Transcript
Good morning, everyone, and welcome to today's conference call titled Landmark Bancorp Third Quarter Earnings Call. My name is Ellen, and I'll be the call operator today. I'd now like to turn the call over to Michael Scheopner, CEO, to begin. Michael, please go ahead, whenever you're ready.
Thank you, and good morning. Thank you for joining our call today to discuss Landmark's earnings and operating results for the third quarter and year-to-date 2023. Joining the call with me to discuss various aspects of our third 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 $2.9 million during the third quarter of 2023. Earnings per share on a fully diluted basis for the third quarter was $0.55. For the three months ended September 30, the return on average assets was 0.74%, and the return on average equity was 9.87%. Year-to-date, in 2023, net income grew 10.7% to $9.6 million. Our return on average assets was 0.84%, and the return on average equity was 11.13%. Our third quarter results reflected solid growth in loans, coupled with strong credit results compared to the second quarter of 2023. Total gross loans increased by $44.2 million or 19.6% on an annualized basis this quarter. Deposits also increased in the third quarter by $27.1 million due to growth in noninterest demand deposits and an increase in certificate of deposit accounts. This quarter, our net interest margin totaled 3.53%, which is down from 3.21% last quarter, while our loan-to-deposit ratio totaled 70.8%, reflecting ample liquidity for future loan growth. Credit quality remained very strong this quarter as we recorded net loan recoveries of $521,000. The allowance for credit losses remains robust, totaling $11 million at September 30, 2023. Landmark continues to maintain 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 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. 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 on November 29, 2023, to shareholders of record as of November 15, 2023. This represents the 89th consecutive quarterly cash dividend since the company's formation in 2001. The Board also declared a 5% stock dividend to be issued on December 15, 2023, to shareholders of record on December 1, 2023. This represents the 23rd consecutive year that the Board has declared a 5% stock dividend, a continued demonstration of our long-term commitment to support growth in value and liquidity for our shareholders. I will now turn the call over to Mark Herpich, our CFO, who will review the financial results with you.
Thanks, Michael, and good morning to everyone. While Michael has already highlighted our overall financial performance in the third quarter of 2023, I'd like to provide further details on our performance in this quarter. Comparisons to the prior year third quarter results and year-to-date are impacted by the Freedom Bank acquisition, which was effective October 1, 2022. As a reminder, the acquisition of Freedom Bank brought loans of $118 million and deposits of $150.4 million onto our balance sheet as of October 1. As Michael mentioned, net income in the third quarter of 2023 totaled $2.9 million compared to $3.4 million in the prior quarter and $2.5 million in the third quarter of 2022. Compared to the same period last year, net income increased by 15.1%, mainly due to growth in net interest income and noninterest income, but partially offset by higher noninterest expense. Net income this quarter declined in comparison with the prior quarter, mainly due to lower gains on sales of residential loans and an increase in noninterest expense. In the third quarter of 2023, net interest income totaled $10.6 million, a decrease of $207,000 compared to the second quarter of 2023 due primarily to increased interest costs, which more than offset the increase in interest income. Total interest income on loans increased by $908,000 this quarter and the tax-equivalent yield on the loan portfolio increased by 13 basis points to 5.93%. Average loans also increased by $32.4 million during the third quarter, adding to loan interest income. Interest income on investment securities increased by $63,000 to $3.2 million this quarter as a result of higher yields earned despite a decline in average investment securities balances of $8.8 million. The yield on investment securities totaled 2.77% in the current quarter compared to 2.70% in the prior quarter and 2.18% in the third quarter of 2022. Interest expense on deposits in the third quarter of 2023 increased by $932,000, mainly due to higher rates and balances. The average rate on our interest-bearing deposits increased this quarter to 1.93% compared to 1.57% last quarter, while the average balance of interest-bearing deposits increased by $20.0 million. Interest expense on borrowed funds increased by $243,000 this quarter due to higher rates, while total average borrowed fund balances increased by $10.7 million as compared to the second quarter. Landmark's net interest margin on a tax-equivalent basis decreased to 3.06% in the third quarter of 2023 as compared