Transcript
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. Earnings per share on a fully diluted basis for the second quarter was $0.64 for the three 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 of 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. 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 our customers. 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 2001. I will now turn the call over to Mark Herpich, our CFO who will review the financial results with you.
Thank you, Michael, and good morning to everyone. While Michael has already highlighted our overall financial performance for the second quarter of 2023, I would like to provide further details on our performance this quarter. Comparisons to last year's second quarter results are significantly impacted by the Freedom Bank acquisition, effective October 1, 2022. This acquisition added loans of $118.0 million and deposits of $150.4 million to our balance sheet. In the second quarter of 2023, our net income totaled $3.4 million, consistent with the prior quarter and up from $3 million in the same quarter last year. Our earnings remained steady from the previous quarter, with increases in non-interest income balancing a decline in net interest income. There was a 10.9% increase in net income compared to the same period last year, primarily due to growth in net interest income, despite higher expenses. Net interest income for the second quarter of 2023 was $10.8 million, down $114,000 from the first quarter due to increased interest costs exceeding the rise in interest income. Total interest income on loans rose by $1.2 million this quarter, and the tax-equivalent yield on the loan portfolio improved by 37 basis points to 5.80%. Average loans also grew by $23.6 million during the second quarter, contributing to loan interest income. Interest income on investment securities rose by $51,000 to $3.2 million this quarter due to higher yields, despite a decline in average investment securities balances of $4.1 million. The yield on investment securities was 2.70% in the second quarter, up from 2.68% in the prior quarter and 1.97% in the same quarter of 2022. Interest expense on deposits rose by $913,000 in the second quarter, primarily due to higher rates and balances. The average rate on interest-earning deposits increased to 1.57% from 1.18% last quarter, with the average balance of interest-bearing deposits rising by $9.8 million. Interest expense on borrowed funds also increased by $450,000 due to higher short-term rates, while total average borrowed fund balances rose by $21.3 million from the first quarter. Landmark's net interest margin on a tax-equivalent basis decreased to 3.21% in the second quarter compared to 3.31% in the first quarter. On January 1, we implemented the new accounting standard known as CECL, leading to an increase of $1.5 million in the allowance for credit losses on loans. This quarter, a provision for credit losses of $250,000 was made as credit models took into account the economic environment along with our strong loan growth and solid credit experience. As of 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, an increase of $334,000 over the first quarter of 2023 and up by $33,000 compared to the second quarter last year. The year-over-year increase was primarily due to a rise 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 were mainly linked to the Freedom Bank acquisition last year. The rise in other non-interest income was associated with an increase in rental income from a branch location that was vacant last year but is now being rented. These increases were partly offset by a $243,000 decline in gains on sales of one to four family residential loans due to higher interest rates and lower housing inventories affecting purchase and refinancing activities for these fixed-rate loans in 2023. The quarterly increase in non-interest income was mainly due to a $123,000 rise in fees and service charges and seasonal increases in residential mortgage loan originations, leading to a $137,000 increase in gains on sales of fixed-rate one to four family loans. We continue to observe growth in new loan originations for adjustable-rate mortgages, which we usually retain in our loan portfolio instead of selling on the market. Non-interest expense for the second quarter of 2023 was $10.3 million, remaining mostly unchanged from the previous quarter and $1.3 million higher than the first quarter of 2023. Non-interest expense was flat compared to the first quarter as higher professional fees were offset by lower data processing fees following the completion of data processing conversions related to the Freedom Bank acquisition in March. The rise in non-interest expense compared to the second quarter last year was mainly due to increased operating costs for compensation and benefits, occupancy and equipment, data processing, and other costs tied to the Freedom Bank acquisition. This quarter, we recorded a tax expense of $701,000, resulting in an effective tax rate of 17.3%, compared to a tax expense of $639,000 in the second quarter of last year, or an effective tax rate of 17.4%. Loan growth remained strong this quarter, with gross loans increasing by $23.5 million, or 10.8% annualized, during the second quarter. We continue to see solid demand across our agriculture, commercial, and residential mortgage lending portfolios. Our investment securities portfolio decreased by $5.8 million in the second quarter of 2023. Gross unrealized net losses in this portfolio increased by $3.6 million to $30.0 million, mainly due to rising interest rates during the quarter. Total deposits amounted to $1.3 billion