Landmark Bancorp, Inc.
Q1 2018 Earnings Call Transcript

Published: 6 May 2018

[Operator:]

Good morning, and welcome to the Landmark Bancorp First Quarter Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Michael Scheopner, President and Chief Executive Officer. Please go ahead.

[Michael Scheopner:]

Thank you, and good morning. Thank you for joining our call today to discuss Landmark's earnings and results of operations for the first quarter ending March 31, 2018. Joining the call with me today, to discuss various aspects of our first quarter performance, is Mark Herpich, Chief Financial Officer of the company. Before we get started, 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. We reported net earnings of $2.1 million or $0.51 per share on a fully diluted basis for the first quarter of 2018. The first quarter 2018 return on average assets calculates to 0.92%, the company's return on average equity for the quarter was 9.91%. Mark will provide additional detail on Landmark's financial performance and asset quality metrics. As I look at how Landmark is positioned in 2018, from a big picture perspective, we are financially very strong, we are very well capitalized, we have excellent credit quality in our loan portfolio, and the company continues to deliver solid performance on ROA and ROE. I'm pleased to report that our Board of Directors has declared a cash dividend of $0.20 per share to be paid May 30, 2018, to shareholders of record as of May 16, 2018. This represents the 67th consecutive quarterly cash dividend since the company's formation resulting from the merger of Landmark Bancorp, Inc. with MNB Bancshares, Inc. in October 2001. Our first quarter performance continues our trend of strong earnings, and this success is a credit to the continued efforts of our associates throughout the organization, who practiced good banking fundamentals and deliver high-quality customer service consistent with our vision that everyone starts as a customer and leaves as a friend. Your management team remains focused on managing the organization in a conservative and disciplined manner, dedicated to underwriting loans and investments prudently, monitoring interest-rate risk and structuring the overall organizational risk profile in a way that will prepare us as well as possible for any unforeseen economic events. As a community bank with a strong presence across the state of Kansas, Landmark is committed to growing our customer relationships and meeting the diverse financial needs of families and businesses. I will now turn the call over to Mark Herpich, our CFO, who will review the financial results with you.

[Mark Herpich:]

Thanks, Michael, and good morning to everyone. As Michael has already summarized our earnings for the first quarter of 2018, I would like to make a few comments on various elements comprising those results. While our 2018 first quarter net earnings of $2.1 million was lower than the first quarter of 2017's net income of $2.2 million, earnings remained solid as evidenced by achieving a 9.9% return on average equity and reporting a $226,000 increase in net interest income. Looking at the first quarter income statement highlights. Net interest income was $6.6 million, an increase of $226,000 or 3.5% in comparison to the prior year's first quarter. Improvement in net interest income was attributable to an increase of $11.3 million or 1.4% in average interest-earning assets to $834.2 million in comparison to the prior year first quarter period, partially offsetting the increased net income levels were higher rates on interest-bearing deposits and borrowings, which resulted in a decline in our net interest margin from 3.38% in the first quarter of 2017 to 3.34% in the same period of 2018. Looking at our provision for loan losses. Our analysis of the allowance for loan losses resulted in providing $200,000 to the allowance in the first quarter of 2018, as compared to a provision of $50,000 in 2017. Noninterest income decreased $240,000 to $3.4 million for the first quarter of 2018, down 6.6% as compared to the same period of 2017. The decrease was primarily related to a $228,000 decline in gains on sales of loans. The volume of mortgage loans sold and originated for sale declined in the period as a result of lower origination volumes of one-to-four family, residential real estate loans. In addition to the reduced gains on sales of loans, our gain on sales of investments was $35,000 during the first quarter of 2018 as compared to a gain of $147,000 in the same period a year earlier. Our first quarter noninterest expenses increased by $379,000 to $7.4 million or a 5.4% on a linked-quarter basis. The increase related primarily to increases in noninterest expense of $219,000 relating to the accrual of loss reserves at Landmark’s captive insurance subsidiary, and professional fees of $98,000 due to the accrual of costs associated with an audit of internal controls over financial reporting as a result of the company changing to an accelerated filer status with the SEC, effective January 1, 2018, due to an increase in market capitalization as of June 30, 2017. Additionally, occupancy and equipment increase $54,000 in the first quarter of 2018 as compared to the same period of 2017. Landmark recorded income tax expense of $256,000 in the first quarter of 2018 compared to $693,000 in the same period of 2017. The effective tax rate decreased from 23.9% in the first quarter of 2017 to 10.9% in the first quarter of 2018, primarily as a result of the reduction in 2018 federal corporate income tax rates from 35% to 21%, following the enactment of the federal tax reform legislation in December 2017. Touch on a few balance sheet highlights. Our total assets increased $9.5 million to $939 million at March 31, 2018, compared to $929.5 million at December 31, 2017. Our loan portfolio increased $2.5 million during the quarter to $436.2 million at March 31, 2018, from $433.7 million at December 31, 2017. Investment securities increased $10.2 million to $403.6 million at March 31, 2018, from $393.4 million at year-end 2017. Stockholders equity decreased to $84.4 million at March 31, 2018, or a book value of $20.51 per share compared to $87.6 million at December 31, 2017, or a book value of $21.47 per share. Our consolidated and bank regulatory capital ratios as of March 31, 2018, continue to exceed the levels considered well capitalized. The bank's leverage capital ratio was 10% at March 31, 2018, while the total risk-based capital ratio is 17.8%. Both capital ratios continued to improve over 2017, reinforcing our strong financial position. Stockholders equity declined during the first 3 months of 2018 as a result of an increase in unrealized losses on our investment portfolio associated with the increase in interest rates during the first quarter of 2018. I'd now like to provide some additional details regarding our loan portfolio. As noted earlier, net loans outstanding as of March 31, 2018, totaled $436.2 million, an increase of $2.5 million from our net loan total of $433.7 million on December 31, 2017. Nonaccrual loans, which primarily consist of loans greater than 90 days past due, totaled $5.8 million or 1.3% of gross loans as of March 31, 2018. These totals are down slightly compared to a level of 1.38% as of year-end 2017. Our credit risk and collection efforts continue to focus on reducing these totals. Another indicator we monitor as part of our overall credit risk management efforts is our level of loans past due 30 to 89 days. The level of past due loans between 30 and 89 days still accruing interest as of March 31, 2018, totaled $1.1 million or 0.26% of gross loans. This is a decrease from 0.31% of gross loans as of December 31, 2017. We continue to monitor delinquency trends carefully in all loan categories. Our balance in other assets or real estate owned totaled $416,000 as of March 31, a slight decline from $436,000 at year-end 2017. The other real estate owned balances consist of 4 residential housing properties and a small commercial office building. We continue to market for sale all properties held in real estate owned. We recorded net loan charge-offs of $15,000 during the first quarter of 2018, and this compares to net loan charge-offs of $67,000 for the same period of 2017. I will now turn the call back over to Michael to review our loan portfolio segments and the credit risk outlook.

