Landmark Bancorp, Inc. (LARK) Earnings Call Transcript & Summary

Thank you for standing by. My name is Carly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Landmark Bancorp, Inc. Second Quarter Earnings Call. [Operator Instructions] I would now like to turn the conference over to Shelley Reed, Head of Investor Relations. You may begin.

Thanks, Carly. Good morning, everyone, and welcome to Landmark Bancorp's Second Quarter Earnings Conference Call. My name is Shelley Reed. I'm the Head of Corporate Strategy and Development and Investor Relations. Joining me today are several members of our executive leadership team, including our President and CEO, Abby Wendel; Chief Financial Officer, Mark Herpich; and Chief Credit Officer, Raymond McLanahan. During today's call, we may make statements that constitute projections, plans, objectives, future performance, beliefs, expectations or similar forward-looking statements. These statements involve risks and uncertainties, which should be considered in evaluating forward-looking statements, and undue reliance should not be placed on such statements. We caution that such statements are predictions only and that actual results may differ materially. We include more information on these factors in our earnings release furnished with our Form 8-K yesterday as well as our Form 10-K and Form 10-Q filings and subsequent filings with the SEC. Additionally, all statements, including forward-looking statements, speak only as of the date they are made, and Landmark undertakes no obligation to update any statement in light of new information or future events. Also, our remarks may reference certain non-GAAP financial metrics we believe provide useful information to investors. Additional disclosures regarding non-GAAP metrics, including the reconciliation of those non-GAAP metrics to GAAP, are contained in our earnings release, which we filed yesterday with the SEC and are also available on the Investors section of our website at banklandmark.com. We caution that these non-GAAP financial metrics should not be viewed as a substitute for operating results determined in accordance with GAAP as contained in our earnings release and other filings with the SEC. A replay of this call will be available through August 6, 2026. Access information can be found in our earnings release. I will now turn the conference call over to our President and Chief Executive Officer, Abby Wendel.

Thanks, Shelley. Good morning, everyone, and thank you for joining us today. I am pleased to report that Landmark delivered strong second quarter 2026 financial results. Highlights from these results included record revenue and increased profitability driven by continued execution of our disciplined growth strategy. Second quarter revenue increased to a record $19.2 million, driven by higher net interest income and increased gain on sale revenue. Earnings per share increased to $0.88, return on average assets improved to 1.35% and return on average equity increased to 13.23%. I am pleased with these results, which reflect the strength of our relationship-based banking model, disciplined pricing strategies and prudent balance sheet management. Landmark's commercial lending teams found opportunities to win new and expand existing customer relationships within markets we serve in the second quarter. Their efforts resulted in positive loan growth in commercial and agriculture-related portfolios. Compared to the first quarter of 2026, commercial loan payoffs moderated during the second quarter, also contributing to the quarter-over-quarter growth in these portfolios. We remain cautiously optimistic, however, about our growth outlook for the second half of the year. Competition remains strong across the markets we serve, not only for customer relationships, but also for talent. As part of our growth initiatives, we are investing in practices to acquire, develop and retain exceptional talent to strengthen our portfolio management capabilities and drive future relationship-based growth. During the quarter, for example, we elevated an internal candidate to lead commercial banking in our Central, Western and Southeastern Kansas regions, who is reporting directly to me. These regions represent important markets for Landmark, and this investment reinforces our long-term commitment to the customers and communities we serve. These investments in leadership and talent are supporting growth across our footprint, including in larger metro areas like the Kansas City metropolitan market, where we continue to successfully expand our customer base. Moving to deposits. Total deposits declined $17.7 million from the end of the first quarter, primarily due to a $28.7 million reduction in broker deposits. Core deposits, which represents total deposits, excluding broker deposits, increased $11.0 million during the quarter, representing an annualized linked quarter growth rate of 3.4%. Noninterest-bearing deposits represented 29.2% of total deposits at June 30, while our total cost of deposits improved to 1.3%, reflecting the benefits of our disciplined adjustments to our funding strategy. Growing our core deposit franchise remains a strategic priority, and we are focused on acquiring new customers and expanding full-service banking relationships across all business lines. Turning to asset quality, which Mark and Raymond will discuss in greater detail later in the call. Nonperforming loans increased by $2.7 million during the second quarter to $13.1 million, yet net charge-offs remained low at 0.17% of average loans compared to 0.13% of average loans in the first quarter of 2026. As we monitor our loan portfolio, we are doing so with a bias toward action and proactively addressing deteriorating credit. As we elevate expectations across the board, we are strengthening our credit culture simultaneously. We are proactively addressing credits that no longer meet our credit risk profile and strengthening the overall quality of the loan portfolio. Before turning the call over to Mark, I would also like to highlight the continued strength of our balance sheet and the growth in our tangible equity. During the quarter, tangible book value per share increased to $21.76, representing annualized linked quarter growth of 16.8% and tangible common equity to assets increased to 8.44%. The Board of Directors declared a cash dividend of $0.21 per share payable on August 27, 2026, to shareholders of record as of August 13, 2026. This dividend marks the company's 100th consecutive quarterly cash dividend since the formation of the holding company in 2001, underscoring our long-standing commitment to delivering value to shareholders. I will now turn the call over to Mark Herpich, our Chief Financial Officer, who will discuss our financial results in greater detail.