to 3.21% in the second quarter 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 $1.5 million to the allowance for credit losses on loans at that time. This quarter, no provision for credit losses was made as our credit models considered the economic environment, along with our strong loan growth, continued strong credit experience, and a $626,000 loan recovery received during the third quarter. At September 30, 2023, the ratio of our allowance for credit losses to gross loans was 1.17%. Noninterest income totaled $3.7 million this quarter, increasing $123,000 compared to the third quarter last year, while decreasing $177,000 compared to the second quarter of 2023. This increase from the prior year was primarily the result of recognizing a $353,000 loss on investment sales on the sale of lower-yielding investments in the third quarter of 2022, as well as an increase of $107,000 in fees and service charges and increases in bank-owned life insurance and other noninterest income of $41,000 and $180,000, respectively. The increase in fees and service charges and bank-owned life insurance related primarily to the acquisition of Freedom Bank last year. The increase in other noninterest income was related to an increase in rental income associated with a branch location, which was vacant in the third quarter last year but is now being rented. These increases were offset by a decline of $558,000 in gains on sales of residential mortgage loans, as higher interest rates and lower housing inventories continue to slow purchase and refinancing activity of these fixed-rate loans in 2023. The decrease in noninterest income compared to the prior quarter is mainly due to a decrease of $339,000 in gains on sales of residential mortgage loans, offset by an increase of $137,000 in fees and service charge income. We continue to see growth in our new loan originations of adjustable-rate mortgages, which we normally keep in our loan portfolio instead of selling into the market. Noninterest expense for the third quarter of 2023 totaled $10.7 million, an increase of $380,000 compared to the prior quarter, and was $1.3 million higher than the same period last year. Noninterest expense increased in comparison to the second quarter of 2023 due to higher compensation expense associated with adjustable-rate mortgage loan production along with higher FDIC insurance premiums and other insurance costs. The increase in noninterest expense compared to the third quarter last year was mainly due to higher operating costs for compensation and benefits, occupancy and equipment, data processing, amortization and other costs associated with the Freedom Bank acquisition. This quarter, we recorded a tax expense of $671,000, resulting in an effective tax rate of 18.9% as compared to a tax expense of $522,000 in the third quarter of last year or an effective tax rate of 17.3%. Loan growth continued strong this quarter as gross loans increased $44.2 million or 19.6% annualized during the third quarter. We continue to see solid demand from our commercial real estate, commercial, and residential mortgage lending portfolios. Our investment securities portfolio actually decreased $27.5 million in the third quarter of 2023. Gross unrealized net losses in this portfolio increased $12.8 million to $42.8 million, principally due to higher interest rates during the quarter. Our investment portfolio has an average life of 4.7 years with maturities of $67.6 million coming due in the next 12 months. Deposits totaled $1.3 billion at September 30, 2023, and increased by $27.1 million this quarter. Noninterest demand deposits and certificates of deposit grew by $12.6 million and $37.6 million this quarter, respectively, while money market, interest checking, and savings accounts declined by $23.1 million. Our loan-to-deposit ratio totaled 70.8% at September 30, which remains low, giving us ample liquidity to fund new loan growth. We operate in stable markets throughout the state of Kansas, which provides us predictable liquidity through 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 Federal Reserve Bank lines of credit and Fed funds agreements. Combined, they provide approximately $216 million of additional borrowing capacity as of September 30. Our investment portfolio also has unpledged securities available to serve as collateral for additional borrowings. Stockholders' equity decreased to $109.6 million at September 30, 2023, and our book value decreased to $20.98 per share at September 30 compared to $22.50 at June 30. The decrease in stockholders' equity mainly resulted from the increase in unrealized losses on our investment securities portfolio mentioned above. Our consolidated and bank regulatory capital ratios as of September 30, 2023, are strong and exceed the regulatory levels considered well-capitalized. The bank's leverage ratio was 8.7% at September 30, 2023, while the total risk-based capital ratio was 13.7%. Now let me turn the call over to Raymond to review the highlights of our loan portfolio and credit risk outlook.