[Michael Scheopner:]

Thank you for your comments, Mark. We continue to maintain a diversified mix in the loan portfolio, both in loan types and in geography across the state. As part of our comprehensive credit risk management process, we review construction land and commercial real estate on a quarterly basis for loan type and geographic concentration issues. As of March 31, 2018, our construction and land loan portfolio balances totaled $24.4 million or 5.5% of our total loan portfolio. Outstanding loan balances in our commercial real estate portfolio totaled $123 million, representing 27.9% of our total loan portfolio. Landmark's loan portfolio in the construction/land category as of March 31, 2018, totals 25% of risk-based capital, which is well below the regulatory guideline of 100%, a level where regulators would view the total as a concentration, requiring heightened risk management practices. Our commercial real estate portfolio was a 152% of risk-based capital, which is far below the 300% regulatory guideline in that category. The mortgage one-to-four family loan portfolio represents 30.4% of the portfolio at $134.6 million as of March 31, 2018. Residential real estate activity across the state continues to show stable to brisk sales activity with tight market supply of inventory in most of our markets. The performance of this segment of our portfolio continues to be strong today with low levels of delinquency and limited collection issues. With regard to our agricultural loan portfolio, total balances were $81.7 million or 18.5% of our total loan portfolio as of March 31, 2018. The Federal Reserve Bank's summary of agricultural conditions in the Kansas City Fed district, which was published in March, reflects that the farm economy remained weak, but farm real estate values slowed their declined from the previous months providing some stability for farm finances. Farm income continued to decrease. Agricultural credit conditions weakened further against year-ago levels, but at a more modest pace than the previous reporting periods. Although, prices for most agricultural commodities increased slightly in February, prices for corn, soybeans and hogs were still lower than a year ago. We continue to operate with increased scrutiny on our agricultural loan portfolio, and have identified borrowers who are subject to increased risk through an intentional risk assessment of that portfolio, and we continue to monitor those trends closely. Our agricultural lending staff is made up of some of the most seasoned and qualified ag makers in the state, most of them who have experienced multiple downward cycles in this sector. Commercial and industrial loans were $52.6 million as of March 31, 2018, or 11.9% of the current portfolio. We will continue to carefully monitor the various risk factors impacting our credit portfolio going forward, and we will remain diligent and disciplined in applying the same disciplined underwriting and risk management practices that have supported our continued profitability these past several years. Before we go to questions, I want to summarize by saying that we're pleased with Landmark's operating results for the first quarter of 2018. These results continue a trend of strong earnings across all of our community banking lines of business. We believe that the company's risk management practices and capital strength continue to position us well for long-term growth, and I anticipate our trend of solid earnings to continue in 2018. With that, I'll open the call up to questions that anyone might have.

