Landmark Bancorp Q1 2024 Earnings Call Transcript

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Provided by Quartr
May 2, 2024

There are 6 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Landmark Bancorp Inc. 20 24 First Quarter Earnings Call. All lines have been placed on mute during the presentation portion of the call with an opportunity for question and answer at the end. I would now like to hand the conference call over to Abi Wendel, CEO.

Operator

Please go ahead.

Speaker 1

Thank you. Good morning. Thank you for joining our call today to discuss Landmark's earnings results for the Q1 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 Q1 performance is Mark Herpich, Chief Financial Officer of the company and Raymond McClanahan, Chief Credit Officer.

Speaker 1

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 ks 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 Scheffner retired from his position in March, and I assume the President and Chief Executive Officer role for Landmark Bancorp at that time.

Speaker 1

Michael is still at 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 $2,800,000 during the Q1 of 2024.

Speaker 1

Earnings per share on a fully diluted basis for the Q1 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 Q1 2024 was 73%. Our Q1 results included solid loan growth, lower expenses and continued good credit quality. Total gross loans increased by $15,400,000 or 6.5 percent on an annualized basis this quarter, while average interest bearing deposits increased $24,800,000 Compared to the Q4 of 2023, our non interest 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 percent this quarter, increased slightly aided by relatively stable interest rates.

Speaker 1

Our focus on net loan charge offs, non accrual loans and delinquencies remain at relatively low levels. The allowance for credit losses remains robust, totaling $10,900,000 at December 31 at 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 consistency and consistency to all our customers. I am pleased to also report that our Board of Directors has declared a cash dividend of $0.21 per share to be paid May 29, 2024 to shareholders of record as of May 15, 2024.

Speaker 1

This represents the 91st consecutive quarterly cash dividend since the company's formation in 2,001. I will now turn the call over to Mark Herbeck, our CFO, who will review the financial results with you.

Speaker 2

Thanks, Abby, and good morning to everyone. While Abby has just provided a good summary of our overall financial performance in the Q1 of 2024, I'll provide some further details on these results. As Abby mentioned, net income in the Q1 of 2024 totaled $2,800,000 compared to $2,600,000 in the prior quarter and $3,400,000 in the Q1 of 2023. Net income this quarter increased in comparison with the prior quarter, mainly due to securities losses of $1,200,000 taken in the Q4 last year, but offset by an increase in the provision for credit losses of $250,000 taken this quarter. In the Q1 of 2024, net interest income totaled $10,800,000 a decrease of $139,000 compared to the Q4 of 2023 due primarily to increased interest expense on deposits which more than offset our increase in interest income on loans.

Speaker 2

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 $11,400,000 during the Q1, adding to loan interest income. Interest income on investment securities decreased $22,000 to $3,200,000 this quarter due to a decline in average investment securities balances of $6,800,000 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 Q1 of 2023. Interest expense on deposits in the Q1 of 2024 increased $578,000 mainly due to higher rates and balances.

Speaker 2

The average rate on our interest bearing deposits increased this quarter to 2.35 percent compared to 2.13% last quarter, while the average balance of interest bearing deposits increased $24,800,000 Interest expense on borrowed funds decreased $180,000 this quarter despite slightly higher rates as average borrowed fund balances declined $11,200,000 during the Q1. Landmark's net interest margin on a tax equivalent basis increased to 3.12% in the Q1 of 2024 as compared to 3.11% in the Q4 of 2023. This quarter a $50,000 provision for credit losses was made to our liability for unfunded lending commitment along with a loan related provision of 250,000 mainly due to the continued growth in our loan portfolio. Net loan charge offs decreased this quarter and our allowance for credit losses of $10,900,000 remains strong and represents 1.13% of gross loans. Non interest income totaled $3,400,000 this quarter, decreasing $95,000 compared to the Q1 last year, while increasing $1,100,000 compared to the Q4 of 2023.

Speaker 2

The increase from the Q4 last year was primarily the result of the 1,200,000 in securities losses taken in the 4th 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 Q1 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. Non interest expense for the Q1 of 2024 totaled $10,600,000 a decrease of $11,000 compared to the prior quarter, but grew only 2% higher than the same period last year.

Speaker 2

The increase in non interest expense compared to the first quarter last year was mainly due to decreases of 190 or increases of $198,000 in other non interest expense and $156,000 in professional fees, which were offset by lower data processing costs of $108,000 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 and other non interest expense resulted from a valuation allowance recorded against real estate held for sale and an increase in operating losses incurred. This quarter we recorded tax expense of $518,000 resulting in an effective tax rate of 15.7% as compared to tax expense of $693,000 in the Q1 of last year or an effective tax rate of 17.1%. Gross loans increased 15,400,000 or 6.5 percent annualized during the Q1 and totaled 964,000,000. We saw good growth in our adjustable rate residential mortgage, commercial real estate and commercial construction loan portfolios.

Speaker 2

Our investment securities portfolio decreased 15,500,000 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 $71,500,000 coming due in the next 12 months. Period end deposits totaled 1,300,000,000 at March 31, 2024 and decreased by 22,700,000 this quarter. Interest checking and money market deposits and non interest checking declined by 30,300,000 and 2,700,000 respectively this quarter, while certificates of deposits and savings accounts grew by $10,300,000 The decline in money market and checking accounts was driven by the seasonal decline public fund account balances occurring soon after year end. Average interest bearing deposits however increased $24,800,000 this quarter.

