Landmark Bancorp Q1 2023 Earnings Call Transcript

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May 3, 2023

There are 4 speakers on the call.

Operator

Good morning and thank you for standing by. I would like to welcome you all to Landmark Bancorp Q1 Earnings Call. At this time, all participants are in a listen only mode. And after the speakers' presentation, we will have a question and answer session. Will be ready to take questions.

Operator

Thank you. I would now like to turn the conference over to your first speaker today, Michael Schonner, Vice President and Chief Executive Officer of Landmark Bancorp, please go ahead when you're ready, Michael.

Speaker 1

Thank you, and good morning. Thank you for joining our call today to discuss Landmark's earnings are in the results of operations for the Q1 of 2023. Joining the call with me to discuss various aspects of our Q1 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 will be in the 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 and 10 Regarding our operating results for the quarter, I want to take a moment to comment on events that have taken place in the banking system during the 1st few months of this year. 3 large regional banks have been closed by the FDIC, mainly due to liquidity concerns resulting from interest rate risk issues and large concentrations of uninsured deposits. These liquidity issues were unique to the way these banks operated And are not reflective of the way we manage things at Landmark. Landmark maintains strong capital and liquidity and a stable deposit portfolio with the majority of our deposits being retail based and FDIC insured. We spend significant time each month are monitoring our interest rate and concentration risk through our asset liability management and our lending strategies involve a relationship based banking model, are offering stability and consistency.

Speaker 1

We will continue to remain disciplined in maintaining the credit standards that have historically served us well. Landmark reported net earnings of $3,400,000 during the Q1 of 2023. Earnings per share on a fully diluted basis for the Q1 was $0.64 The return on average assets was 0.9% and the return on average equity was 12.04%. Our efficiency ratio for the Q1 2023 was 70.1%. Our first quarter results included solid loan growth, lower expenses and continued good credit quality.

Speaker 1

Total gross loans increased by 19 point $6,000,000 or 9.4 percent on an annualized basis, while deposits decreased $6,600,000 or 2.1 percent as we expected are due to a seasonal decline in public fund deposit balances. Compared to the prior quarter, net interest income declined 7.9% as rising rates impacted our funding cost. Compared to the prior quarter, non interest income increased while our operating expenses declined. Credit quality remained very strong this quarter as net loan charge offs, non accrual loans and delinquencies were low. The allowance for loan losses totaled $10,300,000 as of March 31, 2023.

Speaker 1

As I mentioned at the beginning of my comments, 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'm pleased to report that our Board of Directors has declared a cash dividend of $0.21 per share to be paid May 31, 2023 are available to shareholders of record as of May 17, 2023. This represents the 87th consecutive quarterly cash dividend since the company's formation in 2,001. I will now turn the call over to Mark Herpitt, our CFO, who will review the financial results with you.

Speaker 2

Thanks, Michael, and good morning to everyone. Michael has already highlighted our financial performance in 2023, And now I'd like to talk further about the Q1 2023 results. Comparisons to the prior year Q1 results are currently impacted by the Freedom Bank acquisition effective October 1, 2022. And 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 1. Net income in the Q1 of 2023 totaled $3,400,000 compared to $1,200,000 in the prior quarter And $3,100,000 in the Q1 of 2022.

Speaker 2

The increase of $2,200,000 over the Q4 of 2020 was mainly due to Freedom Bank acquisition related costs of $3,000,000 that were recorded in the Q4 of 2023 that did not repeat in the current quarter. Net income increased 7.1% over the same period last income totaled $10,900,000 a decrease of $939,000 compared to the Q4 of 2022 due primarily to the increased interest costs, which more than offset the increase in interest income. Total interest income on loans increased 275,000 dollars this quarter and the tax equivalent yield on the loan portfolio increased 14 basis points to 5.43%. Average loans also increased by $18,000,000 during the Q1, adding to loan interest. Interest income on investment securities increased $50,000 to $3,100,000 this quarter as a result of higher rates earned Despite a decline in average investment securities balances of $5,000,000 the yield on investment securities totaled 2 point Interest expense on interest bearing deposits in the Q1 of 2023 increased $1,100,000 mainly due to higher rates and balances.

