Landmark Bancorp, Inc. (NASDAQ:LARK) Q3 2022 Earnings Conference Call November 3, 2022 11:00 AM ET
Company Participants
Michael Scheopner – President and Chief Executive Officer
Mark Herpich – Chief Financial Officer
Raymond McLanahan – Chief Credit Officer
Conference Call Participants
John Rodis – Janney Montgomery
Michael Scheopner
Thank you for joining our call today to discuss Landmark’s third quarter earnings and results of operations. 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.
Before I get into the specifics regarding our financial performance, I want to briefly comment on the acquisition of Freedom Bancshares, Inc., which was completed at the opening of business on October 1, 2022. While their financial information is not included in Landmark’s third quarter results, we are very excited about the opportunities that Freedom acquisition brings to Landmark.
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 had total loans of approximately $118 million and total deposits of approximately $150 million. We are excited to have Freedom Bank’s employees join our community banking team and we look forward to continuing Freedom’s commitment to its customers and the community it serves.
Landmark reported net earnings of $2.5 million during the third quarter of 2022. Net income for the nine months ended September 30 totaled $8.7 million and resulted in earnings per share on a fully diluted basis of $1.73. The return on average assets year-to-date 2022 was 0.89% and the return on average equity was 9.33%. We saw strong loan growth this quarter, along with increased net interest income and higher fees and service charge income.
Compared to the second quarter of 2022, total gross loans increased by more than $41 million while net interest income grew by over 6% or $553,000. Non-interest expense in the current quarter included acquisition costs of $134,000 and was essentially flat with the third quarter of 2021. Our mortgage banking business has slowed down as higher rates has slowed originations, but we continue to see growth in the origination of adjustable rate mortgages.
Credit quality was strong this quarter as net loan charge-offs, nonaccrual loans and delinquencies remained low. The allowance for loan losses totaled $8.9 million at September 30, 2022. 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 November 30, 2022, to shareholders of record as of November 16, 2022. This represents the 85th consecutive quarterly cash dividend since the company’s formation in 2001. The Board also declared a 5% stock dividend to be issued December 16, 2022, to shareholders of record as of December 2. This represents the 22nd 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. The company also purchased 19,691 shares of treasury stock this quarter.
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. Michael has already alluded to our financial performance in 2022 with solid growth in both our loans and net interest income. And now I’d like to discuss various aspects comprising our third quarter 2022 results.
Net income of $2.5 million in the third quarter of 2022 was lower by $533,000 in comparison to the second quarter of 2022, mainly the result of a credit loss provision to our allowance for loan losses of $500,000 in the third quarter of 2022, while no loan loss provision was made in the second quarter. Also, we recognized a $353,000 loss on the sale of some of our lowest yielding investments that we strategically sold this quarter.
Excluding those two items, the third quarter income statement showed growth in net interest income and non-interest income. Loan growth this quarter was also very strong as loans grew by an annualized rate of 24.5%.
In the third quarter of 2022, net interest income totaled $9.5 million, an increase of $553,000 compared to the second quarter of 2022, due primarily to growth in interest on investment securities and loans, but offset by higher interest costs.
Landmark’s net interest margin on a tax equivalent basis increased to 3.21% in the third quarter of 2022 as compared to 3.05% in the second quarter of 2022. The average tax equivalent yield on the loan portfolio increased this quarter to 4.63% compared to 4.40% in the prior quarter.
Interest income on investment securities increased $290,000 this quarter compared to the second quarter of 2022 due to a growth in average investment balances of $17.2 million, along with increased yields. Yields on investment securities totaled 2.18% in the current quarter compared to 1.97% in the prior quarter and 1.88% in the third quarter of 2021.
The investment portfolio growth in the third quarter of 2022 resulted from taking advantage of the rising rate environment, investing in longer term municipal bonds supplemented with mortgage-backed securities.
Interest costs on interest-bearing deposits have increased but remained low this quarter, totaling 39 basis points in the current quarter compared to 18 basis points last quarter and 13 basis points in the third quarter of 2021.
Interest expense on borrowings increased this quarter due to higher short-term rates and average balances. Interest expense on total deposits increased $413,000 from the second quarter due to these higher rates despite a decline in average balances of $8.7 million in interest-bearing deposits.
