $3,500 | $2,254 | | Net Interest Income | $7,481 | $6,836 | $14,677 | $13,430 | | Provision for Loan Losses | $400 | $250 | $600 | $450 | | Total Non-interest Income | $3,988 | $4,253 | $7,244 | $7,654 | | Total Non-interest Expense | $7,965 | $7,566 | $15,693 | $15,006 | | Net Earnings | $2,598 | $2,845 | $4,781 | $4,944 | | Basic EPS | $0.59 | $0.65 | $1.09 | $1.14 | | Diluted EPS | $0.59 | $0.65 | $1.09 | $1.14 | | Dividends per share | $0.20 | $0.19 | $0.40 | $0.38 | Consolidated Statements of Comprehensive Income/(Loss) Total comprehensive income significantly increased for both periods ending June 30, 2019, driven by net unrealized gains on available-for-sale securities | Metric (in thousands) | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :-------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net Earnings | $2,598 | $2,845 | $4,781 | $4,944 | | Other Comprehensive Income (Loss) | $4,248 | $(244) | $7,817 | $(5,084) | | Total Comprehensive Income (Loss) | $6,846 | $2,601 | $12,598 | $(140) | Consolidated Statements of Stockholders' Equity Stockholders' equity significantly increased from January to June 2019, primarily due to net earnings and higher accumulated other comprehensive income | Metric (in thousands) | Balance at January 1, 2019 | Balance at June 30, 2019 | | :-------------------- | :------------------------- | :----------------------- | | Common Stock | $44 | $44 | | Additional Paid-in Capital | $63,775 | $63,904 | | Retained Earnings | $32,073 | $35,105 | | Accumulated Other Comprehensive Income (Loss) | $(3,991) | $3,826 | | Total Stockholders' Equity | $91,901 | $102,879 | - Key activities impacting equity during the six months ended June 30, 2019, included net earnings of $4,781 thousand, other comprehensive income of $7,817 thousand, and dividends paid of $1,749 thousand[19] Consolidated Statements of Cash Flows Cash and cash equivalents decreased by $4.8 million during the first six months of 2019, as operating and investing outflows exceeded financing inflows | Cash Flow Activity (in thousands) | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :-------------------------------- | :--------------------------- | :--------------------------- | | Net Cash (Used in) Provided by Operating Activities | $(5,260) | $3,395 | | Net Cash Used in Investing Activities | $(5,127) | $(47,570) | | Net Cash Provided by Financing Activities | $5,572 | $47,474 | | Net (Decrease) Increase in Cash and Cash Equivalents | $(4,815) | $3,299 | | Cash and Cash Equivalents at End of Period | $14,299 | $19,883 | - Investing activities primarily used cash due to a net increase in loans and purchases of investment securities, partially offset by maturities and prepayments of investment securities[22] - Financing activities provided cash mainly from Federal Home Loan Bank advance borrowings and an increase in deposits, despite repayments on other borrowings and dividend payments[22] Notes to Consolidated Financial Statements These notes provide essential details on the company's accounting policies, key financial statement items, and regulatory compliance 1. Interim Financial Statements This note clarifies that interim financial statements are unaudited and details the adoption of new accounting standards, ASU 2016-02 (Leases) and ASU 2017-08 (Premium Amortization), with immaterial impact on net earnings - The company adopted ASU 2016-02 (Leases) on January 1, 2019, recording a right-of-use asset and lease liability of $132,000, with an additional $221,000 for a new lease in Q1 2019, with no material impact on net earnings[28] - ASU 2017-08 (Premium Amortization on Purchased Callable Debt Securities) was adopted on January 1, 2019, shortening the amortization period for investment security premiums, but its impact on interest income was not material[29] 2. Investments The company's available-for-sale investment portfolio decreased slightly, shifting from net unrealized losses to net unrealized gains, with a significant portion pledged as collateral | Investment Securities Available-for-Sale (in thousands) | June 30, 2019 | December 31, 2018 | | :------------------------------------- | :------------ | :---------------- | | Amortized Cost | $377,227 | $393,631 | | Gross Unrealized Gains | $5,853 | $829 | | Gross Unrealized Losses | $(785) | $(6,115) | | Estimated Fair Value | $382,295 | $388,345 | - As of June 30, 2019, 104 securities had temporary unrealized losses totaling $785 thousand, a significant improvement from $6,115 thousand in unrealized losses across 490 securities at December 31, 2018[31][32] Sales of