Michael Scheopner – President and Chief Executive Officer
Mark Herpich – Chief Financial Officer
Raymond McLanahan – Chief Credit Officer
Conference Call Participants
Good morning and thank you for standing by. I would like to welcome you all to Landmark Bancorp Q1 Earnings Call. [Operator Instructions]
I would now like to turn the conference over to your first speaker today, Michael Scheopner, President and Chief Executive Officer of Landmark Bancorp. Please go ahead when you’re ready, Michael.
Thank you, and good morning. Thank you for joining our call today to discuss Landmark’s earnings and results of operations for the first quarter of 2023. Joining the call with me to discuss various aspects of our first 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 details regarding our operating results for the quarter, I want to take a moment to comment on events that have taken place in the banking system during the first few months of this year. Three large regional banks have been closed by the FDIC mainly due to liquidity concerns resulting from interest rate risk issues and large concentrations of uninsured deposits. These liquidity issues were unique to the way these banks operated and are not reflective of the way we manage things at Landmark.
Landmark maintains strong capital and liquidity and a stable conservative deposit portfolio, with the majority 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, and our lending strategies involve a relationship-based banking model offering stability and consistency. We will continue to remain disciplined in maintaining the credit standards that have historically served us well.
Landmark reported net earnings of $3.4 million during the first quarter of 2023. Earnings per share on a fully diluted basis for the first quarter were $0.64. The return on average assets was 0.9%, and the return on average equity was 12.04%. Our efficiency ratio for the first quarter 2023 was 70.1%. Our first quarter results included solid loan growth, lower expenses and continued good credit quality. Total gross loans increased by $19.6 million, or 9.4% on an annualized basis, while deposits decreased $6.6 million or 2.1%, as we expected, due to a seasonal decline in public fund deposit balances.
Compared to the prior quarter, net interest income declined 7.9% as rising rates impacted our funding costs. Compared to the prior quarter, non-interest income increased, while our operating expenses declined. Credit quality remained very strong this quarter as net loan charge-offs, non-accrual loans and delinquencies were low. The allowance for loan losses totaled $10.3 million as of March 31, 2023. As I mentioned at the beginning of my comments, we believe Landmark’s risk management practices, liquidity and capital strength continued 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 May 31, 2023, to shareholders of record as of May 17, 2023. This represents the 87th 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 highlighted our financial performance in 2023, and now I’d like to talk further about the first quarter 2023 results.
Comparisons to the prior year, first quarter results are significantly impacted by the Freedom Bank acquisition effective October 1, 2022. And 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.
Net income in the first quarter of 2023 totaled $3.4 million compared to $1.2 million in the prior quarter and $3.1 million in the first quarter of 2022. The increase of $2.2 million over the fourth quarter of 2022 was mainly due to Freedom Bank acquisition-related costs of $3.0 million that were recorded in the fourth quarter of 2023 that did not repeat in the current quarter. Net income increased 7.1% over the same period last year mainly due to growth in net interest income, offset by higher expenses.
In the first quarter of 2023, net interest income totaled $10.9 million, a decrease of $939,000 compared to the fourth quarter of 2022, due primarily to the increased interest costs, which more than offset the increase in interest income. Total interest income on loans increased $275,000 this quarter and the tax equivalent yield on the loan portfolio increased 14 basis points to 5.43%. Average loans also increased by $18.0 million during the first quarter, adding to loan interest.
Interest income on investment securities increased $50,000 to $3.1 million this quarter as a result of higher rates earned, despite a decline in average investment securities balances of $5 million. The yield on investment securities totaled 2.68% in the current quarter compared to 2.56% in the prior quarter and 1.83% in the first quarter of 2022. Interest expense on interest-bearing deposits in the first quarter of 2023 increased $1.1 million mainly due to higher rates and balances. The average rate on our interest-bearing deposits increased this quarter to 1.18% compared to 0.68% last quarter, while the average balance of interest-bearing deposits increased $22.9 million.
