LARK - NASDAQ

Hello, everyone and welcome to the Landmark Bancorp Q2 Earnings Conference Call. My name is Carla and I will be coordinating your call today. [Operator Instructions] I would now like to hand you over to Abi Wendel, President and Chief Executive at Landmark, to begin. Abi, please go ahead.

Thank you. Good morning. Thank you for joining our call today to discuss Landmark’s earnings and operating results for the second quarter of 2024. As you just heard from the operator, my name is Abi Wendel, President and CEO of Landmark Bancorp. Joining the call with me to discuss various aspects of our second 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 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 $3 million during the second quarter of 2024. Earnings per share on a fully diluted basis for the first quarter were $0.55, the return on average assets was 0.78%, and the return on average equity was 9.72%. Our efficiency ratio in the second quarter was 67.9%. Our second quarter results reflected continued solid earnings driven by continued solid growth in loans, along with higher net interest income and non-interest income. As mentioned in our press release, this quarter, we recorded a pretax valuation adjustment of $979,000 on a former branch, which is under sale contract this adjustment resulted in a reduction of earnings per share of $0.13. Excluding this item, non-interest expenses declined from the prior quarter on lower compensation, occupancy and mortgage amortization expense. Total gross loans increased this quarter by $16.5 million and average interest-bearing deposits also increased by $820,000. Compared to the first quarter of 2024, net interest income grew 2.1%, and our net interest margin expanded to 3.21%. Non-interest income also increased as both fees and gains on mortgage loan sales were higher than in the prior quarter. Core non-interest expense was well controlled this quarter as we continue to focus on operational efficiency. Credit quality has remained strong as net loan charge-offs, non-accrual loans and delinquencies remain at relatively low levels this quarter. The allowance for credit losses remains robust, totaling almost $11 million at June 30, 2024. Landmark 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 our relationship-based model, which offers stability and consistency to all our customers. I am pleased to report that our Board of Directors had declared a cash dividend of $0.21 per quarter to be paid September 4, 2024, to shareholders of record as of August 21, 2024. This represents the 92nd 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 in detail with you.