Available-for-Sale Securities | Sales of Available-for-Sale Securities (in thousands) | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :------------------------------------ | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Sales Proceeds | $9,491 | $- | $9,491 | $1,535 | | Net Realized Losses (Gains) | $(146) | $- | $(146) | $35 | - Securities with carrying values of $244.0 million were pledged to secure public funds, repurchase agreements, and borrowings at June 30, 2019[37] 3. Loans and Allowance for Loan Losses The loan portfolio grew, with increased allowance for loan losses and a rise in impaired and non-accrual loans, while classified loans decreased overall | Loan Category (in thousands) | June 30, 2019 | December 31, 2018 | | :--------------------------- | :------------ | :---------------- | | Total Gross Loans | $516,362 | $495,247 | | Allowance for Loan Losses | $(6,266) | $(5,765) | | Loans, net | $510,205 | $489,373 | Allowance for Loan Losses Activity | Allowance for Loan Losses Activity (in thousands) | 3 Months Ended June 30, 2019 | 6 Months Ended June 30, 2019 | | :-------------------------------- | :--------------------------- | :--------------------------- | | Balance at Beginning of Period | $5,938 | $5,765 | | Charge-offs | $(134) | $(183) | | Recoveries | $62 | $84 | | Provision for Loan Losses | $400 | $600 | | Balance at End of Period | $6,266 | $6,266 | - Impaired loans increased from $8.7 million at December 31, 2018, to $11.0 million at June 30, 2019[41][42][44] - Non-accrual loans were $7.8 million at June 30, 2019, up from $5.2 million at December 31, 2018[41][42][44] Loan Risk Categories | Loan Risk Categories (in thousands) | June 30, 2019 | December 31, 2018 | | :-------------------------------- | :------------ | :---------------- | | Non-classified Loans | $488,895 | $463,444 | | Classified Loans | $27,467 | $31,803 | - The company had 13 outstanding loans classified as Troubled Debt Restructurings (TDRs) at June 30, 2019, with a total balance of $3.7 million ($524k non-accrual, $3,219k accruing)[50][53] 4. Goodwill and Other Intangible Assets Goodwill was not impaired, and other intangible assets, primarily mortgage servicing rights, core deposit intangibles, and lease intangibles, saw a slight decrease in net carrying amount due to amortization - Goodwill was tested for impairment as of December 31, 2018, and no impairment was found, with no triggering events for an interim test occurring in the first six months of 2019[54] Other Intangible Assets | Other Intangible Assets (in thousands) | June 30, 2019 | December 31, 2018 | | :----------------------------------- | :------------ | :---------------- | | Core Deposit Intangible Assets (Net) | $392 | $479 | | Lease Intangible Asset (Net) | $94 | $117 | | Mortgage Servicing Rights (Net) | $2,372 | $2,495 | | Total Other Intangible Assets (Net) | $2,858 | $3,091 | Mortgage Servicing Rights Activity | Mortgage Servicing Rights Activity (in thousands) | 3 Months Ended June 30, 2019 | 6 Months Ended June 30, 2019 | | :---------------------------------------- | :--------------------------- | :--------------------------- | | Balance at Beginning of Period | $2,384 | $2,495 | | Additions | $225 | $322 | | Amortization | $(237) | $(445) | | Balance at End of Period | $2,372 | $2,372 | - The fair value of mortgage servicing rights decreased from $6.2 million at December 31, 2018, to $5.3 million at June 30, 2019[58] 5. Earnings per Share Basic and diluted earnings per share decreased for both the three and six months ended June 30, 2019, compared to the prior year, reflecting lower net earnings | Earnings per Share (EPS) | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :----------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net Earnings (in thousands) | $2,598 | $2,845 | $4,781 | $4,944 | | Basic EPS | $0.59 | $0.65 | $1.09 | $1.14 | | Diluted EPS | $0.59 | $0.65 | $1.09 | $1.14 | - The diluted EPS computations excluded 30,859 unexercised stock options for both periods as their inclusion would have been anti-dilutive[61] 6. Repurchase Agreements The company's repurchase agreements, collateralized by investment securities, decreased slightly from December 31, 2018, to June 30, 2019, with all agreements being overnight and continuous | Repurchase Agreements (in thousands) | June 30, 2019 | December 31, 2018 | | :----------------------------------- | :------------ | :---------------- | | Total Repurchase Agreements | $14,283 | $15,246 | | Collateral Pledged | $20,700 | $18,600 | - All repurchase agreements are overnight and continuous, secured