Landmark Bancorp Q3 2023 Earnings Call Transcript

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November 1, 2023

There are 7 speakers on the call.

Operator

Morning, everyone, and welcome to today's conference call titled Landmark Bancorp Third Quarter Earnings Call. My name is Ellen, and I'll be the call operator for today. All participants' lines will be muted throughout the presentation. At the end of today's presentation, there will be an opportunity to ask a question. Operator.

Operator

I star followed by 2. I would now like to turn the call over to Michael Schepner, CEO to begin. Michael, please go ahead whenever you're ready.

Speaker 1

Thank you and good morning. Thank you for joining our call today to discuss Landmark's earnings and operating results for the 3rd quarter and year to date 2023. Joining the call with me to discuss various aspects of our Q3 performance is Mark Herbeck, Chief Financial Officer of the company And the company's Chief Credit 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.

Speaker 1

Additional information on these factors is included from time to time in our 10 ks in 10 Q filing, which can be obtained by contacting the company or the SEC. Landmark reported net earnings of $2,900,000 during the Q3 of 2023. Earnings per share on On a fully diluted basis for the Q3 was $0.55 For the 3 months ended September 30, the return on average assets was 0.74 percent and the return on average equity was 9.87%. Year to date in 2023, Net income grew 10.7 percent to $9,600,000 Our return on average assets was 0 point 8 4% and return on average equity was 11.13%. Our 3rd quarter results reflected solid growth in loans Coupled with strong credit results, compared to the Q2 of 2023, total gross loans increased by $44,200,000 We're 19.6 percent on an annualized basis this quarter.

Speaker 1

Deposits also increased in the 3rd quarter by $27,100,000 Due to growth in non interest demand deposits and an increase in certificate of deposit accounts. This quarter, our net interest margin totaled 3.06%, that's down from 3.21% last quarter, while our loan to deposit ratio 70.8 percent, reflecting ample liquidity for future loan growth. Credit quality remained very strong this quarter as we recorded net loan recoveries of $521,000 this quarter. The allowance for credit losses remains robust, totaling $11,000,000 at September 30, 2023. Landmark continues to maintain strong capital and liquidity and a stable conservative deposit portfolio with most of our deposits being retail based and FDIC insured.

Speaker 1

We spend significant time each month monitoring our interest rate and concentration risk through our asset liability management practices. Further, we employ a relationship based banking model, which offers stability and consistency to all of our customers. We continue to remain disciplined in maintaining the credit standards that have historically served us well. Our 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 November 29, 2023 to shareholders of record as of November 15, 2023.

Speaker 1

This represents the 89th consecutive quarterly cash dividend since the company's formation in 2000 and 1. The Board also declared a 5% stock dividend to be issued December 15, 2023 to shareholders of record on December 1, 2023. This represents the 23rd consecutive year that the Board has declared a 5% stock dividend, A continued demonstration of our long term commitment to support growth in value and liquidity for our shareholders. I will now turn the call over to Mark Herbig, our CFO, who will review the financial results with you.

Speaker 2

Thanks, Michael, And good morning to everyone. While Michael has already highlighted our overall financial performance in the Q3 of 2023, I'd like to provide further details on our performance this quarter. Comparisons to the prior year Q3 results and year to date are impacted by the Freedom Bank acquisition, which was effective October 1, 2022. As a reminder, the acquisition of Freedom Bank Brought loans of $118,000,000 and deposits of $150,400,000 onto our balance sheet as of October 1st. As Michael mentioned, net income in the Q3 of 2023 totaled 2,900,000 Compared to the same period last year, net income increased 15.1% mainly due to growth In net interest income and non interest income, partially offset by higher non interest expense.

Speaker 2

Net income this quarter declined in comparison with the prior quarter mainly due to lower gains on sales of residential loans and an increase in non interest expense. In the Q3 of 2023, net interest income totaled $10,600,000 A decrease of $207,000 compared to the Q2 of 2023 due primarily to increased interest cost which more than offset the increase in interest income. Total interest income on loans increased $908,000 this quarter and the tax equivalent yield on the loan portfolio increased 13 basis points to 5.93%. Average loans also increased by $32,400,000 during the Q3 adding to loan interest income. Interest income on investment securities increased $63,000 to $3,200,000 this quarter as a result of higher yields earned Despite a decline in average investment securities balances of $8,800,000 the yield on investment securities totaled 2.77% In the current quarter compared to 2.70 percent in the prior quarter and 2.18% in the Q3 of 2022.

