Landmark Bancorp Q2 2023 Earnings Call Transcript

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August 9, 2023

There are 5 speakers on the call.

Operator

Good morning, all. I would like to welcome you all to the Landmark Bancorp Second Quarter Earnings Call. My name is Brika, and I'll be your moderator for today. All lines are on mute for the presentation portion of the call. I would now like to pass the conference over to your host, Michael Schopner, President and Chief Executive Officer to begin.

Operator

Sir Michael, please go ahead.

Speaker 1

Thank you and good morning. Thank you for joining our call today to discuss Landmark's earnings and results of operations for the 2nd quarter and year to date 2023. Joining the call with me to discuss various aspects of our 2nd quarter 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 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.

Speaker 1

Landmark reported net earnings $3,400,000 during the Q2 of 2023. Earnings per share on a fully diluted basis for the Q2 was $0.64 For the 3 months ended June 30, the return on average assets was 0.88% and the return on average equity was 11.52%. Our efficiency ratio in the Q2 of 2023 was 69.2%. Our 2nd quarter results reflected continued solid earnings driven by growth in loans, well controlled expenses and strong credit quality. Compared to the Q1 2023, total gross loans increased by $23,500,000 or 10.8 percent on an annualized basis this quarter.

Speaker 1

While deposits decreased $13,100,000 during the Q2 of 2023 due to lower non interest demand deposits and savings accounts, but offset by growth in money market, interest checking and certificate of deposit accounts. Our loan to deposit ratio this quarter remains relatively low It reflects ample liquidity for future loan growth. Credit quality remained very strong this quarter as we continued to see low net loan charge offs, Declining non performing assets and low levels of delinquent loans. The allowance for loan losses totaled $10,400,000 as of June 30, 2023. Landmark maintained strong capital and liquidity and a stable conservative deposit portfolio With most of our deposits being retail based and FDIC insured, we spend significant time each month monitoring our interest rate and concentration risk Through our asset liability management and employee relationship based banking models, which offers stability and consistency to all of our customers.

Speaker 1

We will 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 September 6, 2023 to shareholders of record as of August 23, 2023. This represents the 88th consecutive quarterly cash dividend since The company's formation in 2,001. I will now turn the call over to Mark Kerpich, 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 Q2 Of 2023, I'd like to provide further details on our performance this quarter. Comparisons to the prior year's 2nd Quarter results are significantly 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 1. Net income in the Q2 of 2023 totaled $3,400,000 Compared to $3,400,000 in the prior quarter $3,000,000 in the Q2 of 2022.

Speaker 2

Our earnings remained constant with the prior quarter as we saw increases in noninterest income offset a decline in net interest income. Net income increased 10.9% over the same period last year, mainly due to growth in net interest income, offset by higher expenses. In the Q2 of 2023, net interest income totaled $10,800,000 a decrease of $114,000 Compared to the Q1 of 2023 due primarily to the increased interest costs, which more than offset the increase in interest income. Total interest income on loans increased $1,200,000 this quarter and the tax equivalent yield on the loan portfolio increased 37 basis points to 5.80%. Average loans also increased by $23,600,000 During the Q2, adding to loan interest income.

Speaker 2

Interest income on investment securities increased $51,000 to $3,200,000 this quarter as a result of higher yields earned despite a decline in average Investment securities balances of $4,100,000 The yield on investment securities totaled 2.70 percent in the Q2 compared to 2.68% in the prior quarter and 1.97% in the Q2 of 2022. Interest expense on deposits in the Q2 of 2023 increased $913,000 mainly due to higher rates and balances. The average rate on interest earning deposits increased this quarter to 1.57% compared to 1.18 Percent last quarter, while the average balance of interest bearing deposits increased 9,800,000 Interest expense on borrowed funds increased $450,000 this quarter due to higher short term rates, while total average Borrowed fund balances increased $21,300,000 as compared to the Q1. Landmark's net interest margin on a tax equivalent basis decreased 3.21% in the Q2 of 2023 as compared to 3.31 percent in the Q1 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.

