Landmark Bancorp Inc (LARK) 2021 Q3 法說會逐字稿

Thank you, and good morning. Thank you for joining our call today to discuss Landmark's earnings and results of operations for the third quarter and year-to-date 2021.

Joining the call with me to discuss various aspects of our third quarter performance is Mark Herpich, Chief Financial Officer of the company; and the company's Chief Credit Officer, Raymond McLanahan.

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.

We are pleased to report continued solid earnings during the third quarter of 2021 driven mainly by our growth in core lending, solid credit metrics and strong capital. Third quarter 2021 net earnings amounted to $4.5 million. Year-to-date 2021, net earnings totaled $14.9 million and resulted in earnings per share on a fully diluted basis of $3.12. The return on average assets year-to-date 2021 was 1.59%, and the return on average equity was 15.23%.

We continue to see a reduction in our Paycheck Protection Program loans this quarter as they are being forgiven by the Small Business Administration. Excluding these loans, our loan portfolio increased $12.1 million or 7.7% from solid growth in both our commercial and commercial real estate loan portfolios. While gains on sales of loans this quarter are down from the same quarter of last year, mostly the result of the tight housing supply in our markets and reduced refinancing activity, but nevertheless, are a significant portion of our noninterest income, which we can count on in the future.

Credit quality remained strong this quarter. The allowance for loan losses totaled $8.8 million at September 30, 2021, and there was no provision for loan losses this quarter. Our capital and liquidity positions remained strong, with total equity assets of 10.79% and loans to deposits of 61.6%. We believe Landmark's risk management practices, liquidity and capital strength continue to position us well to meet the financial need for families and businesses in our markets.

I'm pleased to report that our Board of Directors have declared a cash dividend of $0.20 per share to be paid November 24, 2021, to shareholders of record as of November 10, 2021. This represents the 81st consecutive quarterly cash dividend since the company's formation in 2001. The Board also declared a 5% stock dividend to be issued December 15, 2021, to shareholders of record on December 1, 2021. This represents the 21st consecutive year that the Board has declared a 5% stock dividend, a continued demonstration of our long-term commitment to support growth in value and liquidity for our shareholders.

I will now turn the call over to Mark Herpich, our CFO, who will review the financial results with you.

Thanks, Michael, and good morning to everyone. Michael has already alluded to our continued strong core net earnings for the third quarter ended September 30, 2021. And now I would like to make a few comments on various elements comprising those results.

Starting with earnings highlights for the third quarter, net interest income was $9.6 million, an increase of $346,000 or 3.7% in comparison to the prior year's third quarter. While on a linked quarter basis, our net interest income was down by $367,000. The growth in net interest income from the third quarter last year was the result of an increase in loan interest of $463,000, coupled with lower deposit costs, but offset by lower interest earned on investment securities. The decline in net interest income from the prior quarter was mainly due to a decline in loan interest of $379,000.

Compared to the same quarter last year, the increase in interest income on loans was mainly the result of an increase in interest on PPP loans, which totaled $1.6 million in the current quarter compared to $832,000 in the third quarter of last year. Also, average loans, excluding PPP loans, grew by $37.6 million this quarter over the same period last year. Compared to our prior quarter, the decline in loan interest was mainly due to a decline in interest on PPP loans of $600,000, partly offset by higher average loans this quarter.

The average tax equivalent yield on the loan portfolio was 5.03% in the current quarter compared to 4.42% in the same period last year and 5.00% last quarter. Interest income on investment securities decreased $229,000 this quarter compared to the same period last year, mostly due to lower rate earned, offset by growth in average balances, which grew by $49.7 million. The yield on investment securities declined from 2.54% in the third quarter of 2020 to 1.86% in the current quarter.

Interest cost on interest-bearing deposits totaled 13 basis points in the current quarter compared to 20 basis points from the third quarter last year. Interest expense on deposits declined $96,000 from the third quarter last year, mostly due to lower rates, offset by growth in average balances of $78.8 million in interest-bearing deposits.