Interest expense on borrowed funds increased $186,000 this quarter due to higher short-term rates, while total average borrowed fund balances decreased by $2.6 million as compared to the fourth quarter. Landmark’s net interest margin on a tax-equivalent basis decreased to 3.31% in the first quarter of 2023 as compared to 3.53% in the fourth quarter of 2022.
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. Additionally, we recorded a provision of $49,000 for credit losses related to our unfunded loan commitments and held-to-maturity investments during the first quarter. Based on our analysis of the economic environment and our strong credit results in the first quarter, we determined that no further provision to the allowance for credit losses was warranted in the first quarter. At March 31, 2023, the ratio of our allowance for credit losses to gross loans was 1.18%.
Non-interest income totaled $3.5 million this quarter, increasing $683,000 compared to the fourth quarter of 2022, while declining by $68,000 in comparison to the first quarter last year. The increase from the prior quarter was due primarily to the $750,000 loss on the sale of lower yielding investment securities in the fourth quarter of 2022, while there were no securities gains or losses in the current quarter or in the first quarter last year.
The decline in non-interest income in comparison to the prior year is mainly due to a decrease of $212,000 in gains on sales of residential mortgage loans, partially offset by a $170,000 increase in fees and service charges. Higher interest rates, coupled with lower housing inventories, continued to slow purchases and refinancing activities. However, we continued to see growth in new loan originations of adjustable-rate mortgages, and we normally keep in our loan portfolio instead of selling into the market.
Non-interest expense for the first quarter of 2023 totaled $10.3 million or a decrease of $3.6 million over the prior quarter and was $1.5 million higher than the same period last year. The decrease in non-interest expense over the fourth quarter of 2022 was driven primarily by the acquisition costs of $3 million in the fourth quarter, which did not reoccur. Also during the fourth quarter of 2022, a one-time valuation allowance of $354,000 was recorded on certain other real estate owned. The increase in non-interest expense compared to the first quarter last year was mainly due to higher operating costs for compensation and benefits, occupancy, equipment and other costs associated with the Freedom Bank acquisition. This quarter, we recorded a tax expense of $693,000 resulting in an effective tax rate of 17.1% as compared to tax expense of $737,000 in the first quarter of last year or an effective tax rate of 19.0%.
Loan growth continued strong this quarter as gross loans increased $19.6 million during the first quarter, representing an annualized growth rate of 9.4%. We continued to see solid demand from our residential mortgage, commercial real estate and consumer lending portfolios. On a period-end basis, our investment securities portfolio increased $863,000 in the first quarter of 2023, but average balances declined by $5 million. Gross unrealized net losses in this portfolio decreased $6.7 million principally due to maturities and a decline in bond market rates during the quarter.
Deposits totaled $1.3 billion at March 31, 2023, and decreased by $6.6 million this quarter, primarily related to seasonal declines in public fund balances we normally see each year during the first quarter. Certificates of deposits and non-interest demand deposits grew by $20.9 million and $11.8 million this quarter, while money market and interest checking accounts declined by $38.3 million. Our loan-to-deposit ratio totaled 66% at March 31, which remains low giving us plenty of liquidity to fund new loan growth.
On the topic of liquidity, the stable markets we operate in throughout Kansas continue to provide 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, the Federal Reserve Bank and Fed Funds Agreements. We also have additional capacity through Insured Cash Sweep and CDARS programs to provide additional insurance coverage for customers and a source of wholesale funding. Our investment portfolio also provides a solid source of liquidity and is 99.3% available for sale with approximately $73 million in projected cash flow over the next year.
As of March 31, 2023, we had $183.7 million of unpledged or over-pledged investments, which can be used as collateral for additional borrowing.
Stockholders’ equity increased to $117.7 million at March 31, 2023, and our book value per share increased to $22.58 per share. The increase in stockholders’ equity was due primarily both from quarterly net income, along with a decline in unrealized losses on our investment securities portfolio mentioned above. Also included in our stockholders’ equity was the adoption of the CECL accounting standard mentioned above, which resulted in a $1.2 million after-tax reduction of equity.
