Landmark Bancorp, Inc.
Q4 2018 Earnings Call Transcript

Published: 30 Jan 2019

[Operator:]

Good morning, ladies and gentlemen and welcome to the Landmark Bancorp Fourth Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note that this event is being recorded. At this time, I would like to turn the conference over to Michael Scheopner, President and Chief Executive Officer. Please go ahead, sir.

[Michael Scheopner:]

Thank you. Good morning. Thank you for joining our call today to discuss Landmark's earnings and results of operations for the fourth quarter and fiscal year ending 2018. Joining the call with me today to discuss various aspects of our 2018 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 $2.5 million or $0.56 per share on a fully diluted basis for the fourth quarter of 2018. For the year ending December 31, 2018, Landmark's net earnings totaled $10.4 million or $2.39 per diluted share. The company continues to deliver good performance on ROA and ROE. Return on average assets calculates to 1.09% for the full year and return on average equity was 12.09% for 2018. Mark will provide additional detail on Landmark's financial performance and asset quality metrics later in this call. I'm also pleased to report that our Board of Directors has declared a cash dividend of $0.20 per share to be paid March 6, 2019 to shareholders of record as of February 20, 2019. This represents the 70th 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 performance in the fourth quarter and fiscal year 2018 continues our trend of strong earnings and this success is a credit to the continued efforts of our associates throughout the organization, who practice good banking fundamentals and deliver high quality customer service, consistent with our vision that everyone starts as a customer and leaves as a friend. We are very pleased to report that our 2018 organic growth efforts resulted in net loan growth year-over-year of $55.7 million or 12.8%. This loan growth, which was spread across all of our geographic markets in 2018 [indiscernible] our total asset base as of year-end to 985 million, a 6% increase from the prior year end period. The midyear addition of a team of commercial bankers with a specialty in small business SBA lending located in our Johnson County, Kansas market contributed to our lending success. At year-end 2018, we also added another team of commercial bankers in the Kansas City market area who we believe will immediately contribute in 2019. As we begin 2019, Landmark is well positioned for continued success. We are financially very strong. We are very well capitalized and we have very good asset quality in our loan portfolio. We're delivering healthy growth in loans and total assets. I will now turn the call over to Mark Herpich, our CFO, who will review the financial results and asset quality indicators for you.

[Mark Herpich:]

Thanks, Michael and good morning to everyone. As Michael has already commented on our net earnings for the fourth quarter and year ended December 31, 2018, I would like to make a few comments on various elements comprising those results. Starting with the fourth quarter income statement highlights, net interest income was 7.2 million, an increase of $609,000 or 9.3% in comparison to the prior year's fourth quarter. The improvement in net interest income was attributable to an increase of 40.2 million or 4.8% in average interest earning assets to 872.3 million. This was almost entirely attributable to loan growth. Net interest margin on a tax equivalent basis remained relatively stable at 3.37% in the fourth quarter of 2018, as compared to 3.38% in the same period of 2017. The net interest margin was impacted by an increase in average loan balances, increased short-term interest rates on deposits, and the reduction in 2018 federal corporate income tax rates from 34% to 21%, following federal tax reform enacted in December 2017. The lower income tax rate reduced the tax equivalent yield on our tax-exempt, municipal investments and loans. Looking at our provision for loan losses, our analysis of the allowance for loan losses resulted in providing 500,000 to the allowance in the fourth quarter of 2018 as compared to 200,000 in the fourth quarter of 2017. This increase was primarily due to our loan growth, as well as an increase in classified asset levels. Noninterest income decreased 140,000 or 4% to 3.4 million in the fourth quarter of 2018, compared to the same period of 2017. This was primarily related to a decrease of 171,000 in gains on sales of loans due to lower volumes of loans sold in the secondary market. Also contributing to the decline in non-interest income, we had no gains on sales of investments during the fourth quarter of 2018 as compared to 135,000 in the fourth quarter of 2017. Our fourth quarter non-interest expenses increased by 421,000 to 7.6 million in comparison to the fourth quarter of 2017. This was primarily driven by an increase of $510,000 in compensation benefits, related in part to our 2018 commercial loan growth as we added employees in this area and also to general increased compensation costs. Income tax expense was lower in the fourth quarter of 2018 as a result of the recognition of $512,000 of previously unrecorded tax benefits and as a result of the reduction in the federal corporate income tax rate in 2018. The fourth quarter of 2017 included a $352,000 tax benefit to reflect the reduction in income tax rates on deferred tax assets and liabilities as a result of the enactment of the federal tax reform and the recognition of $197,000 of previously unrecorded -- or unrecognized tax benefits. Moving on to discuss some financial highlights for the full year of 2018, our net earnings were $10.4 million. Earnings remained solid, as evidenced by achieving a 1.09% return on average assets and were supported in large part by our $55.7 million increase in net loans since December 31, 2017. In 2018, we delivered a $1.7 million increase in net interest income from a year earlier as a result of average interest earning assets increasing 3.5% from 828.1 million in 2017 to 857.5 million during 2018. Primarily as a result of the reduction in 2018 federal corporate income tax rates, our net interest margin decreased slightly on a tax equivalent basis from 3.40% in 2017 to 3.37% for 2018. In addition, the rates on our interest-bearing liabilities increased more than the yields on our interest-bearing assets as short-term interest rates increased more than longer-term rates during 2018 as compared to 2017. During 2018, we provided 1.4 million to the allowance for loan losses as compared to $450,000 in 2017. The increase in our provision for loan losses was a result of loan growth, an increase in our classified loan totals, and increased charge-offs during 2018. Noninterest income totaled 15.6 million for 2018, an increase of $287,000 or 1.9% from the prior year period. This increase results primarily from an increase of 1.5 million in other noninterest income, which includes the 1.5 million of recoveries on the deposit-related loss that occurred in 2017. Partially offsetting the recoveries were declines of 367,000 in gains on sales of loans, 269,000 in bank-owned life insurance, and 69,000 in fees and service charges. Also partially offsetting the increase in noninterest income were lower gains on sales of investments, which were 20,000 in 2018 as compared to 498,000 in 2017. Looking at noninterest expense, we reported a decrease of 7.1 million to 30.4 million for 2018 in comparison to the same period of 2017. This relates to the pretax deposit-related loss of 8.1 million in the third quarter of 2017. Partially offsetting the decrease was an increase of 901,000 in compensation and benefits in part again related to our 2018 commercial loan growth as we added employees along with general increased compensation costs. To touch on a few balance sheet highlights, our total assets increased 56.3 million to 985.8 million at December 31, 2018, compared to 929.5 million at December 31, 2017. Our loan portfolio increased 55.7 million during the year to 489.4 million at December 31, 2018 from 433.7 million at year-end 2017. Investment securities decreased 285,000 to 393.1 million at December 31, 2018 from 393.4 million a year earlier. Deposits increased 58.0 million to 823.6 million at December 31, 2018, compared to 756.6 million at year-end 2017. The increase in deposits was primarily related to brokered certificates of deposit, which represented 61.9 million of the total deposits at December 31, 2018. Stockholders' equity increased to 91.9 million at December 31, 2018, or a book value of $21.02 per share, compared to 87.6 million at December 31, 2017, or a book value of $20.45 per share. Our consolidated and bank regulatory capital ratios as of December 31, 2018 continued to exceed the levels considered well capitalized. The Bank's leverage capital ratio was 10.2% at December 31, 2018, while the total risk-based capital ratio was 17.3%. I would now like to provide some additional details regarding the loan portfolio. As mentioned earlier, our net loans outstanding as of December 31, 2018 totaled 489.4 million. This represents a 12.8% increase from December 31, 2017. Non-accrual loans, which primarily consist of loans greater than 90 days past due totaled 5.2 million or 1.06% of gross loans as of December 31, 2018. This represents an improvement from the year-end 2017 level of 1.37%. Our credit risk and collection efforts continue to focus on reducing these totals even further. Another indicator we monitor as part of our credit risk management efforts is the level of loans past due 30 to 89 days. The level of past due loans between 30 and 89 days, still accruing interest, totaled $1.7 million or 0.34% of gross loans as of December 31, 2018. This ratio has increased slightly 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 and real estate owned totaled 35,000 as of December 31. The other real estate owned balances are comprised of residential housing and we continue to market for sale all properties held in real estate owned. We recorded net loan charge-offs of 1.1 million during 2018, which was up from 335,000 for the same period of 2017. I'll now turn the call back over to Michael to review our loan portfolio segments and the credit risk outlook.

