Q2 2023 Landmark Bancorp Inc Earnings Call
Participants
Mark A. Herpich; VP, Secretary, CFO & Treasurer; Landmark Bancorp, Inc.
Michael E. Scheopner; President, CEO & Director; Landmark Bancorp, Inc.
Raymond L. McLanahan; Chief Credit Officer; Landmark Bancorp, Inc.
Ross Haberman; Principal; RLH Investments, LLC
Presentation
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. (Operator Instructions)
I would now like to pass the conference over to your host, Michael Scheopner, President and Chief Executive Officer, to begin. So Michael, please go ahead.
Michael E. Scheopner
Thank you, and good morning. Thank you for joining our call today to discuss Landmark's earnings and results of operations for the second quarter and year-to-date 2023. Joining the call with me to discuss various aspects of our second quarter performance is Mark Herpich, Chief Financial Officer of the company; and the company's Chief Credit Officer, Raymond McLanahan.
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. Additional information on these factors is included from time to time in our 10-K and 10-Q filings, which can be obtained by contacting the company or the SEC.
Landmark reported net earnings of $3.4 million during the second quarter of 2023. Our earnings per share on a fully diluted basis for the second quarter was $0.64 for the 3 months ended June 30th, the return on average assets was 0.88% and the return on average equity was 11.52%.
Our efficiency ratio in the second quarter of 2023 was 69.2%. Our second quarter results reflected continued solid earnings driven by growth in loans, well-controlled expenses and strong credit quality. Compared to the first quarter 2023, total gross loans increased by $23.5 million or 10.8% on an annualized basis this quarter, while deposits decreased $13.1 million during the second quarter 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 and reflects ample liquidity for future loan growth. Credit quality remained very strong this quarter as we continue to see low net loan charge-offs, declining non-performing assets and low levels of delinquent loans. The allowance for loan losses totaled $10.4 million as of June 30, 2023.
The 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 employ a relationship-based banking model, which offers stability and consistency to all of our customers.
We will continue to remain disciplined in maintaining the credit standards that had 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 2001.
I will now turn the call over to Mark Herpich, our CFO, who will review the financial results with you.
Mark A. Herpich
Thanks, Michael, and good morning to everyone.
While Michael has already highlighted our overall financial performance in the second quarter of 2023, I'd like to provide further details on our performance this quarter.
Comparisons to the prior year second 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 $118.0 million and deposits of $150.4 million onto our balance sheet as of October 1st.
Net income in the second quarter of 2023 totaled $3.4 million compared to $3.4 million in the prior quarter and $3 million in the second quarter of 2022.
Our earnings remained constant with the prior quarter as we saw increases in non-interest 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 second quarter of 2023, net interest income totaled $10.8 million, a decrease of $114,000 compared to the first quarter of 2023 due primarily to the increased interest costs, which more than offset the increase in interest income.
Total interest income on loans increased $1.2 million this quarter and the tax equivalent yield on the loan portfolio increased 37 basis points to 5.80%. Average loans also increased by $23.6 million during the second quarter, adding to loan interest income.
Interest income on investment securities increased $51,000 to $3.2 million this quarter as a result of higher yields earned despite a decline in average investment securities balances of $4.1 million. The yield on investment securities totaled 2.70% in the second quarter compared to 2.68% in the prior quarter and 1.97% in the second quarter of 2022.
Interest expense on deposits in the second quarter to 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% last quarter, while the average balance of interest-bearing deposits increased $9.8 million.
Interest expense on borrowed funds increased $450,000 this quarter due to higher short-term rates, while total average borrowed fund balances increased $21.3 million as compared to the first quarter.
Landmark's net interest margin on a tax equivalent basis decreased 3.21% in the second quarter of 2023 as compared to 3.31% in the first quarter of 2023.
As a reminder, on January 1st, we implemented the new accounting standard commonly referred to as CECL, which resulted in an increase of $1.5 million to the allowance for credit losses on loans. 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 $3.8 million this quarter, increasing $334,000 compared to the first quarter of 2023, while improving by $33,000 in comparison to the second quarter last year. The increase from the prior year was due 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. 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 second quarter 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 charges gains and seasonal increases in originations, residential mortgage loans, which resulted in an increase of $137,000 and gains on sales of fixed rate 1-4 family loans. We continue to see growth in new loan originations of adjustable rate mortgages, which we normally keep in our loan portfolio instead of selling into the market.
Non-interest expense for the second quarter of 2023 totaled $10.3 million and was mostly unchanged compared to the prior quarter and was $1.3 million higher than the quarter -- the first quarter of 2023.
Non-interest expense was flat in comparison to the first quarter 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 second quarter 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% as compared to tax expense of $639,000 in the second quarter of last year or an effective tax rate of 17.4%.
Loan growth continued strong this quarter as gross loans increased $23.5 million or 10.8% annualized during the second quarter. We continue to see solid demand from our agriculture, commercial and residential mortgage lending portfolios.
Our investment securities portfolio decreased $5.8 million in the second quarter of 2023. Gross unrealized net losses in this portfolio increased $3.6 million to $30.0 million, principally due to an increase in interest rates during the quarter. Deposits totaled $1.3 billion at June 30, 2023, and decreased by $13.1 million this quarter. Certificates of deposits and money market and interest checking accounts grew by $17.5 million and $18.1 million this quarter, respectively. While non-interest demand deposits and savings accounts declined by $39.6 million and $9.1 million, 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. 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 million of additional borrowing capacity as of June 30th. We also have additional capacity through insured cash sweep and CDARS programs to 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 million in projected cash flow over the next year.
