Landmark Bancorp Q2 2024 Earnings Call Transcript

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August 6, 2024

There are 4 speakers on the call.

Operator

Hello, everyone, and welcome to the Landmark Bancorp Q2 Earnings Conference Call. My name is Carla, and I will be coordinating your call today. During the presentation, you can register to ask questions I would now like to hand you over to Avi Wendel, President and Chief Executive at Landmark to begin. Avi, please go ahead.

Speaker 1

Thank you. Good morning. Thank you for joining our call today to discuss Landmark's earnings and operating results for the 2nd quarter of 2024. As you just heard from the operator, my name is Abby Wendel, President and CEO of Landmark Bancorp. Joining the call with me to discuss various aspects of our Q2 performance is Mark Herbeck, Chief Financial Officer of the company and Raymond McClanahan, Chief Credit Officer.

Speaker 1

As we start, I would like to remind 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 ks and 10 Q filings, which can be obtained by contacting the company or the SEC. Landmark reported net earnings of $3,000,000 during the Q2 of 2020 4. Earnings per share on a fully diluted basis for the Q1 were $0.55 The return on average assets was 0.78% and the return on average equity was 9.72%.

Speaker 1

Our efficiency ratio in the 2nd quarter was 67 0.9%. Our 2nd quarter results reflected continued solid earnings driven by continued solid growth in loans along with higher net interest income and non interest income. As mentioned in our press release, this quarter we recorded a pre tax valuation adjustment of 979,000 on a former branch which is under a sales contract. This adjustment resulted in a reduction of earnings per share of $0.13 Excluding this item, non interest expenses declined from the prior quarter on lower compensation, occupancy and mortgage amortization expense. Total gross loans increased this quarter by $16,500,000 and average interest bearing deposits also increased by 820,000.

Speaker 1

Compared to the Q1 of 2024, net interest income grew 2.1% and our net interest margin expanded to 3.21%. Non interest income also increased as both fees and gains on mortgage loan sales were higher than in the prior quarter. Core non interest expense was well controlled this quarter as we continue to focus on operational efficiencies. Credit quality has remained strong as net loan charge offs, non accrual loans and delinquencies remain at relatively low levels this quarter. The allowance for credit losses remains robust, totaling almost $11,000,000 at June 30, 2024.

Speaker 1

Landmark's capital and liquidity measures are strong and we have a stable conservative deposit portfolio with most of our deposits being retail based and FDIC insured. We remain risk averse both in monitoring our interest rate and concentration risk and in maintaining a strong credit discipline. Further, we employ a relationship based banking model, which offers stability and consistency to all our customers. I am pleased to report that our Board of Directors have declared a cash dividend of $0.21 per quarter to be paid September 4, 2024 to shareholders of record as of August 21, 2024. This represents the 92nd consecutive quarterly cash dividend since 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 in detail with you.

Speaker 2

Thanks Abby and good morning to everyone. While Abby has just provided a highlight of our overall financial performance in the Q2 of 2024, I'll provide some further details on those results. As Abby mentioned, net income in the Q2 of 2024 totaled 3,000,000 compared 2,800,000 in the prior quarter and 3,400,000 in the Q1 of 2023. Net income this quarter increased in comparison with the prior quarter mainly due to improvements in net interest income and non interest income. Also we did not make a provision for credit losses this quarter.

Speaker 2

Core non interest expense also declined nicely exclusive of the branch valuation adjustment that Abbie mentioned earlier. In fact excluding those adjustments, our non interest expenses would have declined by 306,000 or 2.9%. In the Q2 of 2024, net interest income totaled $11,000,000 an increase of $227,000 compared to the Q1 of 2024 due primarily to increased interest income on loans which more than offset our increase in interest expense on deposits. Total interest income on loans increased $532,000 this quarter and the tax equivalent yield on the loan portfolio increased 17 basis points to 6.33%. Average loans also increased by 9,400,000 during the 2nd quarter, adding to our loan interest income.

Speaker 2

Interest income on investment securities decreased $74,000 to 3,100,000 this quarter due to a decline in average investment securities balances of 19,800,000 but offset by higher yields earned on our investment securities balances. The yield on investment securities totaled 3.04% in the current quarter compared to 2 0.96% in the prior quarter and 2.7% in the Q2 of 2023. Interest expense on deposits in the Q2 of 2024 increased 216,000 mainly due to higher rates. The average rate on our interest bearing deposits increased this quarter to 2.44% compared to 2.35% last quarter while the average balance of interest bearing deposits increased $820,000 Interest expense on borrowed funds decreased slightly this quarter despite slightly higher rates as average borrowed fund balances declined 2,600,000 during the 2nd quarter. Landmark's net interest margin on a tax equivalent basis increased to 3.21% in the Q2 of 2024 as compared to 3.12% in the Q1 of 2024.

