Landmark Bancorp Q4 2023 Earnings Call Transcript

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February 1, 2024

There are 4 speakers on the call.

Operator

Good morning or good afternoon all and welcome to the Landmark Bancorp Inc. Q4 Earnings Call. I'll now hand the call over to Michael Schevener, President and Chief Executive Officer to begin. So Michael, please go ahead when you are ready.

Speaker 1

Thank you and good morning. Thank you for joining our call today to discuss Landmark's earnings and the operating results for the Q4 fiscal year ending 2023. Joining the call with me to discuss various aspects of our Q4 performance is Mark Herbig, 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 lines, I must point out that any statements made during this presentation that discuss our hopes, beliefs, expectations or predictions of the future Our 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's results in 2023 were strong. Net income for the 12 months ending December 31st totaled over $12,000,000 or an increase of over 23 from the prior year. This increase was achieved through solid growth in net interest income, well controlled expenses and excellent credit quality in our loan portfolio. Further in 2023, we realized significant benefits from the integration of both people and systems as a result of our acquisition of Freedom Bank in the Q4 of 2022. For the Q4 of 2023, We reported net earnings of $2,600,000 compared to $2,900,000 in the prior quarter and $1,200,000 in the Q4 2020 2, earnings per share on a fully diluted basis for the 4th quarter was $0.48 For the 3 months ended December 31, 2023, the return on average assets was 0.67%, the return on average equity was 9.39%, and the efficiency ratio was 71.9%.

Speaker 1

In the 4th quarter, the Federal Reserve started to stabilize short term rates and long term interest rates declined. This enabled us to grow deposits, reduce investment securities and fund continued loan growth. We also reduced our reliance on borrowed funds as we sold some lower rate investment securities at a pre tax loss of $1,200,000 and reduce higher cost funding sources. Lower rates overall effectively increased our book value per share to $23.17 while also increasing equity to assets. Compared to the Q3 of 2023, total gross loans increased by 11 point $2,000,000 mainly due to growth in residential mortgage and agricultural loans.

Speaker 1

Deposits also increased $6,800,000 during the Q4 of 2023. Net interest income grew 2.4% from the prior quarter and our net interest margin increased to 3 1 1 percent during the Q4 of 2023. Non interest income decreased $1,400,000 compared to the Q3 of 2023, mostly due to the security losses mentioned earlier, while non interest expense declined mainly due to acquisition costs incurred in 2022 in the Q4 that did not reoccur. The credit quality of our loan portfolio remains solid. Non accrual loans declined significantly this quarter, while the balance of other past due loans remains relatively very low.

Speaker 1

The allowance for credit losses remains robust totaling $10,600,000 at December 31, 2023. Landmark continues to maintain strong capital and liquidity and a stable conservative deposit portfolio with most of our deposits retail based and FDIC insured. 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.

Speaker 1

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. During the Q4, our company distributed a 5% stock dividend representing the 23rd consecutive year that we have done this. We also paid a cash dividend of $0.20 per share representing a 5% increase when adjusted for the 5% stock dividend. I'm also pleased to report that our Board of Directors has declared a cash dividend of $0.21 per share to be paid February 28, 2024 to shareholders of record as of February 14, 2024. This represents the 90th consecutive quarterly cash dividend the company's formation in 2,001.

Speaker 1

I will now turn the call over to Mark Herpich, our CFO, who will review the financial results

Speaker 2

Thanks, Michael, and good morning to everyone. While Michael has already summarized our financial results and performance in the Q4 of 2023, I'd like to provide further details on those results. As Michael mentioned, net income in the Q4 of 2023 totaled $2,600,000 compared to $2,900,000 in the prior quarter and $1,200,000 in the Q4 of 2022. Net income this quarter declined in comparison to the prior quarter, mainly due to a $1,200,000 loss on sales of investment securities totaling 27,000,000 but offset by growth in net interest income and a slight decline in non interest expense. In the Q4 of 2023, Net interest income totaled $10,900,000 an increase of $260,000 compared to the Q3 of 2023 due primarily to increased interest income on loans which more than offset an increase in interest expense.