Thanks, Abby, and good morning to everyone. While Abby has just provided a highlight of our overall strong financial performance this year, I'll provide some further detail on our second quarter results. Net income in the second quarter of 2026 totaled $5.4 million compared to $5.1 million in the first quarter of 2026, mainly due to continued growth in net interest income and gain on sale of loans income. In the second quarter of 2026, Net interest income totaled $15.1 million, an increase of $57,000 compared to the first quarter of 2026, driven by increased investment portfolio yields and lower funding costs. Net interest income also grew $1.4 million compared to the same period of the prior year. Total interest income on investments increased $124,000 as compared to the prior quarter to $3.1 million due to higher yields on investments, improving from 3.55% to 3.66%. Average loans decreased by $3.2 million in the second quarter of 2026, while tax equivalent yields on the loan portfolio declined slightly to 6.31% due in part to the $2.7 million increase in nonaccrual loans. Interest expense on deposits in the second quarter of 2026 decreased $262,000 from the prior quarter due to lower cost of deposits, while average deposit balances decreased to $1.3 billion in the second quarter. The decline in deposits relates to a reduction in the level of broker deposits as we strategically elected to utilize our Federal Home Loan Bank borrowing line more heavily during the second quarter. Excluding these broker deposits, our core deposits actually grew by $11.0 million. The average rate on interest-bearing deposits decreased 8 basis points to 1.82% compared to the prior quarter, mainly due to lower rates on deposits. Interest expense on borrowed funds increased by $208,000 compared to the prior quarter due to higher average balances, which were partially offset by lower borrowing rates. The average rate on other borrowed funds decreased 31 basis points to 4.54% in the second quarter as a result of the lower short-term rates. Landmark's net interest margin on a tax equivalent basis declined 2 basis points to 4.22% in the second quarter of 2026 as compared to the first quarter of 2026 and improved 39 basis points as compared to the second quarter of 2025. Noninterest income totaled $4.1 million this quarter, an increase of $331,000 compared to the prior quarter and an increase of $469,000 compared to the second quarter of 2025. The increase in comparison to the prior quarter resulted primarily from a $356,000 increase in gains on sale of loans due to an increase in the volume of loans sold in the secondary market during the second quarter of 2026. Noninterest expense for the second quarter of 2026 totaled $12.0 million, an increase of $63,000 compared to the prior quarter. This increase related primarily to increases of $487,000 in professional fees and $246,000 in compensation and benefits expense, which were partially offset by decreases of $364,000 in other expense and $243,000 in occupancy and equipment expense. The increase in professional fees related primarily to forensic accounting and onetime legal costs associated with previously disclosed fraudulent activity by a nonexecutive officer, along with an increase in talent recruitment and development costs. The decrease in other expense was primarily related to $433,000 of fraud losses recognized during the first quarter as previously disclosed. The recorded fraud loss excludes any potential insurance recoveries we may receive. This quarter, we recorded tax expense of $1.3 million, resulting in an effective tax rate of 19.7% as compared to tax expense of $1.3 million in the first quarter of 2026 for an effective tax rate of 19.8%. Gross loans, including net deferred fees and loans in process increased $4.4 million in the current quarter compared to the previous quarter and totaled $1.1 billion at quarter end. Average loans declined by $3.2 million in the current quarter as compared to the prior quarter. As of June 30, 2026, we experienced increases in our construction and land development portfolio of $4.5 million, our commercial loan portfolio of $2.8 million and our agricultural loan portfolio of $1.5 million, which were partially offset by a $4.0 million decrease in our residential real estate portfolio. Investment securities decreased $1.3 million during the second quarter of 2026, mainly due to maturities slightly exceeding our level of purchases. Our investment portfolio has an average duration of 4.2 years with projected 12-month cash flow of $78.6 million at a roll-off yield of less than 3%, which is lower than current yields available on new investments purchased. Unrealized net losses on our investment portfolio decreased by $1.0 million during the quarter to $7.6 million as a result of lower interest rates. Deposits totaled $1.3 billion at June 30, 2026, a decrease of $17.7 million in the second quarter compared to the prior quarter. This quarter, certificates of deposits declined by $33.5 million, of which $28.8 million was related to lower brokered CDs as we were able to leverage slightly lower cost of funding from other borrowing sources like the Federal Home Loan Bank. The broker deposit decreases were offset by growth in core customer deposits, most notably a $12.8 million increase in noninterest-bearing deposits and $6.7 million growth in money market and checking account balances. Our total borrowings increased by $15.7 million during the quarter as we reduced our brokered deposit balances in connection with the previously discussed transition to less expensive short-term borrowing sources. Our loan-to-deposit ratio totaled 83.5% at June 30 and continues to provide sufficient liquidity to fund expected future loan growth. Stockholders' equity increased $5.2 million during the second quarter to $166.9 million at June 30, 2026, and our book value increased to $27.35 per share at June 30 compared to $26.50 at March 31. The increase in stockholders' equity this quarter mainly resulted from net earnings from the quarter, along with a decrease in other comprehensive losses. Our consolidated and bank regulatory capital ratios as of June 30, 2026, are strong and exceed the regulatory levels required to be considered well capitalized. 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 discussed, overall loan balances grew modestly during the second quarter. Total gross loans, including net deferred fees and loans in process, ended the quarter at approximately $1.1 billion, increasing $4.4 million from the prior quarter. As you can see in our earnings release and as Mark mentioned earlier during this call, we enjoyed growth in construction and land, commercial and agricultural loans. Excluding the decline in 1 to 4 family residential real estate loan balances, the portfolio grew 4% annualized over the linked quarter. We continue to thrive in working with high-quality operators and remain focused on disciplined growth, strong underwriting standards and pursuit of opportunities that align with our long-term credit strategy. Turning to credit quality. Nonperforming loans increased during the quarter to $13.1 million or 1.18% of gross loans compared to $10.4 million or 0.94% of gross loans at the end of the first quarter. The increase was largely attributed to two borrower relationships that migrated to nonaccrual status during the quarter. These credits continue to receive heightened attention from management as we work toward the resolution of each relationship. Loans delinquent 30 to 89 days and still accruing interest totaled $6.3 million or 0.57% of gross loans at June 30 compared to $7.4 million or 0.68% at March 31. While we continue to monitor these relationships closely, the decline in early-stage delinquencies is an encouraging trend and reflects progress on several borrower-specific situations. Net loan charge-offs during the second quarter totaled $452,000 compared to $349,000 during the first quarter. On an annualized basis, net charge-offs represented approximately 0.17% of average loans compared to 0.13% of average loans during the prior quarter. Historically, we have enjoyed low net charge-off rates and while charge-offs increased modestly during the quarter, we remain -- they remain manageable relative to the size of the portfolio. Allowance for credit losses totaled $12.7 million or 1.15% of gross loans at June 30, consistent with the prior quarter. We recorded a $500,000 provision for credit losses during the quarter and believe the allowance remains appropriate based on the composition of the portfolio, identified credit trends and our ongoing review process. While nonperforming loans increased during the quarter due to a limited number of borrower-specific situations that we have been actively monitoring and managing, the increases were partially offset by progress made on other credits. Our focus remains on timely identification of emerging issues, proactive portfolio management and working toward a resolution of challenged credits. With that, I thank you. I'll turn the call back over to Abby.

