Landmark Bancorp, Inc. (LARK) Q2 2019 Earnings Report, Transcript and Summary

Good day, and welcome to the Landmark Bancorp Second Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Michael Scheopner, President and Chief Executive Officer. Mr. Scheopner, please proceed.

Thank you and good morning. Thank you for joining our call today to discuss Landmark's earnings and results of operations for the second quarter and year-to-date 2019. Joining the call with me today to discuss various aspects of our second 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 those 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. Landmark reported net earnings of $2.6 million or $0.59 per share on a fully diluted basis for the second quarter of 2019. Year-to-date Landmark's net earnings totaled $4.8 million or $1.09 per diluted share. The year-to-date return on average assets calculates to 0.98% and return on average equity year-to-date was 10.08%. Mark will provide additional detail on Landmark's financial performance and asset quality metrics later in the call. I'm pleased to report that our Board of Directors has declared cash dividend of $0.20 per share to be paid August 21, 2019 to shareholders of record as of August 7, 2019. This represents the 72nd 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 second quarter and year-to-date 2019 performance continues our trend of strong earnings. The 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 particularly pleased with the loan growth Landmark is delivering across our footprint and I will comment on a few minutes on our expanded lending team. Management 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 our families and businesses. I will now turn the call over to Mark Herpich, our CFO will review the financial results and asset quality indicators [issues] [ph].

Thanks Michael and good morning to everyone. Michael mentioned our net earnings for the second quarter and six months ended June 30, 2019. And now I'd like to make a few comments on various elements comprising those results. Starting with the second quarter income statement highlights, net interest income was $7.5 million, an increase of $645,000 or 9.4% in comparison to the prior year second quarter. The improvement in net interest income was attributable to a $45.8 million or 5.4% increase in average interest earning assets to $901.2 million in comparison to the prior year second quarter period. This growth was entirely attributable to loan growth of $59.8 million as our average investment balance actually declined by $13.6 million. Net interest margin on a tax equivalent basis improved to 3.43% in the second quarter of 2019 as compared to 3.33% in the same period of 2018. The net interest margin benefited significantly from the increase in average loan balances as the yields on our interest earning assets and short-term interest rates on liabilities both increased. Looking at our provision for loan losses, our analysis of the allowance for loan losses resulted in providing 400,000 to the allowance in the second quarter of 2019 as compared to 250,000 in the second quarter of 2018. Non-interest income decreased, 265,000 or 6.2% to 4.0 million in the second quarter of 2019, compared to the same period of 2018. The comparison was primarily impacted by a $514,000 decline in other non-interest income reflecting $525,000 of recoveries during 2018 on a deposit related loss that occurred in the third quarter of 2017. Additionally, we sold investments totaling 9.5 million comprised of investments with lower yields and small balances resulting in a loss of $146,000 during the second quarter of 2019. Partially offsetting the declines were increases of $274,000 in gains on sales of loans driven by higher volume of 1-to-4 family residential real estate loans originated for sale, $123,000 in fees and service charges. Our second quarter non-interest expenses increased by $399,000 to $8.0 million in comparison to the second quarter of 2018. This was primarily driven by an increase of $285,000 in compensation and benefits related in part to our commercial loan growth over the past four quarters as we added employees in this area and also to general increased compensation costs. Income tax expense increased during the second quarter of 2019 despite lower pre-tax earnings due to the recognition of $72,000 of excess tax benefits associated with the exercise of stock options during the second quarter of 2018. With no stock option exercises in the second quarter of 2019, our effective tax rate increased from 13.1% in the second quarter of 2018 to 16.3% in the second quarter of 2019. Moving on to discuss some financial highlights for the first half of 2019, our net earnings of $4.8 million was lower than the $4.9 million in the first six months of 2018. Earnings remain strong as evidenced by achieving a 0.98% return on average assets supported in large part by our increase in net loans. In the first half of 2019, we achieved a $1.2 million or 9.3% increase in net interest income from a year earlier as a result of average interest earning assets increasing 5.6% from $844.9 million during the first six months of 2018 to $892.2 million during 2019. Consistent with my comments earlier on the second quarter, net interest margin benefited significantly from a $56.7 million increase in average loan balances on a comparable six-month period basis resulting in our net interest margin on a tax equivalent basis improving from 3.3% in the first six months of 2018 to 3.42% in the corresponding period of 2019. During the first six months of 2019, we provided $600,000 to the allowance as compared to $450,000 in the first half of 2018, in large part due to the increased loan balances. Non-interest income totaled $7.2 million for the first six months of 2019 or a decrease of 410,000 or 5.4% from the prior year period. This results primarily from a decline of $516,000 in other non-interest income reflecting the $525,000 of recoveries during 2018 on the deposit related loss during 2017. Also contributing to the reduction in non-interest income was a loss on sales of investment securities of $146,000 during the first six months of 2019, as compared to a gain of $35,000 during the comparable period of 2018. Partially offsetting these reductions were increases of $233,000 in gains on sales of loans and $56,000 in fees and service charges. Looking at non-interest expense, we reported an increase of 4.6% or $687,000 for the first six month of 2019, in comparison to the same period of 2018. Consistent with my second quarter comments mentioned earlier, this increase primarily relates to a $639,000 increase in compensation and benefits related to our commercial loan growth over the past year as we added employees in this area and also due to general increased compensation costs. Partially offsetting this increase was a decline of $105,000 in other non-interest expense, which was impacted by the accrual of loss reserves that are captive insurance subsidiary during the first half of 2018. While our pre-tax earnings for the first six months of 2019 were the same as the comparable period of 2018, the effective tax rate increased from 12.2% in the first half of 2018 to 15.0% in the first six months of 2019 primarily as a result of the recognition of $136,000 of excess tax benefits from the exercise of stock options during the first six months of 2018. To touch on a few balance sheet highlights, total assets increased $16.1 million to $1.0 billion at June 30, 2019 compared to $985.8 million at December 31, 2018. Our loan portfolio increased $20.8 million during the quarter to $510.2 million at June 30, 2019 from $489.4 million at year end 2018. Investment securities decreased $7.3 million to $385.8 million at June 30, 2019 from $393.1 million at December 31, 2018. Deposits increased $5.9 million to $829.5 million at June 30, 2019, compared to $823.6 million at year end 2018. Stockholders equity increased to $102.9 million at June 30, 2019, or a book value of $23.53 per share up from $91.9 million at December 31, 2018, or a book value of $21.02 per share, primarily as a result of net earnings and an increase in the fair value available for sale investment securities. Our consolidated and bank regulatory capital ratios, as of June 30, 2019, continued to exceed the levels considered well capitalized. The banks leverage capital ratio was 10.3% at June 30, while the total risk based capital ratio was 17.0%. I would now like to provide some additional details regarding our loan portfolio. As I mentioned earlier, our net loans outstanding as of June 30, 2019 totaled $510.2 million. Non-performing loans which primarily consist of loans greater than 90 days past due totaled 8.0 million or 1.55% of gross loans, as of June 30, 2019. This represents an increase from the year-end 2018 level of 1.06% and relates to a one loan relationship consisting of 2.3 million of 1-to-4 family residential, construction and loan, commercial real estate and commercial loans. Our credit risk and collection efforts continue to focus on reducing these totals. Another indicator that 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 3.5 million or 0.68% of gross loans, as of June 30, 2019. This ratio has increased from 0.34 gross loans as of December 31, 2018. We continue to monitor delinquency trends carefully on all loan categories. Our balance and other assets, or real estate-owned totaled 91,000 as of June 30, and the other real estate-owned balances are comprised of residential houses which are being marketed for sale. We recorded net loan charge offs of 99,000 during 2019 up from $74,000 during the same period in 2018. I will now turn the call back over to Michael to review our loan portfolio segments and the credit risk outlook for the company.

