Landmark Bancorp, Inc. (LARK) Q4 2019 Earnings Report, Transcript and Summary

Good day, and welcome to the Landmark Bancorp Fourth 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.

Good morning, and thank you for joining our call today to discuss Landmark's earnings and results of operations for the fourth quarter and fiscal year ending 2019. Joining the call with me to discuss various aspects of our 2019 performance is Mark Herpich, Chief Financial Officer for 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. I'm pleased to report that Landmark achieved record results for the fourth quarter and full year of 2019. We are particularly pleased with the loan growth Landmark's delivering across our footprint as we are seeing the benefit of our expansion of Landmark's lending team over the past couple of years. We reported record net earnings of $3.3 million or $0.71 per share on a fully diluted basis for the fourth quarter 2019. For the year ending December 31, 2019, Landmark's net earnings totaled $10.7 million or $2.31 per diluted share. We delivered loan growth of 8.7% in 2019 along with strong core earnings. Our 2019 return on average assets calculates to 1.07%, and return on average equity for 2019 was 10.58%. Landmark remains financially strong, very well capitalized with a strong credit quality in our loan portfolio. We are delivering healthy growth in loans and total assets. Mark will provide additional detail on Landmark's financial performance and asset quality metrics later in the 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 4, 2020, to shareholders of record as of February 19, 2020. This represents the 74th consecutive quarterly cash dividend since the company's formation resulting from the merger of Landmark Bancorp, Inc. with MNB Bancshares in October 2001. Our performance in the fourth quarter and fiscal year 2019 continues our trend of strong earnings. 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. 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 financial results and asset quality indicators with you.

Thanks, Michael, and good morning to everyone. Michael mentioned our record net earnings for the fourth quarter and year ended December 31, 2019, and now I would like to make a few comments on various elements comprising those results. Starting with highlights of the fourth quarter income statement. Net interest income was $8.0 million, an increase of $840,000 or 11.7% in comparison to the prior year's fourth quarter. The improvement in net interest income was attributable to a $34.0 million or 3.9% increase in average interest-earning assets to $906.3 million in comparison to the prior year fourth quarter period. This growth was entirely attributable to loan growth of $51.9 million or 10.7% as our average investment balance actually declined by $18.2 million. Landmark's net interest margin on a tax-equivalent basis improved to 3.61% in the fourth quarter of 2019 as compared to 3.37% in the same period of 2018. The net interest margin benefited significantly from the increase in average loan balances as yields on our loans receivable increased while our overall cost of interest-bearing liabilities declined during the quarter. Looking at the provision for loan losses. Our analysis resulted in providing $400,000 to the allowance for loan losses in the fourth quarter of 2019 as compared to $500,000 in the fourth quarter of 2018. Noninterest income increased by $660,000 or 19.7% to $4.0 million for the fourth quarter of 2019 compared to the same period of 2018. Our core banking business delivered significant increases in noninterest income with a $492,000 rise in gains on sales of loans and a $147,000 increase in fees and service charges. The gains on sales of loans were driven by a higher volume of one-to-four family real estate loans originated for sale. And fees and service charges increased due to higher fee income on deposit accounts. Additionally, bank-owned life insurance income increased by $112,000 during the fourth quarter of 2019 as compared to the same period of 2018 as a result of a death benefit received in the fourth quarter of 2019. Partially offsetting the noninterest income increase were $31,000 of losses on sales of investment securities in the fourth quarter of 2019 as compared to no gains or losses in the fourth quarter of 2018. Noninterest expenses increased by $690,000 to $8.3 million in the quarter compared to the fourth quarter of 2018. This was primarily driven by an increase of $677,000 in compensation and benefits, related in part to our commercial loan growth over the past year as we added employees in this area and also to general increased compensation costs. Income tax expense was affected in the fourth quarters of both 2019 and 2018 by the recognition of $558,000 and $512,000, respectively, of previously unrecognized tax benefits, reducing the effective tax rate in both periods. Moving on to financial highlights for the full year of 2019. Our net earnings of $10.7 million were $236,000 higher than the $10.4 million earned in 2018. The 2018 period included $1.5 million in recoveries related to a 2017 deposit-related loss. Thus absent the deposit loss recoveries in 2018, our 2019 bank earnings improved by well over $1 million. The solid core performance is evidenced by achieving a 1.07% return on average assets and a 10.58% return on average equity, supported in large part by our $42.8 million increase in net loans since December 31, 2018. In 2019, we achieved a $2.6 million or 9.2% increase in net interest income from a year earlier as a result of average interest-earning assets increasing 5% from $857.5 million in 2018 to $900.5 million during 2019. Consistent with my comments on the fourth quarter, net interest margin benefited significantly from a $55.0 million increase in average loan balances during 2019 as compared to 2018, resulting in our net interest margin on a tax-equivalent basis improving from 3.37% in 2018 to 3.48% for 2019. In both 2019 and 2018, we provided $1.4 million to the allowance for loan losses. Noninterest income totaled $15.8 million for 2019, an increase of $238,000 or 1.5% from the prior year. Increases of $1.3 million in gains on sales of loans, $448,000 in fees and service charges and $109,000 in bank-owned life insurance were partially offset by a $1.5 million decrease in other noninterest income. The increase in gains on sales of loans were driven by higher volumes of one-to-four family residential real estate loans originated, while the higher fees and service charges were related to higher fee income on deposit accounts. The decline in other noninterest income was related to $1.5 million of recoveries in 2018 on the deposit-related loss from 2017. Also partially offsetting the increase in noninterest income were losses on sales of investment securities of $177,000 during 2019 as compared to a gain of $20,000 during 2018. Looking at noninterest expense. We reported an increase of 7.5% or $2.3 million to $32.6 million for 2019 in comparison to the same period of 2018. Consistent with my fourth quarter comments, this increase relates primarily to a $1.8 million 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 increased general compensation costs. Landmark's effective tax rate increased from 10.1% in 2018 to 12.0% in 2019 primarily as a result of the recognition of $136,000 of excess tax benefits from the exercise of stock options during 2018 as compared to none in 2019. Let's touch on a few balance sheet highlights. Total assets increased $12.7 million to $998.5 million at December 31, 2019, compared to $985.8 million at December 31, 2018. Our loan portfolio increased $42.8 million to $532.2 million at December 31, 2019, from $489.4 million at year-end 2018. Investment securities decreased $27.0 million to $366.1 million at December 31, 2019, from $393.1 million at December 31, 2018. Deposits increased $11.4 million to $835 million at December 31, 2019, compared to $823.6 million at year-end 2018. Stockholders' equity increased to $108.6 million at December 31, 2019, or a book value of $23.62 per share, up from $91.9 million at December 31, 2018, or a book value of $20.02 per share. The increase in book value was primarily a result of net earnings and an increase in the fair value of available-for-sale investment securities. Our consolidated and bank regulatory capital ratios as of December 31, '19, continue to exceed the levels considered well capitalized. The bank's leverage capital ratio was 10.7% at December 31, 2019, while the total risk-based capital ratio was 17.0%. I would now like to provide some additional details on asset quality in our loan portfolio. As I mentioned earlier, net loans outstanding as of December 31, 2019, totaled $532.2 million. Nonperforming loans, which primarily consist of loans greater than 90 days past due, totaled $5.8 million or 1.03% of gross loans as of December 31, 2019. This represents a decrease from the year-end 2018 level of 1.06%. Our credit risk and collection efforts continue to focus on reducing these totals. Another indicator we monitor as part of our credit risk management efforts is the level of past due loans 30 to 89 days. The level of past due loans between 30 and 89 days still accruing interest totaled $3.4 million or 0.64% of gross loans as of December 31, 2019. This ratio has increased from 0.34% of gross loans as of December 31, 2018. We continue to monitor the delinquency trends carefully in all loan categories. Our balance in other real estate owned totaled $290,000 as of December 31. The other real estate owned balances are comprised of residential houses which are being marketed for sale. We recorded net loan charge-offs of $698,000 during 2019, up from $1.1 million for the same period of 2018. I will now turn the call back over to Michael to review our loan portfolio segments and the credit risk outlook.