Thank you, Raymond. We will now pause for a brief Q&A session.

[Operator Instructions] I'll now turn the call over I'm sorry, we do have a question from the line of John Rodis with Brean Capital.

Abby, in your prepared remarks, talking about loan growth. I think I wrote down, you said cautiously optimistic about growth going forward. Do you think you can build on the growth you saw in the second quarter and maybe improve that a little bit in the second half of the year? And sort of what are the puts and takes to that?

Yes. That's a great question, John. Thank you for asking, and thanks for joining our call this morning. I also mentioned we're finding opportunities, both winning new customer relationships and expanding on ones that we've enjoyed for many years. And the other dynamic to this is that we're onboarding a number of new commercial lenders out across our footprint. So those things indicate, and I'll point back to cautious optimism around building on the growth that we enjoyed in the second quarter. And as you saw, we did have some nice activity both in the commercial space, commercial focused mortgages, I guess, you could say, to some ag. And really, it was offset by some declines, which was a strategic decision, allowing not putting on more mortgages on the balance sheet, so allowing those payoffs to roll down, leaving room for more opportunities on the commercial side of our business. So without giving specific numbers, I mean, I feel really good about it. We just want to be steady. We want to be prudent. We want to work through the things that we have right in front of us. And we think we have a really nice value proposition for owner-operated businesses across our footprint.