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

Hello, and welcome to the Annual Meeting of Stockholders of Landmark Bancorp, Inc. Please note that today's meeting is being recorded. [Operator Instructions] It is now my pleasure to turn today's meeting over to Michael Scheopner, President and Chief Executive Officer of Landmark Bancorp. Mr. Scheopner, the floor is yours.

Good afternoon, ladies and gentlemen. Welcome to the 2023 Annual Meeting of Stockholders of Landmark Bancorp, Inc. I'm Michael Scheopner, President and Chief Executive Officer of the company, and it's my pleasure to serve as Chair of this meeting. Thank you for your time and attendance today. We are holding our Annual Meeting of Stockholders virtually this year because we believe that hosting a virtual meeting enables more of our stockholders to attend and participate in the meeting, and it allows our stockholders to participate from any location around the world with Internet access. Before we move to the business at hand, there are a few housekeeping items I will address related to today's virtual meeting. To vote your shares or submit questions, you will need the control number provided on your proxy card. If you have not yet voted or wish to vote or if you wish to revoke a previously submitted proxy and change your vote, you may do so by clicking on the Vote icon. Stockholders who have already voted by Internet, telephone or mail need not vote again online at this meeting. Your voting instructions will be carried out of this meeting by Mark Herpich and myself as your appointed proxies. If you would like to submit a question, please click on the Q&A icon on your screen now or at any time during the meeting. We encourage you to submit any questions as soon as possible to ensure your question is received. We have reserved time after the adjournment of the meeting to address any questions that don't directly relate to today's proposals. At this time, I call the meeting to order. Landmark's executive leadership team and directors are all in attendance at the meeting today. We are very proud of the members of our management team and our Board of Directors, and we are grateful for their dedicated service. Thank you all. I also want to give a special thank you to Director, Brent Bowman, who will be retiring from the Board of Directors effective at the end of this meeting. Mr. Bowman has served as a director since 1987. Brent, we thank you for your services and contributions to the company over the years, and we wish you all the best going forward. Also in attendance is a representative of our independent registered public accounting firm, Crowe LLP. Steve Wagner is here today to represent Crowe and is available to respond to appropriate questions during the general question-and-answer period. We will now conduct the formal part of the annual meeting. Mark Herpich will act as the Secretary of this meeting. Mark has advised me that a quorum is present at this meeting, so I declare this to be a properly constituted meeting, duly organized and ready for business. Mark has delivered an affidavit from Computershare, which states that mailing of the notice and proxy statement originally commenced on April 20, 2023, and was mailed to all stockholders of record as of the close of business on April 5, 2023, the record date for this annual meeting. Jeremy Hinkle is serving as the Inspector of Election at this meeting, and that completes the necessary formalities. The purpose of our meeting is to conduct the following 2 business matters: to elect 4 Class I directors who will each serve a 3-year term and to ratify the appointment of Crowe LLP as the company's independent registered public accounting firm for the year ending December 31, 2023. We will now take stockholder questions related to the proposals presented. If you have not done so already, at this time, please submit any questions you have. If you would like to submit a question, please click on the Q&A icon on your screen. We have not received any questions regarding the business before this meeting. So the question-and-answer session is now closed. If you have not already done so, please submit your vote now on each matter by clicking on the Vote icon on your screen. Voting is about to be closed. [Voting]

I now declare that the polls are closed on all matters before the stockholders. That concludes the voting on the proposals considered at this meeting. The results of the vote are as follows: Each of the 4 nominees has been elected as a Class I Director of the company and the appointment of Crowe LLP was ratified. That completes the formal business items on today's agenda, and I declare that the business portion of this meeting is adjourned. I would now like to ask Mark Herpich, our Chief Financial Officer, to make some comments regarding a brief review of the company's financial performance; and Raymond McLanahan, our Chief Credit Officer, provide a lending division review. I will then provide my comments regarding the company and our strategies for driving value for our stockholders, after which then we can take any stockholder questions. Let me direct your attention to the forward-looking statement slide for today's meeting.

