Landmark Bancorp, Inc. (NASDAQ:LARK) Q2 2022 Earnings Conference Call July 27, 2022 11:00 AM ET
Company Participants
Michael Scheopner – President & Chief Executive Officer
Mark Herpich – Chief Financial Officer
Raymond McLanahan – Chief Credit Officer
Conference Call Participants
Michael Scheopner
Thank you for joining our call today to discuss Landmark’s earnings and results of operations for the Second Quarter and Year-To-Date 2022. Joining the call with me today 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.
Before I get into the specifics regarding our financial performance, I want to briefly comment on our recent announcement related to the pending acquisition of Freedom Bancshares, Inc. We are very excited about this agreement with Freedom.
Freedom Bank has been a strong commercial bank in Overland Park, Kansas since its formation and this transaction allows us an excellent opportunity to expand our presence in the Kansas City metro market. Freedom has total loans of approximately $132 million and total deposits of approximately $169 million. The transaction is expected to be completed in the fourth quarter of this year.
As I said, we’re very excited to have Freedom Bank’s employees join our community banking team and we look forward to continuing Freedom’s commitments to its customers and the community it serves.
Landmark reported net earnings of $3 million during the second quarter of 2022. Year-to-date 2022, net income totaled $6.2 million and resulted in earnings per share on a fully diluted basis of $1.23. The return on average assets year-to-date 2022 was 0.95% and the return on average equity was 9.81%.
We saw strong loan growth during the second quarter, along with increased net interest income, higher fees and service charges and increased gains on sale of residential mortgage loans. Compared to the first quarter of 2022, total gross loans increased by more than $36 million, while net interest income grew almost 3%.
Credit quality continued to remain strong this quarter. The allowance for loan losses totaled $8.3 million at June 30, 2022. Our capital and liquidity positions remained strong, with total equity to assets of 9.08% and loans to deposits of 58.5%.
We believe Landmark’s 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’m pleased to report that our Board of Directors has declared a cash dividend of $0.21 per share to be paid August 24, 2022, to shareholders of record as of August 10, 2022. This represents the 84th consecutive quarterly cash dividend since the company’s formation in 2001. We also purchased 21,115 shares of treasury stock during the second quarter of 2022.
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. As Michael has already alluded to our financial performance in 2022, I’d now like to discuss various aspects comprising our second quarter 2022 results.
Net income of $3.0 million in the second quarter of 2022 was lower by $100,000 in comparison to the first quarter of 2022, mainly the result of a credit loss provision to our allowance for loan losses of $500,000 in the first quarter of 2022, while no loan loss provision was made in the current quarter.
Also, we incurred merger-related costs of $221,000 associated with our recently announced acquisition of Freedom Bancshares. Excluding these two items, the second quarter income statement showed growth in net interest income, non-interest income and the reduction in non-interest expense. Loan growth this quarter was also very strong.
In the second quarter of 2022, net interest income totaled $8.9 million, an increase of $253000 compared to the first quarter of 2022, due primarily to growth in interest on investment securities, but offset by slightly lower loan interest income and higher interest costs. Landmark’s net interest margin on a tax equivalent basis increased to 3.05% in the second quarter of 2022, as compared to 2.99% in the first quarter of 2022.
The slight decline in interest on loans resulted mainly from lower interest and fees on Paycheck Protection Program, or PPP, loans in the second quarter of 2022, which declined by $302,000 compared to the first quarter this year. PPP loan balances declined by $4.6 million this quarter and totaled $652000 at June 30.
This decline was mostly offset by higher interest on residential real estate, commercial and commercial real estate loans due to growth in average balances. The average tax equivalent yield on the loan portfolio declined this quarter to 4.4% compared to 4.59% in the prior quarter and 5% in the same period last year.
Interest income on investment securities increased $498,000 this quarter compared to the first quarter of 2022, due to a growth in average investment balances of $55 million, along with increased yields. The yield on investment securities totaled $1.97 in the current quarter, compared to 1.83% in the prior quarter, and 2.02% in the second quarter of 2021.
The investment portfolio growth in the second quarter of 2022 resulted from deploying excess cash balances into investments to take advantage of the rising rate environment. Interest costs on interest-bearing deposits have increased, but remained low this quarter totaling 18 basis points in the current quarter compared to 10 basis points last quarter, and 14 basis points in the second quarter of 2021.
Interest expense on repurchase agreements also increased this quarter due to higher short-term rates. Interest expense on total deposits increased $97,000 from the second quarter last year due to higher rates and by growth in average balances of $19.5 million in interest-bearing deposits.
Based on our analysis of the economic environment, combined with our strong credit results no provision was made to the allowance for loan losses in the second quarter of 2022. At June 30, 2022, the ratio of our loan loss reserve to gross loans was 1.24%.
As our economic outlook evolves, we will continue to adjust our allowance for credit loss and provisioning accordingly. Non-interest income totaled $3.8 million this quarter increasing $233,000 compared to the first quarter of 2022, while declining by $1.7 million in comparison to the prior year second quarter. The increase over the first quarter this year was due mainly to an increase in fees and service charges of $192,000 and an increase of $168,000 in gains on sales of residential mortgage loans that the bank originated.
The decline in non-interest income in comparison to the prior year is mainly due to a decrease of $1.8 million in gains on sales of residential mortgage loans. Higher interest rates coupled with lower housing inventories have slowed purchase and refinancing activities as compared to 2021, when mortgage activity was extremely strong.
However, we did see growth in originations of adjustable rate mortgages due to these higher rates and these are loans we normally keep in our loan portfolio. Non-interest expense for the second quarter of 2022 totaled $9.0 million, or an increase of $184,000 over the prior quarter, and was $168,000 lower than the same period last year.
