Landmark Bancorp, Inc. (LARK) Q1 2020 Earnings Report, Transcript and Summary

Good morning, and welcome to the Landmark Corp. Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Michael Scheopner, Chief Executive Officer. Please go ahead, sir.

Thank you. Thank you, and good morning. Thank you for joining our call today to discuss Landmark’s earnings and results of operations for the first quarter ending 2020. Joining the call with me to discuss various aspects of our first 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 by saying our thoughts go out to all those impacted by the coronavirus pandemic. We understand that Landmark plays a vital role as part of the critical infrastructure of our economy. And we take that responsibility seriously. We have seen firsthand the impact that this crisis has had on our clients and communities, and we are committed to helping them through these troubled and uncertain times. I also want to thank all of the associates at Landmark National Bank who have embraced their role as part of the nation’s essential workforce. As part of our pandemic response plan and with the safety and well-being of our associates and customers foremost in mind, we began limiting access to our traditional bank lobby network following the presidential declaration of a national emergency in mid-March. Since that time, we have continued to follow appropriate guidance from the Centers for Disease Control and Prevention and the Kansas Department of Health and Environment. We have a significant portion of our associates working from home, and we have 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 center to handle increased volumes of client questions and to support client access to our digital banking platforms. As a preferred lender with the Small Business Administration, we were able and prepared to immediately respond to help existing and new clients access the Paycheck Protection Program authorized by the CARES Act during these challenging times. As of April 30, we have assisted 739 customers in securing approximately $123.6 million of funding through the Small Business Administration’s Payroll Protection Program. 78% of these loans were for existing Landmark clients, with the remaining loans provided to new Landmark customers. Similar to my earlier comment, we repositioned internal resources to support our response to the SBA PPP effort. Now as I move on to our 2021 quarter performance, we reported net earnings of $3.4 million or $0.73 per share on a fully diluted basis. This represented a record quarter for the company. Earnings were positively impacted by a $1.8 million gain on sale of investment securities as we strategically decided to liquidate higher-coupon mortgage-backed investments based on market conditions in early March. During the first quarter, we recorded a $1.2 million provision for loan losses, primarily as a result of the projected economic impact of COVID-19 on our loan portfolio. Our first quarter 2020 return on average assets calculates to 1.35%, and return on average equity was 12.21%. Mark will provide additional detail on Landmark’s financial performance and asset quality metrics later in the call. I am pleased to report that our Board of Directors has declared a cash dividend of $0.20 per share to be paid June 10, 2020, to shareholders of record as of May 27, 2020. This represents the 75th 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 quarter 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 consistent with our vision that everyone starts as a customer and leaves as a friend. Your 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. 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 first quarter ended March 31, 2020. And now I would like to make a few comments on various elements comprising those results. Starting with highlights of the first quarter income statement. Net interest income was $8.1 million, an increase of $906,000 or 12.6% in comparison to the prior year’s first quarter. The improvement in net interest income built upon a $29.4 million or 3.3% increase in average interest-earning assets to $912.4 million in comparison to the prior year first quarter period. This growth was entirely attributable to loan growth of $55.2 million or 11.2% as our average investment balance actually declined by $28.2 million. In addition, Landmark’s net interest margin on a tax equivalent basis improved to 3.67% in the first quarter of 2020 as compared to 3.41% 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 investment as a proportion, while our overall cost of interest-bearing liabilities declined from 0.98% in the first quarter of 2019 to 0.71% in the current quarter. Our loan-to-deposit ratio increased to 66.7% as of March 31, 2020, as compared to 59.7% as of March 31, 2019. Looking at our provision for loan losses. Our analysis resulted in providing $1.2 million to the allowance for loan losses in the first quarter of 2020 as compared to $200,000 in the first quarter of 2019. The increase in the provision for loan losses reflects our best estimate of the future 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 to $5.4 million for the first quarter of 2020 compared to $3.3 million for the same period of 2019. The primary driver of the $2.1 million increase in noninterest income was related to $1.8 million in 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 of the risks associated with accelerating prepayment speeds to the market prices on this portion of our investment securities portfolio. Our core banking business also contributed to the increase in noninterest income with a $273,000 increase in fees and service charges, primarily related to deposit accounts. Noninterest expenses increased by $379,000 or 4.9% to $8.1 million in the quarter compared to the first quarter of 2019. This was primarily driven by an increase of $439,000 in compensation and benefits related in part to our commercial loan growth over the past year as we added employees in this area and also to general increased compensation costs. The effective tax rate was 18.9% in the quarter and 13.5% in the first 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 period. Let’s touch on a few balance sheet highlights. Total assets decreased $9.4 million to $989.1 million at March 31, 2020, compared to $998.5 million at December 31, 2019. Our loan portfolio increased $21.5 million to $553.7 million at March 31, 2020, from $532.2 million at year-end 2019, while our investment securities decreased $48.3 million to $317.8 million at March 31, 2020, from $366.1 million at December 31, 2019. Deposits decreased $4.5 million to $830.5 million at March 31, 2020, compared to $835.0 million at year-end 2019. Additionally, our Federal Home Loan Bank and other borrowings decreased $11.3 to $30.9 million at March 31, 2020, compared to $42.2 million at December 31, 2019. Stockholders’ equity increased to $111.1 million at March 31, 2020, or a book value of $24.64 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 $2.0 million of shares of our outstanding stock during the first quarter of 2020. Our consolidated and bank regulatory capital ratios as of March 31, 2020, continue to exceed levels considered well capitalized. The bank’s leverage capital ratio was 10.8% at March 31, 2020, while the total risk-based capital ratio was 16.9%. I would now like to provide some additional details on our asset quality within our loan portfolio. As I mentioned earlier, net loans outstanding as of March 31, 2020, totaled $553.7 million. Nonperforming loans, which primarily consist of loans greater than 90 days past due, totaled $7.6 million or 1.35% of gross loans as of March 31, 2020. This represents an increase from the 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 to 89 days. The level of past due loans between 30 and 89 days and still accruing interest totaled $2.7 million or 0.48% of gross loans as of March 31, 2020. This ratio has decreased from 0.64% of gross loans as of December 31, 2019. Thus while our nonperforming or nonaccrual loans experienced an increase from December 31, our delinquent loan totals declined during the first quarter of 2020. We continue to monitor delinquency trends carefully in all loan categories. Our balance in other real estate owned totaled $570,000 as of March 31, and the other real estate owned balances are comprised of residential houses, which are being marketed for sale. We recorded net loan charge-offs of $188,000 during the first quarter of 2020, up from $27,000 for the same period of 2019. I will now turn the call back over to Michael to review our loan portfolio segments and the credit risk outlook.

