Landmark Bancorp, Inc. (LARK) Q4 2020 Earnings Report, Transcript and Summary

Good day, and welcome to the Landmark Bancorp Fourth Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like 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 fourth quarter and fiscal year ending 2020. Joining the call with me to discuss various aspects of our 2020 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 first want to take this opportunity to thank all of our associates at Landmark National Bank. The challenges that were faced by our associates in 2020 resulting from the COVID-19 pandemic were truly unprecedented. Their response to these challenges and our ability to work with our clients as they dealt with the economic uncertainty presented by the pandemic is something that I am very proud of and I feel honored to be a member of this team. Each associate at Landmark took their role as part of the nation's critical infrastructure sector seriously. 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 was an integral part of our 2020 record performance. We are pleased to report that Landmark achieved record results for the fourth quarter and the full year of 2020. We reported record net earnings of $5.6 million for the fourth quarter and record net earnings of $19.5 million for the year ending 2020. The fourth quarter earnings were $1.18 per share on a fully diluted basis, while year-end earnings totaled $4.10 per fully diluted share. Our 2020 return on average assets calculates to 1.77% and return on average equity was 16.70%. Our 2020 earnings benefited from increased gains on sales of loans, as the continued low mortgage interest rate environment drove an active housing market and refinance activity. In addition, our community banking relationships across the state of Kansas generated strong growth in earnings, as our loans grew by 32.1% and our deposits grew by 21.7% during 2020, which increased our net interest margin to 3.72%, resulting in a 20.2% increase in net interest income as compared to 2019. Also during 2020, strategic liquidations of our higher coupon mortgage-backed investment securities resulted in a $2.4 million gain on sale of investments. As a result of continued economic uncertainty due to COVID-19, as well as the loan growth previously mentioned, we recorded a $3.3 million provision for loan losses during 2020. I previously mentioned the efforts of our associates and their work with our clients during this period of economic uncertainty. These efforts included COVID-related loan modifications and access to funding through the Small Business Administration's Paycheck Protection Program. We are pleased to report that COVID-19 loan modifications have declined significantly with most of our borrowers returning to their loan contractual terms. We are also currently actively working with borrowers to navigate the SBA loan forgiveness process, as well as to apply for additional PPP funds that were authorized by the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act, which was signed into law in late December 2020. As we begin 2021, 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 these challenging times. I am pleased to report that the Board of Directors has declared a cash dividend of $0.20 per share to be paid March 3, 2021 to shareholders of record as of February 17, 2021. This represents the 78th consecutive quarterly cash dividend since the company's formation resulting from the merger of Landmark Bancorp Inc. with MNB Bancshares Inc. in October 2001. 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 fourth quarter and year ended December 31, 2020. Now I would like to make a few comments on various elements comprising those results. Starting with highlights of the fourth quarter income statement. Net interest income was $10.1 million, or an increase of $2.1 million, or 26% in comparison to the prior year's fourth quarter. The improvement in net interest income built upon a $153.5 million, or 16.9% increase in average interest-earning assets to $1.060 billion in comparison to the prior year fourth quarter period. This growth was entirely attributable to loan growth of $192.6 million, or 35.8% as our average investment balance actually declined by $67.8 million. The loan growth was impacted significantly by our SBA PPP loans, which totaled $100.1 million at December 31. In addition, Landmark's net interest margin on a tax equivalent basis improved to 3.8% in the fourth quarter of 2020, as compared to 3.61% in the same period of 2019. The net interest margin benefited significantly from the increase in average loan balance, 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 0.85% in the fourth quarter of 2019 to 0.24% in the current quarter. Our loans-to-deposit ratio increased to 69.2% as of December 31, 2020 as compared to 63.7% as of December 31, 2019. Looking at our provision for loan losses. Our analysis resulted in providing $700,000 to the allowance for loan losses in the fourth quarter of 2020 as compared to $400,000 in the fourth quarter of 2019. On a year-to-date basis, as Michael mentioned earlier, our 2020 provision for loan losses was $3.3 million in comparison to $1.4 million in 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 continue to adjust our allowance for credit losses and provisioning accordingly. Non-interest income increased to $6.9 million for the fourth quarter of 2020, compared to $4.0 million in the same period of 2020. The primary driver of the increase in non-interest income was related to a $2.8 million increase in gains on sales of loans relating to the increased volumes of one-to-four family real estate loans originated for sale at the low interest rate environment has driven up purchase and refinancing activity in our markets during the fourth quarter of 2020. Non-interest expenses increased by $1.2 million, or 14.2% to $9.5 million in the quarter compared to the fourth quarter of 2019. This was driven by an increase of $543,000 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 17.0% in the current quarter, up from 0.7% in the fourth 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 pre-tax earnings, while our tax exempt income declined over the comparable periods. In addition, income tax expense included the recognition of $229,000 and $558,000 in the fourth quarter of 2020 and 2019 respectively of previously unrecognized tax benefits reducing the effective tax rate in both periods. Moving on to discuss some financial highlights for the full year of 2020. Our net earnings $19.5 million represented a record year for Landmark and exceeded 2019 by $8.8 million. These results were driven by our improvement in net interest income of $6.1 million as compared to 2019, $2.4 million in investment securities gains and an $8.8 million