LARK - NASDAQ

Ladies and gentlemen, thank you for standing by. Welcome to the Landmark Bancorp Inc. 2024 First Quarter Earnings Call. [Operator Instructions] I would now like to hand the conference call over to Abby Wendel, CEO. Please go ahead.

Thank you. Good morning. Thank you for joining our call today to discuss Landmark's earnings and operating results for the first quarter of 2024. As you just heard from the operator, my name is Abby Wendel and I am the new CEO of Landmark Bancorp. Joining the call with me to discuss various aspects of our first quarter performance is Mark Herpich, Chief Financial Officer of the company; and Raymond McLanahan, Chief Credit Officer. As we start, 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 review the highlights regarding our operating results for the quarter, I want to take a moment to comment on our leadership change effective March 29. As you are aware by now, Landmark's former CEO, Michael Scheopner, retired from his position in March and I assumed the President and Chief Executive Officer role for Landmark Bancorp at that time. Michael is still with the bank in a non-executive capacity providing assistance to me during this transition for which I'm grateful. I'm also very excited for the opportunity to further build upon Landmark's legacy and help write the next chapter for the company. While it's only been a month, I have already come to appreciate the team that is in place and look forward to working with the outstanding leadership team, associates and Board of Directors to deliver tailored financial solutions to our customers and value to our shareholders. Now I will move on to our results. Landmark reported net earnings of $2.8 million during the first quarter of 2024. Earnings per share on a fully diluted basis for the first quarter was $0.51. The return on average assets was 0.72% and the return on average equity was 8.88%. Our efficiency ratio in the first quarter 2024 was 73%. Our first quarter results included solid loan growth, lower expenses and continued good credit quality. Total gross loans increased by $15.4 million or 6.5% on an annualized basis this quarter while average interest-bearing deposits increased $24.8 million. Compared to the fourth quarter of 2023, our noninterest income increased while our operating expenses declined. This quarter we continued to see very good demand for residential mortgages and other commercial loans and our net interest margin, which totaled 3.12% this quarter, increased slightly aided by relatively stable interest rates. Our focus on operational efficiencies kept our noninterest expenses well controlled this quarter. Credit quality has remained strong as net loan chargeoffs, nonaccrual loans and delinquencies remain at relatively low levels. The allowance for credit losses remains robust totaling $10.9 million at December 31 and March 31, 2024. Landmark's capital and liquidity measures are strong and we have a stable conservative deposit portfolio with most of our deposits being retail based and FDIC insured. We remain risk averse both in monitoring our interest rate and concentration risk and in maintaining a strong credit discipline. Further, we employ a relationship-based banking model, which offers stability and consistency to all our customers. I am pleased to also report that our Board of Directors have declared a cash dividend of $0.21 per share to be paid May 29, 2024 to shareholders of record as of May 15, 2024. This represents the 91st 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, Abby, and good morning to everyone. While Abby has just provided a good summary of our overall financial performance in the first quarter of 2024, I'll provide some further details on these results. As Abby mentioned, net income in the first quarter of 2024 totaled $2.8 million compared to $2.6 million in the prior quarter and $3.4 million in the first quarter of 2023. Net income this quarter increased in comparison with the prior quarter mainly due to securities losses of $1.2 million taken in the fourth quarter last year, but offset by an increase in the provision for credit losses of $250,000 taken this quarter. In the first quarter of 2024, net interest income totaled $10.8 million, a decrease of $139,000 compared to the fourth quarter of 2023 due primarily to increased interest expense on deposits, which more than offset our increase in interest income on loans. Total interest income on loans increased $267,000 this quarter and the tax equivalent yield on the loan portfolio increased 12 basis points to 6.16%. Average loans also increased by $11.4 million during the first quarter adding to loan interest income. Interest income on investment securities decreased $22,000 to $3.2 million this quarter due to a decline in average investment securities balances of $6.8 million, but offset by higher yields earned on our investment securities balances. The yield on investment securities totaled 2.96% in the current quarter compared to 2.86% in the prior quarter and 2.68% in the first quarter of 2023. Interest expense on deposits in the first quarter of 2024 increased $578,000 mainly due to higher rate balances. The average rate on our interest-bearing deposits increased this quarter to 2.35% compared to 2.13% last quarter while the average balance of interest-bearing deposits increased $24.8 million. Interest expense on borrowed funds decreased $180,000 this quarter despite slightly higher rates as average borrowed fund balances declined $11.2 million during the first quarter. Landmark's net interest margin on a tax equivalent basis increased to 3.12% in the first quarter of 2024 as compared to 3.11% in the fourth quarter of 2023. This quarter a $50,000 provision for credit losses was made to our liability for unfunded lending commitments along with a loan-related provision of $250,000 mainly due to the continued growth in our loan portfolio. Net loan chargeoffs decreased this quarter and our allowance for credit losses of $10.9 million remains strong and represents 1.13% of gross loans. Noninterest income totaled $3.4 million this quarter decreasing $95,000 compared to the first quarter last year while increasing $1.1 million compared to the fourth quarter of 2023. The increase from the fourth quarter last year was primarily the result of the $1.2 million in securities losses taken