Landmark Bancorp Inc.

Hello, everyone, and welcome to today's landmark Bancorp third quarter earnings call. My name is Seb, and I'll be the operator for your call today. If you would like to submit a question during the Q&A session, please press star one on your telephone keypad, or if you'd like to withdraw your question, please press star two. I will now hand the floor over to Abby Wendell, President and CEO, to begin the call. Please go ahead.

Good morning. Thank you for joining our call today to discuss Landmark's earnings and operating results for the third quarter of 2024. As you just heard from the operator, my name is Abby Wendell, President and CEO of Landmark Bancorp. Joining me on the call to discuss various aspects of our third quarter performance is Mark Herpich, Chief Financial Officer, and Raymond McClanahan, 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. Landmark reported net earnings of $3.9 million during the third quarter of 2024. Earnings per share on a fully diluted basis for the third quarter was 72 cents. The return on average assets was 1.0%, and the return on average equity was 11.82%. Our efficiency ratio for the third quarter of 2024 was 66.5%. Our third quarter results reflected continued solid earnings driven by strong growth in loans, along with higher net interest income and non-interest income. Net income grew by 30.5% over the prior quarter, and 36.6% over the same period in 2023, while our earnings per share increased by 36.5% over the third quarter of last year. Total gross loans increased this quarter by 21.3 million, and deposit balances also increased 8.0%. I'm pleased to share, for the first time in company history, our total gross loan balances reached $1 billion this quarter. This is a significant milestone for Landmark. As a result of this growth, net interest income grew 5.7% and our net interest margin increased nine basis points to 3.30% compared to the second quarter of 2024. Non-interest income increased 533,000 over the prior quarter, mainly due to an increase in fee-based revenue, residential mortgage revenue, and a gain on the sale of a former branch facility. Credit quality has remained strong with low net credit losses and a robust allowance for credit losses which totaled $11.5 million at September 30, 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 risks and in maintaining a strong credit discipline. Further, we employ a relationship-based banking model which offers stability and consistency to all our customers across our footprint. I'm pleased to report that our board of directors has declared a cash dividend of 21 cents per share to be paid November 27th, 2024 to shareholders of record as of November 13th, 2024. This represents the 93rd consecutive quarterly cash dividend since the company's formation in 2001. The board also declared a 5% stock dividend to be issued December 16, 2024, to shareholders of record on December 2, 2024. This represents the 24th consecutive year that the board has declared a 5% stock dividend, a continued demonstration of our long-term commitment to support growth in value and liquidity for our shareholders. With that, I will now turn the call over to Mark Herpich, our CFO, who will review the financial results in detail with you.