increase in gains on sales of mortgage loans as a result of the significant drop in interest rates during 2020. In 2020, net interest income grew to $36.5 million, up 20.2% from a year earlier as a result of average interest-earning assets increasing 11.7% from $900.5 million during 2019 to $1 billion during 2020. Consistent with my comments earlier on the fourth quarter, net interest margin benefited significantly from a $150.4 million increase in average loan balances, $88.5 million of which was related to PPP loans during 2020 as compared to 2019, resulting in our net interest margin on a tax equivalent basis, improving from 3.48% in 2019 to 3.72% in 2020. Noninterest income totaled $27.4 million for 2020, an increase of $11.5 million or 73.1% from the prior year. This results primarily from an increase of $8.8 million in gains on sales of loans and $2.6 million of gains on sales of investment securities, as we sold approximately $61 million of our higher coupon mortgage-backed investment securities during 2020. These sales were based on our evaluation of the risks associated with accelerating prepayment speeds to the market prices on this portion of our investment securities portfolio. Looking at noninterest expense, we reported an increase of 11.1% or $3.6 million for 2020 in comparison to 2019. Consistent with my fourth quarter comments, this increase primarily relates to a $2.9 million increase in compensation 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 as well as general increased compensation costs. The effective tax rate increased from 12% in 2019 to 19.7% in 2020, mostly due to -- our tax-exempt income declined over the comparable period. To touch on a few balance sheet highlights, total assets increased $189.6 million to $1.2 billion at December 31, 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 $170.6 million to $702.8 million at December 31, 2020 from $532.2 million at year-end 2019, while our investment securities decreased $64.4 million to $301.7 million at December 31, 2020 from $366.1 million at December 31 2019. Deposits increased $181.0 million to $1.0 billion at December 31, 2020 compared to $835.0 million at year-end 2019. Additionally, our Federal Home Loan Bank and other borrowings decreased $14.2 million to $28 million at December 31 2020 compared to $42.2 million at December 31, 2019. Stockholders' equity increased to $126.7 million at December 31, 2020 or a book value of $26.66 per share, up from $108.6 million at December 31, 2019 or a book value of $22.50 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 securities. Our consolidated and bank regulatory capital ratios as of December 31, 2020 continue to exceed the levels considered well-capitalized. The bank's leverage capital ratio was 10.5% at December 31, 2020 while the total risk-based capital ratio was 17.5%. 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 December 31, 2020, totaled $702.8 million of which PPP loans comprised $100.1 million. Non-performing loans, which primarily consist of loans greater than 90 days past due totaled $10.5 million or 1.47% of gross loans as of December 31, 2020. This represents an increase from the year-end 2019 level of $5.5 million or 1.03% of gross loans. 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 $1.5 million or 0.21% of gross loans as of December 31, 2020. This ratio has decreased from 0.64% of gross loans as of December 31, 2019. We continue to monitor delinquency trends carefully in all loan categories. Our balance in other real estate owned totaled $1.8 million as of December 31. And the other real estate owned balances are being marketed for sale currently. We recorded net loan charge-offs of $992,000 during 2020, which was up from $698,000 during 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 2020 totaled $702.8 million. This was a 32% increase from our year-end 2019 net loan total of $532.2 million. PPP loans made up $100.1 million of the net loan total as of year-end. Loan growth excluding the PPP volume was $70.5 million or 13.3% during 2020. As of year end 2020, our construction and land loan portfolio balances increased by 16.2% to $26 million or 3.7% of our total loan portfolio. The outstanding loan balances in our commercial real estate portfolio increased by 29.1% to $172.3 million, representing 24.2% of our total loan portfolio. Commercial and industrial loans were $234 million as of year-end 2020 or 32.8% of the current portfolio. That includes the $100 million in PPP loans. Excluding those PPP loans, our commercial and industrial loans increased by 22.3% during 2020. With regard to our agricultural loan portfolio, total balances decreased by 2.1% to $96.5 million or 13.5% of the total loan portfolio as of the end of the year. Our mortgage 1-4 family loan portfolio represented 22.1% of the portfolio at $158 million as of December 31, which was an increase of 7.8%. As I noted in my opening comments, our mortgage banking activity during 2020 was extremely strong driven by historically low loan rates. Our 2020 single-family loan production totaled nearly $450 million. Production volume was nearly equally split 49% purchase money transactions versus 51% refinance activity. Our mortgage pipeline levels remain high and we anticipate significant production volumes extending through the first part of 2021. As previously noted, we recorded a $3.3 million provision for loan losses during 2020 based on the continued economic uncertainty surrounding the impact of COVID-19 on our loan portfolio as well as the net loan growth we experienced. As I previously mentioned, 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 year-end 2020, Landmark had six loan modifications on outstanding loan balances of $7.2 million in connection with the COVID-19 pandemic. There is one commercial real estate loan totaling $3.7 million that was modified and is also on non-accrual status as of year-end 2020. Consistent with the CARES Act and regulatory guidance the company also entered into short-term forbearance plans and short-term repayment plans on three one-to-four family residential mortgage loans totaling $366,000 as of December 31, 2020. Before we go to questions, I want to summarize by saying 2020 contained very positive operating results for Landmark, resulting in a record earnings year. I again want to express my thanks and appreciation to all of the associates at Landmark National Bank. It was a total team effort. As we enter 2021 we believe that the company's risk management practices and capital strength position us well as we continue to navigate these uncertain times. With that I'll open the call up to questions that anyone might have.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from John Rodis with Janney. Please go ahead.