Mark, thanks for your comments. As Mark noted, net loans outstanding as of the end of 2019 totaled $532.2 million, up 8.7% from our year-end 2018 total. During the fourth quarter of 2019, we delivered an increase of $12.1 million in net loans outstanding. The loan growth during 2019 is spread across all of our geographic markets. The growth was boosted in part by the midyear 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 during the first part of 2019 who are located in a loan production office that opened in Prairie Village in May. After receiving regulatory permission, we converted the LPO to a bank branch during 3Q '19. As we pursue additional loan growth in 2020, 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 year-end 2019, our construction and land loan portfolio balances totaled $22.5 million or 4.2% of our total loan portfolio. Outstanding loan balances in our commercial real estate portfolio totaled $133.5 million, representing 24.8%. The loan balances in both the construction and land and commercial real estate portfolios remained significantly below the regulatory percentage concentration thresholds that would require heightened risk management practices. Commercial and industrial loans were $109.6 million as of December 31, 2019, or 20.4% of the current portfolio. The strong increase in commercial lending contributed significantly to our overall loan growth in 2019. With regard to our agricultural loan portfolio, total balances were $98.6 million or 18.3% of our total portfolio as of the end of 2019. Our mortgage one-to-four family loan portfolio represented 27.2% of the portfolio at $146.5 million as of December 31, 2019. Our team delivered healthy growth in mortgage loans in 2019. And while we experienced an increase in refinancing activity during part of 2019 as a result of the decreasing interest rates, our mortgage banking production for the year was approximately 76% focused on purchase money transactions versus refinance activity. Our pipeline of commercial and mortgage banking loan activity remains strong, and I anticipate additional loan growth in 2020. 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. Before we go to questions, I want to summarize by saying that we are pleased with Landmark's record operating results for the fourth quarter of 2 -- for the fourth quarter and for fiscal year 2019. These results continue our 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. We anticipate our trends of strong and solid earnings to continue in 2020. With that, I'll open the call up to questions that anyone might have.

Well, thank you. And I want to thank everyone for participating in today's earnings call. I truly appreciate your continued support and confidence in the company, and I look forward to sharing news related to our first quarter 2020 results at our next earnings conference call. Thank you.

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