Speaker 2

This quarter, no provision for credit losses was made after our credit models considered the economic environment and recognized a large part of our loan growth this quarter within the 1 to 4 family residential mortgage category where we continue to experience strong credit results. At June 30, 2024, our allowance for credit losses totaled 10,900,000 which remains strong and represents 1.11 percent of gross loans. Non interest income totaled 3,700,000 dollars this quarter increasing $320,000 as compared to the Q1 while decreasing $109,000 compared to the Q2 of 2023. The increase from the Q1 was primarily the result of an increase in fees and service charges of $230,000 along with growth in gains of 136,000 on sales of residential mortgages. Compared to the Q2 last year, gains on sales of fixed rate residential mortgages declined by 182,000.

Speaker 2

While fees from sales of fixed rate mortgages have declined somewhat over the last year, growth in adjustable rate mortgages which are kept on our balance sheet has been strong. Non interest expense for the Q2 of 2024 totaled 11,100,000, dollars an increase of $544,000 compared to the prior quarter, but as discussed earlier this increase was entirely driven by the 979 dollars valuation adjustment on a former branch building that is under contract for sale. Absent the valuation adjustments in the first and second quarters, non interest expense would have been $306,000 lower than the prior quarter. Compensation benefits, occupancy and equipment and mortgage servicing amortization were all lower this quarter. This quarter we recorded tax expense of $587,000 resulting in an effective tax rate of 16.3% as compared to tax expense of $518,000 in the Q1 of this year for an effective tax rate of 15.7%.

Speaker 2

Gross loans increased 16,500,000 or 6.9% annualized during the 2nd quarter and totaled 980,600,000. We saw good growth in our adjustable rate residential mortgage and commercial construction loan portfolios. Our investment securities portfolio decreased $16,800,000 on a period end basis as we utilized maturing investments to fund our loan growth. Our investment portfolio has an average life of 4.3 years with a projected cash flow of 69,700,000 coming due in the next 12 months. Period end deposits totaled 1,300,000,000 at June 30, 2020 4 and decreased by 43,000,000 this quarter.

Speaker 2

Interest checking and money market deposits and non checking accounts declined by $36,900,000 $3,800,000 respectively this quarter. The decline in money market and checking accounts was mainly driven by a decline in broker deposits on the last day of the second quarter leading to a corresponding increase in overnight borrowings from the Federal Home Loan Bank at quarter end. Average interest earning deposits actually increased slightly in the Q2 of 2024 while our average borrowings declined by 2,600,000 during the quarter. Our loan to deposit ratio totaled 77.5% at June 30th which remains low giving us sufficient liquidity to fund loan growth. Stockholders' equity increased to 128,300,000 at June 30, 2024 and our book value totaled $23.45 per share at June 30 compared to $23.14 at March 31.

Speaker 2

Our consolidated and bank regulatory capital ratios as of June 30, 2024 are strong and exceed the regulatory levels considered well capitalized. The bank's leverage ratio was 8.9% at June 30, 2024 while the total risk based capital ratio was 13.7%. Now let me turn the call over to Raymond to review highlights of our loan portfolio and credit risk outlook. Thank you, Mark, and good morning to everyone. As mentioned earlier, we enjoyed continued loan growth throughout the quarter mainly due to increases in our residential mortgage and construction and land loan portfolios.

Speaker 2

Gross loans outstanding at the end of the quarter totaled $980,600,000 an increase of $16,500,000 or 6.9 percent on an annualized basis from the previous quarter. Our residential mortgage loan portfolio increased $19,300,000 this quarter mainly due to continued demand for our adjustable rate loan mortgage products. Additionally, our construction and land loan portfolio increased $5,700,000 this quarter. Turning to credit quality, at June 30, 2024 non performing loans consisting mainly of non accrual loans totaled $5,000,000 an increase of $1,400,000 from the prior quarter. This increase is largely due to weakness identified with a $1,200,000 SBA guaranteed commercial loan relationship.

Speaker 2

Total foreclosed real estate was unchanged from the prior quarter and ended at $428,000 The balance of past due loans between 30 89 days still accruing interest decreased $2,200,000 this quarter and totaled $1,900,000 or 0.19 percent of gross loans. We recorded net loan recoveries of $52,000 during the Q2 of 2024 compared to net loan charge offs $68,000 during the Q2 of 2023. Our allowance for credit losses totaled $10,900,000 and ended the quarter at 1.11 percent of gross loans. Asset quality at Landmark has remained excellent over the last few years and we remain focused on maintaining strong metrics. Regarding our commercial real estate portfolio, our lending philosophy has always been focused on relationship banking with customers in our respective markets.

