Landmark Bancorp's Strategic Deposit Gathering Amid Strong Loan Growth and Margin Expansion

Landmark Bancorp (NASDAQ: LARK) has emerged as a standout regional bank in 2025, leveraging robust loan growth and a widening net interest margin to drive profitability. However, the institution faces a critical test in managing funding pressures as deposit balances dipped in Q2 2025. For long-term shareholders, the question is whether Landmark's strategic focus on deposit gathering, combined with disciplined credit practices, can sustain its momentum while mitigating risks to liquidity and asset quality.

Loan Growth and Margin Expansion: A Recipe for Profitability

Landmark's Q2 2025 results underscore its ability to capitalize on favorable economic conditions. Gross loans surged by $42.9 million (16% annualized), pushing the total portfolio beyond $1.1 billion. This growth was fueled by strong demand in residential mortgages, commercial loans, and commercial real estate—a reflection of the bank's diversified lending strategy. The net interest margin expanded by 7 basis points to 3.83%, driven by higher loan yields and a 6.37% tax-equivalent yield on the loan portfolio.

The efficiency ratio improved to 62.8%, a significant drop from 67.9% in Q2 2024, as noninterest expenses stabilized. Meanwhile, returns on average assets (1.11%) and equity (12.25%) highlight the bank's ability to convert its balance sheet growth into shareholder value. These metrics position Landmark as a high-performing regional bank in a competitive landscape.

Deposit Declines and Funding Challenges

The headwind, however, lies in deposit dynamics. Total deposits fell by $61.9 million from Q1 2025, primarily due to a one-day slip in brokered funding bids and seasonal fluctuations. While year-over-year deposits increased by 1.9%, the quarterly decline raises questions about the bank's ability to maintain a stable low-cost funding base. Landmark temporarily offset the shortfall with overnight borrowings from the Federal Home Loan Bank (FHLB), but this strategy could become costly if interest rates remain elevated.

Management remains confident in its deposit-gathering capabilities, emphasizing its 29-branch network across Kansas and a focus on deepening customer relationships. CFO Mark Herpich noted the company's $150 million in borrowing capacity between the FHLB and Federal Reserve Bank as a buffer. Yet, the reliance on short-term funding underscores a vulnerability: if deposit growth stalls, the bank's liquidity could face pressure, potentially squeezing net interest margins.

Asset Quality and Risk Management: A Conservative Approach

Landmark's credit discipline is a critical factor in assessing its long-term viability. The allowance for credit losses stands at 1.23% of gross loans, a level management deems adequate given the current economic environment. Nonperforming loans increased to $17 million, driven by two commercial real estate credits placed on nonaccrual. However, these loans were conservatively underwritten, and one was brought current post-quarter end.

The Kansas economy remains a tailwind, with a 3.8% unemployment rate and stable housing market metrics. Yet, a 2.5% decline in home sales in June 2025 signals potential headwinds. Landmark's conservative approach to loan underwriting and its focus on diversified sectors (agricultural, commercial, residential) should help mitigate sector-specific risks.

Strategic Initiatives and Shareholder Value

Landmark's management has outlined a clear path to address funding challenges while maintaining growth. Key initiatives include:
- Branch Network Optimization: Leveraging its 29 locations to deepen customer relationships and cross-sell deposit products.
- Digital Transformation: Enhancing digital banking tools to attract younger demographics and reduce reliance on brokered deposits.
- Capital Allocation: Returning value to shareholders via a 23-year consecutive dividend increase (yield: 3.2%) and maintaining a strong capital position (leverage ratio: 9.2%).

The board's decision to raise the dividend to $0.21 per share, payable August 27, 2025, underscores confidence in the bank's ability to balance growth with profitability. However, investors should monitor the loan-to-deposit ratio (currently 86.7%) and the pace of deposit recovery in H2 2025.

Risks to Consider

While Landmark's fundamentals are strong, several risks could impact its trajectory:
1. Interest Rate Volatility: A prolonged high-rate environment could dampen mortgage demand and increase borrowing costs.
2. Credit Risk: A slowdown in Kansas's economy or housing market could strain credit quality.
3. Competitive Pressures: Regional banks face intensifying competition from fintechs and larger institutions.

Investment Implications

For long-term investors, Landmark represents a compelling case study in balancing growth and prudence. The bank's ability to expand margins while maintaining conservative credit practices positions it well in a challenging macroeconomic environment. However, the deposit decline and reliance on short-term funding warrant caution.

Actionable Insights:
- Buyers: Investors seeking a high-ROE regional bank with a strong capital position and conservative management may find value at current levels. The stock's P/E of 9.29 and PEG ratio of 0.37 suggest it is undervalued relative to earnings growth.
- Sellers: Those prioritizing income can benefit from the 3.2% dividend yield, but should monitor the bank's liquidity metrics and credit quality.

In conclusion, Landmark Bancorp's strategic deposit-gathering initiatives, coupled with its disciplined approach to asset quality, position it to navigate current challenges while delivering sustainable shareholder value. However, success will hinge on its ability to stabilize deposit growth and manage interest rate risks—a test that will define its long-term trajectory.