Landmark Bancorp, Inc. (LARK) Q1 2022 Earnings Report, Transcript and Summary

Hello, everyone, and welcome to the Landmark Bancorp Q1 Earnings Call. My name is Seth, and I'll be the operator for your call today. [Operator Instructions] I will now hand the floor over to Michael Scheopner, 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 first quarter ending 2022. Joining the call with me to discuss various aspects of our first quarter performance is Mark Herpich, Chief Financial Officer of the company; and the company's Chief Credit Officer, Raymond McLanahan. 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. Landmark reported net earnings of $3.1 million during the first quarter of 2022 compared to $5.4 million during the first quarter of last year. The decline in net earnings in the first quarter of this year compared to the same quarter last year, resulting from decreased mortgage banking activity, lower interest income on loans, partly a result of a decrease in Paycheck Protection Program loans and lower gains on sales of investment securities. Earnings per share on a fully diluted basis for the first quarter 2022 was $0.62. The return on average assets for the first quarter was 0.97%. The return on average equity for the first quarter was 9.59%, and our efficiency ratio was 71.9%. During the first quarter 2022, total gross loans declined 4.4%, mainly due to lower PPP loans, coupled with decreased lines of credit utilization in our agribusiness portfolio and other commercial-related loans. Deposits totaled $1.1 billion at March 31, 2022, and remained steady. With declines in both interest and noninterest revenues this quarter, we focused on reducing noninterest expense this quarter, which declined almost 3% compared to the first quarter last year. Credit quality continued to remain strong this quarter as we recorded net loan recoveries along with a decline in nonaccrual loans. The allowance for loan losses totaled $8.4 million at March 31, 2020, and the company recorded a $500,000 reverse provision during the first quarter. Our capital and liquidity positions remained strong with total equity to assets of 9.45% and loans to deposits of 54.9%. 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. I am pleased to report that our Board of Directors has declared a cash dividend of $0.21 per share to be paid May 25, 2022, to shareholders of record as of May 11, 2022. This represents the 83rd consecutive quarterly cash dividend since the company's formation in 2001. I will now turn the call over to Mark Herpich, our CFO, who will review the financial results with you.