Speaker 2

Total interest income on loans increased $692,000 this quarter and the tax equivalent yield on the loan portfolio increased 11 basis points to 6.04%. Average loans also increased by $28,000,000 during the Q4 adding to loan interest income. Interest income on investment securities decreased $3,000 to $3,200,000 this quarter as a result of higher yields earned but offset by a decline in average investment securities balances of $22,900,000 The yield on investment securities totaled 2.86% in the current quarter compared to 2.77% in the prior quarter and 2.56% in the Q4 of 2022. Interest expense on deposits in the Q4 of 2023 increased $495,000 mainly due to higher rates and balances. The average rate on our interest bearing deposits increased this quarter 2.13% compared to 1.93% last quarter, while the average balance of interest bearing deposits increased 7,900,000 Interest expense on borrowed funds decreased $63,000 this quarter despite higher rates as total borrowed fund balances declined $17,800,000 during the 4th quarter.

Speaker 2

Landmark's net interest margin on a tax equivalent basis increased to 3.11% in the Q4 of 2023 as compared to 3.06% in the Q3 of 2023. As a reminder, on January 1, 2020 3, we implemented the new accounting standard commonly referred to as CECL, which resulted in an increase $1,500,000 to the allowance for credit losses on loans at that time. This quarter, a $50,000 provision for credit losses made to our liability for unfunded lending commitments and we did not make a loan related provision. While net loan charge offs increased this quarter, Our allowance for credit losses of $10,600,000 remains strong and represents 1.12 percent of gross loans. Non interest income totaled $2,300,000 this quarter, decreasing $558,000 compared to the Q4 last year, while decreasing $1,400,000 compared to the Q3 of 2023.

Speaker 2

The decreases from the prior year was primarily the result of recognizing a loss of $1,200,000 on the sale of lower yielding investments compared with a securities loss of $496,000 in the same period last year. Also, the gain on sales of fixed rate residential mortgages declined by $162,000 compared to Q4 last year. These decreases were partially offset by a 191,000 or 7.4% increase in fees and service charges. The decrease in non interest income compared to the prior quarter is mainly due the securities loss of $1,200,000 mentioned earlier and a decrease of $236,000 in gains on sales of residential mortgage loans, offset by an increase of $145,000 in fees and service charge income. We continue to growth in new loan originations of adjustable rate mortgages, which we normally keep in our loan portfolio instead of selling into the market.

Speaker 2

Non interest expense for the Q4 of 2023 totaled $10,600,000 a decrease of $167,000 compared to the prior quarter and was $3,400,000 lower than the same period last year. The decrease in non interest expense compared to the prior quarter mainly due to lower losses incurred by our captive insurance subsidiary coupled with a decline in comp and benefits. The decrease in non interest expense compared to the Q4 last year was mainly due to costs associated with the Freedom Bank acquisition in the prior year that did not reoccur plus higher costs for foreclosed real estate and captive insurance costs last year. This quarter, We recorded a tax benefit of $111,000 compared to a tax benefit of $466,000 in the Q4 of last year and income tax expense of $671,000 in the prior quarter. The 4th quarter of 2023 included $517,000 of previously unrecognized tax benefits.

Speaker 2

Gross loans increased $11,200,000 or 4.8 percent annualized during the Q4 and totaled 948,700,000 We saw solid demand from our adjusted adjustable rate residential mortgage and agricultural lending portfolios. Our investment securities portfolio decreased $4,100,000 on a period end basis. In the Q4 2023, mainly due to the sale of U. S. Treasury securities I mentioned earlier offset by purchases of municipal and agency backed Mortgage securities.

Speaker 2

Gross unrealized net losses in the portfolio decreased $20,900,000 to $21,900,000 due to lower overall interest rates during the quarter and the securities sales mentioned earlier. Our investment portfolio has an average life 4.2 years with a projected cash flow of $83,400,000 coming due in the next 12 months. Our year end deposits totaled $1,300,000,000 representing an increase of $6,800,000 this quarter. Interest checking and money market deposits and certificates of deposit grew by $25,600,000 and $13,900,000 respectively this quarter, while non interest bearing checking and savings accounts declined by $32,700,000 Our loan to deposit ratio totaled $71,300,000 at December 31, which remains low, giving us ample liquidity to fund new loan growth. We operate in stable markets throughout the state of Kansas, which provide us predictable liquidity through access to retail, commercial and municipal deposits.