Good morning guys.

Hey good morning John.

Hope you guys are doing well. Maybe just first question just as it relates to the PPP program. Just curious what you're seeing I guess call it Phase 2 or Round 2, what sort of demand do you think you're going to see from your customers relative to the first round?

Yes, John thanks. We actually were in the group that opened the portal right after the holiday. So, we had it open a few weeks and we've seen fairly steady demand. We don't expect it to be nearly at the volumes that we looked at in 2020. We are seeing interestingly enough in addition to the second draw of loans we are seeing an appetite for borrowers to go back and apply for first draw PPP funds. But overall, I think from the standpoint of our client base I mean it's mostly existing clients that we're seeing that are active in this 2021 round for the PPP funding.

Okay. And then as far as PPP fees remaining, I think you said you had $1.5 million in the fourth quarter. How much in PPPs are actually remaining currently?

As far as fee revenue from the 2020 round?

Yes. Yes. From -- as the loans pay-off are forgiven.

That's a number I guess we haven't put out yet John deferred for on our balance sheet. Maybe we may consider putting that out. But its still -- as we got that $1.5 million on the -- which was interest income as well as the fee recognition in the fourth quarter, we were down from $130 million to $100 million at that point in time. So, one would gauge that it's -- that we still got quite a bit left to come in this year depending on how fast they ask for forgiveness.

Okay. Michael just another question for you on core loan trends excluding PPP. So, you grew loans roughly 13% in 2020. What -- do you think you can do something close to that, again in 2021? Or that seems a little bit high to me, but...

That would be a little aggressive, John, just from the standpoint. We were still enjoying some business development growth from the commercial bankers that we added in the metro Kansas City market in 2020. And so that contributed to that double-digit loan growth levels last years. We look at our budgeting model for this year, John. We do expect to see non-PPP loan growth in 2021, but it would be in the high-single digits from a modeling standpoint.

Okay. And just one more question from me. Just Michael, just sort of an update on the ag economy, that you usually typically give.

Sure. Really as we look at agri business conditions across Kansas, for the -- I guess winter wheat is probably the crop that is most of interest right now. And those conditions I think are pretty favorable, really across the entire franchise. We are seeing a little bit of I won't call it significant drought, but a little bit of moisture concerns in -- across the state with I guess, moisture test being a little bit below average. So we are of course, always concerned about that. I think overall as I look at our portfolio and the way our borrowers are positioned, I would say that, as we're entering 2021, conditions for our ag business clients are probably as favorable as they have been, over the last couple of years.

Okay. Thank you, guys.

Thanks, John.

As we have no further questions, this concludes our question-and-answer session. I would now 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 do appreciate your continued support and the confidence, that you have in our company. I look forward to sharing news related to our first quarter 2021 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.