Based on our analysis of the economic environment and in large part related to our third quarter loan growth, we made a $500,000 provision to the allowance for loan losses in the third quarter of 2022. At September 30, 2022, the ratio of our loan loss reserve to gross loans was 1.25%.
Noninterest income totaled $3.5 million this quarter, decreasing $267,000 compared to the second quarter of 2022, while declining by $1.9 million in comparison to the third quarter last year. The decrease from the second quarter of this year was due primarily to the $353,000 loss on the sale of our lower-yielding investment securities which was offset by an increase in deposit-related fees and service charges of $131,000. The decline in noninterest income in comparison to the prior year is mainly due to a decrease of $1.6 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, as Michael said, we did see growth in new loan originations of adjustable rate mortgages, and these are loans that we normally keep in our loan portfolio.
Noninterest expense for the third quarter of 2022 totaled $9.5 million or an increase of $436,000 over the prior quarter and was $15,000 higher than the same period last year. The increase in noninterest expense over the second quarter of 2022 was driven primarily by increased costs for occupancy and equipment, along with increased software cost and captive insurance loss reserves.
Compared to the third quarter of 2021, slight increase in noninterest expense resulted from an increased occupancy and equipment costs and acquisition-related costs, which were offset by reductions in compensation, data processing and intangible amortization. Lower costs for compensation and intangible amortization resulted from the reduced mortgage lending activities, while a new contract in effect this year with our main technology vendor resulted in lower data processing expenses.
The effective tax rate was 17.3% in the current quarter, down from 17.4% in the second quarter of 2022. Alluded to before, loan growth was very strong this quarter as gross loans, excluding PPP loans, increased $41.4 million during the third quarter, representing an annualized growth rate of 24.5%.
Deposits decreased by $14.3 million during the quarter to $1.1 billion, which combined with our loan growth resulted in increasing our loan-to-deposit ratio to 63% at September 30, 2022, which still remains low, giving us plenty of opportunities to fund new loan growth.
Stockholders’ equity decreased to $105.5 million at September 30, 2022, and our book value decreased to $21.21 per share. The decrease in stockholders’ equity was due primarily to the decline in the fair value of our investment securities, which were impacted by higher interest rates and increased our other net comprehensive losses this quarter.
Additionally, we purchased $502,000 of the company’s common stock this quarter. Our consolidated and bank regulatory capital ratios as of September 30, 2022, are very strong and exceed the regulatory levels considered well capitalized. The banks leverage ratio was 8.8% at September 30, 2022, while the total risk-based capital ratio was 14.8%.
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 mentioned earlier, loan growth this quarter was strong. Gross loans outstanding as of September 30, 2022, totaled $711.3 million, an increase just over 24% on an annualized basis from the previous quarter. We experienced solid growth in our one to four family residential real estate, commercial real estate, commercial and agricultural loan portfolios. One to four family was up $13 million, commercial real estate was up $19 million, our commercial portfolio was up $7 million, and our agricultural portfolio was at $8 million this quarter.
We remain focused on growing our commercial and commercial real estate portfolios. Competition for quality opportunities remains present in all of our markets. However, we believe we have the right mix of talent and the tools available to navigate any challenges.
Additionally, with the completed acquisition of Freedom Bancshares on October 1 and as part of that transaction, we added three very experienced commercial bankers to our Kansas City team. Credit disciplines are aligned among our two organizations, and we’re very excited about the future of our expanded portfolio in that market.
Turning to credit quality. Credit quality within the portfolio remains strong. Nonperforming loans, which primarily consists of nonaccrual loans and accruing loans greater than 90 days past due, totaled $4.8 million or 0.68% of gross loans as of September 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 all foreclosed real estate.
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 0.09% of gross loans this quarter. We recorded net loan recoveries of $43,000 during the third quarter of 2022 compared to net loan charge-offs of $397,000 during the third quarter of 2021. And as you can tell from these numbers, we remain focused on maintaining solid asset quality metrics.
