Landmark Bancorp, Inc. (NASDAQ:LARK) Q2 2018 Earnings Conference Call July 25, 2018 11:00 AM ET
Michael Scheopner - President & CEO
Mark Herpich - CFO
Michael Brilley - Sit Investments
Good day, and welcome to the Landmark Bancorp Quarter Two Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation there will be an opportunity to ask questions. [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.
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 2018. 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 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 $2.8 million or $0.68 per share on a fully diluted basis for the second quarter of 2018. Year-to-date, Landmark's net earnings totaled $4.9 million or $1.19 per diluted share. The company continues to deliver good performance on ROA and ROE. Return on average assets calculates to 1.06% for the year-to-date 2018 period and return on average equity year-to-date is 11.69%.
As I look at how Landmark is positioned from a big picture perspective, we are financially very strong, we are very well capitalized, and we have excellent credit quality in our loan portfolio and we're 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 pleased to report that our board of directors has declared a cash dividend of $0.20 per share to be paid August 22, 2018, to shareholders of record as of August 08, 2018. This represents the 68th consecutive quarterly cash dividend since the company's formation resulting from the merger of Landmark Bancorp, Inc. with MNB Bancshares in October 2001.
Our second quarter 2018 performance continues our trend of strong earnings and this success is a credit to the continued efforts of our associates throughout the organization to 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.
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 leads of families and businesses.
I'll now turn the call over to Mark Herpich, our CFO, who will review the financial results and asset quality indicators with you.
Thanks Michael and good morning to everyone.
As Michael has already summarized our earnings for the second quarter and six months ended June 30 of 2018, I would like to make a few comments on various elements comprising those results.
Starting with the second quarter income statement highlights, net interest income was $6.8 million, an increase of $260,000 or 4.0% in comparison to the prior year second quarter. The improvement in net interest income was attributable to a $24.1 million or 2.9% increase in average interest earning assets to $855.4 million in comparison to the prior year second quarter period.
Net loans increased $25.2 million during the second quarter driving our growth and interest earning assets.
Our net interest margin on a tax equivalent basis decreased from 3.41% in the second quarter of 2017 to 3.33% in the same period of 2018; primarily as a result of the reduction in 2018 federal corporate income tax rates from 34% to 21% following the approval of the federal tax reform legislation 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 $250,000 to the allowance in the second quarter of 2018 as compared to $100,000 in the second quarter of 2017.
Non-interest income increased $52,000 to $4.3 million for the second quarter of 2018, up 1.2% as compared to the same period of 2017. This was primarily related to a $519,000 increase in other non-interest income reflecting $525,000 of recoveries on a deposit-related loss that occurred during the third quarter of 2017. Partially offsetting the impact of these recoveries were decreases of $224,000 in gains on sales of loans, $177,000 of gains on sales of investment, and $109,000 in fees and service charges.
Our second quarter non-interest expenses remained relatively consistent on linked quarter basis as evidenced by an increase of 0.2% or $14,000 to $7.6 million.
The effective tax rate decreased from 23.7% in the second quarter of 2017 to 13.1% in the second quarter of 2018, primarily as a result of the reduction in 2018 federal corporate income tax rates.
Moving on to discuss the financial highlights for the first half of 2018, our net earnings of $4.9 million exceeded the $4.6 million in the first six months of 2017. Earnings remained solid as evidenced by achieving a 1.06% return on average assets and were supported in large part by our $27.7 million increase in net loans since December 31, 2017.
In the first half of 2018 we experienced a $486,000 increase in net interest income from a year earlier as a result of our average interest earning assets increasing 2.1% from $827.1 million during the first six months of 2017 to $844.9 million during 2018. Primarily as a result of the reduction in 2018 federal corporate income tax rates, our net interest margins on a tax equivalent basis decreased from 3.40% in the six months of 2017 to 3.33% in the corresponding period of 2018.
During the first six months of 2018, we provided $450,000 to the allowance as compared to $150,000 in the first half of 2017.
Non-interest income totaled $7.7 million for the first six months of 2018, a decrease of $188,000 or 2.4% from the prior year period. This decrease results primarily from a decline of $452,000 in gains on sales of loans due to lower volumes of loans sold in the secondary market. Also contributing to the reduction in non-interest income were lower gains on sales of investment securities which were $35,000 during the first six months of 2018 as compared to $324,000 during the comparable period of 2017. Partially offsetting these reductions was an increase of $536,000 in other non-interest income which includes the $525,000 of recoveries on the deposit-related loss that occurred in 2017.
