Q2 2020 Landmark Bancorp Inc Earnings Call
Good morning, and welcome to land Bank Corp. second quarter earnings Conference call.
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I would now like to turn the conference over to Michael Show No President and CEO. Please go ahead.
Thank you and good morning.
Thank you for joining our call today to discuss landmarks earnings and results of operations for the second quarter and year to date 2020.
Joining the call with me to discuss various aspects of our second quarter performance, It's Mark Herpich Chief Financial Officer for the company.
Before we get started likes to remind all listeners that some of the information we will be providing today falls under the guidelines for forward looking statements as defined by the Securities Exchange Commission.
As part of these guidelines I must point out that any statements made during this presentation that discuss our hopes beliefs expectations or predictions of the future are forward looking statements <unk> actual results could differ materially from those expressed.
Additional information on these factors it isn't isn't included from time to time in our 10-K, and 10-Q filings, which can be obtained by contacting the company or the FCC.
I want to start the call today. They take this opportunity to express my steaks and appreciation to all of you associates at landmark National Bank.
It has been an entire team effort during the first half of this year.
Each of these associates have taken their role that's part of the nation's critical infrastructure sector seriously.
And they have focus daily on executing our company vision that everyone starts as a customer and leaves as a friend.
Elements of our pandemic response plan remain in place as of today with the safety and well being of our associates and customers foremost in money.
We have maintained limited access to our traditional based lobby network.
Continue to have a portion of our associates working from home with enhanced precautions in place for the safety of those to remain in our bank facilities.
To ensure we are meeting customer needs, we have repositioned associates to support our customer care call center to handle plant questions and to support clear access to our mobile and digital banking platforms.
That's a preferred lender with the small business administration, we responded to help existing and new clients access the paycheck protection program authorized by the cares that.
As of June 30, we assist a 1035 customers in securing approximately $130.1 million a funding through the small business administration payroll protection program.
Our focus will now turn to assisting those clients in navigating the PPP loan forgiveness process as the SBH begins to accept forgiveness applications as of August Tim.
Moving onto our 2022nd quarter performance, we reported net earnings of $5.1 million or $1.13 cents per share on a fully diluted basis. This represented a record quarter for the company.
Year to date net earnings totaled $8.5 million.
Second quarter earnings were boosted by the impact of historically low mortgage interest rates, which resulted in a significant refinance activity and strong purchase levels in many of our markets.
We recorded a 3.1 million dollar increase and gains on sale of loans in the second quarter.
As a result of the projected economic impact of Cobot 19 on our loan portfolio. We recorded a 400000 dollar provision for loan losses in the second quarter, which brings our year to date provision to $1.6 million. This is an increase of $1 million from the same period last year.
Our year to date 2020 return on average assets calculates to 1.62%.
With return on average equity a 15.22%.
[noise] Mark will provide additional detail on light on landmarks financial performance and asset quality metrics later in this call.
Im pleased to report that our board of directors has declared a cash dividend of 20 cents per share to be paid August 26, two to 2020 to shareholders of record as of August 12 2020.
This represents the 76 consecutive quarterly cash dividend since the company's formation, resulting from the merger of landmark Bancorp Inc. with him and be Bancshares age in October 2001.
Our performance in the first half of 2020 is a credit to the efforts of our associates throughout the organization, who practice, good banking fundamentals and deliver high quality customer service.
Your management team remains focused on managing the organization in a conservative and disciplined manner that will prepare us to respond as well as possible. During these uncertain economic times.
With that I'll now turn the call over to Mark Herpich, Our CFO, who will review the financial results and asset quality indicators with you.
Thanks, Michael and good morning, everyone.
Michael mentioned, our record net earnings for the second quarter in six months ended June Thirtyth 2020, now I'd like to make a few comments on various elements comprising those results.
Starting with highlights of the second quarter income statement net interest income was $9 million an increase of 1.5 million were 20.5% in comparison to the prior year second quarter.
The improvement in net interest income built upon a.
98.1 million or 10.9% increase in average interest, earning assets to 999.3 million in comparison to the prior year second quarter period.
This growth was entirely attributable to loan growth of 161.9 million or 31.6% as our average investment balance actually declined by 74.8 million.
The loan growth was impacted significantly by our SPJ CPP loans, which totaled 130.1 million at June Thirtyth.
In addition, landmarks net interest margin on a tax equivalent basis improved to 3.72% in the second quarter of 2020 as compared to 3.43% in the same period of 2019.