As mentioned before, the increase in non-interest expense over the first quarter of 2022 was driven primarily by merger-related costs of $221,000 related to the Freedom Bancshares acquisition.
Compared to the second quarter of 2021, the decline in noninterest expense of 1.8% resulted from reductions in completion, data processing, amortization and other non-interest expense.
Lower costs for compensation, amortization and other non-interest expense resulted from reduced mortgage lending activities, while a new contract in effect this year with our main technology vendor resulted in lower data processing expense. These decreases in non-interest expense were partially offset by the acquisition costs previously mentioned. The effective tax rate was 17.4% in the current quarter, down from 20.5% in the second quarter of 2022 – or the first quarter of 2021.
Loan growth was very strong this quarter as gross loans excluding PPP loans increased $40.9 million during the second quarter, representing an annualized growth rate of 26.1%. Deposits decreased by $8.1 million during the quarter to $1.1 billion, while the decrease in cash and cash equivalents of $75.9 million, funded growth in our investment securities of $19.7 million, along with the loan growth previously mentioned.
Our loan-to-deposit ratio totaled 58% at June 30, 2022, and remains low giving us plenty of opportunities to fund new loan growth. Stockholders equity decreased to $117.3 million at June 30, 2022 and our book value decreased to $23.57 per share. The decrease in book value is due to the purchase of the company’s treasury stock, and a decline in the fair value of our investment securities, which were impacted by higher interest rates.
Our consolidated and bank regulatory capital ratios as of June 30 are very strong and exceed the regulatory levels considered to be well capitalized. The bank’s leverage ratio was 10.5% at June 30, 2022, while the risk-based capital ratio was 18.3%.
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. As has been stated earlier, loan growth this quarter was excellent. Gross loans outstanding as of June 30, 2022 totaled $669.9 million, or an increase of $36.4 million from the previous quarter. This quarter’s PPP loans outstanding declined $4.6 million to end the quarter at $652,000. Excluding these loans, our core loan portfolio actually grew by almost $41 million, or at an annualized rate of 26.1%. We experienced solid growth in our one-to-four family residential real estate, commercial real estate and commercial loan portfolios.
One-to-four family was up $23 million, commercial loans — excuse me commercial real estate was up $13.1 million and our commercial portfolio was up $10.7 million this quarter. We remain focused on growing our commercial and commercial real estate portfolios. As has also noted before, higher rates have resulted in greater origination of adjustable rate mortgages, which we book on our balance sheet. We continue to see strong competition for quality loan opportunities in all of our markets. However, we believe we have the right mix of talent and tools available to navigate these challenges and to continue to grow our loan book.
Turning to credit quality. Credit quality within the portfolio remains strong. Non-performing loans which primarily consist of non-accrual loans and accruing loans greater than 90 days past due totaled $4.9 million or 0.73% of gross loans as of June 30, 2022. Total foreclosed real estate was unchanged at $1.3 million from the prior quarter and we continue to actively pursue the sale of these properties. Another indicator that we monitor as part of our credit risk management efforts is the level of loans past due between 30 and 89 days. The level of past due loans between 30 and 89 days still accruing interest remains low and was only 0.13% of gross loans this quarter.
We recorded net loan charge-offs of $42,000 during the second quarter of 2022 compared to net loan recoveries of $82,000 last quarter and net loan charge-offs of $108,000 during the second quarter of 2021. And as you can tell from these numbers, we remain focused on maintaining solid asset quality metrics. Because of this focus on strong asset quality, no provision was required this quarter for our allowance for loan losses. And as Mark pointed out, our reserve remains strong at 1.24% of gross loans.
The current economic landscape in Kansas is healthy. The preliminary seasonally adjusted unemployment rate for Kansas as of June 30 is 2.4% according to the Bureau of Labor Statistics. This is actually lower than the pre-pandemic level of 3.1%. And looking at a year ago, the Kansas unemployment rate was 3.5%. The Kansas Association of REALTORS reported home prices in Kansas have increased 14.2% compared to the same period last year, while sales volumes in Kansas fell by 11.5% in June of 2022 compared to last year.
Since the ag economy is important in the majority of our markets, we continue to monitor the crop conditions across the state. The USDA reported dry soil conditions across the state, topsoil moisture supplies were rated very short or short over half the state. However, despite the dry conditions, the majority of corn and soybeans continue to be rated between fair to excellent. Additionally, everyone continues to monitor the impact of inflation on our ag economy both in terms of higher prices, commodity prices, but also coupled with higher input costs.
This month, Kansas Governor, Laura Kelly announced that Panasonic Energy plans to build one of the largest electric vehicle battery manufacturing facilities of its kind in the United States in Eastern Kansas near Kansas City. This $4 billion investment is reportedly the largest private investment in our state’s history and is expected to create 4,000 new jobs. The Kansas City region is the third fastest-growing tech market in the United States and is a nucleus of engineering technology and automotive manufacturing expertise. We’re excited to see this outside investment come, as we expand our presence in the Kansas City metro area.
And with that, I will now turn the call back over to Michael.
Michael Scheopner
Thank you, Raymond, and I want to thank Mark for his comments also earlier. Before we go to questions, I want to summarize by saying our second quarter of 2022 reflected a continued trend of positive operating results for Landmark. 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
Michael Scheopner
Okay. Thank you. And I do want to thank everyone for participating in today’s earnings call. I truly appreciate your continued support and confidence in the company and I look forward to sharing news related to our third quarter 2022 results at our next earnings conference call.
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