Landmark Bancorp, Inc. — Q2 2020 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and six months ended June 30, 2020. Landmark is a Kansas-focused bank holding company operating Landmark National Bank and a captive insurance subsidiary. The period was significantly affected by COVID-19, emergency lending programs, lower interest rates, and elevated mortgage refinancing activity.
Financial performance and condition
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $9.0 million | $7.5 million | $17.1 million | $14.7 million |
| Provision for loan losses | $0.4 million | $0.4 million | $1.6 million | $0.6 million |
| Non-interest income | $7.0 million | $4.0 million | $12.3 million | $7.2 million |
| Non-interest expense | $9.1 million | $8.0 million | $17.2 million | $15.7 million |
| Net earnings | $5.1 million | $2.6 million | $8.5 million | $4.8 million |
| Diluted earnings per share | $1.13 | $0.56 | $1.86 | $1.04 |
| Net interest margin, tax-equivalent | 3.72% | 3.43% | 3.69% | 3.42% |
- Q2 net earnings rose 96.3%; first-half earnings rose 77.1%. Management attributed the increase primarily to higher gains on mortgage loan sales amid low rates and refinancing activity.
- Q2 gains on loan sales were $4.8 million, versus $1.7 million; first-half gains were $6.0 million, versus $2.9 million. First-half non-interest income also included $1.8 million of gains on investment-security sales.
- At June 30, total assets were $1.119 billion, up 12.1% from year-end 2019. Net loans were $689.6 million, up 29.6%, including $130.1 million in PPP loans; available-for-sale securities were $306.8 million, down from $363.0 million.
- Deposits increased 13.1% to $944.2 million, with growth primarily in non-interest-bearing, money market/checking, and savings accounts. Total borrowings were approximately $39.8 million, including $21.7 million of subordinated debentures.
- Cash and cash equivalents were $18.2 million. Cash plus available-for-sale securities totaled $325.0 million. The company reported $67.2 million of additional FHLB borrowing capacity, $107.3 million of Federal Reserve discount-window capacity, and approximately $30.0 million of correspondent-bank credit available, subject to applicable requirements.
- First-half cash flows: operating activities used $2.5 million; investing activities used $95.7 million; financing activities provided $102.7 million. Cash increased $4.5 million over the period.
- The allowance for loan losses was $7.7 million, or 1.11% of gross loans, compared with $6.5 million, or 1.20%, at year-end. The lower ratio reflected PPP loans, for which no allowance was allocated.
- Non-accrual loans rose to $8.2 million from $5.5 million; impaired loans rose to $11.9 million from $8.7 million; classified loans increased to $26.0 million from $18.1 million. No loans were 90 or more days past due and accruing.
- The Bank’s June 30 regulatory ratios included a 10.20% leverage ratio and 17.07% total risk-based capital ratio; the Bank was categorized as well capitalized. Stockholders’ equity was $117.3 million.
Changes, outlook, and risks
- Lower market rates reduced loan yields, but sharply lower deposit and borrowing costs contributed to higher net interest income and margin. Management expects lower asset yields and the mix of lower-yielding PPP lending may pressure future net interest income and margin.
- Management expects loan growth in commercial and commercial real estate portfolios to slow amid weaker economic conditions. It also expects higher delinquencies and defaults and says the loan-loss provision may remain elevated or increase if the downturn is deeper or lasts longer than anticipated.
- By June 30, the Bank had funded 1,035 PPP loans totaling about $130.1 million. It had 135 COVID-related loan modifications covering $54.7 million; these were reported as performing under modified terms and were not classified as TDRs under applicable relief provisions. Separately, 13 residential mortgage loans totaling $1.5 million were in short-term forbearance or repayment plans. Management noted that significant PPP forgiveness was anticipated before year-end.
- Management cited particular vulnerability among borrowers in retail, restaurants, hospitality, and agriculture, as well as potential pressure on commercial real estate, residential borrowers, collateral values, deposits, and service-charge income. Kansas unemployment was 10.0% in May 2020, compared with 3.1% in December 2019.
- The company reported no formal earnings guidance. Management said in July it had declared its 76th consecutive quarterly dividend and had no current plan to change its dividend strategy, while emphasizing uncertainty around the recession and future capital and profitability.
- CECL adoption is planned for January 1, 2023; preliminary estimates indicate an increase in the allowance may result, but the amount is uncertain. Goodwill was not impaired in the March 2020 interim test, and management reported no additional Q2 triggering event.
- Interest-rate sensitivity analysis estimated a 0.2% increase in one-year net interest income under a 200-basis-point rise, a 0.4% decrease under a 100-basis-point rise, and a 0.2% increase under a 100-basis-point decline; a 200-basis-point decline was deemed not meaningful in the low-rate environment.
- The filing reports no material pending legal proceedings beyond routine litigation. It also identifies risks from COVID-19, credit losses, interest rates, collateral and securities values, cybersecurity and vendor disruptions, and other economic and operational factors.
Most important facts for investors to verify
- Whether loan-sale gains and unusually strong mortgage refinancing volumes persist, and how much reported earnings depend on those items.
- PPP loan forgiveness timing, associated fee recognition, and resulting effects on loan balances, yields, and net interest margin.
- Trends in modified loans as deferrals expire, especially the $54.7 million COVID-related modification pool and exposure to affected industries.
- Whether classified, impaired, and non-accrual loans continue to rise, and whether the allowance adequately reflects evolving economic conditions.
- Deposit stability, borrowing capacity and costs, and the effect of upcoming time-deposit maturities on liquidity and funding expense.
- Capital and dividend capacity under a prolonged downturn, plus the eventual CECL allowance increase and implementation controls.