Speaker 2

This quarter, a provision for credit losses of $250,000 was made as credit models Considered the economic environment along with our strong loan growth and continued strong credit experience, At June 30, 2023, the ratio of our allowance for credit losses to gross loans was 1.17%. Non interest income totaled $3,800,000 this quarter, increasing $334,000 compared to the Q1 of 2023, while improving by $33,000 in comparison to the Q2 last year. The increase from the prior year was due call. Primarily to increases of $101,000 in fees and service charges along with $142,000 In other non interest income and $33,000 in bank owned life insurance. The increases in fees and service charges And bank owned life insurance related primarily to the acquisition of Freedom Bank last year.

Speaker 2

The increase Other non interest income was related to an increase in rental income associated with a branch location, which was vacant in the Q2 last year, but is now being rented. These increases were offset by a decline of $243,000 and gains on sales of 1 to 4 family residential loans As higher interest rates and lower housing inventories continue to slow purchase and refinancing activity of these fixed rate loans in 2023. The increase in non interest income compared to the prior quarter is mainly due to an increase of $123,000 in fees and service charge, which is Gains and seasonal increases in originations of residential mortgage loans, which resulted in an increase of $137,000 And gains on sales of fixed rate 1 to 4 family loans. We continue to see growth in new loan originations of adjustable rate mortgages, call, which we normally keep in our loan portfolio instead of selling into the market. Non interest expense for the Q2 of 2023 Totaled $10,300,000 and was mostly unchanged compared to the prior quarter and was $1,300,000 higher than The Q1 of 2023.

Speaker 2

Non interest expense was flat in comparison to the Q1 of 2023 As higher professional fees were offset by lower data processing fees as we completed data processing conversions this past March related to our Freedom Bank acquisition. The increase in non interest expense compared to the Q2 last year was mainly due to higher operating costs for compensation and benefits, Occupancy and equipment, data processing and other costs associated with the Freedom Bank acquisition. This quarter, we recorded tax expense of $701,000 resulting in an effective tax rate of 17.3 percent As compared to the tax expense of $639,000 in the Q2 of last year, or an effective tax rate of 17.4%. Loan growth continued strong this quarter as gross loans increased 23,500,000 We're 10.8% annualized during the Q2. We continue to see solid demand from our agriculture, Commercial and residential mortgage lending portfolios.

Speaker 2

Our investment securities portfolio decreased $5,800,000 in the Q2 of 2023. Gross unrealized net losses in this portfolio increased $3,600,000 to $30,000,000 principally due to an increase Interest rates during the quarter. Deposits totaled $1,300,000,000 at June 30, 2023 and decreased by $13,100,000 this quarter. Certificates of deposits and money market and interest Checking accounts grew by $17,500,000 $18,100,000 this quarter, respectively, While non interest demand deposits and savings accounts declined by $39,600,000 $9,100,000 respectively. Our loan to deposit ratio totaled 68.9% at June 30, which remains low, giving us plenty of liquidity to fund new loan growth.

Speaker 2

We operate in the stable markets throughout the state of Kansas, which provides us predictable liquidity through the 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 the Federal Reserve Bank lines of credit and Fed funds agreements. Combined, they provide us Approximately $220,000,000 of additional borrowing capacity as of June 30. We also have additional capacity through insured cash sweep and SEDAR's programs to provide additional insurance coverage for customers and as a source of wholesale funding. Our investment portfolio also provides a solid source of liquidity and is 99.3% available for sale with approximately 76,000,000 and projected cash flow over the next year.

Speaker 2

As of June 30, 2023, we had 168,400,000 of investment securities, which can be used as collateral for additional borrowing. Stockholders' equity decreased Slightly to $117,400,000 at June 30, 2023, and our book value decreased to 22 $0.50 per share at June 30 compared to $22.57 a share at March 31. The decrease in stockholders' equity resulted from an increase in unrealized losses on our investment securities portfolio mentioned above, which offset our quarterly earnings net of cash dividends. Our consolidated and bank regulatory capital ratios as of June 30, 2023 Are strong and exceed the regulatory levels considered to be well capitalized. The bank's leverage ratio was 8.7% at June 30, 2023, while our total risk based capital ratio was 13.9%.

