Landmark Bancorp, Inc. (NASDAQ:LARK) Q4 2023 Earnings Call Transcript

Landmark Bancorp, Inc. (NASDAQ:LARK) Q4 2023 Earnings Call Transcript February 1, 2024

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Operator: Good morning or good afternoon all. And welcome to the Landmark Bancorp, Inc. Q4 Earnings Call. My name is Adam, and I’ll be your operator for today. [Operator Instructions] I will now hand the call over to Michael Scheopner, President and Chief Executive Officer to begin. So, Michael, please go ahead when you are ready.

Michael Scheopner: Thank you and good morning. Thank you for joining our call today to discuss Landmark’s earnings and the operating results for the fourth quarter and fiscal year ending 2023. Joining the call with me to discuss various aspects of our fourth 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’s results in 2023 were strong. Net income for the 12 months ending December 31st totaled over $12 million 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 fourth quarter of 2022. For the fourth quarter 2023, we reported net earnings of $2.6 million, compared to $2.9 million in the prior quarter and $1.2 million in the fourth quarter 2022.

Earnings per share on a fully diluted basis for the fourth quarter was $0.48. For the three 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%. In the fourth 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 pretax loss of $1.2 million and reduced 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 third quarter of 2023, total gross loans increased by $11.2 million, mainly due to growth in residential mortgage and agricultural loans.

Deposits also increased $6.8 million during the fourth quarter of 2023. Net interest income grew 2.4% from the prior quarter and our net interest margin increased to 3.11% during the fourth quarter of 2023. Non-interest income decreased $1.4 million compared to the third quarter 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 fourth quarter, 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. The allowance for credit losses remains robust, totaling $10.6 million at December 31, 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.

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Q&A Session

We spend significant time each month monitoring our interest rate and concentration risks 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. During the fourth quarter, 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 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 Herpich: Thanks, Michael, and good morning to everyone. While Michael has already summarized our financial results and performance in the fourth quarter of 2023, I’d like to provide further details on those results. As Michael mentioned, net income in the fourth quarter of 2023 totaled $2.6 million, compared to $2.9 million in the prior quarter and $1.2 million in the fourth quarter of 2022. Net income this quarter declined in comparison to the prior quarter, mainly due to a $1.2 million loss on sales of investment securities, totaling $27 million, but offset by growth in net interest income and a slight decline in non-interest expense. In the fourth quarter of 2023, net interest income totaled $10.9 million, an increase of $260,000 compared to the third quarter of 2023, due primarily to increased interest income on loans, which more than offset an increase in interest expense.

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 million during the fourth quarter, adding to loan interest income. Interest income on investment securities decreased $3,000 to $3.2 million this quarter as a result of higher yields earned, but offset by a decline in average investment securities balances of $22.9 million. 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 fourth quarter of 2022. Interest expense on deposits in the fourth quarter of 2023 increased $495,000, mainly due to higher rates and balances. The average rate on our interest-bearing deposits increased this quarter to 2.13%, compared to 1.93% last quarter, while the average balance of interest-bearing deposits increased 7.9 million.

Interest expense on borrowed funds decreased $63,000 this quarter, despite higher rates as total borrowed fund balances declined $17.8 million during the fourth quarter. Landmark’s net interest margin on a tax equivalent basis increased to 3.11% in the fourth quarter of 2023, as compared to 3.06% in the third quarter of 2023. As a reminder, on January 1, 2023, 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, a $50,000 provision for credit losses was 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 $10.6 million remains strong and represents 1.12% of gross loans.

Non-interest income totaled $2.3 million this quarter, decreasing $558,000 compared to the fourth quarter last year, while decreasing $1.4 million compared to the third quarter of 2023. The decreases from the prior year was primarily the result of recognizing a loss of $1.2 million 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 the fourth quarter last year. These decreases were partially offset by $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 to the securities loss of $1.2 million, 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 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 fourth quarter of 2023 totaled $10.6 million, a decrease of $167,000 compared to the prior quarter and was $3.4 million lower than the same period last year. The decrease in non-interest expense compared to the prior quarter was 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 fourth quarter 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 fourth quarter of last year, an income tax expense of $671,000 in the prior quarter. The fourth quarter of 2023 included $517,000 of previously unrecognized tax benefits. Gross loans increased $11.2 million or 4.8% annualized during the fourth quarter and totaled $948.7 million. We saw solid demand from our adjusted — adjustable rate residential mortgage and agricultural lending portfolios. Our investment securities portfolio decreased $4.1 million on a period-end basis in the fourth quarter 2023, mainly due to the sale of U.S. Treasury securities, I mentioned earlier, offset by purchases of municipal and agency-backed mortgage securities. Gross unrealized net losses in the portfolio decreased $20.9 million to $21.9 million due to lower overall interest rates during the quarter and the securities sale mentioned earlier.

Our investment portfolio has an average life of 4.2 years with a projected cash flow of $83.4 million coming due in the next 12 months. Our year-end deposits totaled $1.3 billion, representing an increase of $6.8 million this quarter. Interest checking and money market deposits and certificates of deposit grew by $25.6 million and $13.9 million, respectively, this quarter, while non-interest-bearing checking and savings accounts declined by $32.7 million. Our loan-to-deposit ratio totaled $71.3 million at December 31st, 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.

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 $244 million of additional borrowing capacity as of December 31st. Our investment portfolio also has unpledged securities available as collateral for additional borrowings. Stockholders’ equity increased to $126.9 million at December 31, 2023, and our book value grew to $23.17 per share at December 31st, compared to $19.99 per share at September 30th. The increase in stockholders’ equity mainly resulted from the decrease in net unrealized losses on our investment securities portfolio mentioned above. 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.

Raymond McLanahan: 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 residential mortgage and agricultural loan portfolios. Gross loans outstanding at the end of the year totaled $948.7 million, a representative increase of $11.2 million or 4.8% on an annualized basis from the previous quarter. Our residential mortgage loan portfolio increased $12.97 million this quarter, largely the result of continued demand for our adjustable rate loan products. Additionally, our agricultural loan portfolio increased $5.12 million. New originations to existing customers contributed to over half of this increase.

Turning to our credit quality, by December 31, 2023, non-performing loans, mainly consisting of non-accrual loans, totaled $2.4 million, representing a decrease of $2 million from the prior quarter. The decrease in non-accrual loans was primarily due to a credit upgrade of a $1.4 million 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 30 days and 89 days still accruing interest decreased $4.6 million this quarter and totaled $1.6 million or 0.17% 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. 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 fourth quarter of 2023, compared to net loan charge-offs of $67,000 during the fourth quarter of 2022. Our allowance for credit losses totaled $10.6 million and ended the quarter at 1.12% of gross loans. Asset quality at Landmark has remained excellent over the last few years and we remain focused on maintaining strong metrics.

The current economic landscape in Kansas is healthy. The preliminary seasonally adjusted unemployment rate for Kansas as of December 31st was unchanged from the previous quarter 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 last year. 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.

Michael Scheopner: 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 fourth quarter 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: [Operator Instructions] As we have no questions, I’ll hand the call back to the management team for any concluding remarks.

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Michael Scheopner: Very well, and 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 first quarter 2024 results at our next earnings conference call. Thank you.

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