Earnings Call: Q2 2021

Jul 28, 2021

Good morning, and welcome to the Landmark Bancorp's Second Quarter 2021 Earnings Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Michael Scheffner, President and Chief Executive Officer. Please go ahead. Good morning. Thank you for joining our call today to discuss Landmark's earnings and results of operations for the Q2 year to date 2021. Joining the call with me to discuss various aspects of our Q2 performance is Mark Herpich, Chief Financial Officer of the company and the company's Chief Credit Officer, Raymond McClanahan. 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 ks and 10 Q filings, which can be obtained by contacting the company or the SEC. We are pleased to report continued strong earnings during the Q2 of 2021, driven mainly by increased net interest income, lower credit cost, continued solid mortgage banking activities and good expense control. 2nd quarter 2021 net income amounted to $5,000,000 Year to date 2021 net income totaled $10,300,000 and resulted in earnings per share on a fully diluted basis of $2.17 The return on average assets year to date 2021 was 1.68 percent and return on average equity was 16.22%. Excluding the SBA PPP loans, our gross loans grew by $10,600,000 or 6.9 percent annualized during the Q2 due mainly to growth in commercial real estate and residential real estate loans. Total deposits increased $6,500,000 this quarter and had increased 14.1% over the same period last year. Credit quality remained strong this quarter. There was no provision for loan losses this quarter. Loan modifications made last year to support our customers have mostly been returned to their original contractual terms. Our capital position remains strong with total equity to assets of 10.6%. We believe Landmark's risk management practices, liquidity and capital strength continue to position us well to meet the financial needs of families and businesses in our markets. I'm pleased to report that our Board of Directors has declared a cash dividend of $0.20 per share to be paid August 25, 2021 to shareholders of record as of August 11, 2021. This represents the 80th consecutive quarterly cash dividend since the company's formation in 2,001. I will now turn the call over to Mark Herpkin, our CFO, who will review the financial results with you. Thanks, Michael, and good morning to everyone. Michael alluded to our continued strong net earnings for the Q2 ended June 30, 2021. And looking back a year, during our 20 22nd quarter earnings call, we noted that last year's net earnings of $5,100,000 was the highest quarterly earnings Landmark Bancorp had ever reported. This year, our 2021 Q2 earnings of $5,000,000 is reflective of how well we have been able to sustain our earnings level over the past year. Now I'd like to make a few comments on various elements comprising these results. Starting with the earnings highlights for the Q2, net interest income was $10,000,000 an increase of $1,000,000 or 10.7 percent in comparison to the prior year's Q2. While on a linked quarter basis, our net interest income was up by $389,000 The growth in net interest income from the Q2 last year was the result of an increase in loan interest of $1,100,000 coupled with a decline in interest expense of $244,000 but offset by lower interest earned on investment securities. Interest earned on SBA PPP loans totaled $2,200,000 this quarter compared to $665,000 in the Q2 of 2020 and was a primary driver of this quarter's increase in loan interest income. Loan yields in general are repricing downward exclusive of SBA PPP loans. Average interest earning assets grew by $155,800,000 or 15.6 percent over the same period last year and was funded by strong deposit growth of over $134,000,000 over the same period. Average loans grew by $35,700,000 or 5.3% this quarter over the same period last year despite a decrease of $5,300,000 in average SBA PPP loans outstanding during the comparable quarters. Our average investment securities and interest bearing cash balances increased by $120,100,000 from the same period last year as we are letting declines in loans and increases in deposits to be kept in cash or investment securities. Landmark's net interest margin on a tax equivalent basis increased to 3.54% in the Q2 of 2021 as compared to 3.51% in the Q1 of 2021 and still remains strong from an industry standpoint. In comparison to the prior year's 2nd quarter net interest margin of 3.72 percent, we experienced a 19 basis point drop. Our loan to deposit ratio, which totaled 62% at June 30, 2021, remains low giving us plenty of opportunities to fund new loan growth. Looking at our provision for loan losses, our analysis resulted in no provision to the allowance for loan losses in the Q2 of 2021 compared to $500,000 in the Q1 of 2021. The provision for loan losses on loans reflects our best estimate of the economic environment considering the effects of COVID-nineteen. At June 30, 2021, the ratio of our loan loss reserve to gross loans excluding the impact of the $61,200,000 in PPP loans was 1.47%. As the economic outlook evolves and our pandemic related loss experience develops, we will continue to adjust our allowance for credit losses and provisioning accordingly. Non interest income totaled $5,500,000 this quarter, decreasing $1,500,000 compared to the Q2 of 2020 and $1,300,000 lower than the prior linked quarter. The primary driver of the decrease of non interest income over the same period last year was due to lower revenue of $2,000,000 from sales of 1 to 4 family real estate loans that the bank originated. During the current quarter, higher interest rates coupled with a lack of housing inventory in our markets slowed purchase and refinancing activities as compared to the Q2 last year when mortgage activity was extremely strong. This decline in gains on sales of loans was offset