Thanks, Abby, and good morning to everyone. While Abby has just provided a highlight of our overall financial performance in the third quarter of 2024, I'll provide some further details on these results. As mentioned, net income in the third quarter of 2024 totaled $3.9 million compared to $3.0 million in the prior quarter and $2.9 million in the third 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. Loans also increased 21.3 million, which helped to increase our net interest margin, while non-interest expense declined. During the current quarter, the Federal Reserve began to reduce short-term rates, and while the future rate path is somewhat uncertain, we believe our balance sheet is well-positioned for this future interest rate environment. In the third quarter of 2024, net interest income totaled $11.6 million, an increase of $630,000 compared to the second quarter of 2024 due primarily to increased interest income on loans, which more than offset our increase in interest expense on deposits and borrowings. Total interest income on loans increased $911,000 this quarter, and the tax equivalent yield on the loan portfolio increased 10 basis points to 6.43%. Average loans also increased by $30.6 million during the third quarter, adding to loan interest income. Interest income on investment securities decreased $70,000 to $3.0 million this quarter due to a decline in average investment securities balances of $8.8 million, but offset by higher yields on our investment securities balances. The yield on investment securities totaled 2.99% in the current quarter compared to 2.77% in the third quarter of 23. Interest expense on deposits in the third quarter of 2024 increased $157,000, mainly due to increased balances in higher yielding deposit accounts. The average rate on our interest-bearing deposits increased this quarter to 2.48% compared to 2.44% last quarter, while the average balance of interest-bearing deposits remained unchanged as compared to the prior quarter. Interest expense on borrowed funds increased slightly this quarter despite slightly lower rates as average borrowed fund balances increased 4.3 million during the third quarter. Landmarks net interest margin on a tax equivalent basis increased to 3.30 percent in the third quarter of 2024 as compared to 3.21 percent in the second quarter of 2024. This quarter, a provision for credit losses of $500,000 was recorded, while no provision was made in the prior quarter. Net charge-offs totaled $9,000 in the third quarter of 2024, compared to net loan recoveries of $52,000 in the prior quarter. At September 30, 2024, our allowance for credit losses of $11.5 million remains strong and represents 1.15% of gross loans. Non-interest income totaled $4.3 million this quarter, increasing $533,000 as compared to the prior quarter, while increasing $601,000 compared to the third quarter of 2023. The increase from the second quarter of 2024 resulted from growth in other non-interest income of $282,000 and an increase in fees and service charges of $189,000. along with higher gains on sales of residential mortgages. The increase in other non-interest income was primarily due to a $273,000 gain on the sale of a former branch. Compared to the third quarter last year, fees and service charge income grew by $262,000, while gains on sales of fixed-rate residential mortgages improved by $213,000. Non-interest expense for the third quarter of 2024 totaled $10.6 million, a decrease of $536,000 compared to the prior quarter. As a reminder, the prior quarter included a $979,000 expense representing a valuation adjustment on the branch building that was sold during the current quarter. Compensation and benefits increased by 5.4% due to staffing levels and healthcare costs, while occupancy and equipment expense increased due to higher utilities and repair costs. This quarter, we recorded tax expense of $867,000, resulting in an effective tax rate of 18.1%, as compared to tax expense of $587,000 in the second quarter of this year, or an effective tax rate of 16.3%. Gross loans increased $21.3 million, or 8.6% annualized, during the third quarter until it was $1.0 billion. As Abby mentioned, this is a first in Landmark's history. We saw solid loan growth from our adjustable rate residential mortgage loan portfolio, which grew by $12.3 million. Our agriculture portfolio also increased by $7.5 million, while our commercial real estate portfolio increased $5.2 million during the third quarter. Our investment securities portfolio decreased $9.4 million on a period-end basis as we utilized maturing investments to fund loan growth. Our investment portfolio has an average life of 3.9 years with a projected cash flow of $91.1 million coming due in the next 12 months. Deposits totaled $1.3 billion at September 30, 2024 and increased by $25 million this quarter. Interest checking and money market deposits, along with Certificates of deposits grew by $19.2 million and $11.4 million, respectively, this quarter, while non-interest checking and savings accounts declined by $5.6 million. Average interest-bearing deposits decreased slightly in the third quarter of 2024, and average borrowings increased by $4.3 million during the quarter. However, period end balances declined $33.6 million. Our loan-to-deposit ratio totaled 77.6% at September 30th, which remains low, giving us sufficient liquidity to fund loan growth. Our stockholders' equity increased $11.4 million to $139.7 million at September 30th, 2024, and our book value increased to $25.39 per share at September 30th, compared to $23.45 at June 30th. The increase in stockholders' equity this quarter mainly resulted from a decline in other comprehensive losses, which were aided by lower rates during the quarter. Our consolidated and bank regulatory capital ratios as of September 30, 2024, are strong and exceed the regulatory levels considered to be well capitalized. The bank's leverage ratio was 9.0% at September 30, 2024, while the total risk-based capital ratio with 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, agricultural, commercial, and commercial real estate portfolios. Gross loans outstanding at the end of the year, excuse me, at the end of the quarter totaled $1 billion, an increase of $21.3 million, or 8.6%, on an annualized basis from the previous quarter. Our residential mortgage loan portfolio increased $12.3 million this quarter due to continued demand for our adjustable rate loan products that we retain in our portfolio. Agricultural loans increased $7.5 million during the prior quarter. $6 million of that increase resulted from new loan growth, while only 1.5 million represented seasonal increases in line of credit usages. Our commercial real estate portfolio increased 5.2 million, and our commercial portfolio increased 2.8 million from the prior quarter. While credit losses remained low this quarter, non-accrual and past due loans increased. At September 30th, 2024, non-performing loans consisting mainly of non-accrual loans totaled $13.4 million, an increase of $8.4 million from the prior quarter. This increase is mainly due to a single secured commercial loan relationship that we placed on non-accrual this quarter. We're working closely with our customer as they work to address their situation. 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 increased $5.4 million this quarter and totaled $7.3 million or 0.73% of gross loans. This increase was primarily due to a $3.5 million agricultural loan that was 32 days past due at quarter end. That loan is now current. We recorded net loan charge-offs of $9,000 during the third quarter of 2024 compared to net loan recoveries of $521,000 during the third quarter of 2023. As Mark mentioned, our allowance for credit losses totaled $11.5 million and ended the quarter at 1.15% of gross loans. The current economic landscape in Kansas remains healthy. The preliminary seasonally adjusted unemployment rate for Kansas as of September 30th was 3.3%, according to the Bureau of Labor Statistics. In terms of housing, despite moderating in recent weeks, long-term mortgage rates are down from a year ago. This lower rate environment appears to have improved buyer activity. The Kansas Association of Realtors president recently said, quote, although sales fell in September, the number of pending contracts was up nearly 9% compared to the same month last year, end quote. Home prices in September increased 6% in Kansas compared to the same time last year, while prices in the Midwest increased 5% compared to last year. Home sales in Kansas fell by 9% in September compared to the same period as last year. With that, I thank you, and I'll turn the call back over to Abby.