We recorded a $500,000 provision this quarter for our allowance for loan and lease losses, primarily due to increased loan balances. And as Mark pointed out, our reserves remained strong at 1.25% of gross loans. The current economic landscape in Kansas remains healthy. The preliminary seasonally adjusted unemployment rate for Kansas as of September 30 is 2.6% according to the Bureau of Labor Statistics. And looking at a year ago, the Kansas unemployment rate was 3%. The Kansas Association of REALTORS reported home prices in Kansas have increased 8.2% compared to the same period last year, while sales volumes in Kansas fell by 16.1% in September of 2022 compared to last year. The Kansas Association of REALTORS’ President commented that even though demand has slowed, tight inventories remain a problem.
Turning to our ag economy. Dry soil conditions continued across the state with 90% of top soil moisture supplies being rated as short to very short. Harvest conditions, however, have been favorable for both corn and soybeans, with their harvest being ahead of average. 83% of corn has been harvested and 66% of beans have been harvested as of October 23, 2022.
And then finally, as you know, we’re in uncertain economic times. Interest rates have increased materially from a year ago and are poised to go higher. Commentators continue to predict some form of recession in the near term, and geopolitical events continue to occupy front page news. There’s plenty of uncertainty to go around.
Thankfully, we believe we are well poised for the current rate – for the current environment. Our loan portfolio remains very healthy. And we believe we have a strong team of bankers that will be able to navigate the challenges and expand the portfolio in the month ahead.
And with that, I thank you, and I’ll turn the call back over to Michael.
Michael Scheopner
Thanks, Raymond, and Mark, thank you for your earlier comments. Before we go to questions, I want to summarize by saying we are pleased with our performance this quarter, with our strong loan growth and improved net interest margin and we are excited to begin our partnership with our new associates from Freedom Bank.
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
Thank you. [Operator Instructions] Our first question today comes from the line of John Rodis from Janney Montgomery. Please go ahead. Your line is now open.
John Rodis
Good morning, guys. Thanks for the update.
Michael Scheopner
Hey, thanks John. Good morning.
John Rodis
Good morning. Michael, maybe just a question for you. Obviously, now two quarters in a row of really strong loan growth. But as you look forward, excluding the Freedom loan portfolio, what do you think is a more reasonable growth rate kind of going forward? I think in the past, we’ve talked about sort of maybe mid to high single-digit loan growth. And just wanted to hear your thoughts.
Michael Scheopner
Yes. I’d probably still stick to that, John. I think some of the momentum we’ve seen in the loan growth we’ve experienced over the last couple of quarters is a result of the human resource investments that we made in commercial banking talent across the franchise and the resulting growth is in part attributed to those additional resources. But on a going-forward basis, I think that metric of mid single-digit growth is probably still a pretty accurate barometer.
John Rodis
Okay. And then just could you remind me again the portfolio you’ve acquired with Freedom, what is – I’m assuming that’s primarily a commercial portfolio.
Michael Scheopner
Yes, it’s exclusively a commercial banking portfolio, John. It’d be focused on CRE and C&I assets.
John Rodis
Okay. And then Michael, just one other question for you. Just given the Freedom deal, the deal has closed now, have you had maybe an increased level of conversations following this deal being announced and so forth? Or just your thoughts on M&A going forward overall?
Michael Scheopner
Yes, our real focus has been on this Freedom transaction, John. So our attention has really been centered on that. And in the near future, we’ll be centered on making sure the assimilation of their associates and their client base is as seamless as possible.
Regarding future activity, I think the – we’re interested in continuing to pursue opportunities that provide an increase in our franchise value and the return to our shareholders. Market is a little bit volatile, I guess, right now with the investment portfolio losses that are other AOCI losses that are impacting maybe the M&A market to some extent.
But from an opportunity standpoint, I mean, we’ve always had success in organic growth following transaction. We expect that success to continue in 2020 – the rest of this year and into next year, for sure, in the organic growth but looking for additional acquisitive growth opportunities will remain a corporate priority going forward.
John Rodis
Okay, sounds good.
Michael Scheopner
Hey, John, thank you.
Operator
[Operator Instructions] There are no additional questions waiting at this time. So I’d like to pass the conference back over to Michael Scheopner for any closing remarks. Please go ahead.
Michael Scheopner
Thank you and I do want to thank everyone for participating in today’s earnings call. I truly appreciate your continued support and the confidence that you have in the company. And I look forward to sharing news related to our fourth quarter and year-end 2022 results at our next earnings conference call. Thank you.
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