Thank you, Mark, and good morning, everyone. As mentioned earlier, loan growth was strong throughout the quarter. Gross loans outstanding as of September 30, 2023, totaled $937.4 million, an increase of $44.2 million or 19.6% on an annualized basis from the previous quarter. We experienced continued growth in our one-to-four family residential real estate portfolio, which increased $29.9 million this quarter. Growth in this residential mortgage portfolio was mainly the result of continued demand for our adjustable-rate loan products. Our commercial real estate portfolio also increased by $8.5 million and our commercial loan portfolio increased by $4.4 million. Turning to credit quality, nonperforming loans, which primarily consist of nonaccrual loans, totaled $4.4 million or 0.47% of gross loans as of September 30, 2023, and increased by $1.7 million from the prior quarter. The increase in nonaccrual loans was primarily due to a $1.2 million SBA commercial loan that we classified as nonaccrual at September 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 increased by $5.6 million this quarter and totaled $6.1 million. This increase was primarily the result of a $4.2 million SBA guaranteed relationship that was delinquent at quarter end. That relationship was brought current in October. Additionally, a $1.1 million commercial real estate note, which matured at quarter end, was renewed in October. Despite the increases, delinquencies remained low and only represented 0.66% of gross loans. We recorded net loan recoveries of $521,000 during the third quarter of 2023 compared to net loan recoveries of $43,000 during the third quarter of 2022. One large loan recovery of $626,000 was received this quarter, which related to a loan charged off in 2011. Our allowance for credit losses totaled $11 million and ended the quarter at 1.17% of gross loans. Asset quality at Landmark has remained excellent over the few years, and we remain focused on maintaining strong metrics. The current economic landscape in Kansas remains healthy. The preliminary seasonally adjusted unemployment rate for Kansas as of September 30 was unchanged from the previous quarter at 2.8% according to the Bureau of Labor Statistics. In terms of housing, inventory levels for available homes in Kansas continue to impact home prices. The Kansas Association of REALTORS President recently commented that newly added listings are down 13% from August compared to the same time last year. This is keeping inventory levels very tight despite the drop in sales activity. In fact, this week, the Wall Street Journal ranked the Topeka, Kansas housing market as #1 in the United States in terms of the real estate market and its strong economy. Home prices in August increased 4.7% in Kansas compared to the same time last year, while prices in the Midwest increased by 6.8% compared to last year. Home sales in Kansas fell by 16% in August compared to the same period last year. Finally, I wanted to provide some additional color to the portfolio growth we experienced this quarter. The growth in our one-to-four family residential portfolio was largely driven by the popularity of our 7/1 ARM loan product; loans within this product represent home loans to consumers across our banking footprint that are underwritten to secondary market standards. The growth in our commercial real estate portfolio was largely due to a $6.1 million growth in our owner-occupied portion of that portfolio. We remain focused on banking relationships and not transactions. And with that, I thank you, and I'll turn the call back over to Michael.
Thanks, Raymond, and I also want to thank Mark for his comments earlier in this call. Before we go to questions, I want to summarize by saying that we are pleased with our performance for the third 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.
Our first question today comes from John Rodis from Janney.
I hope you guys are doing well first day in November. It is hard to believe. You spoke about the growth in your residential mortgage portfolio, the adjustable rates; what is the average sort of loan size LTV on the new production you're putting on? And then by my math, the mortgages are about 1/3 of the loan portfolio? How high would you take that as a percentage of the overall portfolio?
John, we're watching that somewhat carefully at this point. I mean the average unit size from a loan size for our mortgage originations is somewhere in the neighborhood of $200,000 to $250,000 across the footprint. We've put about, I think, total to date just under $65 million of 7/1 product on the books in 2023 with an average coupon of just under 6%. So we are evaluating that as we continue to move forward. Obviously, the cyclicality of mortgage production wanes a little bit as we enter the end of the year. So we would see that pipeline thinning quite a bit as we get into the end of the year and move into the first quarter of 2024.
To some extent, John, our investment portfolio is shrinking. We see the one-to-four family loans as our own mortgage-backed security, offering a better yield with customers we know in our markets compared to what we could acquire through mortgage-backed investments in the portfolio. We are aware that this affects our CECL calculation and uses some of the reserve. However, we believe that if rates decrease in a few years, locked 7-year loans may resurface, giving us another chance to refinance with those customers.
Mark, maybe a question for you on the margin and really net interest income dollars. Do you think the margin and the dollars have bottomed out? Or do you think maybe there's still a little bit more downside?
I think that may depend on much as what the Federal Reserve Bank does today and/or announces today or some of their future meetings. I think we're bottoming out with some of our models, but the pace at which they raise the Fed funds rate over the last one and a half years has caused stress in our margin. Now I think we're catching up to that. But if they find our need to continue to raise another 25 or 50 basis points over the next few months, I think that then maybe I wouldn't say that we're at the bottom. But our assets and repricing are catching up. It was just faster than anticipated on the speed at which the last 500 basis points went up, so if that answers your question, I believe...
It makes sense. You're in a similar situation as many other banks. Maybe one final question on the loan-to-deposit ratio. It's currently at 71%, which is still significantly lower than your peers. How high would you consider increasing it while still feeling comfortable in this environment?
We would like to extend that into the low 80s, John. Our risk profile and the way we have historically underwritten credit will make asset generation a bit more challenging, which means it might take longer. However, if we consider a loan-to-deposit ratio in the low 80% range, I believe that would align with our risk dynamics and be a conservative approach, especially given our geographic focus.