as of June 30, 2023, down by $13.1 million this quarter. Certificates of deposits, money market accounts, and interest checking accounts grew by $17.5 million and $18.1 million, respectively, this quarter. However, non-interest demand deposits and savings accounts fell by $39.6 million and $9.1 million, respectively. Our loan-to-deposit ratio was 68.9% at June 30, which remains low, giving us ample liquidity for new loan growth. We operate in stable markets throughout Kansas, ensuring predictable liquidity through access to retail, commercial, and municipal deposits. Additionally, we maintain various other liquidity sources including Federal Home Loan Bank and Federal Reserve Bank lines of credit, which collectively offer approximately $220 million in additional borrowing capacity as of June 30. We also have capacity through insured cash sweep and CDARS programs to provide extra insurance coverage for customers and serve as a source of wholesale funding. Our investment portfolio contributes a solid source of liquidity and is 99.3% available for sale, with around $76 million in projected cash flow over the upcoming year. As of June 30, 2023, we held $168.4 million in investment securities, which can be used as collateral for further borrowing. Stockholders' equity slightly decreased to $117.4 million as of June 30, 2023, with our book value dropping to $22.50 per share at that date, down from $22.57 a share at March 31. The decline in stockholders' equity was driven by unrealized losses in our investment securities portfolio, which offset our quarterly earnings after cash dividends. Our consolidated and bank regulatory capital ratios as of June 30, 2023, are robust and exceed the regulatory levels considered to be well capitalized, with a core capital ratio of 8.7% and a total risk-based capital ratio of 13.9%. Now, I will hand over the call to Raymond to discuss highlights of our loan portfolio and credit risk outlook.
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 one to four 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 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 one-third 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.
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.
Thank you. We have the first question on the phone line from Ross Haberman, RLH Investment.
Good morning, gentlemen. Nice quarter. Could you tell me a little bit what is the average duration or life of that held-for-sale securities, please?
I think we're in the 3.7 to 3.9 average year life or average life of our available-for-sale investment portfolio.
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?
I think it's the rest of this year, 2023.
Okay. How do you see the scenario where rates are raised by another 0.25% and maintained affecting your margin or spread?
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, the higher rates are good for us, but the inversion and the short-term aspect will result in some compression for us, which we saw from the first quarter to the second quarter of this year.
Can I ask what the highest rate you're currently paying on CDs and money markets is?
We are likely matching customers who come in. Our highest stated rate might be 4% on a 7-month CD, but we are offering rates in the low 5s to customers with established relationships, unlike individuals who are new to us. However, if a customer has a longer-term relationship with other accounts, we would consider matching those rates.
And what kind of rates do you get on your commercial real estate loans today?
Ross, those are probably depending upon the risk metrics attached to it. Those are going to be priced somewhere in the neighborhood north of 7.5%, yes.
So you're making it roughly 2.5. I'm just trying to get a sense of what margin you're getting, probably 2.5 in the spread?
I'm sorry, Ross, what was that again?
I say, I'm trying to get a sense of what kind of margin you're getting on your marginal cost of money today. It looks like you're asking two and three quarter or 3%-ish. Is that sound, right?
That's where we're aiming to achieve it and I wish it was a bit better, but that's where we're noticing a significant amount coming in at this point, Ross.
I have one final question. Thank you for your time. What loan growth are you anticipating in the second half? You noted Europe around $40 million, but it was 5% for the first half at $43 million. Most banks don’t expect much growth in the second half. Based on your pipeline, what are your expectations for the second half?
We think we'll still see some volume in growth, particularly in our one to four 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.
Okay. That’s better than most. Thanks, guys. I really appreciate it. It was a very nice quarter.
Thank you. Thanks for the interest in the company. Yes.
Thank you for your time. We've no further questions registered. I apologize. We have a follow-up question from Ross.
Okay.
I am sorry. No one else. I might well then as go. Sorry. 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?
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.
For the second half. And how about expenses any one-time expenses data processing or you're closing or opening up any new branches in the second half?
Nothing that's scheduled at this point in time, Ross that I can think of. I think our one-time we should still see a little bit of synergies of some of 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.
Okay. Thanks again. I really appreciate it.
You bet.
Thank you. I can confirm we have no further questions. I would like to hand it back to Michael for any final remarks.
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.