Speaker 2

Interest expense on deposits in the Q3 of 2023 increased $932,000 Mainly due to higher rates and balances. The average rate on our interest bearing deposits increased this quarter to 1.93% Compared to 1.57% last quarter, while the average balance of interest bearing deposits increased $20,000,000 Interest expense on borrowed funds increased $243,000 this quarter due to higher rates, While total average borrowed fund balances increased $10,700,000 as compared to the 2nd quarter. Landmark's net interest margin on a tax equivalent basis decreased to 3.06% in the Q3 of 2023 As compared to 3.21 percent in the Q2 of 2023. As a reminder, on January 1, we implemented the new accounting standard commonly referred to as CECL, which resulted in an increase of $1,500,000 to the allowance for credit losses on loans at that time. This quarter, no provision for credit losses was made as our credit models considered the economic environment Along with our strong loan growth, continued strong credit experience and a $626,000 loan recovery received during the 3rd quarter.

Speaker 2

At September 30, 2023, the ratio of our allowance for credit losses to gross loans was 1.17%. Non interest income totaled $3,700,000 this quarter, increasing $123,000 compared to the 3rd quarter last operator. While decreasing 177,000 compared to the Q2 of 2023. This increase From the prior year was primarily the result of recognizing a $353,000 loss on investment sales on the sale of lower yielding investments

Speaker 3

in the Q3 of 2022

Speaker 2

as well as an increase of $107,000 in fees and service charges And increases in bank owned life insurance and other non interest income of $41,000 $180,000 respectively. The increase in fees and service charges and bank owned life insurance related primarily to the acquisition of Freedom Bank last year. The increase in other non interest income was related to an increase in rental income associated with a branch location which was vacant in the Q3 last year, But it's now being rented. These increases were offset by a decline of $558,000 And gains on sales of residential mortgage loans as higher interest rates and lower housing inventories continue to slow purchase and refinancing activity of these fixed rate loans in 2023. The decrease in non interest income compared to the prior quarter It's mainly due to a decrease of $339,000 in gains on sales of residential mortgage loans, Offset by an increase of $137,000 in fees and service charge income.

Speaker 2

We continue to see growth in our new loan Originations of one adjustable rate mortgages which we normally keep in our loan portfolio instead of selling into the market. Non interest expense for the Q3 of 2023 totaled $10,700,000 an increase of $380,000 compared to the prior quarter And was $1,300,000 higher than the same period last year. Non interest expense increased in comparison to the Q2 of 2023 The increase in non interest expense Compared to the Q3 last year was mainly due to higher operating costs for compensation and benefits, occupancy and equipment, data processing, $671,000 resulting in an effective tax rate of 18.9% as compared to tax expense of 522,000 in the Q3 of last year for an effective

Speaker 3

tax rate of 17.3%.

Speaker 2

Loan growth continued strong this quarter as gross loans increased $44,200,000 or 19.6 percent annualized during the Q3. We continued to see solid demand from our commercial real estate, commercial and residential mortgage lending portfolios. Our investment securities portfolio actually decreased $27,500,000 in the Q3 of 2023. Gross unrealized net losses in this portfolio increased $12,800,000 to $42,800,000 principally due to higher interest rates during the quarter. Our investment portfolio has an average life of 4.7 years with maturities of 67,600,000 coming due in the next 12 months.

Speaker 2

Deposits totaled $1,300,000,000 at September 30, 2023 And increased by $27,100,000 this quarter. Non interest demand deposits and certificates of deposit grew by $12,600,000 And $37,600,000 this quarter respectively, while money market, interest checking and savings accounts Declined by $23,100,000 Our loan to deposit ratio totaled 70.8% at September 30, which remains low giving us ample liquidity to fund new loan growth. We operate in stable Markets throughout the state of Kansas, which provides us predictable liquidity through access to retail, commercial and municipal deposits. In addition, we continue to maintain and manage multiple other sources of liquidity, including the Federal Home Loan Bank and Federal Reserve Bank lines of credit and Fed Funds agreements. Combined, they provide approximately $216,000,000 of additional borrowing capacity as of September 30.