Speaker 2

Our loan to deposit ratio totaled 73.6 percent at March 31, which remains low giving us ample liquidity to fund new loan growth. Our markets throughout the state of Kansas remain 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 252,000,000 of additional borrowing capacity as of March 31. Our investment portfolio also has unpledged securities available as collateral for additional borrowings.

Speaker 2

Stockholders' equity decreased to $126,700,000 at March 31, 2024, and our book value totaled $23.14 per share at March 31, compared to $23.17 at December 31st. 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.

Speaker 2

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 losses loan losses this quarter were very low. Gross loans outstanding at the end of the quarter totaled $964,000,000 an increase of $15,400,000 or 6.5 percent on an annualized basis from the previous quarter. Our residential mortgage loan portfolio increased $10,300,000 this quarter, mainly due to continued demand for our adjustable rate loan products. Additionally, our construction loan portfolio increased $3,700,000 while our commercial real estate loan portfolio increased $2,400,000 this quarter.

Speaker 2

Turning to credit quality, at March 31, 2024, non performing loans consisting mainly of non accrual loans totaled $3,600,000 an increase of $1,200,000 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 non performing loans increased this quarter, they remained low and only totaled 0.38 percent 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 89 days still accruing interest increased $2,480,000 this quarter and totaled $4,100,000 or 0.42 percent of gross loans. This increase was primarily due to a $1,500,000 agricultural loan that was past due at the end of the quarter.

Speaker 2

That loan has now been paid charge offs of $7,000 during the Q1 of 2024 compared to net loan charge offs of $47,000 during the Q1 of 2023. Our allowance for credit losses totaled $10,850,000 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, but preliminary seasonally adjusted unemployment rate for Kansas as of March 31st 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.

Speaker 2

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. I'll now turn the call back over to Abby.

Speaker 1

Thank you, Raymond. Before we go to questions, I want to summarize by saying we were pleased with our performance for the Q1 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 strategies, delivering extraordinary service to our clients and communities is a key to our success.

Speaker 1

With that, I will open the call up to questions that anyone might have.

Operator

Thank you. So the first question comes from Ross Haberman of RLH Investment. Your line is now open. Please go ahead.

Speaker 3

Good morning. How are you? Welcome on board, Abi. 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?

Speaker 3

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 2024? Thank you.

Speaker 1

Yes. Ross, thank you. Yes, I look forward to meeting you in person. So I joined the company on March 29th, And I guess I could say I'm about 2 thirds of the way through what I anticipate my entire career being. The first third of that I spent at the Federal Reserve Bank of Kansas City in a variety of capacities.

Speaker 1

And for the last 15 years, I've been at a Midwest midsize 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.

Speaker 1

We're seeing strong loan growth in the Q1 across multiple of our business lines. As you noted on the call, it was led by residential mortgages and most of those were purchase 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 0.5% annualized based on our Q1 results is probably a good indication of where we might land.

Speaker 3

Thank you.

Speaker 1

You're welcome. Thanks for the question.

Operator

Michael Zuk, who is a private investor, has now asked the question. Your line is open. Please go ahead.

Speaker 4

Good morning. Good morning. 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?

Speaker 1

Hi, 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 is some kind of change in the market that there is 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.

Speaker 1

If it's a consequence of another bank's activities or of our own opportunities in the marketplace.

Speaker 4

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

Speaker 1

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.

Speaker 1

I here in my first one hundred days 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.

Speaker 4

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

Speaker 2

Michael, this is Raymond McClanahan.

Speaker 5

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.

Speaker 5

But as far as our customers and the ag economy here in Kansas, we continue to monitor it 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.

Speaker 4

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

Speaker 5

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.

Speaker 4

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

Speaker 1

Thank you, Michael.

Operator

We now have a follow-up question from Ross Haberman of RLH Investments. Your line is now open. Please go ahead.

Speaker 3

Thank you for taking the call again. Just two 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 'twenty four, what's your thought on the margin with that scenario? And 2, your accrual your non accruals have been remarkably low.

Speaker 3

Any concerns or any issues on the criticized or delinquencies in the non accruals? They look remarkably good. Thank you.

Speaker 2

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 or dealing with customers on increases to their 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 get a forecast, which we don't have any forward looking guidance, I think that we're going to be treading water going steady.

Speaker 2

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 non accrual 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 the low levels of non accruals 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 on more so on the coast, but moving its way through the Midwest, but we really don't have a very much exposure to that type of lending for Landmark National Bank. Hopefully that answers

Speaker 3

your question. Just one final, if you'll indulge me with one more. A number of banks are restructuring some of their held for sale securities. If they can make it back, make back the hit in, I don't know, 2 years or less, you had about an $18,000,000 AOCI at the end of March. What was the average life or duration of that?

Speaker 3

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?

Speaker 2

Ross, another good question. As you probably saw in the Q4, we did sell some of our investments and incurred the $1,200,000 loss as we evaluated and the 2 year break up maybe a little longer than we would like to see. We'd like to see something that was a little closer to 1 year or slightly there, slightly over that potentially. But we are continuing to model some of those opportunities and think 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 this portfolio was, I think that's 4.2 years.

Speaker 3

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

Speaker 2

Yes, is our duration, yes.

Speaker 3

Okay, thank you very much. Appreciate your time. Thanks guys.

Operator

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

Speaker 1

Thank you. I'd like 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 Q2 2024 results at our next earnings

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