by U.S. federal treasury obligations, U.S. federal agency obligations, and agency mortgage-backed securities[62] 7. Revenue from Contracts with Customers Non-interest income, including service charges on deposits, interchange income, and gains on sales of real estate owned, is recognized under ASC 606, while other income streams are outside its scope | Non-interest Income (in thousands) | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :--------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Service Charges on Deposits | $1,021 | $918 | $1,924 | $1,853 | | Interchange Income | $538 | $516 | $973 | $958 | | Gains on Sales of Loans (1) | $1,742 | $1,468 | $2,862 | $2,629 | | Total Non-interest Income | $3,988 | $4,253 | $7,244 | $7,654 | - Service charges on deposit accounts are recognized for transaction-based, account maintenance, and overdraft services[66] - Interchange income is recognized daily based on debit cardholder transactions[67] 8. Fair Value of Financial Instruments and Fair Value Measurements The company measures financial instruments at fair value using a three-level hierarchy, with most available-for-sale securities and loans held for sale classified as Level 2, and impaired loans as Level 3 - Fair value measurements are categorized into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1 prices), and Level 3 (significant unobservable inputs)[69][70] Financial Assets Measured at Fair Value | Financial Assets Measured at Fair Value (in thousands) | June 30, 2019 (Total Fair Value) | December 31, 2018 (Total Fair Value) | | :------------------------------------- | :------------------------------- | :----------------------------------- | | Investment Securities Available-for-Sale | $382,295 | $388,345 | | Loans Held for Sale | $13,164 | $4,743 | | Derivative Financial Instruments (Assets) | $1,029 | $522 | - U.S. Treasury securities are Level 1, while U.S. federal agency obligations, municipal obligations, agency mortgage-backed securities, certificates of deposit, loans held for sale, and derivative financial instruments are primarily Level 2[73][75] - Impaired loans are measured at fair value on a non-recurring basis, typically using Level 3 inputs based on collateral appraisals and adjustments[77][80][81] 9. Regulatory Capital Requirements Both the company and the Bank met all regulatory capital adequacy requirements under Basel III rules as of June 30, 2019, and were categorized as 'well capitalized' - The Basel III Rule requires minimum ratios for Common Equity Tier 1 (4.5%), Tier 1 Capital (6.0%), Total Capital (8.0%), and Tier 1 Leverage (4.0%), plus a capital conservation buffer (2.5% for 2019)[84] Company Capital Ratios | Company Capital Ratios | June 30, 2019 | December 31, 2018 | | :--------------------- | :------------ | :---------------- | | Leverage Ratio | 10.49% | 10.34% | | Common Equity Tier 1 Capital Ratio | 13.00% | 13.12% | | Tier 1 Capital Ratio | 16.35% | 16.64% | | Total Risk Based Capital Ratio | 17.38% | 17.63% | - The Bank was categorized as 'well capitalized' under prompt corrective action regulations at both June 30, 2019, and December 31, 2018[85] 10. Impact of Recent Accounting Pronouncements The company is preparing for ASU 2016-13 (CECL) adoption, which is expected to increase the allowance for loan losses, with a proposed delay in the effective date for smaller reporting companies - ASU 2016-13 (CECL) eliminates the incurred loss methodology, requiring reserves to reflect all expected credit losses over the financial asset's term, including held-to-maturity debt securities[87] - The effective date for CECL for smaller reporting companies like Landmark Bancorp, Inc. is proposed to be delayed to fiscal years beginning after December 15, 2022[87] - Initial calculations estimate that the adoption of CECL will result in an increase to the allowance for loan losses, though the exact size of the increase is currently uncertain[87] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance and condition, highlighting key drivers of changes in net earnings, interest income and expense, asset quality, liquidity, and capital Overview Landmark Bancorp, Inc. operates as a financial holding company primarily engaged in banking through Landmark National Bank, focusing on deposits and various loan types, with operations mainly in Kansas - Landmark Bancorp, Inc. operates as a financial holding company, with its primary business being banking through Landmark National Bank, which focuses on attracting deposits and originating residential, commercial, agriculture, and consumer