Speaker 2

Our investment portfolio also has unpledged securities available to serve as collateral for additional borrowings. Stockholders' equity decreased to $109,600,000 at September 30, 2023 and our book value decreased to 20.98 dollars per share at September 30th compared to $22.50 at June 30th. The decrease in stockholders' equity mainly resulted from the increase in unrealized losses on our investment securities portfolio mentioned above. Our consolidated and bank regulatory capital ratios as of September 30, 2023 are strong and exceed the regulatory levels considered well capitalized. The bank's leverage ratio was 8.7% at September 30, 2023, while the total risk based capital ratio was 13.7%.

Speaker 2

Now, let me turn the call over to Raymond to review highlights of our loan portfolio and credit risk outlook.

Speaker 4

Thank you, Mark, and good morning to everyone. As mentioned earlier, loan growth was strong throughout the quarter. Gross loans outstanding as of September 30, 2023 totaled $937,400,000 an increase of $44,200,000 Or 19.6 percent on an annualized basis from the previous quarter. We experienced continued growth In our 1 to 4 family residential real estate portfolio, which increased $29,900,000 this quarter. Growth in this residential mortgage portfolio was mainly the result of continued demand for our adjustable rate loan products.

Speaker 4

Our commercial real estate portfolio also increased $8,500,000 and our commercial loan portfolio increased $4,400,000 Turning to credit quality, non performing loans, which primarily consist of non accrual loans, Total $4,400,000 or 0.47 percent of gross loans as of September 30, 2023 And increased $1,700,000 from the prior quarter. The increase in non accrual loans was primarily due to a 1 point $2,000,000 SBA commercial loan that we classified as non accrual at September 30, 2023. Total foreclosed real estate was unchanged at $934,000 as we continue to actively pursue the sale of these properties. The balance of past due loans between 30 89 days still accruing interest increased $5,600,000 This quarter and totaled $6,100,000 This increase was primarily the result of a $4,200,000 SBA guaranteed relation That was delinquent at quarter end. That relationship was brought current in October.

Speaker 4

A $1,100,000 commercial real estate note, which was matured at quarter end was renewed in October. Despite the increases, Delinquencies remained low and only represented 0.66% of gross loans. We recorded net loan recoveries of $521,000 during the Q3 of 2023 compared to net loan recoveries of $43,000 during the Q3 of 2022. One large loan recovery of $626,000 was received this quarter, which related to a loan charge off that was taken in 2011. Our allowance for credit losses totaled $11,000,000 and ended the quarter at 1.17% of gross loans.

Speaker 4

Asset quality at Landmark has remained excellent over the last few years and we remain focused on maintaining strong metrics. The current economic landscape in Kansas remains healthy. The preliminary seasonally adjusted unemployment rate For Kansas as of September 30 was unchanged from the previous quarter at 2.8% according to the Bureau of Labor Statistics. In terms of housing, inventory levels for available homes in Kansas continue to impact home prices. The Kansas Association of Realtors present operator.

Speaker 4

Recently commented that newly added listings are down 13% from August compared to the same time last year. This is keeping inventory levels very tight despite the drop in sales activity. In fact, this week, The Wall Street Journal ranked the Topeka Kansas housing market as number 1 in the United States in terms of their real estate market and its strong economy. Home prices in August increased 4.7% in Kansas compared to the same time last year, Oil prices in the Midwest increased 6.8% compared to last year. Home sales in Kansas fell by 16% in August compared to the same period last year.

Speaker 4

Finally, I wanted to provide some additional color to the portfolio growth we experienced this quarter. The growth in our 1 to 4 family residential portfolio was largely driven by the popularity of our 7.1 ARM loan product. Loans with business product represent home loans to consumers across our banking footprint that are underwritten to secondary market The growth in our commercial real estate portfolio was largely due to a $6,100,000 growth in our owner occupied portion of that portfolio. We remain focused on banking relationships and not transactions. And with that, I thank you and I'll turn the call back over to Michael.

Speaker 1

Thanks Raymond and I also want to thank Mark for his comments earlier in this call. Before we go to questions, I want to summarize by saying that we are pleased with our performance for the Q3 year to date 2023. 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.

Operator

Thank you. We'll now enter our Q and A session. Our first question today comes from John Rodis from Janney. John, your line is now open. Please go ahead.

Speaker 5

Good morning, guys.

Speaker 1

Hey, good morning, John.