Landmark's net interest margin on a tax equivalent basis decreased to 3.36% in the third quarter of 2021 as compared to 3.54% in the second quarter of 2021 and 3.60% in the third quarter of last year. Our net interest margin remained strong from an industry standpoint, and our loan-to-deposit ratio, which totaled 62% at September 30, 2021, remains low, giving us plenty of opportunities to fund new loan growth.

Based on our analysis, we did not make a provision to the allowance for loan losses in the third quarter of 2021, and this was consistent also with the second quarter of 2021. The provision for loan losses reflects our best estimate of the economic environment, especially considering the effects of the pandemic on our credit results.

At September 30, 2021, the ratio of our loan loss reserve to gross loans, excluding the impact of the $28.7 million in PPP loans, was 1.38%. As the economic outlook evolves and more pandemic-related loss experience develops, we will continue to adjust our allowance for credit losses and provisioning accordingly.

Noninterest income totaled $5.5 million this quarter, decreasing $2.7 million compared to the third quarter of 2020, and while remaining almost identical to the prior linked quarter. The decrease in noninterest income over the same period last year was mainly due to a decline of $2.3 million in sales of one-to-four family real estate loans that the bank originated.

During the third quarter, higher interest rates, coupled with a lack of housing inventory in our markets, slowed purchase and refinancing activities as compared to the third quarter last year when mortgage activity was extremely strong. This decline in gains on sale of loans was offset by an increase over the same quarter last year of $146,000 in fees and service charge income, primarily due to increased interchange revenue and loan servicing fees.

The decline in noninterest income was also impacted by a gain of $678,000 on the sale of higher coupon mortgage-backed securities in the third quarter of 2020, when the third quarter of 2021 only included $30,000 of gains on sales of low balance mortgage-backed investment securities.

Noninterest expense for the third quarter of 2021 totaled $9.4 million or a decrease of approximately 1% over the same period last year and was $253,000 higher than the prior quarter. The decrease over the third quarter of 2020 was driven by a decline in compensation and benefits primarily related to lower mortgage lending activities but offset by an increase in other noninterest expense relating to costs associated with our SBA PPP processing fees and expenses associated with other real estate owned. The linked quarter increase was primarily due to increases in other real estate owned expenses.

The effective tax rate was 19.8% in the current quarter, down from 21.5% in the third quarter of 2020.

To touch on a few balance sheet highlights. Total assets increased $4.1 million during the third quarter to $1.3 billion at September 30, 2021, compared to the prior quarter.

Our gross loans, excluding PPP loans, increased $12.1 million during the third quarter, reflecting an annual growth rate of 7.7% and, as mentioned, was driven by growth in both commercial and commercial real estate lending. Our deposits decreased by $11.1 million during the quarter to $1.1 billion, which, combined with declines of $32.6 million in PPP loans and cash and cash equivalents of $13.7 million, funded growth in investment securities of $34.6 million this quarter.

Stockholders' equity increased $3.1 million this quarter to $135.4 million at September 30, 2021, or a book value, which totaled $28.45 per share, up from $27.83 in the prior quarter.

Our consolidated and bank regulatory capital ratios as of September 30, 2021, are very strong and exceed the regulatory levels considered to be well capitalized. The bank's leverage capital ratio was 10.5% at September 30, 2021, while the total risk-based capital ratio was 18.3%.

I will now turn the call back 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 September 30, 2021, totaled $664.7 million and declined $20.5 million this quarter, mainly due to lower PPP loans in our portfolio.

During the quarter, we continued to successfully assist our customers as they navigated the SBA PPP forgiveness process. That was -- that success resulted in a $32.6 million reduction in our outstanding PPP loans during the quarter.

This quarter, we were successful and recorded a number of new commercial and commercial real estate loans, which helped to offset the decline in PPP loans.

Commercial loans increased $8.1 million during the quarter, while our commercial real estate loans increased $4.4 million during the quarter. This increased loan growth was observed across the Landmark footprint and was a nice mix of new client relationships and expansion of existing relationships. We're very pleased and excited to continue to see growth opportunities in all of our geographical markets.

