Landmark Bancorp Inc (LARK) 2020 Q3 法說會逐字稿

Good day and welcome to the Landmark Bancorp Q3 earnings call. (Operator Instructions) Please note this event is being recorded. I would like now to turn the conference over to Michael Scheopner. Please go ahead.

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 2020. Joining the call with me to discuss various aspects of our third quarter performance is Mark Herpich, Chief Financial Officer of 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.

With respect to our 2020 third quarter performance, we reported net earnings of $5.4 million or $1.20 per share on a fully diluted basis. This represented a record quarter for the company. Year-to-date, net earnings totaled $13.9 million. Our third quarter earnings benefited from an increase of $2.9 million in gains on sales of loans as the continued low mortgage interest rate environment drove an active housing market and refinance activity.

In addition, we continued a strategic liquidation of our higher coupon mortgage-backed investment securities based on the market conditions, resulting in a $678,000 gain on sale of investments. As a result of continued economic uncertainty surrounding the impact of COVID-19 on our loan portfolio, as well as year-to-date net loan growth, we recorded a $1 million provision for loan losses in the third quarter, which brings our year-to-date provision to $2.6 million.

Year-to-date, in 2020, our return on average assets calculates to 1.71%, and return on average equity was 16.19%. Landmark's COVID-19 pandemic response plan remains in place and continues to be focused foremost on the safety and well-being of our customers and associates. During this period of unprecedented economic uncertainty, we supported our customers with loan modifications and access to funding through the Small Business Administration's Paycheck Protection Program. As of September 30, 2020, we assisted 1,095 customers in securing approximately $131 million of PPP funding with an average loan size of $120,000. We are currently actively working with these borrowers as they navigate the SBA loan forgiveness process.

We are also pleased to report that COVID-19 load modifications have declined significantly, with most of our borrowers returning to their loan contracted terms. 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 across Kansas during this challenging time.

I am pleased to report that our Board of Directors has declared a cash dividend of $0.20 per share to be paid November 25, 2020, to shareholders of record as of November 11, 2020. This represents the 77th consecutive quarterly cash dividend since the company's formation resulting from the merger of Landmark Bancorp Inc. with MNB Bancshares, Inc. in October 2001. The Board also declared a 5% stock dividend to be issued December 16, 2020, to shareholders of record on December 2, 2020. This represents the 20th 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.

Before I turn the call over to Mark, I want to 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. Each of these associates have taken their role as part of the nation's critical infrastructure sector seriously, and I am proud of the way that they have responded. They have focused daily on executing our strategies, delivering extraordinary service to our clients and carrying out our company vision that everyone starts as a customer and leaves as a friend.

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 third quarter and 9 months ended September 30, 2020. And now I would like to make a few comments on various elements comprising those results.

Starting with highlights of the third quarter income statement, net interest income was $9.3 million, an increase of $1.6 million or 21% in comparison to the prior year's third quarter. The improvement in net interest income built upon a $136.9 million or 15% increase in average interest-earning assets to $1.048 billion in comparison to the prior year third quarter period. This growth was entirely attributable to loan growth of $191.2 million or 36.1% as our average investment balance actually declined by $73.3 million. The loan growth was impacted significantly by our SBA PPP loans, which totaled $131 million at September 30.

In addition, Landmark's net interest margin on a tax-equivalent basis improved to 3.6% in the third quarter of 2020 as compared to 3.44% 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 1.01% in the third quarter of 2019 to 0.27% in the current quarter.

Our loans-to-deposit ratio increased 76% as of September 30, 2020, as compared to 53.7% as of December 31, 2019. Looking at our provision for loan losses, our analysis resulted in providing $1 million to the allowance for loan losses in the third quarter of 2020 as compared to $400,000 in the third quarter of 2019. On a year-to-date basis, as Michael mentioned earlier, our 2020 provision for loan losses is $2.6 million in comparison to $1 million in the first 9 months of 2019. The provision for loan losses on loans reflects loan growth and 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.

Noninterest income increased $8.2 million for the third quarter of 2020 compared to $4.6 million for the same period of 2019. The primary driver of the increase in noninterest income was related to a $2.9 million increase in gains on sales of loans relating to the increased volume of 1-4 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 third quarter of 2020. Also contributing to this increased level of noninterest income was $678,000 of gains on sales of investment securities as we sold $15.7 million of higher coupon mortgage-backed securities during the third quarter of 2020 after comparing market prices to the risks of accelerating prepayment speeds.

Noninterest expenses increased by $904,000 or 10.5% to $9.5 million in the quarter compared to the third quarter of 2019. This was driven by an increase of $881,000 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 21.5% in the current quarter, up from 18.2% in the third 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 9 months of 2020. Our net earnings of $13.9 million represented a record 9-month period for Landmark, and exceeded the comparable period of 2019 by $6.5 million. These results were driven by our improvement in net interest income of $4 million as compared to the first 9 months of 2019. $2.4 million in investment securities gains and a $6 million increase in gains on sales of mortgage loans as a result of the significant drop in interest rates during 2020.

In the first 9 months of 2020, net interest income grew to $26.4 million, up 18.1% from a year earlier, as a result of average interest-earning assets increasing 9.9% from $898.5 million during the first 9 months of 2019 to $987.4 million during 2020. Consistent with my comments earlier on the third quarter, net interest margin benefited significantly from a $136.2 million increase in average loan balances, $78.1 million of which was related to PPP loans on a comparable 9-month period basis, resulting in our net interest margin on a tax-equivalent basis improving from 3.43% in the first 9 months of 2019 to 3.66% in the corresponding period of 2020.