Mark, thank you for your comments. And as Mark noted, net loans outstanding as of the end of the second quarter 2019, totaled $510 million, which is up 4.3% from our year end 2018 total of $489 million. Compared to the second quarter of 2018, we delivered an increase of $49 million or 10.6% in net loans outstanding. Loan growth over the past year is spread across all of our geographic markets, but the growth was boosted in part by the mid-year 2018 addition of a team of commercial bankers with a specialty and small business, SBA lending located in our Johnson County, Kansas market. We added another team of commercial bankers in Kansas City at the end of 2018 and in early 2019, who are currently located in a loan production office that opened in Prairie Village in May. In late second quarter 2019, we received regulatory permission to convert the LPO to a bank branch and we expect to complete that conversion during the third quarter of 2019. As we pursue additional loan growth in 2019, we will continue our credit risk focus of maintaining a diversified mix in the loan portfolio both in loan types and in geography across the state. As of June 30, 2019, our construction and land loan portfolio balances totaled $20 million or 3.9% of our total loan portfolio. Outstanding loan balances in the commercial real estate portfolio totaled $140 million representing 27% of our total loan portfolio. Loan balances in both the construction land and the commercial real estate portfolios remain significantly below the regulatory percentage concentration thresholds that would require heightened risk management practices. Commercial and industrial loans were $94.4 million as of June 30, 2019 or 18.3% of the current portfolio. With regard to our agricultural loan portfolio, total balances were 99.4 million or 19.2% of the total loan portfolio as of the end of the second quarter. Our mortgage 1-to-4 family loan portfolio represented 26.3% of the portfolio at $136 million as of June 30. Our mortgage banking production continues to focus on purchase money transactions versus refinances. Our pipelines of commercial and mortgage banking loan activity remain strong and I anticipate that we will achieve additional loan growth as we progress through the remainder of 2019. Our team remains focused on recruiting client relationships that meet our credit portfolio standards rather than trying to buy transactions through low price or credit structure compromises. 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. 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 second quarter and year-to-date 2019. 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 continued to position us well for long-term organic or acquisitive growth, anticipate our trend of solid earnings to continue. With that, I will open the call up to questions that anyone might have.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Michael Scheopner, President and Chief Executive Officer for any closing remarks. Q - A -

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

The conference is now concluded. Thank you for your time in today's presentation. You may now disconnect.