[Michael Scheopner:]

Thanks for your comments, Mark. In pursuing the loan growth we achieved in 2018, we continued our credit risk focus to maintain a diversified mix in the loan portfolio, both in loan types and in geography across the state. As of year-end 2018, our construction and land loan portfolio balances totaled 20.1 million or 4.1% of our total loan portfolio. Outstanding loan balances in our commercial real estate portfolio totaled 139 million, representing 28.1% of our total loan portfolio. Landmark's loan balances in the construction land category as of December 31, 2018 totaled 20% of risk-based capital, which is well below the regulatory guideline of 100%, a level where regulators would view the total was a concentration, requiring heightened risk management practices. Our commercial real estate portfolio was 154% of risk-based capital, far below the 300% regulatory guideline in that category. Commercial and industrial loans were 74.3 million as of December 31, or 15% of the current portfolio. With regard to the agricultural loan portfolio, total balances were 96.6 million or 19.5% of our total loan portfolio as of December 31. As I mentioned in my introductory comments, our 2018 commercial and agribusiness banking efforts resulted in a 12.8% increase overall in net loans outstanding as of December 31, 2018 compared to the year-end 2017 period. Our mortgage one-to-four family loan portfolio represented 27.6% of the portfolio at $136.9 million as of December 31, 2018. Residential real estate activity across the state continues to show stable sales activity with a tight market supply of inventory in most of our markets. Our mortgage banking production during 2018 involved an 86% concentration on purchase money transactions versus refinances. The performance of this segment of our portfolio continues to be strong with low levels of delinquency and limited collection issues. Our pipeline of loan activity remains strong and I anticipate additional loan growth as we progress into 2019. Our team focuses on recruiting client relationships that meet our credit portfolio standards rather than trying to buy transactions through low price or credit structure compromises. The 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. Before we go to questions, I want to summarize by saying that we are pleased with Landmark's operating results for the fourth quarter and fiscal year 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 organic and acquisitive growth. I anticipate our trend of solid earnings to continue. With that, I'll open the call up to questions that anyone might have.

[Operator:]

[Operator Instructions]

[Operator:]

And in showing no questions in the queue, we will conclude the question-and-answer session. I would like to hand the conference back over to Michael Scheopner for his closing remarks.

[Michael Scheopner:]

Thank you and I want to thank everyone for participating in today's earnings call. I appreciate your continued support and confidence that you have in our company. I look forward to sharing news related to our first quarter 2019 results at our next earnings conference call.

[Operator:]

Thank you, sir. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. At this time, you may disconnect your lines.