in the fourth quarter that I mentioned earlier. Also gains on sales of residential mortgages more than doubled to $512,000, but were offset by lower deposit fees. Compared to the first quarter last year, gains on sales of fixed rate residential mortgages declined by $181,000. While fees from sales of fixed rate mortgages have declined somewhat over the last year, we continue to see solid growth in new adjustable rate mortgages, which we normally keep in our loan portfolio instead of selling into the market. Noninterest expense for the first quarter of 2024 totaled $10.6 million, a decrease of $11,000 compared to the prior quarter, but grew only 2% higher than the same period last year. The increase in noninterest expense compared to the first quarter last year was mainly due to increases of $198,000 in other noninterest expense and $156,000 in professional fees, which were offset by lower data processing costs of $100,000 and flat compensation and benefits expense. The increase in professional fees was related to higher legal costs associated with the company's benefit plan while growth in other noninterest expense resulted from a valuation allowance recorded against real estate held for sale and an increase in operating losses incurred. This quarter we recorded a tax expense of $518,000 resulting in an effective tax rate of 15.7% as compared to tax expense of $693,000 in the first quarter of last year or an effective tax rate of 17.1%. Gross loans increased $15.4 million or 6.5% annualized during the first quarter and totaled $964 million. We saw good growth in our adjustable rate, residential mortgage, commercial real estate and commercial construction loan portfolios. Our investment securities portfolio decreased $15.5 million on a period-end basis as we utilized our maturing investments to fund our loan growth. Our investment portfolio has an average life of 4.2 years with a projected cash flow of $71.5 million coming due in the next 12 months. Period end deposits totaled $1.3 billion at March 31, 2024 and decreased by $22.7 million this quarter. Interest checking and money market deposits and noninterest checking declined by $30.3 million and $2.7 million, respectively, this quarter while certificates of deposits and savings accounts grew by $10.3 million. The decline in money market and checking accounts was driven by the seasonal decline in public fund account balances occurring soon after year-end. Average interest-bearing deposits, however, increased $24.8 million this quarter. Our loan-to-deposit ratio totaled 73.6% at March 31, which remains low giving us ample liquidity to fund new loan growth. Our markets throughout the State of Kansas remained very stable and they provide us with predictable liquidity through access to retail, commercial and municipal deposits. Also, 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 approximately $252 million of additional borrowing capacity as of March 31. Our investment portfolio also has unpledged securities available as collateral for additional borrowings. Stockholders equity decreased to $126.7 million at March 31, 2024 and our book value totaled $23.14 per share at March 31 compared to $23.17 at December 31. The decrease in stockholders' equity resulted from an increase in net unrealized losses on our investment securities portfolio mainly due to slightly higher interest rates this quarter. Our consolidated and bank regulatory capital ratios as of December 31, 2023 are strong and exceed the regulatory levels considered well capitalized. The bank's leverage ratio was 8.8% at March 31, 2024 while the total risk-based capital ratio was 13.8%. 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. As mentioned earlier, we enjoyed continued loan growth throughout the quarter mainly due to increases in our residential mortgage and commercial loans while net loan losses this quarter were very low. Gross loans outstanding at the end of the quarter totaled $964 million, an increase of $15.4 million or 6.5% on an annualized basis from the previous quarter. Our residential mortgage loan portfolio increased $10.3 million this quarter mainly due to continued demand for our adjustable rate loan products. Additionally, our construction loan portfolio increased $3.7 million while our commercial real estate loan portfolio increased $2.4 million this quarter. Turning to credit quality. At March 31, 2024, nonperforming loans consisting mainly of nonaccrual loans totaled $3.6 million, an increase of $1.2 million from the prior quarter. Approximately half of this increase was due to increased delinquency associated with 1 customer relationship in the Kansas City metro area. While nonperforming loans increased this quarter, they remained low and only totaled 0.38% of gross loans. Total foreclosed real estate decreased $500,000 from the prior quarter and ended at $428,000. The balance of past due loans between 30 and 89 days still accruing interest increased $2.48 million this quarter and totaled $4.1 million or 0.42% of gross loans. This increase was primarily due to a $1.5 million agricultural loan that was past due at the end of the quarter. That loan has now been paid off. We recorded net loan chargeoffs of $7,000 during the first quarter of 2024 compared to net loan chargeoffs of $47,000 during the first quarter of 2023. Our allowance for credit losses totaled $10.85 million and ended the quarter at 1.13% of gross loans. Asset quality at Landmark has remained excellent over the last few years and we remain focused on maintaining sound underwriting practices and strong metrics. The current economic landscape in Kansas is healthy. The preliminary seasonally adjusted unemployment rate for Kansas as of March 31 was 2.7% according to the Bureau of Labor Statistics. In terms of housing, inventory levels for available homes in Kansas continue to impact home prices. The Kansas Association of REALTORS' President recently commented that the limited inventory of homes available for sale continues to be an issue as we enter the spring selling season. Home prices in March increased 8% in Kansas compared to the same time last year while prices in the Midwest increased 7.5% compared to last year. Home sales in Kansas fell by 7% in March compared to the same period of last year. And with that, I thank you and I'll now turn the call back over to Abby.