The net interest margin benefited significantly from the increase in average loan balances as our asset allocation continues to be weighted more heavily to loans and less two investments as a proportion while our overall cost of interest bearing liabilities declined from 1.03 in the second quarter of 2019 to the.
No 0.36% in this in the current quarter.
Our loan to deposit ratio increased to 73.0% as of June Thirtyth 2020, as compared to 61.5% as of June 32019.
Looking at the provision for loan losses, our analysis resulted in providing $400000 to the allowance for loan losses in the second quarter of 2020 as compared to 400000 in the second quarter 2019.
On a year to year to date basis as Michael mentioned earlier, our 2020 provision for loan losses is 1.6 million in comparison to 600000 in the first six months of 2019.
The provision for loan losses.
Reflects our best estimate of the economic environment, considering the effects of covert 19.
As the economic outlook evolves and our pandemic related loss experience develops we will adjust our allowance for credit losses and provisioning accordingly.
Noninterest income increased to 7.0 million for the second quarter 2020, compared to 4.0 million for the same period of.
2019.
The primary driver of the increase in noninterest income was related to a 3.1 million increase and gains on sales of loans relating to the increased volumes of one to four family real estate loans originated for sale at the low interest rate environment has driven up purchase and refinancing activity in our markets during the second quarter of.
2020.
Non interest expenses increased by 1.2 million were 14.5% to 9.1 million in the quarter.
Compared to the second quarter of 2019.
This increase was driven by an increase of 1.0 million in compensation and benefits primarily related to our increased mortgage loan volume and to a lesser extent by our commercial loan growth as we added employees in this area over the past year end by general increased compensation costs.
The effective tax rate was 21.2% in the current quarter up from 16.3% in the second quarter of 2019.
The increase in the effective tax rate in the current quarter compared to the same quarter last year is mostly due to an increase in pre tax earnings while our tax exempt income declined over the comparable periods.
Moving on to discuss some financial highlights for the first half of 2020, our net earnings of $8.5 million represented a record six month period for landmark and exceeded the comparable period of 2019 by 3.7 million.
These results were driven by a 1.8 million investment securities gain in a 3.2 million increase in gains on sales of mortgage loans as a result of a significant drop in interest rates during 2020.
The first half of 2020, we achieved a 2.4 million.
Dollar increase in net interest income up 16.7% from a year earlier as a result of average interest earning assets increasing 7.1% from 892.2 million during the first six months of 2019.
To $955.9 million during 2020.
Consistent with my comments earlier on the second quarter net interest margin benefited significantly from a 108.5 million dollar increase in average loan balances on a comparable six month period basis, resulting in our net interest margin on a tax equivalent basis.
Proving from 3.42% in the six months of 2019% to 3.69% in the corresponding period of 2020.
Noninterest income totaled 12.3 million for the first six months of 2020 or an increase of 5.1 million.
Were 70.1% from the prior year period.
This results primarily from an increase of 3.2 million and gains on sales of loans and 1.8 million of gains on sales of investment securities. As we sold approximately 44 million of our higher coupon mortgage backed investment securities during the first quarter of 2020.
The sale was based on our evaluation and the risks associated with accelerating prepayment speeds to the market prices on this portion of our investment securities portfolio.
Looking at non interest expense, we reported an increase of 9.8% were 1.5 million for the first six months of 2020 in comparison to the same period of 2019.
Consistent with my second quarter comments this first half increase relates.
Primarily to a 1.4 million dollar increase in compensation and benefits related to our increased mortgage of all loan volumes and to a lesser extent, our commercial loan growth over the past year as we get added employees in this area and general increased compensation costs.
The effective tax rate increased from 15.0% till the first half of 2019% to 20.3% in the first six months of 2020, mostly due to an increase in pre tax earnings while our tax exempt income declined over the comparable period.
It's touch on a few balance sheet highlights total assets increased 120.5 million to 1.1 billion at June 32020.
Fair to 998.5 million at December 31, 2019.
Our loan portfolio with the driver of our increase in total assets as loans increased 157.4 million to 689.6 million at June Thirtyth 2020.
From 532.2 million at year end 2019, while our investment portfolio decreased 55.9 million to 310.2 million at June Thirtyth 2020 from 366.1 million at December 31 2019.
Deposits increased 109.2 million to 944.2 million at June 32020, compared to 835.0 million at year end 2019.
Additionally, our federal home loan bank and other borrowings decreased 2.4 million to 39.8 million at June Thirtyth 2020.
Imperative 42.2 million at December 31, 2019.
Our stockholders equity increased to 117.3 million at June Thirtyth 2020, right book value of $26 them 10 cents per share up from 108.6 million at December 31, 2019 or book value of 23.62 per share.
