Earnings Call: Q1 2021

May 5, 2021

Good day, and welcome to The Landmark Bancorp Q1 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Michael Scheffner, President and Chief Executive Officer. 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 Q1 ending 2021. Joining the call with me today to discuss various aspects of our Q1 performance is Mark Herfect, Chief Financial Officer of the company and the company's Chief Press 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 ks and 10 Q filings, which can be obtained by contacting the company or the SEC. We are pleased to report continued strong earnings for the Q1 of 2021, driven mainly by solid mortgage banking activities, continued growth in loans and deposits and stable expenses. Q1 2021 net income amounted to $5,400,000 resulting in earnings per share on a fully diluted basis of $1.13 Return on average assets for the quarter was 1.77 percent and the return on average equity was 17.06%. These are strong ratios. While last year loan growth was very strong, we continued to achieve solid loan growth in the current quarter as total gross loans grew $17,000,000 or an annualized rate of over 90%. Total deposits also increased this quarter by $55,000,000 or an annualized growth rate of over 21%. Additionally, strategic liquidations of higher coupon municipal investment securities resulted in a $1,100,000 gain on sale of investments during the 1st 3 months of 2021. Mortgage banking activities remained strong due to the low interest rate environment, which has supported an active housing market and credit quality also remained solid this quarter with low levels of net loan charge offs, solid reserves and only a small increase in non performing loans. We continue to value our community banking relationships across the state of Kansas, which are important and contributed significantly to our strong earnings performance. Landmark continued to support our customers with access to funding through the 2021 round of the Small Business Administration's Paycheck Protection Program. We are also currently actively working with borrowers to navigate the SBA loan forgiveness process for PPP loans. We are also pleased to report that COVID-nineteen loan modifications have declined significantly with most of our borrowers returning to their loan contractual 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. I am pleased to report that our Board of Directors has declared a cash dividend of $0.20 per share to be paid June 2, 2021 to shareholders of record as of May 19, 2021. This represents the 79th consecutive quarterly cash dividend since the company's formation resulting from the merger of Landmark Bancorp Inc. With M&D Bancshares Inc. In October, 2021. I will now turn the call over to Mark Kerpich, 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 Q1 ended March 31, 2021. And to reflect back a year, during our 2020 Q1 earnings call, we noted that last year's net earnings of $3,400,000 was the highest quarterly earnings Landmark Bancorp had ever reported, which makes 20 21's Q1 earnings of $5,400,000 reflective of how far we have come in the last 12 months. Now I would like to make a few comments on various elements comprising those results. Starting with earnings highlights for the Q1. Net interest income was $9,600,000 an increase of $1,500,000 or 18.4 percent in comparison to the prior year's Q1, while on a linked quarter basis, our net interest income was down $509,000 The growth in net interest income for the Q1 last year was the result of an increase in loan interest of $1,300,000 coupled with a decline in interest costs of $814,000 offset by lower securities interest. Average interest earning assets grew by $218,800,000 dollars or 24% over the same period last year and was funded by strong deposit growth of over $240,000,000 over the same period and was invested mostly in loans, which grew by $183,300,000 or 33.5 percent this quarter. Balance of our average investment securities balance declined by $54,200,000 from the same period last year. The loan growth was impacted significantly by our SBA PPP loans, which averaged $111,000,000 during the Q1 and were not present in the Q1 of last year. Interest earned on PPP loans totaled $1,100,000 this quarter. Landmark's debt interest margin on a tax equivalent basis declined to 3.51% in the Q1 of 2021 as compared to 3.87% in the Q4 of 2020 and still remains strong from an industry standpoint, but our yield on interest earning assets declined by 39 basis points to 3.65 percent from the 4th quarter, while our overall cost of funding only declined by 3 basis points to 0.21%. Decline in our net interest income compared to the Q4 of 2020 mostly was the result of lower interest on PPP loans, which declined by $395,000 as loan forgiveness levels