Thanks, Abi, and good morning to everyone. While Abi has just provided a highlight of our overall financial performance in the second quarter of 2024, I’ll provide some further details on those results. As Abi mentioned, net income in the second quarter of 2024 totaled $3.0 million compared to $2.8 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 improvements in net interest income and non-interest income. Also, we did not make a provision for credit losses this quarter. Core non-interest expense also declined nicely exclusive of the branch valuation adjustment that Abi mentioned earlier. In fact, excluding those adjustments, our non-interest expenses would have declined by $306,000 or 2.9%. In the second quarter of 2024, net interest income totaled $11.0 million, an increase of $227,000 compared to the first quarter of 2024, due primarily to increased interest income on loans, which more than offset our increase in interest expense on deposits. Total interest income on loans increased $532,000 this quarter and the tax equivalent yield on the loan portfolio increased 17 basis points to 6.33%. Average loans also increased by $9.4 million during the second quarter, adding to our loan interest income. Interest income on investment securities decreased $74,000 to $3.1 million this quarter due to a decline in average investment securities balances of $19.8 million, but offset by higher yields earned on our investment securities balances. The yield on investment securities totaled 3.04% in the current quarter compared to 2.96% in the prior quarter and 2.7% in the second quarter of 2023. Interest expense on deposits in the second quarter of 2024 increased $216,000, mainly due to higher rates. The average rate on our interest-bearing deposits increased this quarter to 2.44% compared to 2.35% last quarter, while the average balance of interest-bearing deposits increased $820,000. Interest expense on borrowed funds decreased slightly this quarter despite slightly higher rates as average borrowed fund balances declined $2.6 million during the second quarter. Landmark’s net interest margin on a tax equivalent basis increased to 3.21% in the second quarter of 2024 as compared to 3.12% in the first quarter of 2024. This quarter, no provision for credit losses was made after our credit models considered the economic environment and recognized a large part of our loan growth this quarter was in the one-to-four-family residential mortgage category, where we continue to experience strong credit results. At June 30, 2024, our allowance for credit losses totaled $10.9 million, which remains strong and represents 1.11% of gross loans. Non-interest income totaled $3.7 million this quarter, increasing $320,000 as compared to the first quarter, while decreasing $109,000 compared to the second quarter of 2023. The increase from the first quarter was primarily the result of an increase in fees and service charges of $230,000, along with growth in gains on – of $136,000 on sales of residential mortgages. Compared to the second quarter last year gains on sales of fixed rate residential mortgages declined by $182,000. While fees from sales of fixed rate mortgages have declined somewhat over the last year, growth in adjustable rate mortgages, which are kept on our balance sheet has been strong. Non-interest expense for the second quarter of 2024 totaled $11.1 million an increase of $544,000 compared to the prior quarter, but as discussed earlier, this increase was entirely driven by the $979,000 valuation adjustment on a former branch building that is under contract for sale. Absent the valuation adjustments in the first and second quarters, non-interest expense would have been $306,000 lower than the prior quarter. Compensation and benefits, occupancy and equipment and mortgage servicing amortization were all lower this quarter. This quarter, we recorded tax expense of $587,000, resulting in an effective tax rate of 16.3% as compared to tax expense of $518,000 in the first quarter of this year for an effective tax rate of 15.7%. Gross loans increased $16.5 million or 6.9% annualized during the second quarter and totaled $980.6 million. We saw good growth in our adjustable rate residential mortgage and commercial construction loan portfolios, our investment securities portfolio decreased $16.8 million on a period-end basis as we utilize maturing investments to fund our loan growth. Our investment portfolio has an average life of 4.3 years with a projected cash flow of $69.7 million coming due in the next 12 months. Period-end deposits totaled $1.3 billion at June 30, 2024, and decreased by $43 million this quarter. Interest checking and money market deposits, and non-interest checking accounts declined by $36.9 million and $3.8 million, respectively, this quarter. The decline in money market and checking accounts was mainly driven by a decline in broker deposits on the last day of the second quarter, leading to a corresponding increase in overnight borrowings from the Federal Home Loan Bank at quarter end. Average interest-earning deposits actually increased slightly in the second quarter of 2024, while our average borrowings declined by $2.6 million during the quarter. Our loan-to-deposit ratio totaled 77.5% at June 30, which remains low, giving us sufficient liquidity to fund loan growth. Stockholders’ equity increased to $128.3 million at June 30, 2024, and our book value totaled $23.45 per share at June 30 compared to $23.14 at March 31. Our consolidated and bank regulatory capital ratios as of June 30, 2024, are strong and exceed the regulatory levels considered well capitalized. The bank’s leverage ratio was 8.9% at June 30, 2024, while the total risk-based capital ratio was 13.7%. 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, everyone. As mentioned earlier, we enjoyed continued loan growth throughout the quarter, mainly due to increases in our residential mortgage and construction and land loan portfolios. Gross loans outstanding at quarter – excuse me, gross loans outstanding at the end of the quarter totaled $980.6 million, an increase of $16.5 million or 6.9% on an annualized basis from the previous quarter. Our residential mortgage loan portfolio increased $19.3 million this quarter, mainly due to continued demand for our adjustable rate loan mortgage products. Additionally, our construction and land loan portfolio increased $5.7 million this quarter. Turning to credit quality. At June 30, 2024, non-performing loans consisting mainly of non-accrual loans totaled $5 million, an increase of $1.4 million from the prior quarter. This increase is largely due to weakness identified with a $1.2 million SBA guaranteed commercial loan relationship. Total foreclosed real estate was unchanged from the prior quarter and ended at $428,000. The balance of past due loans between 30 and 89 days still accruing interest decreased $2.2 million this quarter and totaled $1.9 million or 0.19% of gross loans. We recorded net loan recoveries of $52,000 during the second quarter of 2024, compared to net loan charge-offs of $68,000 during the second quarter of 2023. Our allowance for credit losses totaled $10.9 million and ended the quarter at 1.11% of gross loans. Asset quality at Landmark has remained excellent over the last few years, and we remain focused on maintaining strong metrics. Regarding our commercial real estate portfolio, our lending philosophy has always been focused on relationship banking with customers in our respective markets. As a result, our commercial real estate portfolio is primarily comprised of owner-occupied commercial real estate which historically has been a well-performing asset class. We remain vigilant in monitoring the health and performance of this loan portfolio as well as the trends in the broader commercial real estate economic environment. The current economic landscape in Kansas is healthy. The preliminary seasonally adjusted unemployment rate for Kansas as of June 30th, was 3.1% according to the Bureau of Labor Statistics. In terms of housing, the Kansas Association of Realtors’ President recently shared two interesting statistics. They said, “During the first half of the year, typical sale prices across the state are up 6.3% compared to the first half of 2023. In addition, half of all homes sold did so in 10 days or less.” Home prices in June increased 5.3% in Kansas compared to the same time last year, while prices in the Midwest increased 5.5% compared to last year. Home sales in Kansas fell by 17.8% in June compared to the same period last year. Given the statistics shared by the Kansas Association of Realtors, it would appear that inventory levels of available homes remain very tight. And with that, I thank you, and I will turn the call back over to Abi.