Thanks, Michael, and good morning to everyone. Michael has already alluded to our financial performance in 2022. And now I'd like to talk further about our first quarter 2020 results. Net income of $3.1 million in the first quarter of 2022 was lower by $2.2 million, mainly due to a decline in gains on sales of loans, lower net interest income and lower gains on sales of investment securities. In the first quarter of 2022, net interest income totaled $8.6 million, a decrease of $946,000 or 9.9% in comparison to the same period last year. While on a linked quarter basis, net interest income was down by $491,000. The decline in net interest income from the first quarter last year as well as the fourth quarter of 2021 was mainly the result of decreased interest this quarter on Paycheck Protection Program, or PPP and other commercial-related loans, but partly offset by lower deposit costs. Interest on PPP loans in the first quarter of 2022 declined by $636,000 compared to the first quarter last year, while the PPP balance interest on the PPP balance loans declined by $112.1 million over the same period. The average tax equivalent yield on the loan portfolio has declined this quarter to 4.59% compared to 4.67% in the same period last year and 4.81% last quarter. Interest income on investment securities increased to $186,000 this quarter compared to the same period last year due to a growth in average investment balances of $120.4 million, but offset by lower yields. The yield on investment securities declined from 2.37% in the first quarter 2021 to 1.83% in the current quarter, which was an increase from 1.77% in the fourth quarter of 2021. The investment portfolio growth in the first quarter of 2022 resulted from deploying excess cash balances into investments with a focus on shorter duration U.S. treasuries that should perform well in a rising rate environment. Interest costs on interest-bearing deposits remained low this quarter, totaling 10 basis points in the current quarter compared to 15 basis points in the first quarter of 2021 and 12 basis points last quarter. Interest expense on total deposits declined $86,000 from the first quarter of last year due to lower rates, offset by growth in average balances of $29.6 million in interest-bearing deposits. Landmark's net interest margin on a tax equivalent basis decreased to 2.99% in the first quarter of 2022 as compared to 3.17% in the fourth quarter of 2021. Our loan-to-deposit ratio, which totaled 55% at March 31, 2022, remains low, giving us plenty of opportunities to fund new loan growth. Based on our analysis of the economic environment, our strong credit results and a decline in loans this quarter, excluding PPP loans, we recorded a $500,000 reverse provision to the allowance for loan losses in the first quarter of 2022. At March 31, 2022, the ratio of our loan loss reserve to gross loans, excluding PPP loans at year-end was 1.33%. As our economic outlook evolves, we will continue to adjust our allowance for credit losses and provisioning accordingly. Noninterest income totaled $3.6 million this quarter, decreasing $3.2 million compared to the first quarter of 2021, while declining by $1.0 million in comparison to the prior linked quarter. This decrease over the same period last year was due mainly to a decline of $2.2 million in sales of 1 to 4 family real estate loans that the bank originated. During the current quarter, higher interest rates, coupled with a lack of housing inventory in our markets, slowed purchase and refinancing activities as compared to the first quarter last year when mortgage activity was extremely strong. The first quarter of 2021 included a gain of $1.1 million on the sale of higher coupon municipal investment securities that did not occur in the current quarter. These declines were offset by an increase over the same quarter last year of $155,000 in fees and service charge income. Noninterest expense for the first quarter of 2022 totaled $8.8 million, representing a decrease of $235,000 over the same period last year and was $712,000 lower than the prior quarter. The decrease over the first quarter of 2021 was driven by a decline of $166,000 in compensation and benefits, primarily related to lower mortgage lending activities, along with declines of $161,000 in data processing and $121,000 in amortization expense. These decreases in noninterest expense were partially offset by an increase of $171,000 in occupancy and equipment. The effective tax rate was 19.0% in the current quarter, down from 20.4% in the first quarter of 2021. I Total assets remained stable during the first quarter at $1.3 billion for each of the 2 recent quarter ends. Gross loans, excluding PPP loans, decreased $16.9 million during the first quarter, and as mentioned, related to reductions in both agricultural lending and other commercial loans. Our deposits decreased by $8.9 million during the quarter to $1.1 billion due in part to seasonality of public funds, while the decrease in cash and cash equivalents of $82.9 million funded growth in investment securities of $86.3 million. Stockholders' equity decreased to $123.5 million at March 31, 2022, and our book value decreased to $24.72 per share. The decrease in book value was due to a decline in the fair value of our investment securities, which were impacted by higher interest rates. Our consolidated and bank capital ratios as of March 31, 2022, are very strong and exceed the regulatory levels considered to be well capitalized. The bank's leverage ratio was 10.5% at March 31, 2022, while the total risk-based capital ratio was 19.2%. Now let me turn the call over to Raymond to review highlights of our loan portfolio and the credit risk outlook.

Thank you, Mark, and good morning to everyone. Gross loans outstanding as of March 31, 2022, totaled $633.5 million and declined $28.8 million this quarter, mainly due to lower PPP loans in our portfolio. Additionally, we experienced declines in our agricultural loan portfolio and our commercial loan portfolio. During the current quarter, SBA PPP loans outstanding declined $12 million and ended at $5.2 million. During the first quarter, our core portfolio, excluding PPP loans, decreased $16.9 million or an annualized rate of 10.7%. This decline was mostly due to an $11.8 million decrease in our agricultural loan portfolio, resulting primarily from decreased line usage. We believe this decrease in line usage is due to strong cash positions among our ag borrowers as well as a slightly slower start to the planting season. While our other commercial-related loans declined $8.9 million compared to the prior quarter, these loans are still 4.8% higher than in the same quarter last year. We remain focused on growing our commercial and commercial real estate portfolios. Competition for quality opportunities is present in all of our markets. However, we believe we have the right mix of talent and tools available to navigate any challenges. We believe that despite a rising rate environment, we will continue to see growth opportunities within our mortgage 1-4 family portfolio. We continue to see consumer demand for our portfolio [ 71 ARM ] product as an alternative to conventional 30-year fixed rate mortgage loan products. Turning to credit quality. Credit quality within the portfolio continues to improve. Nonperforming loans, which primarily consist of nonaccrual loans and accruing loans greater than 90 days past due, totaled $4.7 million or 0.74% of gross loans as of March 31, 2022. This represents a decline of $554,000 from the previous quarter and is largely due to the payoff of one nonperforming loan as well as further improvements within our loan portfolio. Total foreclosed real estate decreased $1.3 million over the quarter to finish at $1.3 million. We continue to actively pursue the sale of all foreclosed real estate. Another indicator that we monitor as part of our credit risk management efforts is the level of loans past due between 30 and 89 days. The level of past due loans between 30 and 89 days still accruing interest remains low and was only 0.13% of gross loans this quarter compared to 0.30% in the previous quarter. We continue to monitor our delinquency trends carefully across all loan categories. We recorded net loan recoveries of $82,000 during the first quarter of 2022 compared to net loan charge-offs of $4,000 during the first quarter of 2021. And as you can tell from these numbers, we remain focused on improving our asset quality metrics. Because of this focus on strong asset quality, we were able to reduce our allowance for loan and lease losses by $500,000 during the quarter. And as Mark pointed out, our reserve remains strong at 1.32% of gross loans. The current economic landscape in Kansas is healthy. The preliminary seasonally adjusted unemployment rate for Kansas as of March 31 is 2.5% according to the Bureau of Labor Statistics. This is actually lower than the pre-pandemic level of 3.1%. And looking at a year ago, the Kansas unemployment rate was 3.5%. The Kansas associations of Realtors reported home prices in Kansas have increased 10.5% compared to the same period last year, while sales volumes in Kansas fell 2.7% in March of 2022 compared to last year. We continue to monitor crop conditions across the state. The USDA reported dry soil conditions across the state and everyone continues to monitor the impact of high commodity prices on our ag community, both in terms of higher grain prices, but also coupled with higher input costs. And while there is uncertainty in the ag sector, there's also a lot of opportunity for our ag producers. Kansas continues to see strong investment across the state. Smithfield Foods, the world's largest pork processor announced the opening of an automated next-generation distribution center in Olathe, Kansas. This $100 million investment is expected to create 127 new jobs. Additionally, Scorpion Biological Services, a subsidiary of Heat Biologics, recently announced a new 500,000 square-foot biomanufacturing facility in Manhattan, Kansas. This represents a $650 million investment and will create 500 new jobs over the next 7 years. And as our governor stated in her press release, Kansas is open for business. And with that, I thank you. I'll turn the call back over to Michael.