Non-performing loans, which primarily consists of nonaccrual loans and loans greater than 90 days past due, totaled $9.8 million or 1.48% gross loans as of September 30, 2021. This represents a decline of $3.5 million from the previous quarter, and this decrease is the result of improvement in one large agricultural relationship and the successful collection of one commercial real estate relationship.

Total foreclosed real estate increased $1.2 million to $2.6 million this quarter as a result before closing on one commercial real estate loan, which also reduced total nonaccrual loans. We continue to actively pursue the sale of these properties.

Another indicator that 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 and 89 days still accruing interest remains low and was only 0.23% of gross loans this quarter compared to 0.27% the previous quarter. We continue to monitor delinquency trends carefully across all of our loan categories.

Net loan charge-offs remained low and well controlled this quarter. We recorded net loan charge-offs of $397,000 during the third quarter of 2021 compared to net loan charge-offs of $381,000 during the third quarter of 2020.

The ratio of annualized net loan charge-offs to total average loans was 24 basis points in the current quarter and 21 basis points in the same period last year. During the 9 months that ended September 30, 2021, net loan charge-offs totaled $509,000 compared to $701,000 during the same period in 2020.

In terms of exposure to credit concentrations, we continue to focus on strong portfolio management to maintain a diversified loan portfolio. As of quarter end, our largest 3 portfolio concentrations were commercial real estate loans, which represented 29% of gross loans, one-to-four family residential loans, which represented 24% of gross loans, and commercial loans, which represented 20% of gross loans.

The current economic landscape in Kansas, while still somewhat uncertain, has improved this year. The preliminary seasonally adjusted unemployment rate for Kansas as of September 30 is 3.9% according to the Bureau of Labor Statistics and represents an improvement from an unemployment rate of 12.6% at the onset of the pandemic in April of 2020.

And partially driven by historically low interest rates, home sales across Kansas have remained strong but challenged by lack of available homes for sale.

According to the Kansas Association of REALTORS August 2021 housing market statistics report, home sales in Kansas fell by 1.4% in August compared to a year earlier. Year-to-date sales across the state were up 6.3% compared to last year. Home prices continue to increase across the state. The statewide average sales price in August was up 9.4% compared to a year earlier.

Switching to our ag economy, the United States Department of Agriculture recently reported that corn and soybean harvests are well underway. Harvest conditions remain favorable, and early reports indicate good yields for both corn and soybeans. Cattle prices in Kansas have remained strong throughout the quarter, but uncertainty is increasing within the cattle industry. And while we do not have a significant animal production exposure from a portfolio perspective, we are monitoring some of the headwinds within this segment on our economy.

In September, Kansas' Governor, Laura Kelly, announced that Kansas had received Area Development Magazine's prestigious Golden Shovel Award for 2021, including being recognized on their 20 top states for doing business license. Overall, we believe the health of our Kansas' economy remains strong.

And with that, I thank you, and I will now turn the call back over to Michael.

Thank you, Raymond, and Mark, thank you for your earlier comments also.

Before we go to questions, I want to summarize by saying our third quarter 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 lease as a friend is the key to our success.

With that, I'll open up the call to questions that anyone might have.

(Operator Instructions) Our first question today is from John Rodis from Janney.

Mark, a question for you on the PPP fees. Do you have -- how much of those fees are remaining after this quarter?

I do have that, and I sort of -- thought it'll come out in our queue as well, but -- and we've got about $1.24 million remaining in deferral at the end of the quarter.

And do you guys think that most of the remaining PPP loans run off in the fourth quarter and then maybe some in the first quarter, too?

I definitely think it'll reach into the first quarter next year, John. The pace was going fairly fast through, I'd say, August. And now it's really slowed down. Most of our PPP loans from round one has almost paid off, but now we've still got -- the balance of our $27 million is a large part in our 2021 second wave of PPP loans. And those haven't been paying off quite as fast, but -- so I think I would expect them to go into the first quarter of 2022.

Okay. Okay. Sounds good. Michael, maybe a question or 2 for you. Just you guys put up continued good core loan growth, excluding PPP. Do you still sort of think -- given the outlook you presented, do you think sort of mid- -- maybe mid- to high single-digit loan growth going forward is still achievable?