Speaker 5

Hope you guys are doing well. 1st day in November.

Speaker 1

Operator.

Speaker 5

It is hard to believe. You spoke about the growth in your Residential mortgage portfolio, the adjustable rates, what is the average sort of loan size LTV on the new production you're putting on? And then By my math, the mortgages are about a third of the loan portfolio. How high would you take that as a percentage of the overall portfolio?

Speaker 1

John, we're watching that somewhat carefully at this point. I mean the average unit size from a loan size for For our mortgage originations, it's somewhere in the neighborhood of $200,000 to $250,000 across the footprint. We've put about, I think total to date just under $65,000,000 of 7.1 product on the books in 2023 with an average coupon of just under 6%. So, Rokita, we are evaluating with that as we continue to move forward. Obviously, the cyclicality of Mortgage production wanes a little bit as we enter the end of the year.

Speaker 1

So we would see that pipeline thinning Quite a bit as we get into the end of the year and move into the Q1 of 2024.

Speaker 2

And to some extent, John, it's kind of a As you can see our investment portfolio is shrinking. I think we envision these 1 to 4 family loans It's kind of being our creating our own mortgage backed security if you wish at a yield with customers that we knew In our markets that we can get a better yield on than what we could buy a mortgage backed investment in the investment portfolio for, but we are cognizant that Does that metric into our CECL calculation and soaks up a little bit of the reserve as well, but we think strategically that If rates go down in a few years, these 7 year locked loans may come back and provide us another opportunity To work with that customer again for a refinance.

Speaker 5

Makes sense. Mark, maybe a question for you on the margin and really net interest income dollars. Do you think the margin and the dollars have bottomed out or do I think maybe there is still a little bit more downside?

Speaker 2

I think that may depend Much as what the Federal Reserve Bank does today and or announces today or at some of their future meetings, I think we're bottoming out with some of our models, but the pace at which they raised The Fed funds rate over the last year and a half was caused stress in our margin. Now we think we're catching up To that, but if they find a need to continue to raise another 25 or 50 basis points over the next few months, I think Then maybe I wouldn't say that we're at the bottom, but our assets and repricing are catching up. It was just Faster than anticipated on the speed at which the last 500 basis points went up. If that answers your question, makes sense.

Speaker 5

No, it does. It does. You're sort of in the same situation as a lot of banks. So maybe one final question. Just on the loan to deposit Ratio, so it's 71%, so still a lot lower than your peers.

Speaker 5

How high would you take that and feel comfortable in this environment?

Speaker 1

We'd love to stretch that into the low 80s, John. I mean, our risk profile It's going to or just our risk disciplines as we've historically underwritten credit is going to make that A little bit of a longer path, I guess, from the standpoint of asset generation. But If we were to model something into the low 80% loan to deposit ratio that would, I think, meet our risk dynamics operator. And particularly in the geography in which we do business with, that would be a, I think, a conservative

Operator

Thank you, John. Our next question today comes from Michael Zuk, an individual investor. Michael, please go ahead. Your line is open.

Speaker 6

Good morning. Congratulations on a solid performing quarter. I have a question. What's the percentage relationship of A floating rate versus fixed loans?

Speaker 1

Across the entire portfolio?

Speaker 6

Across the whole portfolio.

Speaker 1

Operator. I think our average our portfolio reprices on an average of, What is it, 50% of our portfolio reprices on an annual basis? Annual basis.

Speaker 2

I think I'd be guessing a little bit Mike if I quoted that number that I don't have at my fingertips right now. But like Michael said, I think as we look at Repricing over a 1 or 2 year period, I think we're in the just over 1 year as far as our Portfolio rolling over, so the fact that those might be fixed for 1 year repricing versus immediate.

Speaker 6

And then I may have missed it, but what's the average duration on your securities portfolio?

Speaker 2

We're at 4.7 years currently.

Speaker 6

And are you as you roll over components in that portfolio, are you shortening the duration a little bit?

Speaker 2

We're probably not at the yields that are a little higher now looking at if we were to make Some purchases which we haven't done a lot of this year, we're going a little longer with the rates kind of elevated at this point, but our The maturities we have in the next couple of years are our lowest yielding investments in the portfolio, but we're needing to get Couple more years of roll off to get those treasury notes and lower yielding investments to be removed and help out our unrealized loss On the portfolio.