The increase in book value was primarily result of net earnings and an increase in the fair value of investments securities available for sale.
Which were offset by our purchase of 2.3 million worth of shares of our outstanding stock during the first half of 2020.
Our consolidated and bank regulatory capital ratios as of June Thirtyth 2020 continue to exceed the levels considered well capitalized.
The banks leverage capital ratio was 10.1% at June Thirtyth 2020, while the total risk based capital was 17.1%.
I'd now like to provide some additional details on asset quality in our loan portfolio.
As I mentioned earlier net loans outstanding as of June Thirtyth 2020 totaled at 689.6 million.
Nonperforming loans, which primarily consist of loans greater than 90 days past due.
Totaled 8.2 million were 1.18% of gross loans as of June Thirtyth 2020.
This represents an increase from year end 2019 level of 1.03%.
Our credit risk and collection efforts continue.
To focus on reducing these totals.
Another indicator, we monitor as part of our credit risk management efforts as the level of loans past due 30 to 89 days.
The level of past due loans between 30, and 89 days still accruing interest totaled $4.2 million or 0.6% gross loans.
As of June Thirtyth 2020.
This ratio has decreased from 0.64 of gross loans as of December 31, 2019.
We continue to monitor delinquency trends carefully and all loan categories.
Our balance and other real estate owned totaled 314000 as of June Thirtyth.
And the other the other real estate loan balances are all being marketed for sale.
We recorded net loan charge offs of $320000 during 2020 up from 99000 for the same period in 2019.
I'll now turn the call back over to Michael to review, our loan portfolio segments in the credit risk outlook.
Thank you Mark and thank you for your comments as Mark noted net loans outstanding as of the end of the second quarter 2020 totaled $689.6 million.
This is a 29.6% increase from our year end 2019 that loan total of $532.2 million.
PPP loans made up 130.1 million of the overall at 157.4 million dollar increase in loans outstanding.
As of the ended the second quarter, our construction and land loan portfolio balances totaled 29.4 million or 4.2% of our total loan portfolio.
Outstanding loan balances in the commercial real estate portfolio totaled 144.2 million, representing 20.6% of our total loan portfolio.
Commercial and industrial loans were 247.5 million as of June Thirtyth, 2020, or 35.3% of the current portfolio and that includes the 130.1 million in PPP loans.
With regard to our agricultural loan portfolio total balances were $98 million or 14% of our total loan portfolio as of the end of the second quarter.
And our mortgage one to four family loan portfolio represented 22% of the portfolio at $154.4 million as of June Thirtyth 2020.
As I noted in my opening comments, our mortgage banking activity. During the first half of 2020 has been extremely strong driven by historically low loan rates.
As of the end of June 2020 are single family loan production totaled approximately $181.5 million.
52% of this production volume in bulk purchase money transactions, while 48% was made up of refinance activity.
As we entered the third quarter, our mortgage pipeline levels remain high and we anticipate significant production volumes extending through the third quarter of this year.
Obviously, there remains much uncertainty regarding the overall impact of the koeppen 18 pandemic on our loan portfolio.
As previously noted we recorded a 1.6 million dollar provision for loan losses. During the first half of this year and we may need to make additional increases to our provision for loan losses in future periods.
In addition to the SP HPP efforts that I noted, we actively worked with clients on the case by case basis related to payment deferrals or loan modifications.
Solutions were specific to our clients capital and liquidity needs.
As of June Thirtyth, we had cobot related modifications to 135 loans representing $54.7 million.
Opened 19 restructured loans represented 8.5% of the total loan portfolio or tenant a half percent if you exclude BSP HPP close.
During the month of July as of July 24, 51 of those loans with outstanding balances of $17.7 million had reached the end of their initial deferral periods and returned to their respective contractual payment terms.
Additionally, as of the same they only to borrowers with aggregate loans outstanding of $3.8 million were granted a second deferral.
While these are customized on a case by case basis. The approved modifications are consistent with the inter agency regulatory guidance that was issued in late March.
Before we go to questions I want to summarize by saying the first half of 2020. It contains some very positive operating results for landmark.
We believe that the company's risk management practices and capital strength, because it and capital straight position us well as we navigate these uncertain economic times.
With that I'll open the call up to questions that anyone might have.
We will now begin the question and answer session to ask a question.
Press Star then one on your telephone keypad.
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At this time, we will pause momentarily to assemble a roster.
First question comes from John Roden with Fiveg partners. Please go ahead.
Good morning, guys good morning, John.
Well you guys are doing well.
