Landmark Bancorp, Inc. (LARK) Q4 2021 Earnings Report, Transcript and Summary

00:07 Hello, everyone and welcome to the Landmark Bancorp Q4 Earnings Call. My name is Nadia and I'll be coordinating the call today. [Operator Instructions] 00:21 I will now hand over to your host, Michael Scheopner, President and Chief Executive Officer to begin. Michael, please go ahead.

00:29 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 2021. Joining the call with me to discuss various aspects of our fourth quarter performance is Mark Herpich, Chief Financial Officer of the company; and the company's Chief Credit Officer, Raymond McLanahan. 00:51 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. 01:28 I want to begin my remarks today with a thank you all of my fellow associates at Landmark National Bank. Our continued success in generating solid earnings, strong balance sheet growth and solid credit quality is a direct result of their efforts in 2021. Their response to the challenges presented during year two of COVID-19 and our ability to continue to work with our clients as they dealt with pandemic-related uncertainty is something that I'm very proud of and I feel honoured to be a member of this team. 02:00 Landmark reported net earnings of $3.1 million during the fourth quarter of 2021. While fourth quarter 2021 net earnings declined compared to the same period last year, due to low interest rates, declining balances of Paycheck Protection Program loans and lower mortgage banking activities, our financial performance for the full year 2021 was very strong. Full year 2021 net earnings totaled $18 million driven mainly by core loan and deposit growth, solid credit results and good expense control. 02:34 Earnings per share on a fully diluted basis for 2021 was $3.60, the return on average assets for 2021 was 1.44% and the return on average equity was 13.8%. As expected, we continue to see a large reduction of almost $83 million in our Paycheck Protection Program loans during 2021, as they were forgiven by the Small Business Administration. However, excluding those PPP loans, our loan portfolio increased $32 million or 5.2% during 2021. Also, deposit balances grew by $132 million or 13% during 2021. 03:19 Credit quality remained strong this quarter. The allowance for loan losses totaled $8.8 million at December 31, 2021 and there was no provision for loan losses this quarter. Our capital and liquidity positions remain strong with total equity to asset of 10.21% and loans to deposits of 56.9%. 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. 03:50 I'm pleased to report that during the fourth quarter, our company distributed a 5% stock dividend, representing the 21st consecutive year that we have done this. And we also paid a cash dividend of $0.19 per share. Also, this month, our Board of Directors has declared a cash dividend of $0.21 per share to be paid March 2, 2022 to shareholders of record as of February 16, 2022. This is an increase of 10.3% from the cash dividend level in 2021. And this represents the 82nd consecutive quarterly cash dividend since the company's formation in 2001. 04:29 I will now turn the call over to Mark Herpich, our CFO, who will review the financial results with you.

04:37 Thanks, Michael, and good morning to everyone. Michael has already alluded to our continued strong financial performance of 2021. And now, I'd like to take some time to talk further about our fourth quarter 2021 results. Net income of $3.1 million in the fourth quarter 2021 was lower by $2.5 million, mainly due to a decline in gains on sales of loans and lower net interest income. 05:04 In the fourth quarter of 2021, net interest income totaled $9.1 million, a decrease of $964,000 or 9.5% in comparison to the same period last year. While on a linked-quarter basis, net interest income was down by $477,000. The decline in net interest income from the fourth quarter last year as well as the third quarter of 2021 was mainly the result of decreased interest this quarter on SBA, PPP loans but partly offset by lower deposit costs. 05:40 Interest on PPP loans in the fourth quarter of 2021 declined by $850,000 compared to the fourth quarter last year, while PPP loans declined by $82.9 million over the same period. However, total loans, excluding PPP loans, grew by $31.8 million this quarter over the same period last year, which partially offset the decline in PPP loan interest. The average tax equivalent yield on the loan portfolio was still very strong this quarter totaling 4.81% compared to 4.86% in the same period last year and 5.03% last quarter. 06:23 Interest income on investment securities decreased $57,000 this quarter compared to the same period last year due to lower yields offset by growth in average balances, which grew by $90.9 million. The yield on investment securities declined from 2.42% in the fourth quarter of 2020 to 1.74% in the current quarter. 06:43 Interest costs on interest-bearing deposits remained low this quarter totaling 12 basis points in the current quarter compared to 17 basis points from the fourth quarter of 2020, and 13 basis points last quarter. Interest expense on total deposits declined $84,000 from the fourth quarter last year due to lower rates offset by growth in average balances of $55.8 million in interest-bearing deposits. 07:13 Landmark’s net interest margin on a tax equivalent basis decreased to 3.17% in the fourth quarter of 2021 that remains strong from an industry standpoint. Our loan to deposit ratio, which totaled 57% at December 31, 2021 remains low, giving us plenty of opportunities to fund new loan growth. Based on our analysis of the economic environment and considering the effects of the pandemic, we did not make a provision to the allowance for loan losses in the fourth quarter of 2021 and this was consistent with the third quarter of 2021. 07:50 At December 31, the ratio of our loan loss reserve to gross loans excluding PPP loans at year-end, was 1.36%. As our economic outlook evolves and updated pandemic-related loss experience develops, we will continue to adjust our allowance for credit losses and provisioning accordingly. 08:12 Non-interest income totaled $4.6 million this quarter, decreasing $2.3 million compared to the fourth quarter of 2020 while declining by $867,000 in comparison to the prior linked-quarter. This decrease over the same period last year was mainly due to a decline of $2.4 million in sales of one-to-four family real estate loans that the bank originated. 08:35 During the current quarter, higher interest rates coupled with a lack of housing inventory in our markets, slowed purchased and refinancing activities as compared to the fourth 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 $150,000 in fees and service charge income, primarily due to increased debit card interchange revenue and loan servicing fees. 9:05 Non-interest expense for the fourth quarter of 2021 has remained relatively stable at $9.6 million, representing an increase of $33,000 over the same period last year and that was $107,000 higher than the prior quarter. The increase over the fourth quarter of 2020 was driven by higher professional fees and other non-interest expense, offset by a decline of $202,000 in compensation and benefits, primarily related to lower mortgage lending activities. The increase in other non-interest expense related primarily to expenses associated with the other real estate owned. 09:44 Our effective tax rate was 24.8% in the current quarter, up from 19.8% in the third quarter of 2021. As noted above, our balance sheet continues to reflect good growth in both loans and deposits along with strong liquidity and capital levels. Total assets increased $74.4 million during the fourth quarter to $1.3 billion compared to the prior quarter. Gross loans excluding PPP loans, increased $9.1 million or 5.6% during the fourth quarter, and as mentioned, was driven by growth in both commercial real estate, residential real estate and agricultural lending. 10:25 Our deposits increased by $81.8 million during the quarter to $1.1 billion, which combined with a decline of $11.5 million in PPP loans funded an increase of cash and cash equivalents of $71.9 million and growth in investment securities of $9.8 million. Stockholders equity increased to $135.6 million and at December 31, 2021 and our book value increased $27.14 per share. 11:00 Our consolidated and bank regulatory capital ratios as of December 31,2021 are very strong and exceed the regulatory levels considered well capitalized. The bank's leverage capital ratio was 10.6% at December 31, 2021, while the total risk-based capital ratio was 18.5%. 11:21 Now, let me turn the call over to Raymond to review highlights of our loan portfolio and the credit risk outlook.