[Operator:]

[Operator Instructions]. And our first question comes from John Rodis of FIG Partners.

[John Rodis:]

Mark, maybe a few questions for you. You saw the margin trend down a little bit this quarter, and sort of given the nature of your balance sheet and stuff, do you think -- assuming we continue to see some rising rates, do you think the margin will continue to trend down a little bit from here? Or do you think you can hold it steady?

[Mark Herpich:]

I think based on our balance sheet make up at this point, I think that we may see a little bit of continued erosion going forward, John. As you noticed our net interest income from a dollar perspective went up based on, kind of, leveraging, I guess, if you will, with continuing to buy investments. And although our cost of funds did go up, primarily from municipal deposits that are tied to indexes as well as some borrowing cost at the Federal Home Loan Bank on our line of credit. But it's going to be a choice as we manage going forward to see if we -- the dollar income increases is outweighing the margin from a percentage basis point, potentially eroding a little bit.

[John Rodis:]

Okay, that makes sense. Mark, on the expense side, if you look at 2017 versus 2016 and last year if you exclude the $8.1 million charge, you kept -- you basically kept expenses relatively flat. Do -- is that sort of a goal again this year on operating expenses?

[Mark Herpich:]

Yes, it is, John. I mean, I think, some of the operating expenses were up a little bit for our internal audit over controls, kind of, the SOX internal controls audit. But as we look at the whole year, I don't think we'd expect those to be up. It was just, we didn't work for sure at the beginning of last year, if we're going to trip the market capitalization threshold until June 30 of -- first quarter is coming a little higher out of the blocks as we even it out over the whole year and now we're going forward so -- and then I think of the captive insurance, we don't have a high insurance expense level like that going in the future quarters either so...

[John Rodis:]

Okay. And then just the effective tax rate was roughly 11% this quarter. What do you sort of expect it to be going forward for the remainder of the year?

[Mark Herpich:]

I think for the year-to-date, that's probably pretty indicative of where the 2018 will end up for Landmark. I think during the middle -- second, third quarters, I shouldn't maybe say it too out loud, but usually those quarters, if you look back historically, are a little higher in pretax earnings. So maybe the rate would go up a little bit. And fourth quarter usually a little slower potentially, a little bit from the gain on sale of loans activity. And I think as you look at the whole year, you'll -- we'll come right back to this number, so...

[John Rodis:]

Okay. And then, Michael, maybe just one question for you just on M&A. Maybe just sort of your -- obviously, you guys would be interested for the right situation. So maybe just your thoughts as you see things today, are you having more conversations, fewer, et cetera?

[Michael Scheopner:]

Yes, thanks, John. With -- regarding merger and acquisition opportunities, I mean, I think the landscape that we're in right now, there's -- its going to present us with opportunities to consider potential acquisitions. The level of activity that we've seen in our footprint would indicate that we've got some sellers in our geography. And we are -- as we did in 2017, as we've entered 2018, we're maintaining active dialogues relative to potential candidates for acquisition. And I'd expect us to continue to pursue that as part of our strategic objective in 2018.

[John Rodis:]

Okay. And, Michael, maybe just one follow-up on that. Just -- you guys would consider going outside of Kansas for the right situation?

[Michael Scheopner:]

For the right situation, if it -- obviously, just given the way our management infrastructure is set up, it would be easier for us to expand to the east, slightly to the south or to the north than it would be to the west. But we would cross the state line for the right opportunity.

[Operator:]

[Operator Instructions]. And our next question comes from Steve Chuck [ph] of Kennedy Capital.

[Unidentified Analyst:]

I was just looking to get a quick update or some color on any insurance coverage on last year's overdraft.

[Michael Scheopner:]

We're still in the process of negotiating with our various insurance carriers with respect to coverage levels. I'd say that we're nearing the end of those discussions, and I'd expect that we'd see something in the near future from the standpoint of recovery against those insurance claims that we have, Steve.

[Operator:]

[Operator Instructions]. This concludes our question-and-answer session. I would like to turn the conference back over to Michael Scheopner for any closing remarks.

[Michael Scheopner:]

Thank you. And I do want to thank everyone for taking the time to participate in today's earnings call. I really do appreciate your continued support and the confidence that you have in our company. And I look forward to sharing news related to our second quarter 2018 results at our next earnings conference call. Thank you.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.