Thanks, Raymond. Before we go to questions, I want to summarize by saying we were pleased with our strong results in the third quarter. Growth in loans, margin expansion, and higher non-interest income all contributed to solid revenue growth this quarter. Also, non-interest expense was well controlled. With the operating successes we've had over the past few years and the high-quality banking products and services we offer, we are well-positioned to further grow our business and add to our customer base. We are focusing more recently on bringing in both loans and fee businesses to which is playing well across all our markets, and especially in Kansas City, where we are still relatively new. Finally, I'd like to thank all the associates at Landmark National Bank. Their daily focus on executing our strategies, delivering extraordinary service to our clients and communities is key to our success. With that, I'll open up the call to questions for anyone might have.

Thank you. If you would like to ask a question, please press star 1. on your telephone keypad now. If you would like to withdraw your question, please press star two. First question comes from Ross Haberman from RLH Investment. Please go ahead.

Morning. How are you? Nice quarter. Just had a couple of quick questions, if I may. Could you touch upon the margin or the spread? Did you see the full impact of the 50s? basis point drop in September, or I guess we will see that in this next quarter. How do you see that affecting the margin and the spread? And if perhaps we do see some further drops, I don't know, 50 to 75 basis points in the first half of 2025, how do you see that affecting the margin and the spread? Thank you.

Well, good morning, Ross. Thanks for joining and the questions. We're pleased with the quarter, and to get to your question on the margin and spread, we didn't get a full impact as the first 50 basis cut kind of happened in the middle of September, but we noticed it from that point immediately on with a lot of our liabilities and borrowings tied directly to the Fed funds rate on a daily basis. But the full impact will surely be felt in the fourth quarter and on into 2025. And I think the rate cuts are still a little uncertain if we're going to get 25 or eventually 50 or where we're at with some of the market fluctuations. But we're really well positioned to continue to capitalize and show benefits from the Fed funds rate going down. And it not hurting that the five and ten year rates are going up a little bit at this point to get eventually hopefully we get back to being positively sloped instead of an inverted yield curve from the Fed funds right up until the ten year treasury rate. But yes, we're quite optimistic on what the margin might hold for us in the next couple of quarters.

So you're saying the recent drop will be accretive to the margin and the spread, and any further drops will be too? Correct.

Yeah, that's correct. I mean, we obviously didn't get the full impact of the 50 basis point cut on a quarter basis, only a few weeks, but it should be accretive going forward to a much larger extent, and After that, we'll kind of wait and see what the Federal Reserve does at their next few meetings here. We were optimistic, more optimistic a few weeks ago that there might be another 50 basis point cut coming, but now it might be a little more as an uncertainty, but I still think rate cuts are coming.

What are you seeing, just one follow-up, if I may, what are you seeing on the mortgage side? I know mortgage rates actually dropped before they lowered rates, and then I guess I guess they meandered up a little bit. What are you seeing in your mortgage volume? And I think you said you're keeping most of the mortgage, or are you selling whatever 30-year fixed rate which you are originating? And could you tell us about the margins upon the sale today? Thanks.

Yeah, the interest rates did drop down. It seemed like they were the Fed funds or the Federal Reserve was kind of pushed by the market activity in the 15 and 30-year rates. So they kind of were ahead of the Fed making their Fed funds rate cut. But you're right, we have been keeping our variable rate 7-1 arm portfolio, which we kind of priced in competitively with a 15-year rate. But now we're starting to see with the rates going down, more people are starting to choose the fixed rate options. It's a little slow at this point. I think everybody's thinking that maybe there's more rate cuts to come, but we're already seeing some increased activity in that, and we think it'll presumably, if rates stay and continue going down, we'll see more volume in the fixed rate area as well. But we're still managing our balance sheet to where the adjustable rate loans We'll probably keep on our balance sheet, but we're thinking that we will start seeing more and more customers choose the fixed rate option going forward. But our pipeline activity remains very robust at this point in time.

And again, the margins on the sale of those fixed rates, are those margins getting better or worse or kind of stable?

I'd say they're staying stable. I think We're not seeing any significant changes on the margins at this point in time.

Thank you very much.

Yeah, thank you, Russ.

Thanks, Russ.

So just a reminder, for any further questions, please press star 1 on your telephone keypad now. As we have no further questions on the call, I'll just hand the floor back to Abby for closing remarks.

Thank you. I want to thank everyone for participating in today's earnings call. I appreciate your continued support and confidence in the company. I look forward to sharing news related to our fourth quarter and year-end results at our next earnings conference call. And in the meantime, we at Landmark want to wish you a safe and happy Halloween.

Thank you. This concludes today's conference call and you may now disconnect your lines.