John, I would say we're still seeing decent activity across the geography from a pipeline standpoint. As we do our modeling, I think that mid-single-digit growth projection is -- continues to be what we will be forecasting.

Okay. And as far as the recent growth by market, is most of it still sort of around the Kansas city area or some of more your rural locations? Are you seeing any growth there?

It's really across the entire footprint, John. We're seeing decent growth opportunities in -- across the entire geography. We continue to invest in human resources and in markets all across the state. And so from the standpoint of commercial lending capacity, we're already seeing it everywhere.

Okay. So you're seeing some opportunities to hire some new lenders, too? Is that sort of what you're alluding to?

Yes. We continue to look for capable commercial bankers that we can add to our team and that has -- we have been successful in that, this year.

Okay. Super. And then, Michael, maybe just one final question, just on M&A. Maybe just your thoughts, your appetite today and the level of conversations that you're seeing.

Nothing tangible to report today, John. I mean the company and the Board will continue to evaluate opportunities to return value to our shareholders. And so we really forward to looking through the -- add opportunities that would be strategic in nature and add value.

And can you just remind me as far as markets, what markets would make the most sense? Would you go outside the state of Kansas and so forth?

Yes. We would go across the state line if we found an attractive candidate that would add to our shareholder value and franchise value. And [changes], I think we'd be pretty surgical in the markets that we would kind of look to expand or growing in Kansas, but we would definitely look at opportunities across the state line if it made sense.

Our next question is from Ross Haberman from RLH Investments.

I just had a quick question on the gain on sale of loans. Two questions. The $2.6 million you booked for the quarter, how much of that do you think falls? Is the pretax number given the associated expenses?

You say how much falls into the pretax?

Yes, given the related fees and commissions and so on and so forth.

About -- I think after you take out compensation and benefits and other expenses, remember that I don't have off the top of my head that we usually haven't reported our business by lines of business, I guess, a little bit purposely from segmentation accounting with our auditors and public reporting. But it's provides us a nice revenue and line of business that goes in, but quantifying is probably a little -- while we have that information hasn't been something we've disclosed. And if we do then, we got to start segmenting our income statement into columns.

No, no. I'm just saying I hear usually from a number of other banks roughly heard some other banks anywhere from 50% to 60% to 70%-ish within that range. Would that be a reasonable guess?

Yes, about (inaudible). I think on the front half line would be about right.

And what's your -- what are you beginning to assume for mortgage volume, I guess, for the fourth quarter and next year? What do you get into to guesstimate for that?

Sure. This is Michael. And I would tell you that we saw continued active refinance activity in the first half of the year. The production pipeline in the third quarter was trending much more normal from a purchase to refi split.

So we would look for activity to be a little more normal for us in the fourth quarter and moving into 2022. From a volume standpoint, our pipeline as we're entering the third quarter have decreased. And to some extent, as I mentioned in earlier comments, a very tight housing supply available in most of our geographies.

So I would guess we still have a decent third quarter from the standpoint of production activity, probably something in the neighborhood of another $70 million, $75 million, $80 million in production activity through the end of the third quarter.

And typically, it slows in the middle of the fourth and into the first quarter. But I would -- if I were to guess on our production values going forward into 2022, I think the pipelines look much more normal and probably back to volume levels that we enjoyed pre-pandemic.

And that was what gross production of what kind of range?

Gross production in the neighborhood of $250 million to $300 million.

Got it. Okay. $250 million, $300 million. Okay. And just one last question. If you do see the 10-year sort of the [meander] to, I don't know, 2% over the next couple of quarters, would that scenario positively affect your spread on your margin?

And it would. Yes. We've got a lot of cash on the balance sheet right now and investments that are maturing in the next couple of years. So we're anxiously maybe would be the right term, awaiting rates to go up so we can reinvest and then potentially see some of the loans not repriced downward any further either as rates go up. We would welcome rates to go up at this point in time.

Nothing further in the queue are present. (Operator Instructions) As we have no further questions, I'll hand back to the management team 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 our company, and I look forward to sharing [as] related to our fourth quarter 2021 results at our next earnings conference call. Thank you.