Our next question today comes from Michael Zuck, an individual investor.
Congratulations on a solid performing quarter. I have a question. What's the percentage relationship of floating rate versus fixed loans?
Across the entire portfolio?
Across the whole portfolio.
I think about 50% of our portfolio is repriced on an annual basis.
Annual basis. I think I'd be guessing a little bit, Mike, if I quoted that number that I don't have at my fingertips right now. But like Michael said, I think as we look at repricing over a one- or two-year period, I think we are in just over one year as far as our portfolio rolling over, so. And the fact that a number of those might be fixed with one-year repricing versus immediate...
And then I may have missed it, but what's the average duration on your securities portfolio?
We're at 4.7 years currently.
Are you shortening the duration a little bit as you roll over components in that portfolio?
We're probably not at the yields that are a little higher now looking at if we were to make some purchases, which we haven't done a lot of this year, we're going a little longer with the rates kind of elevated at this point. But our maturities we have in the next couple of years are our lowest yielding investments in the portfolio, but we're needing to get a couple more years of roll-off to get those Treasury notes and lower-yielding investments removed and help out our unrealized loss on the portfolio.
Yes. It looks like given that you're going to have some roll-over the next two years that the unrealized loss will gradually decline. Is that a fair assessment?
Yes, very much so, Mike.
Well, again, congratulations. I thought it was a very solid quarter, and I do like the continuation of the 5% stock dividend. My wife and my in-laws have been in the stock since the original conversion back in the 1980s. It's been a great performer.
Thanks, Mike. I appreciate the interest and continued interest in the company.
Our next question today comes from Ross Haberman from RLH Investments.
I got on a little late. So if I repeat something you said, please tell me, and we can take it offline. But I was just wondering if rates stay at these high levels hypothetically through '24. They don't go up anymore, but they just stay at these high levels. When do you think your margin will bottom out, given that scenario?
I guess we're hoping that we're nearing the bottom at this point, Ross. That may depend a little bit on how the Federal Reserve Bank continues. But as you said in your scenario, I guess, if they don't do any raises, we think that we have bottomed out. We're just not certain that they've quit raising, but if they allow for a pause and let us catch up with the rapid increase over the last year. I think that we feel like we are not at, we're very near the bottom at this point in time and think that we should start seeing the pendulum turn a little bit.
Let me ask it differently. Regarding your CDs repricing, have most of them already moved from the 1% to 2% levels after reaching the 4-plus levels? Would you say we're nearing the end of that repricing process?
Yes. But I think we're getting down to the closure coming out of the bullpen, so to speak. And some of those may have repriced 6 months ago and be set for another reprice if we stay steady, which may be a little higher next year if they did a 1- or 2-year repricing, but the increase at that point won't be near the magnitude that it was on the first reset, so that would be my take, Ross.
Okay. And just one last question. We're probably going to see, or we have seen, unfortunately, a significant amount of tax selling in these financial stocks between now and year-end. Would you consider buying back shares at some point? If the stock falls below the tangible book value of around $14, would you consider repurchasing shares at that low level? Or are you primarily focusing your capital on loan growth and other investments?
We're always mindful of managing our capital levels, Ross, but we do have an active stock repurchase plan that we can act on, and we continue to evaluate those metrics, particularly given the depressed price that we're trading at right now. And so it is a little bit of a balancing act, but we would actively consider utilizing capital to repurchase stock if we can make the metrics work.
Do you examine how other banks address the mark-to-market values on their loans? Many of these institutions are facing challenges with loans made in the past few years. How much trust do you place in those mark-to-market figures, and if so, what is the reasoning behind that?
We disclose this in our 10-Q, which will be filed in about a week and a half. However, regarding your question, I don’t place much importance on that number. It is available, but I often wonder why our deposits and loans don't receive as much focus as our investment securities portfolio, which requires us to assess market valuation. The disclosures on loans and deposits are important too, yet they seem to be overlooked. I don’t believe the valuation of loans is more or less significant than the valuation of deposits on the balance sheet.
Okay. Currently, there are no further questions on the line. Michael, I would like to pass it back to you for any closing remarks.
Thank you. And I truly do want to thank everyone for participating in today's earnings call. I very much appreciate your continued support and the confidence that you have in our company, and I look forward to sharing news related to our fourth quarter 2023 results at our next earnings conference call. Thank you.
That concludes today's conference call, everybody. Thank you very much for joining. You may now disconnect your lines. Have a great rest of your day.