Speaker 2

As a result, our commercial real estate portfolio is primarily comprised of owner occupied commercial real estate which historically has been a well performing asset class. We remain vigilant in monitoring the health and performance of this loan portfolio as well as the trends in the broader commercial real estate economic environment. The current economic landscape in Kansas is healthy. Preliminary seasonally adjusted unemployment rate for Kansas as of June 30 was 3.1% according to the Bureau of Labor Statistics. In terms of housing, the Kansas Association of Realtors President recently shared 2 interesting statistics.

Speaker 2

They said, During the first half of the year, typical sale prices across the state are up 6.3% compared to the first half of twenty twenty three. In addition, half of all homes sold did so in 10 days or less. Home prices in June increased 5.3% in Kansas compared to the same time last year, while prices in the Midwest increased 5.5% compared to last year. Home sales in Kansas fell by 17.8% in June compared to the same period last year. Given the statistics shared by the Kansas Association of Realtors, it would appear that inventory levels of available homes remain very tight.

Speaker 2

And with that I thank you and I'll turn the call back over to Abby.

Speaker 1

Thanks Raymond. Before we go to questions, I want to summarize by saying we were pleased with our core performance for of 2024 with continued strong loan growth, solid credit quality and well controlled expenses. Further, our net interest margin expanded nicely. With the operating successes we've had over the past few years, we look forward to expanding our presence with high quality banking products and services. We are focusing more recently on bringing both loans and fee business, which is playing well across all of our markets and especially in Kansas City where we are relatively new.

Speaker 1

Finally, I'd like to thank all of the associates at Landmark National Bank. Their daily focus on executing our strategies, delivering extraordinary service to our clients and communities is the key to our success. And with that, I'll open up the call to questions that anyone might have.

Operator

Our first question comes from Ross Haberman from RLH Investments.

Speaker 3

Good morning. Nice quarter. I have just a couple of quick questions. Could you talk about the mortgage business? What are you seeing today?

Speaker 3

And has there been any recent pickup in the last couple of weeks with the recent drop in rates and do you expect given the recent up in rates a reasonable pickup in the next couple of months? Thanks.

Speaker 1

Hi, Ross. This is Abby. Thanks for joining us this morning. So as we reported for the past several quarters, our mortgage department really has hung in there because of our pivot towards the variable rate, the adjustable rate mortgage that we sell and retain on balance sheet. In the last couple of I mean last week really, we just saw the 30 year fixed move down below where we're offering the variable rate mortgage.

Speaker 1

And I do think over the past month, we started to see an uptick and an interest in the products that we're able to sell on the secondary. I mean, as you know, the mortgage industry is really a rate driven interest industry. And so, we certainly foresee more interest in those fixed products as rates continue to move down.

Speaker 3

And just one follow-up question. If we do see, I don't know, just say for arguments, like a quarter cut in September and another quarter in December, how do you see that scenario affecting the margin or the spread?

Speaker 1

Yes, I'm going to let Mark answer that in more detail. But I guess I would just kick it off by saying irrespective of what the Fed decides to do in September or November, I think we're very well positioned and let me turn it over to Marcus for a little bit more information on that.

Speaker 2

Yes, I'd be happy to Abby and thanks Ross for the question. But I think we're pretty liability sensitive at this juncture of our business and a cut on the Fed funds rate of 25 or 50 or if they want to go farther, that's even better. From our standpoint, we have a lot of borrowings on our what we consider a lot of borrowings on our Federal Home Loan Bank and some broker deposits that will reprice on a daily basis and that will be very advantageous to us to see the short term rates go down. What's been difficult over the past few years or years I guess at this point has been the inverted yield curve which has gotten even more exacerbated Thursday Friday of last week. So if the Fed funds rate which are tied to a lot of our short term variable liabilities, we will take advantage of that.

Speaker 3

And one final question. Any large expenditures expected in the next quarter or 2?

Speaker 2

No unusual or non core expenditures are on the docket at this point in time. We've talked about R1 thing in the Q2 where we're looking at selling a former branch building, but we have that hopefully behind us to close here in a couple of weeks, fingers crossed. But that was the only unusual item that we had in the Q2 to report and as we said in the core expenses we were pleased with and think that we should continue to see expenses along those lines. We'll continue to look for areas that we can invest in human capital or other products but we don't envision anything significant.

Operator

As we currently have no further questions on the queue, I will hand back over to Abby Wendel for any final remarks.

Speaker 1

Thank you. I want to thank everyone for participating in today's earnings call. I appreciate your interest and your continued support and confidence in the company. I look forward to sharing news related to our Q3 2024 results at our next earnings conference call.

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Earnings Conference Call
Landmark Bancorp Q2 2024
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