Speaker 2

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. We continue to see strong loan growth throughout the quarter. Gross loans outstanding as of March 30, 2023, totaled $893,300,000 An increase of $23,500,000 or 10.8 percent on an annualized basis from the previous quarter. We experienced continued growth in our 1 to 4 family residential real estate loan portfolio, which increased $13,300,000 this quarter. Growth in this residential mortgage portfolio was mainly the result of continued demand for our adjustable rate loan mortgage products.

Speaker 3

Our commercial loan portfolio increased $9,000,000 this quarter, driven by growth in new business and increased line utilization. Our agricultural portfolio increased $3,800,000 with approximately onethree of this coming from new business growth. Credit quality within the portfolio continues to remain strong with low net charge offs and declining non performing assets. Non performing loans, which primarily consist of non accrual loans and accruing loans greater than 90 days past due, totaled $2,800,000 or 0.31 percent of gross loans as of June 30, 2023. Total foreclosed real estate was unchanged $934,000 as we continue to actively pursue the sale of these properties, the balance of past Due loans between 3089 days still accruing interest declined significantly this quarter and totaled only 0.07 We recorded net loan charge offs of $68,000 during the Q2 of 2023 Compared to net loan charge offs of $42,000 during the Q2 of 2022.

Speaker 3

Our allowance for credit losses Total $10,500,000 following the $250,000 provision Mark mentioned and ended the quarter at 1.17% of gross loans. Asset quality at Landmark has remained excellent over the last few years, and we are focused on maintaining these quality metrics. The current economic landscape in Kansas is healthy. The preliminary seasonally adjusted unemployment rate for Kansas as of June 30 was down slightly at 2.8% according to

Speaker 2

the Bureau of Labor Statistics.

Speaker 3

In terms of housing, throughout the state of Kansas, higher interest rates Along with lower inventories of homes for sale have impacted sales and financing activities. The Kansas Association of Realtors President recently commented that sales through the first half of the year are down nearly 15% compared to 2022. Nevertheless, it remains a seller's market due to very tight inventories. Home prices in June increased 3.8% in Kansas compared to the same time last year, while prices in the Midwest increased 2.1% compared to last year. Home sales in Kansas fell by 9.6% in June compared to the same period last year.

Speaker 3

Lastly, I wanted to reiterate our credit focus. Our company, your company, remains focused on building and growing relationships that go beyond We're proud of the loan growth we've experienced. However, we're not sticking our neck out to get it. Our current loan to deposit ratio of 69% Still affords us a runway for additional loan growth, and we'll continue to be judicious in deploying that capital for the long term benefit of our company and our shareholders. With that, I thank you.

Speaker 3

And I'll turn the call back over to Michael.

Speaker 1

Thanks, Raymond. And I also want to thank you, Mark, for your comments earlier on the call. Before we go to questions, I want to summarize by saying that we are pleased with our performance for the Q2 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.

Speaker 1

With that, I'll open the call up to questions that anyone might have.

Operator

We have the first question on the phone line from Ross Haberman of RLH Investments.

Speaker 4

Good morning, gentlemen. Nice quarter. Could you tell me a little bit, What is the average duration or life of that held to sorry, of the held for sale Securities, please.

Speaker 2

I think we're in the 3.7% to 3.9 average year life or average life of our available for sale investment portfolio.

Speaker 4

Okay. I think you said, hold on, dollars 76 $1,000,000 I believe you said is the cash flow coming off that. That's about 15%, 16% of the total. That's about right. If I'm understanding

Speaker 1

right. Over

Speaker 4

the next 12 months. Is that what you Yes, I understood that.

Speaker 2

That's actually the rest of this year of 2023.

Speaker 4

Okay. And how are you positioned or what are you seeing? Let's say they raised the rates another 0.25 percent for argument's sake And keep it there. What is how does that scenario do you see affecting your margin or your spread?