Thank you, Raymond. Before we go to questions, I want to summarize by saying we were pleased with our performance for the first quarter of this year with our continued strong loan growth, solid credit quality and well controlled expenses. Further, our net interest margin has held up very well in this environment. I want to express my thanks and appreciation to all of the associates at Landmark National Bank for the warm welcome as I joined the company last month. Their daily focus on executing our strategy and delivering extraordinary service to our clients and communities is a key to our success. With that, I will open the call up to questions that anyone might have.

[Operator Instructions] The first question comes from Ross Haberman of Rlh Investments.

Welcome on board, Abby. I haven't had the pleasure of meeting you yet. Could you just give us a little bit of your background as my first question? And the second question is give us a sense of where you're seeing loan demand today and what kind of net loan growth are you expecting in '24?

Ross, I look forward to meeting you in person. So I joined the company on March 29 as stated and I guess I could say I'm about 2/3 of the way through what I anticipate in my entire career being. The first 1/3 of that I spent at the Federal Reserve Bank of Kansas City in a variety of capacities and for the last 15 years I've been at a midsized regional bank here in the Kansas City area and I remain in the Kansas City area. I was excited about the opportunity to join Landmark probably heavily influenced by the first part of my career where we really understood the importance of community banks. And we've had a lot of change in the industry. There's still a lot of consolidation going on. But I strongly feel that community banks are more important than ever. So that's what brought me here. We're seeing strong loan growth in the first quarter across multiple of our business lines. As you noted on the call, it was led by residential mortgages and most of those were purchased money within our footprint. We are seeing strong commercial growth and commercial real estate growth though too for us and we look forward to capitalizing on some opportunities that are coming. We don't, Ross, give forward guidance in terms of where we plan to end the year with respect to loan growth, but I think 6.5% annualized based on our first quarter results is probably a good indication of where we might land.

[Operator Instructions] Michael

I have a question regarding the announced acquisition of Heartland by United Missouri. Will this have any impact on you positive or negative? Is it an opportunity to get new clients from a runoff of UMB?

Michael, thanks for your question. It's really hard for me to comment on another bank's acquisition or a combination in our footprint. But I can tell you that I think history would show that any time there's some kind of change in the market that there's always an opportunity for conversation. So we will be -- as our teams are always outward facing anyway and working with our customers to help them build their businesses and other aspects of our business, we'll continue to look for every opportunity that comes our way if it's a consequence of another bank's activities or of our own opportunity in the marketplace.