Thank you, Michael, and good afternoon. It is my pleasure to share with you some of the financial information of the company for 2022 and the first quarter of 2023. The information as of December 31 is obtained from the audited financial statements, and the information as of March 31 is unaudited. Let's begin by taking a look at an overview of Landmark Bancorp, which is the holding company for Landmark National Bank. We currently have 31 locations serving 24 communities across Kansas. As of March 31, Landmark's total assets have increased to $1.5 billion, along with $1.3 billion in total deposits. And based on our closing price on May 15 of our stock of -- which was $20.13, our market capitalization approximates $105 million. This next slide presents a variety of Landmark's stock performance metrics as of March 31, 2023. As you can see, once again, based on the LARK stock price for May 15, Landmark's price to tangible book value was 128% of our tangible book value, which was roughly $15.67 at March 31. Another typical industry multiple in comparing stock values is the price to earnings multiple in which banks historically have traded in the 12x to 15x earnings range. Based on our 2022 earnings, we are still only trading at a 10.7x earnings multiple. Each of these valuation metrics are based on our stock price. And hopefully, this means we still have room for improvement in our stock price based on our announcements of continued solid earnings. Lastly, our dividend yield to our stockholders based on our May stock price computes to 4.2%. Over the years, including the recessionary years, the COVID years and the prolonged low interest rate cycle and now with the inflationary and inverted yield curve environment with recessionary concerns, Landmark has continued to pay cash and stock dividends. As this slide shows, we have paid 87 consecutive quarterly cash dividends and 5% stock dividends since we became Landmark in October 2001. The streak would be even longer if we included our former company dating back to the mid-1990s. In fact, Landmark has actually increased our cash dividends by at least 5% each year as a result of the 5% stock dividend impact. Turning to some financial highlights. As we look at our recently announced first quarter of 2023 earnings results and comparable quarters, Landmark's earnings are continuing to show strong consistent results. The fourth quarter of 2022's earnings show a drop but were impacted by the costs associated with our Freedom Bank acquisition on October 1, 2022. Excluding the acquisition costs, we consistently earned in excess of $3 million per quarter, and our return on average equity was approximately 12% for the first quarter of 2023. This slide summarizes our financial results for fiscal years 2022 and 2021. Our earnings for fiscal 2022 were $12.4 million, excluding the acquisition costs and compares to $18.0 million in 2021. 2021's financial results were the second highest on record for Landmark as our mortgage lending activity resulted in $10.5 million in gains on sales of one-to-four family homes as customers are taking advantage of the low interest rates with refinances and home purchases. With the interest rates increasing dramatically in 2022, the gains on sale of loans correspondingly dropped by $7.0 million, and the return on average assets, which is a banking industry metric and 1% has long been a benchmark of higher-performing banks. As you can see, we reported 1.43% return in 2021 and a 0.92% return in 2022. We expect to achieve additional efficiencies in future quarters relating to our Freedom Bank acquisition as our computer systems were assimilated on March 27, which will allow for, among other things, lower data processing costs going forward. This slide presents some financial ratios for Landmark. Of note, our dividends per share has continued to increase, and our loans-to-deposit ratio has increased to 66% as of March 31, 2023, which remains low, giving us plenty of liquidity to fund new loan growth. While we haven't acquired another financial institution in recent years until October 2022, this slide shows that we have been able to achieve loan growth organically during 2022 and continuing into 2023, which was supplemented by the Freedom Bank acquisition in quarter 4 of 2022, which added $118 million of loans. Our net loans have increased by $234.4 million since March 31, 2022, reaching $860 million at March 31, 2023. This next slide shows our net interest margin over the past 5 quarters. As you can see, we were able to increase our net interest margin each quarter in 2022, but have seen a retraction in the first quarter of 2023. This retraction is primarily related to increased funding costs associated with the Federal Reserve Bank's significant interest rates as they attempt to address inflation concerns. This slide provides a snapshot of our balance sheet trends over the past 3 years. We discussed Landmark's continued loan growth on our previous slide, which has driven up our total assets to $1.5 billion. Additionally, our lending efforts are focused on relationships instead of individual transactions, which has helped grow our deposit balances to $1.3 billion. Stockholders' equity has decreased related to the impact of the Fed's interest rate increases during 2022 had on the market value of our investment portfolio. As the interest rates have begun to stabilize in 2023, we are starting to see the market valuations improve and stockholders' equity increasing. Landmark continues to strive for a diversified noninterest income mix while capitalizing on environments such as the low interest rates during 2020 and 2021, when gains on sales of loans reached record levels. Landmark's first quarter 2023 earnings were impacted by our gains on sales of one-to-four family loans originated, which decreased by $221,000 from the comparable 2022 first quarter. This decrease was driven by the higher interest rate environment mentioned earlier, which began in the beginning of the first quarter of 2022, driving down purchase and refinancing activities in our markets. This drop in gains on sales of loans was offset partially by a $170,000 increase in fees and service charges. One of Landmark's most valuable attributes is our deposit portfolio, of which noninterest-bearing deposits comprised approximately 33%. This is a key driver enabling us to achieve a 1.18% cost of funds. Liquidity has been talked about a lot recently in the banking industry, and Landmark is fortunate to operate in stable markets throughout Kansas, which continue to provide access to retail, commercial and municipal deposits. Our uninsured level of deposits is only 18% as compared to other banks who have been reported to have in excess of 90% of their deposits uninsured. Our efforts to achieve consistent earnings over the years has resulted in Landmark achieving a strong capital base as exemplified by our risk-based capital ratios exceeding 13% at March 31. Our capital ratios have grown to over 19% a year ago, and we deployed some of the capital with the Freedom Bank acquisition in 2022 for continued growth. Our capital strength and our solid low-cost deposit base continues to position us well to meet the financial needs of families and businesses across Kansas. As I wrap up my comments, I would like to thank my associates in the various departments with whom I work for all their hard work over the past year as they adapted to all the changes and challenges presented during the year. We have a very knowledgeable and professional group of associates who are willing to do whatever is necessary to ensure Landmark's success. We are excited to continue the assimilation of the company's acquisition in the fourth quarter of 2022 and the prospects for future growth in 2023. We will continue to work diligently navigating Landmark through the inflation and interest rate economic uncertainties facing us currently as we continue our efforts to grow and diversify your company with shareholder value, our foremost goal. Thank you. And I would now like to turn the virtual podium over to Raymond McLanahan.