Our consolidated and bank regulatory capital ratios as of March 31, 2023, are very strong and exceed the regulatory capital levels considered to be well capitalized. The bank’s leverage ratio was 8.7% at March 31, 2023, while the total risk-based capital ratio was 14.1%.
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 March 31, 2023, totaled $869.8 million, an increase of $19.6 million or 9.4% on an annualized basis from the prior quarter. We experienced growth in our 1-4 family residential real estate and commercial real estate portfolios this quarter. The 1-4 family mortgage portfolio increased $9.1 million, while our commercial real estate portfolio increased $12.8 million this quarter. Growth in our residential mortgage portfolio was mainly the result of continued demand for our adjustable-rate mortgage loan product.
Additionally, we had good success at funding new commercial real estate loans this quarter. Commercial real estate loans comprised 36% of our overall portfolio, and we monitor concentrations within this portfolio carefully. Our commercial real estate portfolio primarily consists of owner-occupied commercial real estate. We did see an increase in the nonowner-occupied portion of our commercial real estate portfolio during the first quarter. However, the non-owner-occupied growth that we experienced was mainly due to one transaction with very strong credit risk metrics in a prime area of Kansas City. We remain focused on financing owner-occupied opportunities to seasoned borrowers in all of our markets.
Credit quality within the portfolio continues to remain strong. Non-performing loans, which primarily consist of non-accrual loans and accruing loans greater than 90 days past due, totaled $3.3 million or 0.38% of gross loans as of March 31, 2023. Total foreclosed real estate was unchanged at $934,000, and we continued 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 30 to 89 days. The level of past due loans between 30 and 89 days still accruing interest remains low and was only 0.17% of gross loans this quarter. We recorded net loan charge-offs of $47,000 during the first quarter of 2023 compared to net loan recoveries of $82,000 during the first quarter of 2022. Our allowance for credit losses totaled $10.3 million and ended the quarter at 1.18% of gross loans.
We’re very pleased with our strong and stable asset quality numbers and as you can tell from the numbers, we remain focused on maintaining quality metrics.
The current economic landscape in Kansas remains healthy. The preliminary seasonally adjusted unemployment rate for Kansas as of March 31 was unchanged at 2.9%, according to the Bureau of Labor Statistics.
Turning to our housing economy. Low inventory levels continued to impact sales and financing activities, even though demand has dropped, as rates have increased. Kansas Association of REALTORS President recently commented that without more inventory of homes available for sale, the market will continue to favor sellers, despite the drop in demand. Home prices in March increased 0.3% in Kansas compared to the same time last year, while prices in the Midwest increased 1.7% compared to last year. Home sales in Kansas fell by 13.8% in March compared to the same period last year. We continue to see economic development across our state. The recently announced $4 billion Panasonic battery plant in the Kansas City Metro area has begun vertical construction. The Hilmar Cheese plant in our Dodge City market is also at the vertical stage of construction.
Additionally, Kansas Governor, Laura Kelly recently announced construction of a new $1.9 billion computer chip manufacturing facility in Burlington, Kansas. This capital investment is expected to create 1,200 new jobs in Coffey County, Kansas and the surrounding Southeast Kansas market. We believe our branch footprint will benefit from all of these economic investments across Kansas.
With that, I thank you and I’ll turn the call back over to Michael.
Thanks, Raymond and Mark. I also want to thank you for your earlier comments.
Before we go to questions, I want to summarize by saying we are pleased with our performance for the first quarter of 2023 with our strong loan growth, our solid credit quality and improved net interest margin. 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.
[Operator Instructions]. We have had no questions registered, so I’d like to hand it back to Michael Scheopner for any remarks.
Thank you, and I do want to thank everyone for participating in today’s earnings call. I appreciate your continued support and confidence in the company, and I look forward to sharing news related to our second quarter 2023 results at our next earnings conference call.
Thank you for joining. I can confirm that, that concludes today’s call. You may now disconnect your lines and have a lovely rest of your day.