Good morning, all. I would like to welcome you all to the Landmark Bancorp second quarter earnings call. My name is Brica, and I'll be your moderator for today. All lines are on mute for the presentation portion of the call. We have an opportunity for questions at the end. Please press star one on your telephone keypad to ask a question. I would now like to pass the conference over to your host, Michael Scheopner, President and Chief Executive Officer, to begin. Michael, please go ahead.
Thank you, and good morning. Thank you for joining our call today to discuss Landmark's earnings and results of operations for the second quarter and year-to-date 2023. Joining the call with me 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'd like to 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 $3.4 million during the second quarter of 2023. Earnings per share on a fully diluted basis for the second quarter was $0.64. For the three months ended June 30th, the return on average assets was 0.88%, and the return on average equity was 11.52%. Our efficiency ratio in the second quarter 2023 was 69.2%. Our second quarter results reflected continued solid earnings, driven by growth in loans, well controlled expenses, and strong credit quality.
Compared to the first quarter of 2023, total gross loans increased by $23.5 million, or 10.8% on an annualized basis this quarter, while deposits decreased $13.1 million during the second quarter of 2023 due to lower non-interest demand deposits and savings accounts. Offset by growth in money market, interest checking, and certificate of deposit accounts, our loan-to-deposit ratio this quarter remains relatively low and reflects ample liquidity for future loan growth. Credit quality remained very strong this quarter as we continued to see low net loan charge-offs, declining non-performing assets, and low levels of delinquent loans. The allowance for loan losses totaled $10.4 million as of June 30, 2023. Landmark maintains strong capital and liquidity and a stable, conservative deposit portfolio, with most 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 employ our relationship-based banking model, which offers stability and consistency to all of our customers. We will 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. I am pleased to report that our board of directors has declared a cash dividend of $0.21 per share to be paid September 6, 2023, to shareholders of record as of August 23, 2023. This represents the 88th 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. Good morning to everyone. While Michael has already highlighted our overall financial performance in the second quarter of 2023, I'd like to provide further details on our performance this quarter. Comparisons to the prior year's second quarter results are significantly impacted by the Freedom Bank acquisition, which was effective October 1st, 2022. 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 1st. Net income in the second quarter of 2023 totaled $3.4 million, compared to $3.4 million in the prior quarter, and $3 million in the second quarter of 2022.
Our earnings remained constant with the prior quarter as we saw increases in non-interest income offset a decline in net interest income. Net income increased 10.9% over the same period last year, mainly due to growth in net interest income, offset by higher expenses. In the second quarter of 2023, net interest income totaled $10.8 million, a decrease of $114,000 compared to the first quarter of 2023, due primarily to the increased interest costs, which more than offset the increase in interest income. Total interest income on loans increased $1.2 million this quarter, and the tax equivalent yield on the loan portfolio increased 37 basis points to 5.80%. Average loans also increased by $23.6 million during the second quarter, adding to loan interest income.
Interest income on investment securities increased $51,000 to $3.2 million this quarter as a result of higher yields earned. despite a decline in average investment securities balances of $4.1 million. The yield on investment securities totaled 2.70% in the second quarter, compared to 2.68% in the prior quarter, and 1.97% in the second quarter of 2022. Interest expense on deposits in the second quarter of 2023 increased $913,000, mainly due to higher rates and balances. The average rate on interest-turning deposits increased this quarter to 1.57%, compared to 1.18% last quarter, while the average balance of interest-bearing deposits increased $9.8 million.
Interest expense on borrowed funds increased $450,000 this quarter due to higher short-term rates, while total average borrowed fund balances increased $21.3 million as compared to the first quarter. Landmark's net interest margin on a tax-equivalent basis decreased 3.21% in the second quarter of 2023, as compared to 3.31% in the first quarter of 2023. As a reminder, on January first, 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. This quarter, a provision for credit losses of $250,000 was made as credit models considered the economic environment, along with our strong loan growth and continued strong credit experience.