loans[89][90] - Landmark Risk Management, Inc., a captive insurance subsidiary, exited its pool resources relationship in May 2019 and is no longer providing insurance coverage to the company[91] - The company's results are driven by net interest income, non-interest income (e.g., service charges, loan sales), and operating expenses, all influenced by regulatory, economic, and competitive factors[92][93] - In May 2019, a loan production office was opened in Prairie Village, Kansas, with regulatory approval received in July 2019 to convert it to a branch office[94] Critical Accounting Policies The company's critical accounting policies, which involve significant management judgment, include the allowance for loan losses, accounting for income taxes, and accounting for goodwill and other intangible assets - Key accounting policies requiring significant judgment are the allowance for loan losses, income tax accounting, and goodwill and other intangible assets[95] Summary of Results Net earnings decreased for both the second quarter and the first six months of 2019 compared to the prior year, with a decline in return on average assets and equity | Metric | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :-------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net Earnings (in thousands) | $2,598 | $2,845 | $4,781 | $4,944 | | Basic EPS | $0.59 | $0.65 | $1.09 | $1.14 | | Return on Average Assets | 1.05% | 1.20% | 0.98% | 1.06% | | Return on Average Equity | 10.61% | 13.49% | 10.08% | 11.69% | | Equity to Total Assets | 10.27% | 8.83% | 10.27% | 8.83% | Interest Income Interest income significantly increased for both the three and six months ended June 30, 2019, primarily driven by higher average loan balances and increased yields on loans and investment securities | Interest Income | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :----------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Total Interest Income (in thousands) | $9,293 | $8,083 | $18,177 | $15,684 | | Interest Income on Loans (in thousands) | $6,886 | $5,752 | $13,353 | $11,140 | | Average Loan Balances (in millions) | $512.2 | $452.5 | $502.0 | $445.3 | | Yield on Loans | 5.39% | 5.10% | 5.36% | 5.04% | | Interest Income on Investment Securities (in thousands) | $2,414 | $2,339 | $4,837 | $4,561 | | Yield on Investment Securities | 2.72% | 2.59% | 2.74% | 2.57% | Interest Expense Interest expense rose substantially for both periods, mainly due to higher interest rates on deposits and increased average interest-bearing deposit balances, partially offset by a decrease in average outstanding borrowings | Interest Expense | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :------------------------------ | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Total Interest Expense (in thousands) | $1,812 | $1,247 | $3,500 | $2,254 | | Interest Expense on Deposits (in thousands) | $1,380 | $631 | $2,711 | $1,172 | | Average Interest-Bearing Deposit Balances (in millions) | $642.1 | $597.5 | $645.5 | $599.9 | | Average Rate on Deposits | 0.86% | 0.42% | 0.85% | 0.39% | | Interest Expense on Borrowings (in thousands) | $432 | $616 | $789 | $1,082 | | Average Outstanding Borrowings (in millions) | $60.6 | $91.6 | $54.2 | $79.5 | | Average Rate on Borrowings | 2.86% | 2.70% | 2.93% | 2.74% | Net Interest Income Net interest income increased for both the three and six months ended June 30, 2019, driven by growth in average interest-earning assets and an expansion of the net interest margin | Net Interest Income | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net Interest Income (in thousands) | $7,481 | $6,836 | $14,677 | $13,430 | | Average Interest-Earning Assets (in millions) | $901.2 | $855.4 | $892.2 | $844.9 | | Net Interest Margin (tax-equivalent) | 3.43% | 3.33% | 3.42% | 3.33% | Provision for Loan Losses The provision for loan losses increased for both the three and six months ended June 30, 2019, reflecting management's evaluation of inherent risks in the loan portfolio and an increase in net loan charge-offs | Provision for Loan Losses (in thousands) | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Provision for Loan Losses | $400 | $250 | $600 | $450 | | Net Loan Charge-offs | $72 | $59 | $99 | $74 | Non-interest Income Total non-interest income decreased for both periods, primarily due to a decline in other non-interest income (including prior-year recoveries) and losses on investment securities, partially offset by increased gains on loan sales and fees | Non-interest Income (in