by an increase over the same quarter last year of $399,000 in fees and service charge income. The $1,300,000 decline in non interest income compared to the prior quarter resulted primarily from a gain of $1,100,000 on the sale of higher coupon municipal investment securities in the Q1 of 2021, while the Q2 of 2021 only included $33,000 of gains on the sale of low balance mortgage backed investment securities. Non interest expense for the Q2 of 2021 totaled $9,200,000 or an increase of approximately 1% over the same period last year and was $117,000 higher than the prior quarter. The increase over the Q2 of 2020 was driven by an increase in other non interest expense relating to cost associated with our SBA PPP origination and forgiveness processes. The linked quarter increase was primarily driven by increases in compensation and benefits expense. Effective tax rate was 20.5% in the current quarter, down from 21.2% in the Q2 of 2020. That's on a few balance sheet highlights. Total assets increased 1 point $6,000,000 during the Q2 to $1,300,000,000 at June 30, 2021 compared to the prior quarter. Our gross loans, excluding PPP loans, increased $10,600,000 during the 2nd quarter driven by growth in commercial, real estate and residential mortgage lending that was offset by slightly lower agricultural loan balances. Our deposits increased by $6,500,000 during the quarter to $1,100,000,000 which combined with a decline of $56,100,000 in PPP loans funded growth in both investment securities of $23,000,000 and cash and cash equivalents of $21,900,000 this quarter. Stockholders' equity increased to $132,400,000 at June 30, 2021 or a book value of $27.83 per share, up from $128,300,000 at March 31, 2021 or a book value of $0.267 per share. Our consolidated and bank regulatory capital ratios as of June 30, 2021 are very strong and exceed the regulatory levels considered well capitalized. The bank's leverage capital ratio was 10.3 percent at June 30, 2021, while the total risk based capital ratio was 18.4%. I will now turn the call over to Raymond to review highlights on our loan portfolio and the credit risk outlook. Thank you, Mark, and good morning to everyone. Gross loans outstanding as of June 30, 2021, totaled $685,200,000 This represents a decrease of $45,500,000 or 6.2 percent from the previous quarter end gross loan total of $730,700,000 Throughout the first half of twenty twenty one, we've helped several business clients successfully navigate the SBA Paycheck Protection Program. And as you will recall, we originated $131,300,000 in SBA PPP loans during 2020. And as of December 31, 2020, our outstanding SBA PPP loans totaled $100,000,000 In contrast, during the first half of twenty twenty one, we originated $55,000,000 in SBA PPP loans. The difference in volume is largely due to changes made in the SBA Paycheck Protection Program. We're very proud of our efforts to support businesses and communities that we serve during these uncertain times. In addition to assisting our clients during the 2021 round of PPP funding, we continue to assist our customers navigate the SBA PPP forgiveness process throughout the first half of the year. As of June 30, 2021, 88% of our 2020 SBA PPP loans and 18% of our 2021 SBA PPP loans have been paid in full. This success resulted in a $56,100,000 decrease in our outstanding SBA PPP loans during the quarter and welcome peace of mind to many of our business customers. Due to changes made to the SBA PPP program in 2021, we saw strong participation among our agricultural customers during the 2nd round of funding. Approximately $5,500,000 of our 2021 SBA PPP loans were to agricultural borrowers. We believe this additional liquidity for our agricultural customers resulted in a $2,800,000 decrease in our agricultural loans during the quarter. These quarterly decreases were partially offset by increases in our 1 to 4 family mortgage and our commercial real estate loan portfolios. Commercial real estate loans increased $9,300,000 during the quarter, while our 1 to 4 family mortgage loans increased $2,800,000 during the quarter. And as we said earlier, excluding SBA PPP loans, gross loans grew by $10,600,000 or at an annualized rate of 6.9%. We continue to see growth opportunities in all of our geographical markets. Non performing loans, which primarily consist of non accrual loans and loans greater than 90 days past due, totaled $13,300,000 or 1.94 percent of gross loans as of June 30, 2021. This represents an increase from the previous quarter end level of $11,000,000 or 1.51 percent of gross loans. This increase is the result of continued delinquency of 1 previously identified agricultural loan. At the end of the quarter, legal collection efforts were underway for 3 of our non performing borrowers, which combined totaled $4,300,000 in non accrual loans. We believe notable improvements in these totals are likely over the next two quarters as the legal collection efforts currently underway come to a conclusion. Another indicator we monitor as part of our credit risk management efforts is the level of loans past due 30 to 89 days. The level of past due loans between 30 89 days still accruing interest totaled $1,900,000 or 0.27 percent of gross loans as of June 30, 2021, representing a decrease of $3,100,000 during the Q2 of 2021. We continue to monitor delinquency trends carefully across all loan categories. Total foreclosed real estate amounted to $1,400,000 as of June 30, 2021, a decrease from $1,500,000 as of March 31, 2021. We continue to actively pursue the sale of these properties. We recorded net loan charge offs of $108,000 during the Q2 of 2021 compared to net loan charge offs of $132,000 during the Q2 of 2020. During the 6 months that ended June 30, 2021, net loan charge offs totaled $112,000 compared to $320,000 through the same period in 2020. In terms of exposure to