At June 30, 2023, the ratio of our allowance for credit losses to gross loans was 1.17%. Non-interest income totaled $3.8 million this quarter, increasing $334,000 compared to the first quarter of 2023, while improving by $33,000 in comparison to the second quarter last year. The increase from the prior year was due primarily to increases of $101,000 in fees and service charges, along with $142,000 in other non-interest income and $33,000 in bank-owned life insurance. The increases in fees and service charges and bank-owned life insurance related primarily to the acquisition of Freedom Bank last year.
The increase in other non-interest income was related to an increase in rental income associated with a branch location, which was vacant in the second quarter last year, but is now being rented. These increases were offset by a decline of $243,000 in gains on sales of one-to-four family residential loans, as higher interest rates and lower housing inventories continue to slow purchase and refinancing activity of these fixed-rate loans in 2023. The increase in non-interest income compared to the prior quarter is mainly due to an increase of $123,000 in fees and service charges, gains and seasonal increases in originations of residential mortgage loans, which resulted in an increase of $137,000 in gains on sales of fixed-rate one-to-four family loans.
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 second quarter of 2023 totaled $10.3 million and was mostly unchanged compared to the prior quarter and was $1.3 million higher than the first quarter of 2023. Non-interest expense was flat in comparison to the first quarter of 2023, as higher professional fees were offset by lower data processing fees as we completed data processing conversions this past March related to our Freedom Bank acquisition. The increase in non-interest expense compared to the second quarter last year was mainly due to higher operating costs for compensation and benefits, occupancy and equipment, data processing, and other costs associated with the Freedom Bank acquisition.
This quarter, we recorded tax expense of $701,000, resulting in an effective tax rate of 17.3%, as compared to tax expense of $639,000 in the second quarter of last year, or an effective tax rate of 17.4%. Loan growth continued strong this quarter as gross loans increased $23.5 million, or 10.8% annualized during the second quarter. We continue to see solid demand from our agriculture, commercial, and residential mortgage lending portfolios. Our investment securities portfolio decreased $5.8 million in the second quarter of 2023. Gross unrealized net losses in this portfolio increased $3.6 million to $30.0 million, principally due to an increase in interest rates during the quarter.
Deposits totaled $1.3 billion at June 30th, 2023, and decreased by $13.1 million this quarter. Certificates of deposits and money market and interest checking accounts grew by $17.5 million and $18.1 million this quarter, respectively, while non-interest demand deposits and savings accounts declined by $39.6 million and $9.1 million, respectively. Our loan-to-deposit ratio totaled 68.9% at June 30th, which remains low, giving us plenty of liquidity to fund new loan growth. We operate in the stable markets throughout the state of Kansas, which provides us predictable liquidity through the 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 the Federal Reserve Bank lines of credit and Fed Funds agreements.
Combined, they provide us approximately $220 million of additional borrowing capacity as of June thirtieth. We also have additional capacity through Insured Cash Sweep and CDARS programs to provide additional insurance coverage for customers and as a source of wholesale funding. Our investment portfolio also provides a solid source of liquidity and is 99.3% available for sale, with approximately $76 million in projected cash flow over the next year. As of June 30th, 2023, we had $168.4 million of investment securities, which can be used as collateral for additional borrowing.
Stockholders' equity decreased slightly to $117.4 million at June 30th, 2023. Our book value decreased to $22.50 per share at June 30, compared to $22.57 a share at March 31st. The decrease in stockholders' equity resulted from an increase in unrealized losses on our investment securities portfolio mentioned above, which offset our quarterly earnings net of cash dividends. Our consolidated and bank regulatory capital ratios as of June 30th, 2023, are strong and exceed the regulatory levels considered to be well capitalized. The bank's leverage ratio was 8.7% at June 30th, 2023, while our total risk-based capital ratio was 13.9%. Let me turn the call over to Raymond to review highlights of our loan portfolio and credit risk outlook.