And as a follow-up question, are you satisfied with your current branch profile or are you looking at expanding and adding branches or consolidating branches? What's your, I guess, take on the branch structure?

Sure. Happy to comment on my outlook related to that. Here in Kansas City following the acquisition of Freedom Bank and the integration of that, we actually capitalized on an opportunity to consolidate 2 branches into 1. So we are now at 30 locations across our 24 communities. And like any bank irrespective of size, looking at branch network and looking at customer patterns and how we might best serve our customers is something that we have done here at Landmark, the team that predates me and we will continue to do too. Here in my first 100 days I have a plan to get out and visit all of our locations and I look forward to meeting the associates that are working there. And we will keep you posted as we continue to evaluate our footprint and what best meets the needs of our customers and communities.

And then 1 final question. Kansas is principally an agricultural state and of course there's some important pending legislation in Congress. What's your outlook on agricultural lending going forward?

Michael, this is Raymond McLanahan, I appreciate the question. We stay really attuned to what's going on in Congress and anything that they do to benefit our agricultural producers and our ag customers benefits the bank and so we're happy to see what comes out of Congress this year. And any other actions that they may or may not take that helps increase our competitive advantage would also be a benefit to us as a bank. So we're constantly monitoring it. But as far as our customers and the ag economy here in Kansas, we continue to monitor well and we're currently in the midst of our renewal season and we're pleased with some of the operating results that some of our ag producers are demonstrating.

Do you think there's an opportunity to increase your ag lending?

I think there's always an opportunity to increase our ag lending. It's an important part of our business and it's something that our commercial bankers are regularly focused on.

Well, congratulations to the team. It looks like you're off to a good start in 2024.

We now have a follow-up question from Ross Haberman of Rlh Investments.

Just 2 follow-up questions. First, the margin or the spread. Most banks are seeing continued pressure on their margins. What do you expect? Given, let's say, they keep rates the same throughout '24, what's your thought on the margin with that scenario? And two, your nonaccruals have been remarkably low. Any concerns or any issues on the criticized or delinquencies in the nonaccruals because they look remarkably good?

Ross, thanks for that question. The margin, as you saw, was increased just slightly 1 basis point, 3.11% up to 3.12%. Earlier in the year I would have been a little more optimistic. I think we're continuing to see pressure on dealing with customers on increases to our deposit costs and I continue to see that happening, but we still have the opportunities to increase our loan rates as they come due for renewals. But if I'm going to give a forecast, which we don't have any forward-looking guidance, I think that we're going to be treading water going steady. We were hoping for maybe a rate increase on the short end, but that doesn't look likely in my crystal ball, which isn't very good potentially Ross. But we kind of think that we will go somewhat flat throughout the rest of the year on a margin basis. And then as far as the nonaccrual loans, we continue to work diligently with our customers and have prided ourselves over the years with the quality of loans and customers that we associate with. And I think that the low levels of nonaccruals are a factor relating to that relationship we have and we continue to monitor it. We're hearing that commercial real estate and office type buildings are starting to experience problems also on the coast, but moving its way through the Midwest. But we really don't have very much exposure to that type of lending for Landmark National Bank. Hopefully, that answers your question.

Yes. Just 1 final if you can indulge me with 1 more. A number of banks are restructuring some of their held-for-sale securities if they can make back the hit in, I don't know, 2 years or less. You had about an $18 million AOCI at the end of March. What was the average LIFO duration of that and have you looked at that possibility to restructure some, sell it and reinvest it and what kind of breakeven would be palatable for you to do that?

Ross, another good question. As you probably saw in the fourth quarter, we did sell some of our investments and incurred the $1.2 million loss as we evaluated. The 2-year breakup maybe a little longer than we would like to see. We'd like to see something that's a little closer to 1 year or slightly over that potentially. But we are continuing to model some of those opportunities and thinking about restructuring our investment portfolio if it would make sense in those guidelines and be good for our shareholders on a longer-term basis. And I think you asked what our average life of the portfolio was, I think that's 4.2 years.

Yes, I did. 4.2 years, you said, Mark?

Yes, that's our duration.

As there are no additional questions waiting at this time, I'd like to hand the conference back over to Abby Wendel for closing remarks.