were higher in the 4th quarter, which results in higher loan fees recognized. Our loan to deposit ratio, which totaled 67% at March 31, 2021 remains low, giving us plenty of opportunities to fund new loan growth. Looking at our provision for loan losses, our analysis resulted in providing $500,000 to the allowance for loan losses in the Q1 of 2021 as compared to $700,000 in the Q4 of 2020. Provision for loan losses reflects our best estimate of the economic environment considering the effects of COVID-nineteen. The levels of our reserves excluding the impact of the $117,300,000 in PPP loans on the balance sheet at March 31 was 1.51 percent to gross loans, which is up 8 basis points from the end of December. As the economic outlook evolved and our pandemic related loss experience continues to develop, we will continue to adjust our allowance for credit losses and provisioning accordingly. Non interest income continued to be strong this quarter totaling $6,700,000 compared to $5,400,000 for the Q1 of 2020, but was slightly lower than in the prior quarter. The primary driver of the $1,400,000 increase in non interest income over the same period last year was due to increased revenue from sales of 1 to 4 family real estate loans we originated. And the low interest rate environment, which began in the later part of Q1 of 2020, drove up purchase and refinancing activity in our markets. Loans originated this quarter totaled $96,600,000 compared to $45,900,000 in the same period last year. $143,000 decline in non interest income as compared to the linked quarter results from lower fee and service charges and gains on sales of loans, offset by a gain of $1,100,000 on the sale of coupon municipal investment securities that did not occur in the prior quarter. Non interest income for the 1st excuse me, non interest expense for the Q1 of 2021 was $444,000 lower than the preceding Q4 of 2020, but was 966 $1,000 higher than the Q1 of 2020. Both period comparisons were primarily driven by the fluctuations in our compensation and benefits expense. More specifically, our mortgage lending incentives as the 2021 Q1 origination volumes were much higher than a year earlier, slightly lower than the mortgage loans originated in the Q4 of 2020. Effective tax rate was 20.4% in the current quarter, up from 18.9% in the Q1 of 2020 and was slightly higher due to a higher ratio of taxable earnings to tax exempt revenue this quarter. Touch on a few balance sheet highlights. Total assets increased 5.1 percent or $60,800,000 during the Q1 to $1,200,000,000 at March 31, 2021 compared to the prior quarter. Our gross loans increased at March 31, 2021 compared to the prior quarter. Our gross loans increased $17,200,000 during the Q1, driven by increases in PPP and commercial real estate lending, which were offset by lower commercial and agricultural loan balances. Our deposits increased by 55.2 Our deposits increased by $55,200,000 during the quarter to $1,100,000,000 which funded not only loan growth, but also growth in investment securities of $23,600,000 and cash and cash equivalents of $23,400,000 this quarter. Additionally, our other borrowings, which are primarily customer repurchase agreements, decreased $2,200,000 to $4,200,000 at March 31, 2020. Stockholders' equity increased to $128,300,000 at March 31, 2021, a book value of $26.97 per share, up from $126,700,000 at December 31, 2020, which was a book value of $0.2666 per share. Consolidated and bank regulatory capital ratios as of March 31, 2021, continued to remain very strong and exceed the regulatory capital levels considered well capitalized. Bank's leverage capital ratio was 10.2% at March 31, 2021, while the total risk based capital ratio was 18.1%. 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 March 31, 2021 totaled $730,700,000 This represents a $17,000,000 increase or an annualized growth of 9.6 percent from the previous quarter end gross loan total of $713,500,000 This increase is mainly due to an increase in both PPP and commercial real estate loans. SBA Paycheck Protection Program loans experienced a net increase of approximately $17,200,000 while commercial real estate loans increased $7,500,000 during the quarter. Non performing loans, which primarily consist of non accrual loans and loans greater than 90 days past due, totaled $11,000,000 or 1.51 percent of gross loans as of March 31, 2021. This represents an increase from the year end 2020 level of $10,500,000 or 1.47 percent of gross loans. This slight increase is the result of continued delinquency of 1 previously identified agricultural loan. We remain focused on improving 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 89 days still accruing interest totaled $5,000,000 or 0.69 percent of gross loans as of March 31, 