Landmark Bancorp, Inc. (NASDAQ:LARK) Q2 2020 Results Earnings Conference Call July 30, 2020 11:00 AM ET
Michael Scheopner – President and CEO
Mark Herpich – Chief Financial Officer
Conference Call Participants
John Rodis – FIG Partners
Good morning. And welcome to Landmark Bancorp’s Second Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]
Please note, this event is being recorded. I would now like to turn the conference over to Michael Scheopner, President and CEO. Please go ahead, sir.
Thank you, and good morning. Thank you for joining our call today to discuss Landmark’s 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 is Mark Herpich, Chief Financial Officer for the company.
Before we get started, I would like to remind our listeners that some of the information we will be providing today falls under the guidelines for forward-looking statements as defined by the Securities and 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 and our actual results could differ materially from those expressed. Additional information on these factors is included from time to time in our 10-K and 10-Q filings, which can be obtained by contacting the company or the SEC.
I want to start the call today and take this opportunity to express my thanks and appreciation to all of the 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 as part of the nation’s critical infrastructure sector seriously and they have focused 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 mind. We have maintained limited access to our traditional bank lobby network and continue to have a portion of our associates working from home with enhanced precautions in place for the safety of those that remain in our bank facilities.
To ensure we are meeting customer needs, we have repositioned associates to support our customer care call sooner to handle client questions and to support client access to our mobile and digital banking platforms.
As 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 Act. As of June 30, we assisted 1,035 customers in securing approximately $130.1 million of funding through the Small Business Administration Payroll Protection Program. Our focus will now turn to assisting those clients and navigating the PPP loan forgiveness process as the SBA begins to accept forgiveness applications as of August 10th.
Moving on to our 2020 second quarter performance, we reported net earnings of $5.1 million or $1.13 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 increase in gains on sale of loans in the second quarter. As a result of the projected economic impact of COVID-19 on our loan portfolio, we recorded a $400,000 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 1.62%, with return on average equity of 15.22%. Mark will provide additional detail on Landmark’s financial performance and asset quality metrics later in this call.
I am pleased to report that our Board of Directors has declared a cash dividend of $0.20 per share to be paid August 26, 2020 to shareholders of record as of August 12, 2020. This represents the 76th consecutive quarterly cash dividend since the company’s formation, resulting from the merger of Landmark Bancorp, Inc. with MNB Bancshares, Inc. 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.
The 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 will 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 to everyone. Michael mentioned our record net earnings for the second quarter and six months ended June 30, 2020, and 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 or 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 SBA PPP loans, which totaled $130.1 million at June 30th.
In addition, Landmark’s 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 to investments as a proportion.
While our overall cost of interest-bearing liabilities declined from 1.03% in the second quarter of 2019 to 0.36% in the current quarter. Our loan-to-deposit ratio increased to 73.0% as of June 30, 2020, as compared to 61.5% as of June 30, 2019.
Looking at the provision for loan losses, our analysis resulted in providing $400,000 to the allowance for loan losses in the second quarter of 2020, as compared to $400,000 in the second quarter of 2019.
On a year-to-date basis, as Michael mentioned earlier, our 2020 provision for loan losses is $1.6 million in comparison to $600,000 in the first six months of 2019. The provision for loan losses reflects our best estimate of the economic environment, considering the effects of COVID-19. As the economic outlook evolves and our pandemic related loss experience develops, we will adjust our allowance for credit losses and provisioning accordingly.
Non-interest income increased to $7.0 million for the second quarter of 2020, compared to $4.0 million for the same period of 2019. The primary driver of the increase in non-interest income was related to a $3.1 million increase in gains on sales of loans relating to the increased volumes of one-to-four family real estate loans originated for sale, as 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 or 14.5% to $9.1 million in the quarter compared to 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 volumes and to a lesser extent by our commercial loan growth as we added employees in this area over the past year and 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 pretax 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 in securities gain and a $3.2 million increase in gains on sales of mortgage loans as a result of the significant drop in interest rates during 2020.
In the first half of 2020, we achieved a $2.4 million 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 increase in average loan balances on a comparable six-month period basis, resulting in our net interest margin on a tax equivalent basis improving from 3.42% in the six months of 2019 to 3.69% in the corresponding period of 2020.
Non-interest income totaled $12.3 million for the first six months of 2020 or an increase of $5.1 million or 70.1% from the prior year period. This results primarily from an increase of $3.2 million in 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. This 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% or $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 increase in compensation and benefits related to our increased mortgage loan volumes and to a lesser extent to our commercial loan growth over the past year, as we had added employees in this area and in general increased compensation costs.
The effective tax rate increased from 15.0% in the first half of 2019 to 20.3% in the first six months of 2020. Mostly due to an increase in pretax earnings, while our tax exempt income declined over the comparable period.
To touch on a few balance sheet highlights. Total assets increased $120.5 million to $1.1 billion at June 30, 2020, compared 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 30, 2020 from $532.2 million at year-end 2019, while our investment portfolio decreased $55.9 million to $310.2 million at June 30, 2020 from $366.1 million at December 31, 2019.
Deposits increased $109.2 million to $944.2 million at June 30, 2020, 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 30, 2020, compared to $42.2 million at December 31, 2019.
Our stockholders’ equity increased to $117.3 million at June 30, 2020 or a book value of $26.10 per share, up from $108.6 million at December 31, 2019 or a book value of $23.6. The increase in book value was primarily a result of net earnings and an increase in the fair value of investment 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 30, 2020, continue to exceed the levels considered well capitalized. The Bank’s leverage capital ratio was 10.1% at June 30, 2020, while the total risk-based capital was 17.1%.