Noninterest income totaled $20.5 million for the first 9 months of 2020, or an increase of $8.7 million or 73.7% from the prior year period. This results primarily from an increase of $6 million in gains on sales of loans and $2.6 million in gains on sales of investment securities, as we sold approximately $61 million of our higher-coupon mortgage-backed investment securities during the first 9 months of 2020. These sales were based on our evaluation of the risks associated with accelerating prepayment speeds to the market price on this portion of our investment portfolio.

Looking at noninterest expense. We reported an increase of 10% or $2.4 million for the first 9 months of 2020 in comparison to the same period of 2019. Consistent with my third quarter comments, this increase primarily relates to a $2.3 million increase in comp and benefits related to our increased mortgage loan volumes and to a lesser extent our commercial loan growth over the past year as we added employees in this area and general increased compensation costs. The effective tax rate increased from 16.2% in the first 9 months of 2019 to 20.8% in the first 9 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 $150.5 million to $1.1 billion at September 30, 2020, compared to $998.5 million at December 31, 2019. Our loan portfolio was the driver of our increase in total assets, as loans increased $196 million to $728.2 million at September 30, 2020, from $532.2 million at year-end 2019. While our investment securities decreased $62.1 to $304 million at September 30, 2020, from $366.1 million at December 31, 2019.

Deposits increased $122.9 to $957.9 million at September 30, 2020, compared to $835 million at year-end 2019. Additionally, our Federal Home Loan Bank and other borrowings increased $7.9 to $50.1 million at September 30, 2020, compared to $42.2 million at December 31, 2019.

Stockholders' equity increased to $121.9 million at September 30, 2020, or a book value of $27.02 per share, up from $108.6 million at December 31, 2019, or a book value of $23.62 per share. The increase in book value was primarily a result of net earnings and an increase in the fair value of available-for-sale investment securities, which were offset by our purchase of $2.3 million worth of shares of our outstanding stock during the first 9 months of 2020. Our consolidated and bank capital ratios as of September 30, 2020, continue to exceed the levels considered well-capitalized. The bank's leverage capital ratio was 10.2% at September 30, 2020, while the total risk-based capital ratio was 16.9%.

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 September 30, 2020, totaled $728.2 million, of which PPP loans comprised $131 million. Nonperforming loans, which primarily consist of loans greater than 90 days past due, totaled $6.3 million or 0.86% of gross loans as of September 30, 2020. This represents an increase from year-end 2019 levels of $5.5 million or 1.03% of gross funds.

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 to 89 days. The level of past-due loans between 30 and 89 days still accruing interest totaled $3.7 million or 0.5% of gross loans as of September 30, 2020. This ratio has decreased from 0.64% of gross loans as of December 31, 2019, as we continue to monitor delinquency trends carefully in all loan categories.

Our balance in other real estate owned totaled $1.5 million as of September 30, and the other real estate owned balances are being marketed for sale. We recorded net loan charge-offs of $701,000 during 2020, up from $486,000 for the same period in 2019.

I'll now turn the call back over to Michael to review our loan portfolio segments and the credit risk outlook for the company.

Thank you for your comments, Mark. As Mark noted, net loans outstanding as of the end of the third quarter 2020 totaled $728.2 million. This is a 36.8% increase from our year-end 2019 net loan total of $532.2 million. PPP loans made up $131 million of the net loan total. Year-to-date commercial loan growth, excluding the PPP volume is $65 million or 12.2%.

And as of September 30, 2020, our construction and land loan portfolio balances totaled $28 million or 3.8% of our total loan portfolio. Outstanding loan balances in our commercial real estate portfolio totaled $154.8 million, representing 20.9% of our total loan portfolio.

Construction and industrial loans were $268.3 million as of September 30, or 36.3% of the portfolio. This includes the $131 million in PPP loans. With regard to our agricultural loan portfolio, total balances were $99 million or 13.4% of our total loan portfolio as of the end of the third quarter. And our mortgage 1-4 family loan portfolio represented 22% of the portfolio as of 162 -- at $162.3 million as of September 30, 2020.

As I noted in my opening comments, our mortgage banking activity during this year has been extremely strong, driven by historically low loan rates. As of the end of September 2020, our single-family loan production totaled approximately $328.3 million. Production volume has been equally split this year, 50% purchase money transactions versus 50% refinance activity. Our mortgage pipeline levels remain elevated, and we anticipate significant production volumes extending through the end of this year.

As previously noted, we recorded a $2.6 million provision for loan losses during the first 3 quarters of this year based on the continued economic uncertainty surrounding the impact of COVID-19 on our loan portfolio as well as year-to-date net loan growth. 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 clients' capital and liquidity needs. As of September 30, we have provided modifications to 33 loans, representing $22.9 million. Additionally, as of the same date, only 3 borrowers with aggregate loans outstanding of $6.8 million were granted a second deferral.

As of September 30, 2020, 107 loans with outstanding balances of $35.7 million had reached the end of their deferral periods and returned to their respective contractual payment terms. Consistent with the CARES Act and regulatory guidance, the company also entered into short-term forbearance plans and short-term repayment plans on 8 1-4 family residential mortgage loans totaling $982,000 as of September 30, 2020.

Before we go to questions, I want to summarize by saying 2020 has contained 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'll open the call up to questions that anyone might have.

(Operator Instructions) As there are not currently any questions, 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 for participating in today's earnings call. I appreciate your continued support and confidence in the company, and I look forward to sharing news related to our year-end 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.