Speaker 2

The average rate on our interest bearing deposits increased this quarter to 1.18% compared to 0.68% last quarter, While the average balance of interest bearing deposits increased $22,900,000 Interest expense on borrowed funds increased $186,000 this quarter due to higher short term rates, while total average borrowed fund balances decreased by $2,600,000 as compared to the 4th quarter. Landmark's net interest margin on a tax equivalent basis decreased to 3.31% in the Q1 of 2023 as compared to 3.53% in the Q4 of 2022. 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. Additionally, we recorded a provision of $49,000 for credit losses related to our unfunded loan commitments and held to maturity investments during the Q1. Based on our analysis of the economic environment and our strong Credit results in the Q1, we determined that no further provision to the allowance for credit losses was warranted in the Q1.

Speaker 2

At March 31, 2023, the ratio of our allowance for credit losses to gross loans was 1.18%. Non interest income totaled $3,500,000 this quarter, increasing $683,000 compared Q4 of 2022, while declining by $68,000 in comparison to the Q1 last year. The increase from the prior year excuse me, the increase from the prior quarter was due primarily to the $750,000 loss on the sale of lower yielding investment securities in the Q4 of 2022, while there were no securities gains or losses in the current quarter were in the Q1 last year. The decline in non interest income in comparison to the prior year is mainly due to a decrease have $212,000 in gains on sales of residential mortgage loans, partially offset by a $170,000 increase in fees and service charges. Higher interest rates coupled with lower housing inventories continue to slow purchase and refinancing activities.

Speaker 2

However, we continue to see growth in new loan originations of adjustable rate mortgages and these loans are we normally keep in our loan portfolio instead of selling into the market. Non interest expense for the Q1 of 2023 totaled $10,300,000 or a decrease of $3,600,000 over the prior quarter and was $1,500,000 higher than the same period last year. The The decrease in non interest expense over the Q4 of 2022 was driven primarily by the acquisition cost of $3,000,000 in the 4th quarter, which did not reoccur. Also during the Q4 of 2022, a one time valuation allowance of $354,000 was recorded on certain other real estate owned. The increase in non interest expense compared to the Q1 last year was mainly due to higher operating costs for compensation and benefits, occupancy equipment and other costs associated with the Freedom Bank acquisition.

Speaker 2

This quarter, we recorded tax expense of $693,000 resulting in an effective tax rate of 17.1% As compared to tax expense of $737,000 in the Q1 of last year or an effective tax rate of 19.0%. Loan growth continued strong this quarter as gross loans increased $19,600,000 during the 1st quarter, Representing an annualized growth rate of 9.4%. We continue to see solid demand from our residential mortgage, Commercial Real Estate and Consumer Lending Portfolios.

Operator

On a

Speaker 2

period end basis, our investment securities portfolio increased 863,000 in this portfolio decreased $6,700,000 principally due to maturities and a decline in bond market rates during the quarter. Profits totaled $1,300,000,000 at March 31, 2023 and decreased by $6,600,000 this quarter, primarily related to seasonal declines in public fund balances we normally see each year during the Q1. Certificates of deposit and non interest Demand deposits grew by $20,900,000 $11,800,000 this quarter, while money market and interest checking accounts declined by $38,300,000 Our loan to deposit ratio totaled 66% at March 31st, which remains low, giving us plenty of liquidity to fund new loan growth. On the topic of liquidity, The stable markets we operate in, Sauvao, Kansas, continue to provide 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, The Federal Reserve Bank and Fed Funds Agreements.

Speaker 2

We also have additional capacity through insured cash sweep and SEDAR's programs to provide additional insurance coverage for customers and a source of wholesale funding. Our investment portfolio also provides a solid liquidity and is 99.3 percent available for sale with approximately $73,000,000 in projected cash flow over the next year. As of March 31, 2023, we had $183,700,000 of unpledged or overpledged investments, are in the range of 31,023 and our book value per share increased to $22.58 per share. The increase in stockholders' equity was due primarily both from quarterly net income along with a decline in unrealized losses on our investment securities portfolio mentioned above. Also included in our stockholders' equity was the adoption of the CECL accounting standard mentioned above, which resulted in a $1,200,000 after tax reduction of equity.