Michael I just wanted to make sure your comment on deferrals. So if you.
It sounds like.
As you stand today, you're around 41 million in my thinking about that right.
It'd be somewhere John if.
If you take what has returned to contractual terms as of the 24th of July we'd be somewhere in the neighborhood of 37 million outstanding.
Well, but then I guess then accounting for you said a couple of loans.
Extended another.
Three months.
Or is that it.
That 18 million net of the 4 million I guess, that's usually at 18 million was net so.
It was net of 4 million okay.
Okay. So its 37 million okay.
So so far you could obviously.
Good success. So do you think as we go through August September you'll you'll continue to have more.
Roll off or at least you will have better better clarity.
Yes, I think Thats really fair John as we looked at the buckets in the third quarter from the standpoint of those loans that are scheduled to exit the modifications that would represent a majority of what we have left that's been modified and.
As we went through the allowance process as of the second quarter, we went through each of those individual borrowing relationships and evaluated.
How those businesses and clients at pivoted.
In these economic times and kind of evaluated where their risk were from restoration of income streams et cetera.
And we feel pretty good about where we're positioned and how those clients are positioned to come out of the next quarter.
Okay. Okay. So then I guess, depending on the outcome of.
The remaining deferrals, so that will sort of drive also the provisioning in the back half the year.
Thats exactly right.
Okay.
Just I guess a question on.
On on mortgage obviously very strong in the quarter for you guys and for a lot of banks.
As you.
Soon there some normal seasonality as we get towards the back half of the year, but.
I would think the third quarter would probably continue to be strong is is it fair on my part to think that.
Mortgage in the third quarter is probably.
Less than the second quarter, but still above the first quarter level.
I think that'd be a fair assessment, John I mean, it's going to be a very strong quarter based upon pipeline volumes.
As I've mentioned in my comments.
No I think the thing that I'm. Most pleased about is that through the first half of the year our production volumes were still.
More than half weighted in purchase money activity versus the refinance activity. So we've seen some.
The robust housing conditions in the markets in which we do business and that has that has not changed as we look at that pipeline make up moving in the third quarter. So I think your assessment from the standpoint of production volume.
Just given our capacity to two.
To digest that volume through.
Our our operating system is a fair assessment.
And just to make sure. My notes are right you said refi activity was roughly 48% didn't you.
Our year to date through the through the end of the second quarter that was to refinance activity was weighted at 48% of that volume.
Okay and then just one other question if I might on on on loans. If you exclude the PPP loans for the quarter, you still had a small amount a growth.
And let's call it sort of the core loan portfolio do you think.
Thank you will see much in the way of growth in the second half of the years or sort of staying flat.
I think it's going be pretty yeah, John I think thats. It Thats a great question I think it's going to be pretty.
It's going to be pretty modest in the second half from a from a volume standpoint as far as growth projections I mean it.
I do we are seeing some some some still decent pipeline activity in the commercial lines, but it's too it's still longstanding clients and we have seen a little bit of.
Business development opportunity as a result of new clients that we assistance through the PPP process. So.
I think it's really going to be.
A pretty modest a pretty modest gross line on the on the commercial line in the second half of the year.
Okay, and then I guess final final question, just an update on on the AG industry from your perspective in your borrowers I'd say, it's relatively stable John we are seeing from a crop conditions standpoint, the most recent.
Report for the state of Kansas on on field crops for corn, soybeans organization and cotton most of that would be good or.
I guess they use excellent I have a hard time using excellent when it comes to to agribusiness.
[laughter], but good or excellent conditions really in the field crops.
And that would be.
Similar to what we're seeing on pasturing range conditions.
Our borrowers.
Economically.
We continue to work with with them and really assess there.
Assess their liquidity under leveraged positions in auto auto production cycle basis, just to make sure that.
They are doing okay. We've got we have a couple of relationships.
Right candidly I mean, it's been an extended down cycle for agribusiness and we've got a couple that are at a.
A little more stressed conditions and then they were a year ago, but for the most part.
Basis weathering, the storm is pretty well.
Okay. Okay, great. Thank you guys.
Gentlemen, thanks for your questions and stay well please you too thanks.
Hi, Dan if you have a question.
Please press Star then one.
Yeah.
At this time.
There are no further questions. So this concludes our question and answer session I would like to turn the conference back over to Michael Chef Miller for any closing remarks.
Thank you and I want to thank everyone, who participated in today's earnings call I truly do appreciate your continued support and the confidence that you have in the company.
And I look forward to sharing news related to our third quarter 2020 results at our next earnings conference call. Thank.
Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.