Speaker 2

In addition, we continue to maintain and manage multiple other sources of liquidity, including the Federal Home Loan Bank and Federal Reserve Bank lines credit and Fed funds agreements. Combined, they provide approximately $244,000,000 of additional borrowing capacity as of December 31. Our investment portfolio also has unpledged securities available as collateral for additional borrowings. Stockholders' equity increased to $126,900,000 at December 31, 2023 and our book value grew to $3.17 per share at December 31, compared to $19.99 per share at September 30. The increase in stockholders' equity mainly resulted from the decrease in net unrealized losses on our Investment Securities portfolio mentioned above.

Speaker 2

Our consolidated and bank regulatory capital ratios as of December 31, 2023 are strong and exceed the regulatory levels considered to be well capitalized. The bank's leverage ratio was 8.7% at December 31, 2023, while the total risk based capital ratio was 13.7%. Landmark's return on average equity was 10.7% for the year ended 2023. 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 on the call this morning. As mentioned earlier, we enjoyed continued loan growth throughout the quarter, mainly due to increases in our mortgage and agricultural loan portfolios. Gross loans outstanding at the end of the year totaled $948,700,000 represented an increase of $11,200,000 or 4.8 percent on an annualized basis from the previous quarter. Our residential mortgage loan portfolio increased $12,970,000 this quarter, largely the result of continued demand for our adjustable rate loan products. Additionally, our agricultural loan portfolio increased $5,120,000 New originations to existing customers contributed to over half of this increase.

Speaker 3

Turning to our credit quality, by December 31, 2023, non performing loans, mainly consisting of non accrual loans, totaled $2,400,000 representing a decrease of $2,000,000 from the prior quarter. The decrease non accrual loans was primarily due to a credit upgrade of a $1,400,000 relationship, which returned to accruing status and the payoff of a non accrual loan of $450,000 Total foreclosed real estate was relatively unchanged at $928,000 as we continue to actively pursue the sale of these properties. The balance of past due loans between 3089 days still accruing interest decreased $4,600,000 this quarter and totaled $1,600,000 or 0.17 percent of gross loans. Much has been written lately about the state of commercial real estate lending across the banking industry. At Landmark, we believe in banking relationships not transactions.

Speaker 3

Because of the importance that we place on customer relationships, the majority of our commercial real estate portfolio is comprised of owner occupied properties, which we believe have stable low risk profiles. The asset quality of our CRE portfolio remains strong and we will work hard to keep it that way by staying disciplined in our credit culture, our vision and our approach to relationship banking. We recorded net loan charge offs of $362,000 during the Q4 of 2023 compared to net loan charge offs of $67,000 during the Q4 of 2022. Our allowance for credit losses totaled $10,600,000 and ended the quarter at 1.12 percent of gross loans. Asset quality at Landmark has remained excellent over the last few years, and we remain focused on maintaining strong metrics.

Speaker 3

The current economic landscape in Kansas is healthy. The preliminary seasonally adjusted unemployment rate for Kansas as of December 31 was unchanged from the previous at 2.8% according to the Bureau of Labor Statistics. In terms of housing, inventory levels of available homes in Kansas continue to impact home prices. The Kansas Association of Realtors President recently commented that sale prices are continuing to rise even as sales activity has slowed. Home prices in November increased 5% in Kansas compared to the same time last year, while prices in the Midwest increased 4.9% compared to year.

Speaker 3

Home sales in Kansas fell by 7% in November compared to the same period of last year. With that, I thank everyone and I'll now turn the call back over to Michael.

Speaker 1

Thanks Raymond for your comments and I also want to thank Mark for his 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 Q4 and for the fiscal year ending 2023. I want to express my thanks and my 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

As we have no questions, I'll hand the call back to the management team for any concluding remarks.

Speaker 1

Very well and thank you. And I do want to thank everyone for participating in today's earnings call. I truly do appreciate Thank you.

Operator

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

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Earnings Conference Call
Landmark Bancorp Q4 2023
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