thousands) | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :--------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Total Non-interest Income | $3,988 | $4,253 | $7,244 | $7,654 | | Other Non-interest Income | $301 | $815 | $589 | $1,105 | | Gains (Losses) on Sales of Investment Securities, net | $(146) | $- | $(146) | $35 | | Gains on Sales of Loans, net | $1,742 | $1,468 | $2,862 | $2,629 | | Fees and Service Charges | $1,931 | $1,808 | $3,620 | $3,564 | - The decrease in other non-interest income was largely due to $525,000 in deposit-related loss recoveries in the second quarter of 2018 that did not recur in 2019[109][110] Non-interest Expense Non-interest expense increased for both periods, primarily driven by higher compensation and benefits costs due to increased employee count and compensation, along with rises in data processing and occupancy expenses | Non-interest Expense (in thousands) | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :---------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Total Non-interest Expense | $7,965 | $7,566 | $15,693 | $15,006 | | Compensation and Benefits | $4,251 | $3,966 | $8,394 | $7,755 | | Data Processing | $414 | $376 | $828 | $741 | | Occupancy and Equipment | $1,100 | $1,072 | $2,162 | $2,150 | - The increase in compensation and benefits was attributed to the addition of bank employees and increased compensation costs[111][112] Income Tax Expense Income tax expense increased for both periods, leading to a higher effective tax rate, primarily due to lower recognition of excess tax benefits from stock option exercises compared to the prior year | Income Tax Expense | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :-------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Income Tax Expense (in thousands) | $506 | $428 | $847 | $684 | | Effective Tax Rate | 16.3% | 13.1% | 15.0% | 12.2% | - The increase in effective tax rate was mainly due to the recognition of $72,000 (Q2 2018) and $136,000 (6M 2018) of excess tax benefits from stock option exercises in the prior year periods, which were not as significant in 2019[113][114] Financial Condition Despite general economic uncertainty and challenges in the agriculture sector, the company maintains a diversified loan portfolio and believes it has a high-quality asset base and solid core earnings, providing a strong foundation for future growth - The company's financial condition is affected by economic conditions, including a downturn in the agriculture sector in its geographic markets[115] - Management believes the company has a high-quality asset base and solid core earnings, with efforts focused on resolving problem loans and maintaining quality for future growth and profitability[115] Asset Quality and Distribution Total assets increased, driven by loan growth, while investment securities decreased; the allowance for loan losses increased, and there was a rise in past due and non-accrual loans, primarily linked to one loan relationship | Asset Metrics (in millions) | June 30, 2019 | December 31, 2018 | | :-------------------------- | :------------ | :---------------- | | Total Assets | $1,001.8 | $985.8 | | Net Loans | $510.2 | $489.4 | | Investment Securities | $385.8 | $393.1 | Loan Quality Metrics | Loan Quality Metrics | June 30, 2019 | December 31, 2018 | | :------------------- | :------------ | :---------------- | | Allowance for Loan Losses | $6.3 million | $5.8 million | | ALLL as % of Gross Loans | 1.21% | 1.16% | | Classified Loans | $27.5 million | $31.8 million | | Loans Past Due 30-89 Days | $3.3 million (0.64%) | $1.7 million (0.34%) | | Non-accrual Loans | $7.8 million (1.51%) | $5.2 million (1.06%) | | Impaired Loans | $11.0 million | $8.7 million | | Real Estate Owned | $91 thousand | $35 thousand | - The increase in non-accrual loans was primarily due to one loan relationship ($2.3 million) moving to non-accrual status during the first six months of 2019[119] Liability Distribution Total deposits increased, driven by non-interest-bearing, savings, and time deposit accounts, while money market and checking accounts decreased; total borrowings also increased, primarily due to higher FHLB borrowings to fund loan growth Deposit Categories | Deposit Categories (in millions) | June 30, 2019 | December 31, 2018 | | :------------------------------- | :------------ | :---------------- | | Total Deposits | $829.5 | $823.6 | | Non-interest-bearing Deposits | $180.8 (21.8%) | $168.3 (20.4%) | | Money Market and Checking | $366.2 (44.1%) | $393.5 (47.8%) | | Savings Accounts | $99.2 (12.0%) | $94.9 (11.5%) | | Certificates of Deposit | $183.3 (22.1%) | $167.0 (20.3%) | - Certificates of deposit maturing in one year or less totaled $156.8 million at June 30, 2019, with a significant portion expected to remain with the Bank[123] Borrowings | Borrowings (in millions) | June 30, 2019 | December 31, 2018 | | :----------------------- | :------------ | :---------------- | | Total Borrowings | $58.3 | $56.9 | | FHLB Borrowings | $22.4 | $20.0 | Cash Flows Cash and cash equivalents decreased during the first six months of 2019, as operating and investing activities consumed cash, which was partially offset by cash provided by financing activities - Cash and cash equivalents decreased by $4.8 million during the first six months of 2019[125] - Operating activities used $5.3 million in cash, investing activities used $5.1 million (primarily for loans and investment securities), and financing activities provided $5.6 million (mainly from FHLB borrowings)[125] Liquidity The company maintains liquidity through cash, cash equivalents, and available-for-sale investment securities, supplemented by access to FHLB advances, Federal Reserve discount window, and correspondent bank lines of credit - Liquid assets (cash and cash equivalents, available-for-sale investment securities) totaled $396.6 million at June 30, 2019[126] - The company had access to an additional $85.5 million in FHLB borrowing capacity and $10.3 million from the Federal Reserve discount window at June 30, 2019[127] - Correspondent bank agreements provide approximately $30.0 million in available credit, with no outstanding borrowings at June 30, 2019[127] Off Balance Sheet Arrangements The company has off-balance sheet arrangements primarily in the form of standby letters of credit and outstanding loan commitments, which are subject to credit policies and collateral requirements - Standby letters of credit, representing potential future payments guaranteed by the company, totaled $1.2 million at June 30, 2019, and are typically secured[128] - Outstanding loan commitments, excluding standby letters of credit, amounted to $99.9 million at June 30, 2019[129] Capital Both Landmark Bancorp, Inc. and Landmark National Bank met all Basel III regulatory capital requirements and were rated 'well capitalized' as of June 30, 2019 - The company and the Bank are subject to Basel III Rules, including minimum capital ratios and a capital conservation buffer (2.5% for 2019)[130][131] - As of June 30, 2019, the Bank was rated 'well capitalized,' the highest rating under regulatory capital regulations[131] Dividends The company paid a quarterly cash dividend of $0.20 per share, with dividend payments subject to regulatory capital requirements and limitations imposed by subordinated debentures - A quarterly cash dividend of $0.20 per share was paid during the quarter ended June 30, 2019[132] - Dividend payments are contingent on maintaining adequate capital under Basel III Rules, including the capital conservation buffer[133] - As of June 30, 2019, approximately $10.7 million was available for dividends from the Bank to the Company without prior regulatory approval[133] - The company's ability to pay dividends is also limited by subordinated debentures, requiring interest payments on debentures before dividends on common stock[134] Average Assets/Liabilities This section provides detailed tables on average interest-earning assets and interest-bearing liabilities, along with their respective yields and costs, illustrating the components of net interest margin and interest rate spread for the periods presented Average Assets/Liabilities (3 Months) | Average Assets/Liabilities (in thousands) | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | | :-------------------------------------- | :--------------------------- | :--------------------------- | | Average Interest-Earning Assets | $901,221 | $855,373 | | Average Yield on Interest-Earning Assets | 4.24% | 3.92% | | Average Interest-Bearing Liabilities | $702,664 | $689,129 | | Average Rate on Interest-Bearing Liabilities | 1.03% | 0.73% | | Interest Rate Spread | 3.21% | 3.19% | | Net Interest Margin | 3.43% | 3.33% | Average Assets/Liabilities (6 Months) | Average Assets/Liabilities (in thousands) | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :-------------------------------------- | :--------------------------- | :--------------------------- | | Average Interest-Earning Assets | $892,173 | $844,861 | | Average Yield on Interest-Earning Assets | 4.22% | 3.87% | | Average Interest-Bearing Liabilities | $699,775 | $679,475 | | Average Rate on Interest-Bearing Liabilities | 1.01% | 0.67% | | Interest