As of June 30, 2023, we had $168.4 million of investment securities, which can be used as collateral for additional borrowing. Stockholders' equity decreased slightly to $117.4 million at June 30, 2023, and and our book value decreased to $22.50 per share at June 30th, compared to $22.57 a share at March 31st. 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%.
Now let me turn the call over to Raymond to review highlights of our loan portfolio and credit risk outlook.
Raymond L. McLanahan
Thank you, Mark, and good morning, everyone.
We continue to see strong loan growth throughout the quarter. Gross loans outstanding as of March 30, 2023, totaled $893.3 million, an increase of $23.5 million or 10.8% 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 $13.3 million this quarter. Growth in this residential mortgage portfolio was mainly the result of continued demand for our adjustable rate loan mortgage products. Our commercial loan portfolio increased $9 million this quarter, driven by growth in new business and increased line utilization. Our agricultural portfolio increased $3.8 million with approximately 1/3 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 nonaccrual loans and accruing loans greater than 90 days past due totaled $2.8 million or 0.31% of gross loans as of June 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 and 89 days still accruing interest declined significantly this quarter and totaled only 0.07% of gross funds. We recorded net loan charge-offs of $68,000 during the second quarter of 2023, compared to net loan charge-offs of $42,000 during the second quarter of 2022. Our allowance for credit losses totaled $10.5 million 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 30th was down slightly at 2.8% according to the Bureau of Labor Statistics.
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.
Lastly, I wanted to reiterate our credit focus. Our company your company remains focused on building and growing relationships that go beyond transactions. We're proud of the loan growth we have 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, and I'll turn the call back over to Michael.
Michael E. Scheopner
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 second quarter and 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.
Question and Answer Session
Operator
We have the first question on the phone line from Ross Haberman, RLH Investment.
Ross Haberman
Nice quarter. Could you tell me a little bit what is the average duration or life of that held to -- of the held for sale securities, please?
Mark A. Herpich
I think we're in the 3.7 to 3.9 average year life or average life of our available-for-sale investment portfolio.
Ross Haberman
Okay. And I think you said to $76 million, I believe, you said is the cash flow coming off that. That's about 15%, 16% of the total. Is that about right? If I'm understanding it right?
Mark A. Herpich
(inaudible)
Ross Haberman
Okay, the next 12 months, is that what you...
Mark A. Herpich
The rest of this year of 2023.
Ross Haberman
Okay, okay. And how are you positioned? Or what are you seeing -- let's say they raised the rates another 0.25% for argument sake and keep it there. What is -- how does that scenario do you see affecting your margin or your spread?
Mark A. Herpich
I think on the short term, we're going to continue to see a little more margin compression, Ross, I think as we manage with our borrowing costs and enable 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 inverted 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 first quarter to the second quarter of this year.
Ross Haberman
Can I ask what you're paying -- what's the highest rate you're paying either on CDs and money markets today?
Mark A. Herpich
CDs and money markets, we're probably matching customers when they come in. I think our highest stated rate, maybe 4% on a 7-month CD, but we are matching people that come in, in the low 5s 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 relationship other accounts with us, we'd look at matching.
Ross Haberman
And what kind of rates do you get on your commercial real estate loans today?
Michael E. Scheopner
Ross, those are probably depending upon the risk the risk metric attached to it. Those are going to be priced somewhere in the neighborhood north of 7.5%, yes.
Ross Haberman
So you're making it roughly 2.5 -- okay, so you're making roughly 2.5 (inaudible). Okay. I'm just trying to get a sense of what (inaudible) probably 2.5 (inaudible) in the spread?
Michael E. Scheopner
I'm sorry, Ross, what was that again?
Ross Haberman
I say I'm trying to get a sense of what kind of margin you're getting on your on marginal cost of money today. It looks like you're asking 2 and 3 quarter or 3%-ish. Is that sound right?
Mark A. Herpich
That's where we're targeting to get it and wish it was a little bit better, but that's where we're seeing a lot of it come in at at this point, Ross.
Ross Haberman
And just one final question. What kind of loan growth do you expect in the second half? You had Europe about $40 million, but 5%, I guess, for the -- 5% for the first half, $43 million, most banks are not expecting much growth in the second half. What are you sort of based on your pipeline for second?
Michael E. Scheopner
We think we'll still see some volume in growth, particularly in our 1 to 4 family adjustable rate mortgage portfolio, and that's been an attractive alternative product given this 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 so our model growth for the second half of this year, I'd be looking at mid- to upper single-digit growth.
Operator
(Operator Instructions) We've no further questions registered -- I apologize. We have a follow-up question from Ross.
Ross Haberman
Just one final question. In the $3.3 million year for the quarter, it looked like that number was pretty clean in terms of non-recurring expenses and/or gains. I just want to confirm that. Or I guess, I'm sorry, you did have about $830,000 gain on sale of mortgage loans?
Mark A. Herpich
Yes, that was, and I think we kind of consider that a little continuous and not onetime 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.
Ross Haberman
For the second half. And how about expenses, any onetime expenses data processing or you're closing or opening up any new branches in the second half?
Mark A. Herpich
Nothing that's scheduled at this point in time, Ross, that I can think of. I think our onetime, we should still see a little bit of synergies of some the Freedom Bank acquisition last October, we got through the data processing 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 exploration yet in the second half of this year, but they are material individually.
Operator
We have no further questions. I would like to hand it back to Michael for any final remarks.
Michael E. Scheopner
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 third quarter 2023 results at our next earnings conference call.
