Landmark Bancorp Inc (LARK) 2021 Q2 法說會逐字稿

Good morning and welcome to the Landmark Bancorp Second Quarter 2021 Earnings Call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Michael Scheopner, 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 second quarter and year-to-date 2021. Joining the call with me to discuss various aspects of our second quarter 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-K 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 second quarter of 2021, driven mainly by increased net interest income, lower credit costs, continued solid mortgage banking activities and good expense control. Second quarter 2021 net income amounted to $5 million. Year-to-date 2021 net income totaled $10.3 million 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% and return on average equity was 16.22%. Excluding the SBA PPP loans, our gross loans grew by $10.6 million or 6.9% annualized during the second quarter due mainly to growth in commercial real estate and residential real estate loans.

Total deposits increased $6.5 million 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 2001.

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 alluded to our continued strong net earnings for the second quarter ended June 30, 2021. And looking back a year, during our 2020 second quarter earnings call, we noted that last year's net earnings of $5.1 million was the highest quarterly earnings Landmark Bancorp had ever reported. This year, our 2021 second quarter earnings of $5.0 million 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 earnings highlights for the second quarter, net interest income was $10.0 million, an increase of $1.0 million or 10.7% in comparison to the prior year second quarter. While on a linked quarter basis, our net interest income was up by $389,000. The growth in net interest income from the second quarter last year was the result of an increase in loan interest of $1.1 million, 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 $2.2 million this quarter compared to $665,000 in the second quarter 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 $155.8 million or 15.6% over the same period last year and was funded by strong deposit growth of over $134 million over the same period. Average loans grew by $35.7 million or 5.3% this quarter over the same period last year despite a decrease of $5.3 million in average SBA PPP loans outstanding during the comparable quarters. Our average investment securities and interest-bearing cash balances increased by $120.1 million from the same period last year as we are letting declines in loans and increases in deposits to be kept in cash for investment securities.

Landmark's net interest margin on a tax equivalent basis increased to 3.54% in the second quarter of 2021 as compared to 3.51% in the first quarter of 2021 and still remains strong from an industry standpoint. In comparison to the prior year's second quarter net interest margin of 3.72%, 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 second quarter of 2021 compared to $500,000 in the first quarter of 2021. The provision for loan losses on loans reflects our best estimate of the economic environment considering the effects of COVID-19. At June 30, 2021, the ratio of our loan loss reserve to gross loans, excluding the impact of the $61.2 million 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 $5.5 million this quarter, decreasing $1.5 million compared to the second quarter of 2020 and $1.3 million lower than the prior linked quarter. The primary driver of the decrease in non-interest income over the same period last year was due to lower revenue of $2.0 million from sales of one-to-four 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 second quarter 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 $1.3 million decline in non-interest income compared to the prior quarter resulted primarily from a gain of $1.1 million on the sale of higher coupon municipal investment securities in the first quarter of 2021. By the second quarter of 2021 only included $33,000 of gains on the sale of low balance mortgage-backed investment securities. Non-interest expense for the second quarter of 2021 totaled $9.2 million 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 second quarter of 2020 was driven by an increase in other non-interest expense relating to costs associated with our SBA PPP origination and forgiveness processes. The linked quarter increase was primarily driven by increases in compensation and benefits expense. The effective tax rate was 20.5% in the current quarter, down from 21.2% in the second quarter of 2020.

Touch on a few balance sheet highlights. Total assets increased $1.6 million during the second quarter to $1.3 billion at June 30, 2021 compared to the prior quarter. Our gross loans, excluding PPP loans, increased $10.6 million during the second 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 $6.5 million during the quarter to $1.1 billion, which combined with a decline of $56.1 million in PPP loans funded growth in both investment securities of $23.0 million and cash and cash equivalents of $21.9 million this quarter.

Stockholders' equity increased to $132.4 million at June 30, 2021 or a book value of $27.83 per share, up from $128.3 million at March 31, 2021 or a book value of $26.97 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% 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 $685.2 million. This represents a decrease of $45.5 million or 6.2% from the previous quarter end gross loan total of $730.7 million. Throughout the first half of 2021, we've helped several business clients successfully navigate the SBA Paycheck Protection Program. And as you will recall, we originated $131.3 million in SBA PPP loans during 2020. And as of December 31, 2020, our outstanding SBA PPP loans totaled $100 million.

In contrast, during the first half of 2021, we originated $55 million 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 in the 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 $56.1 million 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 second round of funding. Approximately $5.5 million of our 2021 SBA PPP loans were to agricultural borrowers. We believe this additional liquidity for our agricultural customers resulted in a $2.8 million decrease in our agricultural loans during the quarter. These quarterly decreases were partially offset by increases in our one-to-four family mortgage and our commercial real estate loan portfolios.

Commercial real estate loans increased $9.3 million during the quarter, while our one-to-four family mortgage loans increased $2.8 million during the quarter. And as we said earlier, excluding SBA PPP loans, gross loans grew by $10.6 million 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 $13.3 million or 1.94% of gross loans as of June 30, 2021. This represents an increase from the previous quarter end level of $11 million or 1.51% of gross loans. This increase is the result of continued delinquency of one previously identified agricultural loan.

At the end of the quarter, legal collection efforts were underway for 3 of our nonperforming borrowers, which combined totaled $4.3 million in non-accrual loans. We believe notable improvements in these totals are likely over the next 2 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 and 89 days still accruing interest totaled $1.9 million or 0.27% of gross loans as of June 30, 2021, representing a decrease of $3.1 million during the second quarter of 2021.

We continue to monitor delinquency trends carefully across all loan categories.

Total foreclosed real estate amounted to $1.4 million as of June 30, 2021, a decrease from $1.5 million 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 second quarter of 2021 compared to net loan charge-offs of $132,000 during the second quarter 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 3 portfolio concentrations were commercial real estate loans, which represented 27.6% of gross loans, one-to-four family residential real estate loans, which represented 23.7% of gross loans and commercial loans, which represented 18.6% of gross loans. Our COVID impacted loan modifications declined again this quarter. Currently, only 1 commercial real estate loan totaling $3.8 million, representing a single hotel property remains in some form of COVID deferral. And as hotel occupancies improved over time, our hope is that this loan will migrate back to its originally contracted repayment amount sometime in early 2022. Additionally, only 1 small one-to-four 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 weigh protein processing plant in our Dodge City, Kansas market. The new facility is expected to create 247 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 continue 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 #1 market in the state and #11 in the country. This is the second time Topeka has been ranked as the #1 market in the state by the Wall Street Journal based on the 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 second quarter, 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 second 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 leaves as a friend is the key to our success.

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

(Operator Instructions) Our first question today comes from John Rodis with FIG Partners.

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, were up 9%. Do you sort of -- do 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?

Yeah, 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 as we've been able to continue to recruit additional commercial banking talent to join the company, particularly in the metro market in 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?

Now, 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.

(Operator Instructions) Seeing no further questions. I'd like to turn the call back over to Michael Scheopner 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 third quarter 2021 results at our next earnings call. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.