Rate Spread | 3.21% | 3.20% | | Net Interest Margin | 3.42% | 3.33% | Rate/Volume Table This table analyzes the changes in tax-equivalent interest income and expense, attributing them to either changes in volume or changes in interest rates for major asset and liability components Change in Interest Income/Expense | Change in Interest Income/Expense (in thousands) | 3 Months Ended June 30, 2019 vs 2018 (Net Change) | 6 Months Ended June 30, 2019 vs 2018 (Net Change) | | :--------------------------------------------- | :------------------------------------------------ | :------------------------------------------------ | | Total Interest Income | $1,175 | $2,427 | | Total Interest Expense | $565 | $1,246 | | Net Interest Income | $610 | $1,181 | - For the three months ended June 30, 2019, the increase in net interest income was primarily driven by rate changes ($884k) rather than volume changes ($610k)[141] - For the six months ended June 30, 2019, the increase in net interest income was also primarily driven by rate changes ($1,645k) over volume changes ($1,064k)[141] ITEM 3. Quantitative and Qualitative Disclosures about Market Risk The company actively manages interest rate risk, a significant component of its market risk, using earnings simulation models to monitor the impact of interest rate changes on net interest income within established policy limits - The company's primary market risk is interest rate risk, managed by the Asset/Liability Management Committee using earnings simulation models[142][143] Interest Rate Scenario Impact on Net Interest Income | Interest Rate Scenario (12-month horizon) | Dollar Change in Net Interest Income (in thousands) | Percent Change in Net Interest Income | | :-------------------------------------- | :------------------------------------------------ | :------------------------------------ | | 200 basis point rising | $(1,587) | (5.1)% | | 100 basis point rising | $(783) | (2.5)% | | 100 basis point falling | $518 | 1.6% | | 200 basis point falling | $535 | 1.7% | ITEM 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2019, with no material changes to internal control over financial reporting during the quarter - The company's disclosure controls and procedures were deemed effective as of June 30, 2019[147] - No material changes to internal control over financial reporting occurred during the quarter ended June 30, 2019[148] SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This statement outlines the inherent uncertainties and risk factors associated with the company's forward-looking statements regarding its financial condition, operations, and future performance - This section contains forward-looking statements regarding the company's financial condition, results of operations, plans, and future performance, which are subject to inherent uncertainties[145] - Factors that could materially affect operations and future prospects include the strength of the U.S. economy, changes in laws and regulations, interest rate fluctuations, competitive pressures, technological changes, and the ability to manage credit risk and maintain adequate loan loss allowances[146] PART II – OTHER INFORMATION ITEM 1. 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 its subsidiaries[151] ITEM 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's 2018 Annual Report on Form 10-K - No material changes to risk factors from the 2018 Annual Report on Form 10-K[152] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds during the period - No unregistered sales of equity securities and use of proceeds[153] ITEM 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - No defaults upon senior securities[154] ITEM 4. Mine Safety Disclosures This item is not applicable to the company - Mine Safety Disclosures are not applicable[155] ITEM 5. Other Information The company reported no other information required under this item - No other information to report[156] ITEM 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications from the CEO and CFO, and interactive data files - Exhibits include CEO and CFO certifications (31.1, 31.2, 32.1, 32.2) and Interactive Data Files (101) for financial statements and notes[158] SIGNATURES This section provides the official signatures of the company's President, Chief Executive Officer, Vice President, Secretary, Treasurer, and Chief Financial Officer, certifying the report - The report was signed on August 7, 2019, by Michael E. Scheopner (President and Chief Executive Officer) and Mark A. Herpich (Vice President, Secretary, Treasurer, and Chief Financial Officer)[159]