Thank you, Mark. Good morning to everyone. We continue to see strong loan growth throughout the quarter. Gross loans outstanding as of March 30th, 2023, totaled $893.3 million, an increase of $23.5 million or 10.8% on an annualized basis from the previous quarter. We experienced continued growth in our one-to-four family residential real estate loan portfolio, which increased $13.3 million this quarter. Growth in this residential mortgage portfolio was mainly the result of continued demand for our adjustable rate loan mortgage products. Our commercial loan portfolio increased $9 million this quarter, driven by growth in new business and increased line utilization. Our agricultural portfolio increased $3.8 million, with approximately one-third of this coming from new business growth.
Credit quality within the portfolio continues to remain strong, with low net charge-offs and declining nonperforming assets. Nonperforming loans, which primarily consist of nonaccrual loans and accruing loans greater than 90 days past due, totaled $2.8 million, or 0.31% of gross loans as of June 30th, 2023. Total foreclosed real estate was unchanged at $934,000, as we continue to actively pursue the sale of these properties. The balance of past due loans between 30 and 89 days, still accruing interest, declined significantly this quarter and totaled only 0.07% of gross loans. We recorded net loan charge-offs of $68,000 during the second quarter of 2023, compared to net loan charge-offs of $42,000 during the second quarter of 2022.
Our allowance for credit losses totaled $10.5 million, following the $250,000 provision Mark mentioned, and ended the quarter at 1.17% of gross loans. Asset quality at Landmark has remained excellent over the last few years, and we are focused on maintaining these quality metrics. The current economic landscape in Kansas is healthy. The preliminary, seasonally adjusted unemployment rate for Kansas as of June 30th was down slightly at 2.8%, according to the Bureau of Labor Statistics. In terms of housing, throughout the state of Kansas, higher interest rates, along with lower inventories of homes for sale, have impacted sales and financing activities. The Kansas Association of Realtors president recently commented that, quote, "Sales through the first half of the year are down nearly 15% compared to 2022.
Nevertheless, it remains a seller's market due to very tight inventories," end quote. Home prices in June increased 3.8% in Kansas compared to the same time last year, while prices in the Midwest increased 2.1% compared to last year. Home sales in Kansas fell by 9.6% in June compared to the same period last year. Lastly, I wanted to reiterate our credit focus. Our company, your company, remains focused on building and growing relationships that go beyond transactions. We're proud of the loan growth we've experienced. However, we're not sticking our neck out to get it. Our current loan-to-deposit ratio of 69% still affords us a runway for additional loan growth, and we'll continue to be judicious in deploying that capital for the long-term benefit of our company and our shareholders.
With that, I thank you, and I'll turn the call back over to Michael.
Thanks, Raymond, and I also want to thank you, Mark, for your 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 second quarter and year-to-date, 2023. 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.
Thank you. If you would like to ask a question, please press star then one on your telephone keypad. We have the first question on the phone line from Ross Haberman of RLH Investments.
Good morning, gentlemen. Nice quarter. Could you tell me a little bit, what is the average duration or life of that held to, sorry, of the held for sale, securities, please?
I think we're in the 3.7-3.9 average year life or average life of our available for sale investment portfolio.
Okay. I think you said, hold on. The $76 million, I believe you said, is the cash flow coming off that? That's, that's about 15%-16% of the total. That's about right? If, if I'm, if I'm understanding that right.
Over the rest of the year.
Over the next 12 months, is that what you-- if I understand that?
That's actually the rest of the, of the rest of this year, 2023.
Okay. Okay. How are you positioned, or what are you seeing? Let's say they raise the rates another 0.25%, for argument's sake, and keep it there. How does that scenario do you see affecting your margin or your spread?