Thank you, Mark. One of Landmark's key credit disciplines is to maintain geographic and industry diversification within our loan portfolio. Looking at our exposure to credit concentrations as of the end of the first quarter of 2023, our combined commercial real estate portfolio totaled 36.4%. When you break that down, you can see that our commercial real estate portfolio remains weighted towards owner-occupied commercial real estate, which represents 18.5% of our overall loan portfolio, while nonowner-occupied commercial real estate is comprising only 17.9% of our overall portfolio. We've continued to see growth in our one-to-four family real estate portfolio. That portfolio represents 28.3% of our total loan portfolio. Commercial and industrial loans represent 19.8% of the portfolio, while our agricultural loan portfolio represents 9.3%. During 2022 and continuing into 2023, asset quality metrics remain strong and continue to improve. Our allowance for credit losses to outstanding gross loans is 1.18% as of quarter end. Net charge-offs continue to be low and our classified loan totals continue to decline. Classified loans ended the quarter at $10.9 million, down from our year-end 2022 total of $13 million. Nonperforming loans have declined to 0.28% of total assets. Nonperforming loans have declined to 0.38% of gross loans. Past due and nonaccrual loans continue to remain low at 0.56% of gross loans. And overall, we are very pleased with our asset quality trends. Strong metrics like these don't happen by accident. I would be remiss if I didn't acknowledge the daily commitment of all our team members who live out our values, maintain our credit disciplines and continually provide value to our customers, communities and to our shareholders. It is these efforts that will continue to benefit all of us in the months and years to come. Thank you to all, and I will turn the call to Mr. Scheopner.