Thanks, Raymond. And Mark, thank you for your comments earlier. Before we go to questions, I do want to summarize by saying our first quarter of 2022 reflected a continued trend of 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 a key to our success. With that, I'll open the call up to questions that anyone might have.

[Operator Instructions] The first question today comes from John Rodis.

Glad to see things are going well for you guys. Just curious on the securities portfolio. What sort of yields were you getting on new purchases during the quarter?

It kind of fluctuated quite a bit from the beginning of the quarter to the end of the quarter, John, but towards the end, we were getting yields in the mid-2s and probably averaged closer to the 2% range over the course of the quarter. And now we're starting to get even better than that since quarter end.

Would you expect to continue adding to that portfolio sort of in a meaningful way? Or obviously, I think that I'm sure some of it depends on what sort of loan growth you see, too.

Yes. You're exactly right. We're balancing those 2 components, but I would expect to see still some meaningful growth in the investment portfolio. We're still sitting on some excess cash at this point in time as we kind of manage or evaluate our runoff potential in deposit totals, which we haven't seen really any yet to the contrary, we continue to see deposit growth. But the level of cash that we have currently sitting on the balance sheet of $106 million at quarter end as still too high for us, and we know that the interest rates are moving up to continue to systematically keep putting money into the investment portfolio and still not sure if we're ready to go long yet on investments, but staying so that if we can reinvest in a couple of years as well, if rates continue to go up, but we'll be mindful of keeping cash for loan growth as well.

Maybe just to follow up on the loan growth. Michael, just sort of even though loans were down a little bit, excluding PPP in the quarter, your thoughts for the growth outlook for the remainder of the year?

We're still seeing Jonathan, we're still seeing good pipeline activity really across the franchise and getting a chance to look at some new deals. I would say that as we continue to look at what our projections are, our loan growth projections would still near kind of what we budgeted from the standpoint of mid-single-digit loan growth for the year. Really the impact, as we noted in the comments during the call, really year-to-date has been more of a function of decreased line utilization versus an erosion in the portfolio.

Okay. And what about paydowns? I mean I guess that's part of the lower utilization, but how paydowns trended in the last few quarters?

Really just really the agribusiness decrease in the agribusiness portfolio has been probably the most impactful. Everything else has been pretty much from a trend line standpoint, nothing out of the ordinary.

[Operator Instructions] As we have no further questions on the call, I will hand the floor back to Michael.

Okay. Thank you, and I do want to thank everyone for participating in today's earnings call. I truly appreciate your continued support and the confidence that you have in the company, and I look forward to sharing news related to our second quarter 2022 results at our next earnings conference call. Thank you.

This concludes today's call. Thank you all very much for joining. You may now disconnect your lines.