Landmark Bancorp Inc (LARK) 2022 Q4 法說會逐字稿

Hello, and welcome to the Landmark Bancorp Q4 Earnings Call. My name is Elliot, and I'll be coordinating your call today. (Operator Instructions)

I'd now like to hand over to Michael Scheopner, President and CEO. The floor is yours. Please go ahead.

Good morning. Thank you for joining our call today to discuss Landmark's earnings and results of operations for the fourth quarter and fiscal year-end 2022. 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 reported net earnings of $1.2 million during the fourth quarter of 2022. For the year ended December 31, 2022, net earnings totaled $9.9 million and resulted in earnings per share on a fully diluted basis of $1.88. The return on average assets in 2022 was 0.73% and the return on average equity was 8.25%.

The financial results for 2022 included significant nonrecurring expenses, especially in the fourth quarter associated with the acquisition of Freedom Bancshares, which was completed at the opening of business on October 1, 2022. Mark will provide additional detail related to these expenses and the impact that they had on our financial metrics later in this call.

I am pleased to report that the integration of our Freedom acquisition has gone very smoothly this past quarter, further data processing integrations scheduled for late first quarter 2023 will provide new opportunities for future operational efficiencies.

We continue to see strong loan growth during the fourth quarter, along with solid growth in net interest income. Compared to the third quarter of 2022 and excluding the $118 million of acquired Freedom Bank loans, total gross loans increased by nearly $21 million, while net interest income grew by over 30% compared to the prior quarter. Credit quality continues to remain very strong this quarter as net loan charge-offs, nonaccrual loans and delinquencies remained low. The allowance for loan losses totaled $8.8 million at December 31, 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.

During the fourth quarter, our company distributed a 5% stock dividend, representing the 22nd consecutive year that we have done this, and we also paid a cash dividend of $0.20 per share when adjusted for the 5% stock dividend. I'm pleased to report that our Board of Directors has declared a cash dividend of $0.21 per share to be paid March 1, 2023 to shareholders of record as of February 15, 2023. This represents the 86th 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.

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 fourth quarter 2022 results, which were significantly impacted by closing on the Freedom Bank acquisition effective October 1. As a reminder, the acquisition of Freedom Bank brought loans of $118.0 million and deposits of $150.4 million onto our balance sheet as of October 1.

Net income of $1.2 million in the fourth quarter of 2022 was lower than the third quarter 2022 earnings of $2.5 million and the prior year fourth quarter net earnings of $3.1 million. These declines in net income were driven substantially by the acquisition costs incurred with the Freedom acquisition mostly during the fourth quarter. Excluding the $3.0 million in acquisition costs this quarter, adjusted net income for the fourth quarter of 2022 would have been $3.5 million, while our fourth quarter adjusted return on average assets and average equity adjusted for these acquisition costs would have been 0.92% and 13.04%, respectively. The exclusion of these acquisition costs is a non-GAAP financial measure, but provides a more comparable analysis of related quarterly results.

Also, we recognized a $750,000 loss on the sale of some of our lowest yielding investments that we strategically sold this quarter, which compares to a similar loss of $353,000 in the third quarter of 2022.

The fourth quarter income statement showed continued growth in net interest income as our assets continue to increase along with our net interest margin. Organic loan growth this quarter, excluding the $118 million of loans from the Freedom acquisition increased $20.8 million or an annualized rate of 11.6% as the loan demand remained very strong.

In the fourth quarter of 2022, net interest income totaled $11.9 million, an increase of $2.4 million compared to the third quarter of 2022 due primarily to the acquisition of Freedom Bank, but also due to ongoing growth in both loans and investment securities balances and higher interest rates. Total interest income on loans increased $3.1 million this quarter, and the yield on the loan portfolio increased to 5.29%.

Interest income on investment securities increased $579,000 this quarter compared to the third quarter of 2022 due to a growth in average investment balances of $10.2 million along with increased yield. The yield on investment securities totaled 2.56% in the current quarter compared to 2.18% in the prior quarter and 1.77% in the fourth quarter of 2021.

We were able to take advantage of the rising rate environment during the fourth quarter and invest in longer-term municipal and mortgage-backed securities. This growth was offset by the sale of $12.4 million of low-yielding investments near the end of the quarter.