Speaker 2

I think on the short term, we're going to continue to see a little more margin compression, Ross. I think it's with our Barrowing costs enabled the immediate impact on our investments or our loan portfolio doesn't Reset immediately like it does on some of our short term borrowing lines. Longer term, if the rates stay up and get a little less On the yield curve, it's the higher rates are good for us, but the inversion and the short term aspect are a little will result in some compression for us, Which we saw from the Q1 to the Q2 of this year.

Speaker 4

Can I ask what you're paying? What's the highest rate you're paying either on CDs or money markets today?

Speaker 2

On CDs and money markets, we're probably matching customers when they come in. I think Our highest stated rate may be 4% on a 7 month CV, but we are matching people that come in, in the Low fives with relationships that they bring to us as opposed to A customer coming in off individual coming in that's not a customer wouldn't get that rate, but a Longer term real estate, but you can have some other accounts with us we'd look at matching.

Speaker 4

And what kind of rates you get on your commercial real estate loans today?

Speaker 1

Ross, those are probably dependent upon the The risk metric attached to it, those are going to be priced somewhere in the neighborhood north of 7.5.

Speaker 4

Okay. I'm just trying to get a sense of what net margin cost of by probably 2.5 to 3.5 minutes, correct?

Speaker 1

I'm sorry, Ross, what was that again?

Speaker 4

I said I'm trying to get a sense of what kind of margin you're getting on your On your marginal cost of money today, it looks like we're asking 2.75% or 2% ish. Is that top Sunrise?

Speaker 2

That's where we're targeting to get, which was a little bit better, but that's where we're seeing a lot of it come in at this point, Ross.

Speaker 4

And just one final question now. I greatly appreciate your time. What sort of loan growth do you expect in the second half? You had You're up about $40,000,000 but 5%, I guess, for the 5% for the first half, $43,000,000 Most banks are not expecting much growth in the second half. What are you sort of what are you sort of based on your Pipeline for a second.

Speaker 1

We'll still see some volume in growth, particularly in our 1 to 4 family adjustable rate Mortgage portfolio, that's been an attractive alternative product, given just rate environment. So I'd expect to see some continued growth there. Our pipelines as we're entering the second half of this year, I'd say we still have average pipeline activity and still if we were to model Growth for the second half of this year, I'd be looking at mid to upper single digit growth.

Speaker 4

Okay. That's better than most. Thanks, guys. I really appreciate it. It was a very nice Very nice quarter.

Speaker 4

Thanks.

Speaker 1

Thanks for the interest in the company.

Operator

Thank you. I can confirm we've had no further questions registered. I apologize. We have a follow-up question from Ross.

Speaker 1

Okay. I'm

Speaker 4

sorry. No one else is I might as well indulge. Sorry, guys. Just one final question. In the €3,300,000 for the quarter, it looked like that number was pretty clean in terms of nonrecurring expenses and or gains.

Speaker 4

I just want to call. I guess, I'm sorry, you did have about $830,000 gain on sale of mortgage loans?

Speaker 2

Yes. That was and I think we kind of consider that a little Continuous and not one time as you actually a little bit down from last year's gain on sale of loans as we Originate and sell all the fixed rate products we come up with. The volume is down a little bit now, but I think that's still a recurring number. We'd hope it maybe picks up yet.

Speaker 4

For the second half? And having expenses, any onetime expenses data processing or you're Those are going to open up any new branches in the second half.

Speaker 2

Nothing It's scheduled at this point in time, Ross, what I can think of. I think our onetime, we should still see a little bit of synergies of some of the Freedom Bank acquisition. Last October, we got through the data process call. Conversion in March, so the data processing costs you can see went down quarter over quarter and maybe there's still a few Contracts that we'll need to get to their expiration yet in the second half of this year, but they are material individually.

Operator

Thank you. For time confirmed, we have no further questions. I would like to hand it back to Michael for any final remarks.

Speaker 1

Thank you. And I do want to thank everyone for participating in today's earnings call. I truly do appreciate your continued support and the confidence that you have in our company. And I look forward to sharing news related to our Q3 2023 results at our next earnings conference call.

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Landmark Bancorp Q2 2023
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