Thank you, Raymond, for your comments. And also I want to thank Mark for his earlier remarks. I first want to take a moment to comment on events that have taken place in the banking system during the last few months of 2023. Three large regional banks have been closed by the FDIC, mainly due to liquidity concerns resulting from interest rate risk issues and large concentrations of uninsured corporate deposits. The liquidity issues were unique to the way these banks operated and are not reflective of the way we manage Landmark. Landmark maintains strong capital and liquidity and a stable, conservative deposit portfolio with the majority of our deposits being retail based and FDIC-insured. We spend significant time each month monitoring our interest rate and concentration risk through our asset liability management and our lending strategies involve a relationship-based banking model, offering stability and consistency. We will continue to remain disciplined in maintaining the credit standards that have historically served us well. As both Mark and Raymond noted, Landmark's performance in 2022 and through the first quarter of 2023, represents a continued trend of positive operating results for the company. Our results reflect continued solid loan growth and good credit quality. Deposit levels have remained relatively stable since year-end 2022, and our deposit composition is diversified and almost exclusively comprised of core deposit funding sources. As previously noted, on October 1, 2022, we closed on our merger with Freedom Bancshares, Inc. This added loans and deposits of $118 million and $150 million, respectively. The Freedom acquisition was a strategic opportunity for us to grow our franchise and create a strong commercial bank presence in Overland Park, Kansas, that provides excellent growth potential in the Kansas City metro market. The cultures of our 2 banks align closely with a common approach to Commercial Banking client management, and we now have more resources to compete in this large market. We continue to see success across all of our production lines of business and in every Landmark geographic area during 2022. Our commercial banking team generated loan production during 2022, which net of the loans acquired in the Freedom acquisition represented a 10.5% increase in loan totals during the year. Our retail banking team continued to focus on solving client needs. We believe our strategy to drive growth in lower-cost nonpublic fund checking, money market and savings accounts ultimately results in increased share of wallet from our deposit customers. We continue to invest in a platform of products and services to meet the financial needs of our client base, with a focus on digital services and solutions that are simple, intuitive, integrated and relevant. After record mortgage banking production in 2020 and 2021 that was motivated by low interest rates and strong loan refinance activity, our mortgage production volume in 2022 declined and returned mainly to financing for the purchase of new homes. One-to-four family residential real estate loan production in 2022 totaled $217 million and represented 83% of new home financing. Our interest rates, as interest rates increased in 2022 and into 2023, so has the popularity of our 7/1 adjustable-rate mortgage product offering. These ARM loans were underwritten to secondary market investment standards but have been retained in our loan portfolio as part of our overall asset ability management strategies. Our residential mortgage banking business continues to be pressured by tight housing supplies across our franchise footprint. As of the end of 2022, our $1.5 billion in total assets places us as the ninth largest bank headquartered in the state of Kansas. There are currently 200 banks chartered in the state. In addition to our organic growth efforts, we will continue to evaluate potential merger and acquisition strategies that provide an appropriate return to our shareholders. Landmark's asset quality and capital strength was previously referenced in this report. And while it was also mentioned earlier, I again want to note our history with respect to the payment of dividends to our shareholders. LARK's shareholders of record as of last Wednesday will be paid a cash dividend of $0.21 per share next Wednesday. This represents the 87th consecutive quarterly cash dividend since the company's formation in October 2001. As we focus on 2023 and beyond, your Landmark team will continue to work at recruiting new business in a conservative and disciplined manner. We are dedicated to prudently underwriting loans and investments, monitoring interest rate risk and maintaining an organizational risk profile to prepare for any unforeseen future events. As a community bank with a strong presence across the state, Landmark is committed to growing our customer relationships and meeting the diverse financial needs of families and businesses. I expect our success in organically growing market share across the Landmark franchise to continue. In closing, I want to acknowledge and express my appreciation to all of my fellow Landmark associates. They have been doing great work. Their daily focus on executing our strategies, delivering extraordinary service to our clients and communities and carrying out our company vision that Everyone Starts as a Customer and Leaves as a Friend is a key ingredient to our continued success. They are a highly talented bunch of community bankers, and I am proud to be associated with this team. I also want to express my thanks to our Board of Directors, whose leadership, knowledge of our banking markets and contributions to developing Landmark's strategic plan helped set the stage for continued success. And finally, thank you also to each of our Landmark customers and shareholders. Your support and confidence has made our team's successes possible, and we look forward to continuing to contribute to your success in the years to come. We would now like to answer any questions that you might have. We will do our best to address any relevant questions that have already been submitted. If there are any other questions, please click on the Q&A icon on your screen now. We have not received any relevant questions, so the question-and-answer session is now closed. Thank you very much for attending this year's annual meeting.

This concludes today's conference call. Thank you for participating. You may now disconnect.