Interest costs on interest-bearing deposits have increased, but remained low this quarter totaling 68 basis points compared to 39 basis points last quarter and 12 basis points in the fourth quarter of 2021. Interest expense on total deposits increased $681,000 from the third quarter due to higher rates and an increase in average balances of $67.5 million in interest-bearing deposits. Interest expense on borrowings increased this quarter due to higher short-term rates and average balances.

Landmark's net interest margin on a tax equivalent basis increased to 3.53% in the fourth quarter of 2022 as compared to 3.21% in the third quarter of 2022. The average tax equivalent yield on the loan portfolio increased this quarter to 5.29% compared to 4.63% in the prior quarter.

And based on our analysis of the economic environment and taking into account that the loans acquired from Freedom Bank were accounted for at fair value, we determined that no provision to the allowance for loan losses was warranted in the fourth quarter of 2022 as compared to a provision of $500,000 in the third quarter of 2022. At December 31, 2022, the ratio of our loan loss reserve to gross loans was 1.03%.

Noninterest income totaled $2.8 million this quarter decreasing $717,000 compared to the third quarter of 2022, while declining by $1.8 million in comparison to the fourth quarter last year. The decrease from the third quarter this year was due in part to the $750,000 loss on the sale of our lower-yielding investment securities compared to the prior quarter and was also impacted by a $632,000 decline in gains on sales of mortgage loans.

The decline in noninterest income in comparison to the prior year is mainly due to a decrease of $1.4 million in gains on sales of residential mortgage loans. Higher interest rates, coupled with lower housing inventories, continue to slow purchase and refinancing activities as compared to 2021 when mortgage activity was extremely strong. However, we did see growth in new loan originations of adjustable rate mortgages, and these are loans we normally keep in our loan portfolio instead of selling.

Moving to noninterest expense. For the third quarter of 2022, it totaled $14.0 million or an increase of $4.5 million over the prior quarter and was $4.4 million higher than the same period last year. The increase in noninterest expense over the third quarter of 2022 was driven primarily by the acquisition cost of $3.0 million associated with Freedom Bank as compared to the $134,000 of acquisition costs in the third quarter.

Increased costs for compensation and benefits, occupancy and equipment and other noninterest expenses were primarily associated with the cost of operating the new Freedom branch we acquired. Additionally, amortization expense increased due to the core deposit intangible recorded with the Freedom acquisition.

This quarter, we recorded a tax benefit of $466,000 related to some previously unrecognized tax benefits compared to tax expense of $522,000 in the prior quarter and $1 million in the fourth quarter of last year. Loan growth continued strong this quarter as gross loans, excluding the $118.0 million of loans acquired in the Freedom Bank acquisition increased $20.8 million during the fourth quarter, representing an annualized growth rate of 11.6%. Deposits totaled $1.3 billion at 12/31 and increased by $183.5 million during this quarter, of which $150.4 million resulted from the assumption of Freedom's deposit portfolio.

Our loan-to-deposit ratio totaled 65% at year-end and still remains low, giving us plenty of opportunities to fund new loan growth. Stockholders' equity increased to $111.4 million at December 31, 2022, and our book value increased to $21.38 per share. The increase in stockholders' equity was due primarily to a decline in the unrealized losses on our investment securities portfolio, which was impacted by a decline in intermediate and longer-term interest rates.

Our consolidated and bank regulatory capitals as of December 31, 2022 are very strong and exceed the regulatory levels considered well capitalized. The bank's leverage ratio was 8.6% at December 31, 2022, while the total risk-based capital ratio was 14.0%.

Now let me turn the call over to Raymond to review highlights of our loan portfolio and credit risk outlook.

Thank you, Mark, and good morning to everyone.

Gross loans outstanding as of December 31, 2022 totaled $850.2 million, an increase of $138.9 million from the previous quarter. As mentioned previously, this growth was largely due to the acquisition of Freedom Bancshares, but also reflected strong demand for our core lending products, which grew by 11.6% this quarter. 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 $31.5 million. Commercial real estate was up $75.4 million. Our commercial portfolio was up $28.8 million, and construction loans were up $4.6 million this quarter.

We remain focused on growing our commercial and commercial real estate portfolios. Moreover, we are excited about the opportunities, not only in our expanded Kansas City metro area market, but in all of our markets across Kansas. The assimilation of the Freedom Bank lending team has been a smooth transition as our cultures and lending philosophies are very similar and complementary.