Thanks Raymond. Before we go to questions, I want to summarize by saying, we were pleased with our core performance for the second quarter of 2024, with continued strong loan growth, solid credit quality and well-controlled expenses. Further, our net interest margin expanded nicely. With the operating successes we have had over the past few years, we look forward to expanding our presence with high-quality banking products and services. We are focusing more recently on bringing both loans and fee business, which is playing well across all of our markets and especially in Kansas City, where we are relatively new. Finally, I would like to thank all of the associates at Landmark National Bank, their daily focus on executing our strategies, delivering extraordinary service to our clients and communities is the key to our success. And with that, I will open up the call to questions that anyone might have.

[Operator Instructions] Our first question comes from Ross Haberman from RLH Investments.

Good morning. Nice quarter, having just a couple of quick questions. Could you talk about the mortgage business? What are you seeing today? And has there been any recent pickup in the last couple of weeks with the recent drop in rates? And do you expect given the recent up in rates, say, a reasonable pickup in the next couple of months. Thanks.

Hi Ross, this is Abi. Thanks for joining us this morning. So, as we have reported for the past several quarters, our mortgage department really has hung in there because of our pivot towards the variable rate, the adjustable rate mortgage that we sell and retain on balance sheet. In the last couple of – I mean last week, really, we just saw the 30-year fixed move down below where we are offering the variable rate mortgage, and I do think over the past month, we have started to see an uptick and an interest in the products that we are able to sell in the secondary. I mean as you know, the mortgage industry is really a rate-driven interest industry. And so we certainly foresee more interest in those fixed products as rates continue to move down.

And just one follow-up question, if we do see – I don’t know, just say for argument sake like a quarter cut in September and another quarter in December, how do you see that scenario affecting the margin or the spread?

Yes. I am going to let Mark answer that in more detail. But I guess I would just kick it off by saying irrespective of what the Fed decides to do in September or November, I think we are very well positioned, and let me turn it over to Mark just for a little bit more information on that.

Yes. I would be happy to, Abi, and thanks, Ross, for the question. But I think we are pretty liability sensitive at this juncture of our business. And a cut on the Fed funds rate of 25 or 50 or if they want to go further, that’s even better from our standpoint. We have a lot of borrowings on our – what we consider a lot of borrowings on our Federal Home Loan Bank and some broker deposits that will re-price on a daily basis, and that will be very advantageous to us to see the short-term rates go down. What’s been difficult over the past few years or years, I guess at this point has been the inverted yield curve, which has gotten even more exacerbated Thursday and Friday of last week. So, if the Fed funds rate, which are tied to a lot of our short-term variable liabilities, we will take advantage of that.

And one final question. Any large expenditures expected in the next quarter or two quarters?

No unusual or non-core expenditures are on the docket at this point in time. We talked about the – or one thing in the second quarter where we are looking at selling a former branch building, but we have that hopefully behind us to close here in a couple of weeks, fingers crossed. But that was the only unusual item that we had in the second quarter to report. And as we said in the core expenses, we were pleased with and think that we should continue to see expenses along those lines. We will continue to look for areas that we can invest in human capital or other products, but we don’t envision anything significant.

Thank you very much.

[Operator Instructions] And we currently have no further questions on the queue. I will hand back over to Abi Wendel for any final remarks.

Thank you. I want to thank everyone for participating in today’s earnings call. I appreciate your interest and your continued support and confidence in the company. I look forward to sharing news related to our third quarter 2024 results at our next earnings conference call.