2021. This ratio has increased from $1,500,000 or 0.21 percent of gross loans as of December 31, 2020. This increase is mainly due to the delinquency of 2 larger credits at quarter end. One credit was a $1,300,000 commercial loan that had matured and was in the process of renewal. That loan has since been renewed and is now current. The other was a $1,100,000 commercial real estate loan that was 44 days past due at quarter end. That loan is also now current. We continue to monitor delinquency trends carefully across all loan categories. Our balance in foreclosed real estate totaled $1,500,000 as of March 31, 2021, a decrease from $1,800,000 as of year end 2020. We continue to actively pursue the sale of these properties. We recorded net loan charge offs of $4,000 during the Q1 of 2021 compared to net loan charge offs of $188,000 during the Q1 of 2020 $291,000 in the previous quarter ending December 31, 2020. In terms of exposure to credit concentrations, we continue to focus on portfolio management and maintain a diversified loan portfolio. As of quarter end, our top 3 loan portfolio pool categories were commercial real estate loans, which represented 24.6% of gross loans 1 to 4 family residential real estate, which represented 21.9 percent of gross loans, and commercial loans, which represented 17.4% of gross loans. Our COVID impacted loan modifications declined again this quarter. Currently, only 4 commercial loans totaling $6,800,000 remain in some form of COVID deferral. Additionally, only 2 consumer 1 to 4 family first mortgage loans totaling 250,000 dollars remain in some form of COVID deferral. We continue to work proactively with our customers in a manner that's consistent with regulatory guidance and safe and sound lending practices. One of the COVID impacted sectors that we continue to monitor is our accommodations and food services economic sector. This economic sector was limited to $25,900,000 of our total loan portfolio. Looking at the 2 subsectors within that total, the accommodation subsector made up $15,200,000 of the total, while the food services subsector made up 10,700,000 dollars of the total. And while this economic sector has certainly experienced its share of challenges over the past year, we're pleased with how this portion of our portfolio has performed despite the stress created by the pandemic. The current economic landscape in Kansas is improving steadily following the negative impacts of COVID-nineteen on our state's economy. The preliminary seasonally adjusted unemployment rate for Kansas as of March 31st is 3.7% according to the Bureau of Labor Statistics. This represents an improvement from 12.6% at the onset of the pandemic in April of 2020. Partially driven by historically low interest rates, home sales across Kansas have remained strong. According to the Kansas Association of Realtors, February 2021 housing market statistics report, homes sold were up 5%, active listings were down 53%, and the average sale price was up 6% compared to a year earlier. Additionally, The Wall Street Journal and realtor.com recently ranked our state capital of Topeka, Kansas as the number one market in the state. The two entities ranked metro areas according to their real estate market data, economic health and quality of life. In addition to being number 1 in the state, Topeka ranked 57 out of the 300 metro areas they evaluated nationwide. Switching to our ag economy, the United States Department of Agriculture recently stated that in 2021, livestock and poultry sectors will face additional pressure in the form of higher feed costs. But faced with an expected more stable demand pattern, livestock and poultry prices should average above 2020 levels. Additionally, current outlook for corn and soybeans appears favorable. Corn used for ethanol is projected to be up 5% relative to a year ago and the average farm price for the next marketing year is projected at $11.25 per bushel for soybeans. And while current conditions in the sector reflect the uncertainty and volatility associated with the extreme events of last year, the long term global demand outlook for U. S. Agricultural commodities remains favorable. And with that, I thank you and I will now turn the call back over to Michael. Thanks, Raymond. Before we go to questions, I want to summarize by saying our Q1 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. Thank Showing no questions, I would like to turn the conference back over to Michael Schrockner for any closing remarks. Thank you. And I do want to thank everyone for participating in today's earnings call. I appreciate your continued support and the confidence that you have in our company. I look forward to sharing news related to our Q2 20 21 earnings or 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.