Speaker 6

Yes, it looks like given that you're going to have some rollover in the next 2 years That the unrealized loss will gradually decline. Is that a fair assessment?

Speaker 2

Yes, very much so, Mike.

Speaker 6

Well, again, congratulations. I thought it was a very solid quarter and I do like the continuation of the 5% stock dividend. My wife and my in laws have been in the stock since the original conversion back in the 1980s. It's been a great performer.

Speaker 1

Thanks Mike. I appreciate the interest and continued interest in the company.

Speaker 6

All right. Keep up the good work and happy Thanksgiving to everybody.

Speaker 1

Thank you.

Operator

Thank you, Michael. Our next question today comes from Ross Haberman from RLH Investment. Ross, your line is now open. Please proceed with your question.

Speaker 3

Good morning, gentlemen. Thanks. I got on a little late. So if I repeat something you said, Please tell me and we can take it offline. But I was just wondering, If rates stay at these high levels, hypothetically through 'twenty four, they don't go up anymore, but they just stay at these high levels.

Speaker 3

When do you think your margin will bottom out given that scenario?

Speaker 2

I mean, I guess we're hoping that we're nearing the bottom at this point, Ross. That may depend a little bit on how the Federal Reserve Bank continues, but as you said in your scenario, I guess, if they don't do any raises, we think that we have Bottomed out, we're just not certain that they've quit their raising, but if they allow for a pause and let us to catch up with their rapid Increase over the last year, I think that we feel like we're very near the bottom at this point in time and think that we should start seeing the pendulum turn a little bit.

Speaker 3

Let me ask you a

Speaker 2

different way.

Speaker 3

In terms of your CDs re pricing, have we seen most of those already re priced from the 1% or Percent levels up to the 4 plus levels, would you say we're in the bottom of the 8th or top of the 9th inning in terms of that repricing

Speaker 2

I think we're getting down to the closer coming out of the bullpen, so to speak. And now some of those may have repriced 6 months ago and be set for Another reprice if we stay steady which may be a little higher next year if they did a 1 or 2 year re pricing, but the Increase at that point won't be near to the magnitude that it was on the first resets, that would be my take Ross.

Speaker 4

Okay.

Speaker 3

And just one last Question, we're probably going to see or we have seen probably continue to see, unfortunately, Probably a huge amount of tax selling in all these financial stocks between now year end. Would you consider buying back shares At some point or you don't know if the stock got below what the tens of books around $14 Would you consider buying back shares if it got to and then duly low rate like level like that or Really you're saving your capital for loan growth and other investments you might say?

Speaker 1

We're always mindful of managing our capital levels, Ross, but we do have an active stock repurchase plan that We can act on, and we continue to evaluate those metrics, particularly given the depressed price that we're trading at right now. So it is a it's a little bit of a balancing act, but We would actively consider utilizing capital to repurchase stock if we make the metrics If we make the metrics work.

Speaker 3

Yes. And one Final question, do you guys look at a lot of these banks in their Qs, in the notes they put In the note they put in the mark to market on their loans and everyone of course is underwater, of course they made any loans last couple of years. Do you put much credence into that mark to mark number and if so, why not?

Speaker 2

We do disclose it in our 10 Q, which will get filed in another week and a half or so, but we Maybe a touchy question Ross. Maybe I don't put a lot of credence In that number, I mean it is there, it's sometimes I wonder why we don't get as much attention on the deposits and the loans as we do our investment Securities portfolio which would obviously we have to make entries on that market valuation estimate, but the loan and deposit ones Which we disclosed, I don't seem to get much attention, but we they are important tonight, but I don't think the loan Valuation is any more or less important than the deposit valuation on the other side of the balance sheet.

Speaker 3

Okay. I greatly appreciate your time. Thank you. Let's hope these rates stop going up. I appreciate the time.

Speaker 3

Thanks again.

Speaker 1

All right. Thanks, Ross.

Speaker 5

Okay.

Operator

Thank you, Ross. Okay. Currently no further operator on the line. So Michael, I would like to hand back to you for any closing remarks.

Speaker 1

Thank you. And I truly do want to thank everyone for participating in today's earnings call. I very much appreciate your continued support and the confidence that you have in our company and I look forward to sharing news related to our Q4 2023 results at our next earnings conference call. Thank you.

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Landmark Bancorp Q3 2023
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