Turning quickly 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 $3.3 million or 0.39% of gross loans as of December 31, 2022. Total foreclosed real estate decreased to $934,000 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 charge-offs of $67,000 during the fourth quarter of 2022 compared to net loan recoveries of $9,000 during the fourth quarter of 2021. We're very pleased with our strong and improving asset quality numbers. And as you can tell from these numbers, we remain focused on maintaining solid asset quality metrics. Our allowance for loan and lease losses ended the quarter at 1.03% of gross loans.

Turning to the current economic landscape in Kansas. It remains healthy. The preliminary seasonally adjusted unemployment rate for Kansas as of December 31 was 2.9% according to the Bureau of Labor Statistics. And looking at a year ago, the Kansas unemployment rate was 2.8%. The Kansas Association of Realtors reported home prices in Kansas have increased 5.1% compared to the same period last year, while sales volumes in Kansas fell by 32.1% in December of 2022 compared to last year. The Kansas Association of Realtors' President commented that even though demand has slowed, it will still be a seller's market as we enter this new year.

Turning to our ag economy. Dry soil conditions remain persistent in Kansas. The most recent USDA crop conditions report rated top soil moisture is very short. Additionally, winter wheat crop conditions were rated as poor and very poor. We received some precipitation in Kansas recently, but we continue to monitor our crop conditions across the state.

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 your earlier comments.

Before we go to questions, I want to summarize by saying we are pleased with our performance for 2022 with our strong loan growth, our solid credit quality and our improved net interest margin. I also want to express my thanks and appreciation to all of the associates at Landmark National Bank. They are mainly focused 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 Instructions) Our first question comes from Ross Haberman from RLH Investments.

Nice quarter. Could you discuss just how quickly you're being forced to raise deposit rates? And just antidotally, how are you dealing with those multimillion dollar depositors who are in your money markets at, I don't know, [1.25], and they're coming back to you and want a better deal? Are you bringing them up to 3% or 4% quickly?

Thanks, Ross, and I appreciate your interest in the company. From the standpoint of strategies with respect to managing those interest rate increases on deposit customers, I mean we do focus on the relationships that we have with those clients, and we try to manage those to remain competitive. As a general focus, both our commercial banking and our retail teams continue to be focused on generating core deposits that are operating accounts for our commercial customers and the personal accounts for our retail customers, and those are a little -- we have a little less pressure, I guess, with respect to pricing demands on those accounts. But just in a general phrase, Ross, if we manage those one-off request for increase in the interest rates really on a relationship basis.

Do you -- just -- sorry, as a follow-up, do you think you're going to continue to see continued pressure on the margin, assuming they raise rates another amount of 50 or 70 basis points over the next 6 months? And could you just refresh us off of what base and how accretive is the Freedom deal plan to be?

Yes. With respect to the net interest margin, Mark, do you want to comment on that?

Yes. I think that the interest cost pressure as will impact us. I think we still feel like we've got some room to move up on the repricing of our loan portfolio as well as we continue to go through our renewal processes and resetting interest rates. So we're -- the interest costs that we've been seeing so far have been largely on the one-off and dealing with our larger depositors and/or municipal funds that are tied to indices. We've been a little slow as most banks are probably in raising up the base cost of our CDs and money market and savings accounts. But I think we're still hopeful and projecting out that we're going to see some net interest margin improvements for couple more quarters here, Ross.

I guess, Ross, with respect to the Freedom modeling, as we looked at the modeling of that transaction, we do forecast that to be accretive out of the gate. We are a little bit delayed in some of the efficiencies associated with the acquisition because of (inaudible) pending, core processing computer conversion scheduled late this quarter, and so I would anticipate that are the positive accretive impact to earnings will be recognized as we migrate later on into the year following that computer conversion and our ability then to incorporate some additional efficiencies during that time.

Have you specified how accretive specifically it will be? And if so, of what $2 some odd base are we just talking about?

We haven't published any information yet on the accretive. I didn't quite catch the $2 question there. Was it that you mentioned maybe that cut out just a little bit, but we haven't put out any the public information on what our projected earnings per share are for 2023 yet.

Okay. All right. I greatly appreciate your time guys. Good luck and don't get overwhelmed with recent deposit rates. Thank you.

We have no further questions. I'll hand back to Michael Scheopner, President and CEO, for any final remarks.

Okay. 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've shown in our company, and I look forward to sharing news related to our first quarter 2023 results at our next earnings conference call. Thank you.

Today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.