11:30 Thank you, Mark and good morning, everyone. Gross loans outstanding as of December 31, 2021 totaled $662.4 million and declined $2.4 million this quarter mainly due to lower PPP loans in our portfolio. The fourth quarter -- during the fourth quarter of 2021, SBA PPP loans outstanding declined $11.5 million to $17.2 million. 11:56 Our outstanding balance of PPP loans at December 31, 2021 are now less than 10% of all PPP loans funded over the last two years. Based on the current pace of forgiveness, we anticipate the majority of our remaining PPP balances will be repaid by the end of the second quarter of 2022, with a small portion carrying over into the third quarter of 2022. While our PPP loan portfolio continues to roll off, we remain focused on quality core loan growth. 12:29 During the fourth quarter, our core portfolio increased $9.1 million or 5.6%. The largest increase occurred within our commercial real estate loan portfolio, which grew by $5 million during the quarter. Additional growth was observed within our residential portfolio, which increased $5 million and our agricultural portfolio, which grew by $3 million. 12:54 Credit quality remained excellent this quarter. Non-performing loans, which primarily consists of non-accrual loans and accruing loans greater than 90 days past due totaled $5.2 million or 0.79% of gross loans, as of December 31, 2021. This represents a decline of $4.6 million from the previous quarter and that's largely due to the payoff of one non-performing hotel loan as well as further improvements within our loan portfolio. 13:25 Total foreclosed real estate was mostly unchanged at $2.6 million at quarter-end. However, following the end of the year, this balance was reduced to $1.5 million following the sale of one property and a redemption of another. We continue to actively pursue the sale of all of our foreclosed real estate. 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 remains low and was only 0.3% of gross loans this quarter, compared to 2.3% in the previous quarter, excuse me 0.23% in the previous quarter. We continue to monitor delinquency trends carefully across all loan categories. 14:15 Net loan charge-offs remained low and well controlled this quarter as they have all year. We recorded net loan recoveries of $9,000 during the fourth quarter of 2021, compared to net loan charge-offs of $291,000 during the fourth quarter of 2020. For the year ending December 31, 2021, net loan charge-offs totaled $500,000 compared to $992,000 in 2020. As you can tell from these numbers, we've been focused on improving our asset quality metrics throughout 2020. We remain committed to maintaining a solid asset base and quality loan portfolio as we enter a period of rising interest rates. We have more work to do, but we're very happy with the progress our team has made in 2021. 15:06 The current economic landscape in Kansas is approaching pre-pandemic levels. The preliminary seasonally adjusted unemployment rate for Kansas as of December 31 is 3.3% according to the Bureau of Labor Statistics and represents an improvement from an unemployment rate of 12.6% at the onset of the pandemic in April of 2020. Looking at a year ago, the Kansas unemployment rate was 4.7%. 15:34 Home prices in Kansas increased 8.4% in 2021, even though home sales in Kansas fell by 2.1% in December of 2020 -- excuse me, 2021 compared to the same period last year. The Kansas Association of Realtors President recently commented that they expected to remain a sellers’ market throughout the upcoming spring selling season. 15:59 Our ag economy is also healthy. Our producers across the state performed well throughout 2021. Likewise, however, everyone continues to monitor the impact of inflation on production inputs and commodities as we move into 2022. 16:13 And with that, I thank you and I'll now turn the call back over to Michael.

16:21 Thanks, Raymond. And Mark, thank you for your earlier comments. Before we go to questions, I want to summarize by saying our fourth quarter and fiscal year 2021 performance reflected a continued trend, a very positive operating results for Landmark. I again want to express my thanks and appreciation to all of the associates at Landmark National Bank. They are daily focused 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. 16:55 With that, I'll open the call up to questions that anyone might have.

17:00 Thank you. [Operator Instructions] It appears we have no question. So I hand the call back over to you Michael.

17:36 Thank you. And I again want to thank everyone for participating in today's earnings call. I currently appreciate your continued support and the confidence that you have in our company. I look forward to sharing news related to our first quarter 2022 results at our next earnings conference call. Thank you.

17:56 Thank you. Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect your lines.