Thank you for your comments, Mark. As Mark noted, net loans outstanding as of the end of the first quarter 2020 totaled $553.7 million. This is a $21.5 million or 4.1% increase from our year-end 2019 net loan total of $532.2 million. As of March 31, 2020, our construction and land loan portfolio balances totaled $24.7 million or 4.4% of our total loan portfolio. Outstanding loan balances in our commercial real estate portfolio totaled $141.7 million, representing 25.3% of our total loan portfolio. Commercial and industrial loans were $121.3 million as of March 31, 2020, or 21.6% of the current portfolio. The strong increase in our commercial lending contributed significantly to our overall loan growth. With regard to our agricultural loan portfolio, total balances were $96 million or 17.1% of our total loan portfolio as of the end of the first quarter. Our mortgage one-to-four family loan portfolio represented 26.6% of the portfolio at $149 million as of March 31. With respect to our first quarter mortgage banking activity, single-family loan production totaled approximately $50 million. Mortgage pipeline activity at the end of the quarter reached record levels as the interest rate environment fell, prompting significant home loan refinance activity. As we have historically done, the majority of these one-to-four family loans are sold into the secondary market. The overall impact of the COVID-19 pandemic on our loan portfolio is yet to be seen. Much will depend on the duration of the economic uncertainty, but it is certain that our clients and their business operations have been negatively impacted. As previously noted, we recorded a $1.2 million provision for loan losses during the first quarter, and we may need to make additional increases to our provision for loan losses in future periods. In addition to the SBA PPP effort that I previously noted, we are working with our clients who have requested payment deferrals or loan modifications on a case-by-case basis, so that these solutions are specific to their capital and liquidity needs. As of April 30, we have provided modifications to 111 loans, representing $43.5 million. 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 quarter of 2020 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] Our first question comes from John Rodis, Janney.

