Landmark Bancorp(LARK) - 2020 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements The unaudited financial statements show a significant increase in total assets to $1.12 billion and a 77% rise in net earnings, driven by PPP loans and gains on loan sales Consolidated Balance Sheet Highlights (Unaudited) | (In thousands) | June 30, 2020 | December 31, 2019 | Change (%) | | :--- | :--- | :--- | :--- | | Total Assets | $1,118,937 | $998,465 | +12.1% | | Loans, net | $689,626 | $532,180 | +29.6% | | - Paycheck Protection Program Loans | $130,137 | $0 | N/A | | Investment securities available-for-sale | $306,825 | $362,998 | -15.5% | | Total Liabilities | $1,001,657 | $889,858 | +12.6% | | Total Deposits | $944,204 | $835,048 | +13.1% | | - Non-interest-bearing demand | $277,574 | $182,717 | +51.9% | | Total Stockholders' Equity | $117,280 | $108,607 | +8.0% | Consolidated Earnings Highlights (Unaudited) | (In thousands, except per share) | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | Change (%) | | :--- | :--- | :--- | :--- | | Net Interest Income | $17,117 | $14,677 | +16.6% | | Provision for loan losses | $1,600 | $600 | +166.7% | | Non-interest Income | $12,325 | $7,244 | +70.1% | | - Gains on sales of loans, net | $6,017 | $2,862 | +110.2% | | Net Earnings | $8,463 | $4,781 | +77.0% | | Diluted EPS | $1.86 | $1.04 | +78.8% | Consolidated Cash Flow Highlights (Unaudited) | (In thousands) | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | $(2,468) | $(5,260) | | Net cash used in investing activities | $(95,705) | $(5,127) | | Net cash provided by financing activities | $102,666 | $5,572 | Notes to Consolidated Financial Statements Key notes highlight the impact of COVID-19, including PPP loan growth, increased loan loss provisions, and loan modifications under the CARES Act - The company originated $130.1 million in Paycheck Protection Program (PPP) loans as of June 30, 2020[31] - Impaired loans increased from $8.7 million at year-end 2019 to $11.9 million at June 30, 2020[33] - As of June 30, 2020, the company had 135 loan modifications totaling $54.7 million related to the COVID-19 pandemic, which are not classified as TDRs per regulatory guidance[43] - Goodwill was tested for impairment as of March 31, 2020, due to a triggering event (COVID-19) and was not found to be impaired[44] - The company, as a smaller reporting company, plans to delay the implementation of the CECL accounting standard until January 1, 2023[82] Company Regulatory Capital Ratios (June 30, 2020) | Capital Ratio | Actual Ratio | Minimum for Capital Adequacy (incl. buffer) | | :--- | :--- | :--- | | Common Equity Tier 1 | 13.14% | 7.0% | | Tier 1 Capital | 16.19% | 8.5% | | Total Risk Based Capital | 17.33% | 10.5% | | Leverage | 10.41% | 4.0% | Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes strong performance to higher loan sale gains and PPP loan volume, while increasing provisions for COVID-19 related economic impacts - The company's response to the COVID-19 pandemic included funding 1,035 PPP loans totaling approximately $130.1 million and offering loan forbearance and modifications to impacted customers[99] - The increase in provision for loan losses to $1.6 million for the first six months of 2020 (from $600,000 in 2019) was primarily due to the estimated economic impact of the COVID-19 pandemic[116] - Total assets increased by $120.5 million (12.1%) to $1.1 billion, primarily driven by PPP loan originations; total deposits increased by $109.2 million (13.1%), largely due to PPP funds and government stimulus[124][131] Key Performance Ratios (Annualized) | Ratio | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Return on average assets | 1.62% | 0.98% | | Return on average equity | 15.22% | 10.08% | | Net interest margin | 3.69% | 3.42% | Financial Condition and Asset Quality Total assets reached $1.1 billion due to PPP loans, though asset quality showed stress with increased classified and non-accrual loans - The increase in classified loans was primarily attributed to the impact of COVID-19 and continued weakness in the agriculture industry[126] Asset Quality Indicators | (In thousands) | June 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Classified Loans | $26,013 | $18,117 | | Non-accrual Loans | $8,245 | $5,546 | | % of Gross Loans | 1.18% | 1.03% | | Impaired Loans | $11,908 | $8,680 | | Allowance for Loan Losses | $7,747 | $6,467 | COVID-19 Loan Modifications by Industry (June 30, 2020) | (In thousands) | Commercial Real Estate | Commercial | Other | Total | | :--- | :--- | :--- | :--- | :--- | | Accommodations and hotels | $9,920 | $0 | $0 | $9,920 | | Real estate rental (non-owner) | $8,511 | $0 | $4,720 | $13,231 | | Restaurants | $3,779 | $820 | $0 | $4,599 | | Total Modifications | $33,786 | $6,728 | $14,196 | $54,710 | Liquidity and Capital The company maintained a strong liquidity position and robust capital levels, remaining 'well capitalized' while continuing its quarterly dividend - Liquid assets (cash and AFS securities) totaled $325.0 million at June 30, 2020[136] - The company has significant available credit, including $67.2 million from FHLB, $107.3 million from the Federal Reserve discount window, and $30.0 million from correspondent banks[137] - Both the Company and the Bank met all capital adequacy requirements to be deemed 'well capitalized' as of June 30, 2020[142] - A quarterly cash dividend of $0.20 per share was paid during Q2 2020[144] Quantitative and Qualitative Disclosures about Market Risk The company manages interest rate risk, with models showing minimal impact on net interest income from a 100 basis point rate change Interest Rate Sensitivity Analysis (12-Month Horizon) | Scenario | Dollar Change in Net Interest Income ($000s) | Percent Change in Net Interest Income | | :--- | :--- | :--- | | +200 basis points | $81 | 0.2% | | +100 basis points | $(127) | (0.4%) | | -100 basis points | $58 | 0.2% | Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls during the quarter - The Company's management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2020[163] - No changes in internal control over financial reporting occurred during the quarter ended June 30, 2020, that materially affected or are reasonably likely to materially affect the controls[164] PART II - OTHER INFORMATION Legal Proceedings The company is not party to any material legal proceedings outside of ordinary routine litigation - There are no material pending legal proceedings against the Company or its subsidiaries outside of ordinary routine litigation[167] Risk Factors The COVID-19 pandemic is identified as a significant new risk factor, potentially impacting the economy, customers, and company operations - A new risk factor has been added regarding the adverse impact of the COVID-19 pandemic on the economy, customers, and company operations[168] - The pandemic is expected to cause disruptions leading to decreased earnings, loan defaults, and potential material losses in the loan portfolio[169][173] - Borrowers in the retail, restaurant, hospitality, and agriculture industries are identified as being particularly vulnerable, which could lead to increased loan defaults[170] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 15,757 shares during the quarter as part of its publicly announced stock repurchase programs - As of June 30, 2020, 227,002 shares may yet be purchased under the company's announced stock repurchase plans[174] Share Repurchases for Q2 2020 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 1-30, 2020 | 15,757 | $20.73 | | May 1-31, 2020 | - | - | | June 1-30, 2020 | - | - | | Total | 15,757 | $20.73 | Defaults Upon Senior Securities The company reported no defaults upon senior securities - There were no defaults upon senior securities[175] Mine Safety Disclosures This section is not applicable to the company - Not applicable[176] Other Information No other information was reported for the period - No other information was reported[177] Exhibits The report includes required CEO/CFO certifications and Interactive Data Files as exhibits - Exhibits filed include CEO/CFO certifications and Interactive Data Files (Inline XBRL)[178]