Speaker 2

Our consolidated and bank regulatory capital ratios as of March 31, in 2023 are very strong and exceed the regulatory capital level considered to be well capitalized. The bank's leverage ratio was 8.7% at March 31, 2023, while the total risk based capital ratio was 14.1%. Now let me turn the call over to Raymond to review highlights of our loan portfolio and credit risk outlook.

Speaker 3

Thank you, Mark, and good morning to everyone. Gross loans outstanding as of March 31, 2023, totaled $869,800,000 an increase of $19,600,000 or 9.4 percent on an annualized basis from the prior quarter. We experienced growth in our 1 to 4 family residential real estate and commercial real estate portfolios this quarter. The 1 to 4 family mortgage portfolio increased $9,100,000 while our commercial real estate portfolio increased $12,800,000 this quarter. Growth in our residential mortgage portfolio was mainly the result of continued demand for our adjustable rate mortgage loan product.

Speaker 3

Additionally, we had good success at funding new commercial real estate loans this quarter. Commercial real estate loans comprised 36% of our overall portfolio, and we monitor concentrations within this portfolio carefully. Our commercial real estate portfolio primarily consists of owner occupied commercial real estate. We did see an increase in the non owner occupied portion of our commercial real estate portfolio during the Q1. However, the non owner occupied growth that we experienced was mainly due to one transaction with very strong credit risk metrics in the prime area of Kansas City.

Speaker 3

We remain focused on financing owner occupied opportunities to seasoned borrowers in all of our markets. Credit quality within the portfolio continues to remain strong. Non performing loans, which primarily consist of non accrual loans and accruing loans greater than 90 days past due totaled $3,300,000 or 0.38 percent of gross loans as of March 31, 2023. Total foreclosed real estate was unchanged at $934,000 And 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 30 to 89 days.

Speaker 3

The level of past due loans between 30 89 days still accruing interest remains low was only 0.17 percent of gross loans this quarter. We recorded net loan charge offs of $47,000 during the first in the Q1 of 2023 compared to net loan recoveries of $82,000 during the Q1 of 2022. Our allowance for credit losses totaled $10,300,000 and ended the quarter at 1.18 percent of gross loans. We're very pleased with our strong and stable asset quality numbers. And as you can tell from the numbers, we remain focused on maintaining quality metrics.

Speaker 3

The current economic landscape in Kansas remains healthy. The preliminary seasonally adjusted unemployment rate for Kansas as of the was unchanged at 2.9% according to the Bureau of Trinity's company. Low inventory levels continue to impact sales and financing activities Even though demand has dropped as rates have increased. The Kansas Association of Realtors President recently commented That without more inventory of homes available for sale, the market will continue to favor sellers despite the drop in demand. Home prices in March increased 0.3% in Kansas compared to the same time last year, While prices in the Midwest increased 1.7% compared to last year.

Speaker 3

Home sales in Kansas fell by 13.8% in March compared to the same period last year. We continue to see economic development across our state. The recently announced $4,000,000,000 Panasonic battery plant in the Kansas City metro area has begun vertical construction. The Hillmer cheese plant in our Dodge City market is also at the vertical stage of construction. Additionally, Kansas Governor Laura Kelly recently announced construction of a new $1,900,000,000 computer chip manufacturing facility in Burlington, Kansas.

Speaker 3

This capital investment is expected to create 1200 new jobs in Coffee County, Kansas and the surrounding Southeast Kansas market. We believe our branch footprint will benefit from all of these economic investments across Kansas. And with that, I thank you, and I'll turn the call back over to Michael.

Speaker 1

Thanks, Raymond. And Mark, I also want to thank you for your earlier comments. Before we go to questions, I want to summarize by saying we are pleased with performance for the Q1 of 2023 was our strong loan growth,

Operator

our

Speaker 1

solid credit quality and improved net interest margin. I want to express my thanks and appreciation to all of the associates at Landmark National Bank. Their daily focus on 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

We have had no questions registered. So I'd like to hand it back to Michael Schlotner for any remarks.

Speaker 1

Thank you. And I do want to thank everyone for are participating in today's earnings call. I appreciate your continued support and confidence in the company, and I look forward to sharing

Operator

Thank you all for joining. That concludes today's call. You may now disconnect your lines and have a lovely rest of your day.

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Earnings Conference Call
Landmark Bancorp Q1 2023
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