Good morning guys, hope you are doing well.

Good morning. Thank you.

Michael, maybe a question for you. Just you talked about the loan portfolio and you’ve seen other banks kind of break out their maybe higher risk piece of the portfolio, like hotel, restaurant exposure. Can you give us any detail on that?

Yes. We’ve done the concentration analysis with regard to the portfolio. And with respect to the modifications that we’ve looked at, I believe markets no more than 3% of the portfolio is involved in any one of the specific mix concentrations. And as it relates to overall portfolio risk, our concentration management has been pretty disciplined in the past. Our exposure in the hotel or restaurant -- the accommodations or restaurants mix category is -- our total portfolio is just under $38 million in that category. So we’ve had a pretty modest risk concentration. Our risk management effort has been pretty aggressive with respect to that. Really, as we look at the entire portfolio, there has been no one sector that has been specifically -- that we’re seeing a specific concentration in at this point.

Okay. So $38 million total for hotel plus restaurant?

Yes. That would be the entire total for that.

That’s not the number currently modified.

Yes. That’s the net number as far as the total number. The modifications in that sector would be a little over $8 million of that at this point in time.

You’ve modified $8 million of the $38 million.

Right.

Okay. Can you maybe just give a big picture or sort of an update on -- at the ag industry within your markets and stuff?

Yes. I don’t know that we’ve seen significant deterioration or change in that sector. Obviously, the packing plants have been impacted negatively by COVID, and that’s impacting some of the pricing relative to the commodity pricing. But at this point, as we’ve looked at our individual portfolio and our -- the borrowers within our portfolio, they seem to be withstanding all of those impacts at this point in time. And again, that’s -- we’ve got a portfolio from an agribusiness standpoint that’s diversified across Southwest and Southeast Kansas large to small agribusiness operators. So at this point, it -- they seem to be weathering things pretty good at this point.

Okay. Maybe just one other -- 1 or 2 more questions. Just obviously, you saw strong loan growth in the first quarter, looks like mostly commercial and commercial real estate. What are your sort of thoughts going into the second quarter, third quarter? I mean potential for a pretty dramatic slowdown, I guess, just given the current environment?

Yes. I think that’s fair. We’d see at best a slowdown. I mean we’ve got a little bit of activity that was still in the pipeline as we ended the first quarter and into the second quarter on credits that from a quality standpoint, we still feel comfortable with the commitments that we made on those credit exposures as we move into the second quarter. But as we forecast -- our growth template forecast for 2020 in the commercial loan growth category was mid-single digits. And I would guess that we would be -- retract from that just a little bit as we look at the remainder of this year.

Okay. And then maybe just final question. On the buyback, are you guys still active? Or are you guys sort of on hold like most banks?

We’re probably evaluating that one, John, and probably a little on hold. We do have the authorization to do it. We’d had a plan out during the blackout period, which has ended. And so at this point in time, we’re more evaluating it. We’re watching where our stock price goes and what the economy outlook continues to show as we learn more over the next month or two.

Okay, be safe guys. Thank you.

All right. Thank you so much.

And John, one follow-up to Michael’s comment on the loan growth. I mean absent the PPP loans that we’ve put on, I mean, we will have loan growth due to that. But absent that, I think Michael’s comments are spot on.

Okay. I understood. Thank you.

[Operator Instructions] 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 do want to thank everyone for participating in today's earnings call. I truly appreciate your continued support and confidence in the company. And I look forward to sharing news related to our second 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 your lines. Have a good day.