I think on the short term, we're gonna continue to see a little more margin compression, Ross. I think as we-
Right.
with our borrowing costs and, and able the immediate impact on our investments or our loan portfolio doesn't reset immediately like it does on some of our short-term borrowing lines. longer term, if the rates stay up and get a little less inverted on the yield curve, it's the higher rates are good for us, but the inversion and the short-term aspect are a little will result in some compression for us, which we saw from the first quarter to the second quarter of this year.
Can I ask what you're paying? What's the highest rate you're paying either on CDs or money markets today?
On CDs and money markets, we're probably matching-
Yeah
... customers when they come in. I think our, our highest stated rate may be 4% on a seven-month CD, but we are matching people that come in, in the low 5s.
Relationships.
With relationships that, that they bring to us, as opposed to a customer coming in off, or individual coming in, that's not a, a customer, wouldn't get that rate, but a longer-term relationship...
Existing.
That has some loan or other, accounts with us, we'd look at matching.
What kind of rates are you getting on your commercial real estate loans today?
Ross, those are probably dependent upon the, the risk, the risk metric attached to it. Those are going to be priced somewhere in the neighborhood north of 7.5%.
You're making roughly 2.5. Okay, you're making roughly 2.5+. Okay. I'm just trying to get a sense of what my marginal cost of my probably 2.5%-3% spread.
I'm sorry, Ross, what was that again?
I said I'm trying to get a sense of what kind of margin you're getting on your, on your marginal cost of money today. It looks like around 2% , 2.75% or 3%-ish. Does that sound right?
That's that's where we're targeting to get. We wish it was a little bit better, but that's where we're seeing a lot of it come in at this point, Ross.
Just one final question, and I greatly appreciate your time. What kind of loan growth do you expect the second half? You had, let's see, you're up about $40 million, but, 5%, I guess, for the 5% for the first half, $43 million. Most banks are not expecting much growth the second half. What are you sort of, based on your pipelines, expecting?
I think we'll still see some volume in growth, particularly in our one to four family adjustable rate mortgage portfolio. That's been an attractive alternative product, given this rate environment. I'd expect to see some continued growth there. Our pipelines, as we're entering the second half of this year, I'd say we still have average pipeline activity. If we were to model growth for the second half of this year, I'd be looking at mid to upper single-digit growth.
Okay. That's, that's better than most. Thanks, guys. I really appreciate it. It was a very nice, very nice quarter. Thank you.
Thanks, and thanks for the interest in the company.
Thank you. As a reminder, it is star followed by one to ask any further questions today. I can confirm we've had no further questions registered. Oh, I apologize. We have a follow-up question from Ross.
Okay, I'm sorry. If no one else is, I, I might as well indulge. Sorry, guys. Just one final question. In the $3.3 million in earnings for the quarter, it looked like that number was pretty clean in terms of nonrecurring expenses and/or gains. I just want to confirm that, or, or I guess I'm sorry, you, you did have about $830,000, gain on sale of mortgage loans?
Yes, that was. I think we kind of consider that a little con, continuous and not one time, as you, actually, a little bit down from last year's gain on sale of loans, as we originate and sell all the fixed rate products we come up with. The volume is down a little bit now, but, but I think that's still a recurring number. We'd hope it maybe picks up yet.
For the second half.
Second half.
How about expenses? Any one-time expenses, data processing, or you closing or opening up any new branches in the second half?
Nothing that's that's scheduled at this point in time, Ross, that I can think of. I think our one time, we should still see a little bit of synergies of some of the Freedom Bank acquisition. Last October, we got through the data processing conversion in March. The data processing costs, you can see, went down quarter-over-quarter, and maybe there's still a few contracts that will need to get to their expiration yet in the second half of this year. They are material, individually, so.
Okay. Thanks again, guys. I really appreciate it.
You bet.
Thank you. I can confirm we have no further questions. I'd like to hand it back to Michael for any final remarks.
Thank you. I, 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. I look forward to sharing news related to our third quarter 2023 results at our next earnings conference call.