I would now like to provide some additional details on asset quality in our loan portfolio. As I mentioned earlier, net loans outstanding as of June 30, 2020 totaled $689.6 million. Non-performing loans, which primarily consist of loans greater than 90 days past due, totaled $8.2 million or 1.18% of gross loans as of June 30, 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 is the level of loans past due 30 days to 89 days. The level of past due loans between 30 days and 89 days still accruing interest totaled $4.2 million or 0.6% of gross loans as of June 30, 2020. This ratio has decreased from 0.64% of gross loans as of December 31, 2019 and we continue to monitor delinquency trends carefully in all loan categories.
Our balance in other real estate owned totaled $314,000 as of June 30th and the other real estate owned balances are all being marketed for sale. We recorded net loan charge-offs of $320,000 during 2020, up from $99,000 for the same period in 2019.
I will now turn the call back over to Michael to review our loan portfolio segments and 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 net loan total of $532.2 million. PPP loans made up $130.1 million of the overall $157.4 million increase in loans outstanding.
As of the end of 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 30, 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 30, 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, our single-family loan production totaled approximately $181.5 million, 52% of this production volume involved 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 COVID-19 pandemic on our loan portfolio. As previously noted, we recorded a $1.6 million 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 SBA PPP efforts that I noted, we actively worked with clients on a case-by-case basis related to payment deferrals or loan modifications. These solutions were specific to our client’s capital and liquidity needs.
As of June 30th, we had COVID-related modifications to 135 loans, representing $54.7 million. COVID-19 restructured loans represent 8.5% of the total loan portfolio or 10.5% if you exclude the SBA PPP loans.
During the month of July, as of July 24th, 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 date, only two 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 interagency regulatory guidance that was issued in late March.
Before we go to questions, I want to summarize by saying the first half of 2020 contains some very positive operating results for Landmark. We believe that the company’s risk management practices and capital strength position us well as we navigate these uncertain economic times.
With that, I will open the call up to questions that anyone might have.
[Operator Instructions] Our first question comes from John Rodis with FIG Partners. Please go ahead.
Good morning, guys.
Good morning, John.
Hope 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 are around $41 million, am I thinking about that right?
It would be somewhere, John, if you take what has returned to contractual terms as of the 24th of July, we would be somewhere in the neighborhood of $37 million outstanding.
Well, but then, I guess, then accounting for, you said a couple of loans that extended another three months or is that $18 million net of those $4 million, I guess, that’s correct?
$18 was — that $18 million was net, so…
It was net of the $4 million. Okay. Okay. So it’s $37 million. Okay.
So far you have had obviously good success. So do you think as we go through August, September, you will continue to have more roll-off or at least you will have better clarity, I guess?
Yeah. I think that’s really fair, John, as we look 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.
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 have pivoted in these economic times and kind of evaluated where their risks were from restoration of income streams, et cetera, and we feel pretty good about where we are 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 of the year?
That’s exactly right.
Okay. Just, I guess, a question on mortgage, obviously, very strong in the quarter for you guys and for a lot of banks. As you — I assume there’s 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 and 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 would be a fair assessment, John. I mean it’s going to be a very strong quarter based upon pipeline volumes, and as I mentioned in my comments, I think, the thing that I am 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 have seen some really robust housing conditions in the markets in which we do business and that has not changed as we look at that pipeline make up moving into the third quarter. So I think your assessment from the standpoint of production volume, just given our capacity to digest that volume through 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?
Yeah. Year-to-date through the end of the second quarter that was — refinance activity was weighted at 48% of that volume.
Okay. Okay. And then just one another question if I might on loans, if you exclude the PPP loans for the quarter, you still had a small amount of growth in, let’s call it, sort of the core loan portfolio. Do you think you will see much in the way of growth in the second half of the year or sort of staying flat…
I think it’s going to be pretty…
…with that being excluded?
Yeah. John, I think, that’s a great question. I think it’s going to be pretty modest in the second half from a volume standpoint as far as growth projections. I mean, it — I do — we are seeing some still decent pipeline activity in the commercial lines.
But it’s too longstanding clients, and we have seen a little bit of business development opportunity as a result of new clients that we assisted through the PPP process. So I think it’s really going to be a pretty modest growth line on the commercial line in the second half of the year.
Okay. And then, I guess, final question, just an update on the ag industry from your perspective and your borrowers?
Yeah. I’d say it’s relatively stable, John. We are seeing from a crop conditions standpoint, the most recent report from the State of Kansas on field crops for corn, soybeans, sorghums and cotton, most of that would be at a good or I guess, they use excellent, I have our time using excellent when it comes to agribusiness.
But good or excellent conditions really in the field crops and that would be similar to what we are seeing on pasture and range conditions. Our borrowers economically we continue to work with them and really assess their liquidity and their leverage positions on a production cycle basis just to make sure that they are doing okay.
We have got — we have a couple of relationships that quite candidly, I mean, it’s been an extended down cycle for ag business and we have got a couple that are in a little more stressed condition than they were a year ago. But for the most part, our client base is weathering the storms pretty well.
Okay. Okay. Great. Thank you, guys.
Hey, John. Thanks for your questions and stay well, please.
You too. Thanks.
[Operator Instructions] 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 Scheopner 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 you.
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.