credit concentrations, we continue to focus on portfolio management and analysis to maintain a diversified loan portfolio. At quarter end, our largest three portfolio concentrations were commercial real estate loans, which represented 27.6 percent of gross loans 1 to 4 family residential real estate loans, which represented 23 0.7 percent of gross loans and commercial loans, which represented 18.6 percent of gross loans. Our COVID impacted loan modifications declined again this quarter. Currently, only one commercial real estate loan totaling $3,800,000 representing a single hotel property remains in some form of COVID deferral. And as hotel occupancies improve over time, our hope is that this loan will migrate back to its originally contracted repayment amount sometime in early 2022. Additionally, only one small 1 to 4 family first mortgage loan remains on a short term forbearance plan as of June 30, 2021. We continue to work proactively with our customers in a manner that's consistent with regulatory guidance and safe and sound lending practices. The current economic landscape in Kansas, while still somewhat uncertain, has seen improvement this year. The preliminary seasonally adjusted unemployment rate for Kansas as of June 30 is 3.7% according to the Bureau of Labor Statistics and represents an improvement from 12.6% at the onset of the pandemic in April of 2020. With the recent uptick in COVID cases in the last several months, we continue to closely monitor this situation. Our rural markets, especially our Western Kansas market, have seen notable improvements in employment rates. In May, Kansas Governor, Laura Kelly, jointly announced with a California based cheese company their decision to build a state of the art cheese and whey protein processing plant in our Dodge City, Kansas market. The new facility is expected to create 2 47 new jobs in the local community and 750 new jobs for the regional economy. Kansas continues to be an attractive market for investment. Partially driven by historically low interest rates, home sales across Kansas have remained strong. According to the Kansas Association of Realtors May 2021 Housing Market Statistics report, home sales in Kansas rose by 19.3% in May compared to the same period last year. Home prices continued to increase across the state. The statewide average sale price in May was up 20.9% compared to a year earlier. Supply remains very low at a time when demand remains strong. The Wall Street Journal and realtor.com in their most recent emerging housing market index report ranked our state capital of Topeka, Kansas as the number one market in the state and number 11 in the country. This is the 2nd time Topeka has been ranked as the number one market in the state by The Wall Street Journal based on their real estate market data, economic health and quality of life. Switching to our ag economy, the United States Department of Agriculture recently reported favorable crop conditions across the state. Winter wheat harvest is approximately 96% complete. Corn and soybean crop conditions were also rated as favorable. While we saw cattle prices moderate through most of the Q2, we've seen stronger price support during July. Overall, we believe agricultural conditions in Kansas remain favorable. And with that, I thank you, and I will turn the call back over to Michael. Thank you, Raymond, and Mark, thanks for your earlier comments. Before we go to questions, I want to summarize by saying our Q2 of 2021 reflected a continued trend of very positive operating results for Landmark. I want to express my thanks and appreciation to all of the associates at Landmark National Bank. Their daily focus on executing our strategies, delivering extraordinary service to our clients and communities and carrying out our company vision that everyone starts as a customer and leaves as a friend is the key to our success. With that, I'll open the call up to questions that anyone might have. Our first question today comes from John Lewis with FIG Partners. Hey, good morning, guys. Hey, good morning, John. Thanks for the color. Very helpful. Maybe, Michael, just a question for you on sort of your loan growth outlook, excluding PPP loans, you showed solid growth this quarter sort of mid single digits if you analyze the growth. And over the past year, it looks like sort of core loans excluding PPP are up 9%. Do you sort of you think going forward sort of the mid single digit growth rate, if not a little bit better, is still achievable based on what you're seeing? Yes, John, that's really our target from the standpoint of the model that we want to pursue is in that mid single digit growth. And we've been able to we've seen good activity really across the entire geography. I think the other thing that supports that is we've been able to continue to recruit additional commercial banking talent to join the company, particularly in the metro market of Kansas City. And we think that will the strategies that we've employed, we believe will support that kind of budget forecast from a loan growth standpoint. And can you maybe just give an update on sort of those new lender, new hires over the last couple of quarters? We've added expertise in treasury management and then some additional expertise in the commercial real estate sector from the standpoint of loan opportunities. And both of those have a focus or a history of commercial banking in the Kansas City metro area. Okay. Thank you, guys. Thanks, John. Seeing no further questions, I'd like to turn the call back over to Michael Schechner for any closing remarks. Thank you. And I do want to thank everyone for participating in today's earnings call. I truly do appreciate your continued support and the confidence that you have in the company. I look forward to sharing news related to our Q3 2021 results at our next earnings call. Thank you.