Looking at non-interest expense, we reported an increase of 2.7% or $393,000 for the first six months of 2018 in comparison to the same period of 2017. This increase relates to a $301,000 increase in other non-interest expense which was impacted by the accrual of loss reserves at our captive insurance subsidiary and increases in various other expense categories.
The effective tax rate decreased from 23.8% in the first half of 2017 to 12.2% in the first six months of 2018, primarily as a result of the reduction in 2018 federal corporate income tax rates.
To touch on a few balance sheet highlights, our total assets increased $48.7 million to $978.2 million at June 30, 2018, compared to $929.5 million at December 31, 2017.
Our loan portfolio increased $27.7 million during the first six months to $461.4 million at June 30, 2018, from $433.7 million at December 31, 2017.
Investment Securities increased $10.8 million to $404.2 million at June 30, 2018, from $393.4 million at December 31, 2017.
Stockholders equity decreased by 1.4% to $86.4 million at June 30, 2018, or a book value of $20.83 per share compared to $87.6 million at December 31, 2017, or a book value of $21.47 per share. This decrease in stockholders equity relates to a $5.1 million increase in the net unrealized losses on our investment portfolio net of tax.
Our consolidated and bank regulatory capital raises as of June 30, 2018, continued to exceed the levels considered well capitalized. The bank's leverage capital ratio was 9.9% at June 30, 2018, while the total risk based capital ratio was 17.4%.
I would now like to provide some additional details regarding our loan portfolio. As mentioned earlier, our net loans outstanding as of June 30, 2018, totaled $461.4 million. This represents a 6.4% increase from December 31, 2017, or 9.1% from June 30, 2017.
Non-accrual loans which primarily consist of loans greater than 90 days past due totaled $5.3 million or 1.13% of gross loans as of June 30, 2018, which represents an improvement from the year-end 2017 level of 1.38%.
Our credit risk and collection efforts continue to focus on reducing these totals even further.
Another indicator we have monitored 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 as of June 30, 2018, totaled $1.5 million or 0.33% as gross loans. This ratio has remained relatively flat from 0.31% of gross loans as of December 31, 2017. We continue to monitor delinquency trends carefully in all loan categories.
Our balance and other assets/real estate owned totaled $452,000 as of June 30th. The other real estate owned balances are comprised of residential housing and a commercial real estate property. And we continue to market for sale all properties held in real estate owned.
We recorded net loan charge-offs of $74,000 during the first half of 2018 which was down from $168,000 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.
Thank you, Mark, and thank you for your comments.
We continue to maintain a diversified mix of the loan portfolio both in loan types and in geography across the state. Net loans outstanding as of June 30, 2018, totaled $461.4 million and growth is evident across the various portfolio segments.
As of June 30, 2018, our construction and land loan portfolio balances totaled $26.5 million or 5.7% of our total loan portfolio. Outstanding loan balances in our commercial real estate portfolio totaled $121.9 million representing 26.1% of our portfolio.
Landmark's loan balances in the construction land category as of June 30, 2018, totaled 27% 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 150% of risk-based capital far below the 300% regulatory guidelines in that category.
Commercial and industrials loans were $66.5 million as of June 30 or 14.2% of the portfolio. With regard to our agricultural loan portfolio, total balances were $87.9 million or 18.8% of our total loan portfolio as of June 30.
Our mortgage one-to-four family loan portfolio represented 30% of the portfolio at $138 million as of June 30, 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 through the first six months of 2018 involved an 85% concentration on purchase money transactions versus refinances. The performance of this segment of our portfolio continues to be strong today as low levels of delinquency and limited collection issues.
Across the portfolio segments our pipeline of activity remains strong and I anticipate additional loan growth through the remainder of 2018. Our team remains focused on recruiting client relationships to meet our credit portfolio standards rather than trying to buy transactions through low price or credit structure compromises. We continue to carefully monitor the various risk categories impacting our credit portfolio going forward and will remain diligent and disciplined in applying the same disciplined underwriting and risk management practices that have supported our continued profitability these past years.
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 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 very 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.
We will now begin the question-and-answer session. [Operator Instructions].
Now the first question comes from Michael Brilley with Sit Investments. Please go ahead.
My question is regarding the $525,000 recovery, could you characterize this is an insurance type recovery or is it a recovery from the depositor and do you expect further recoveries related to that loss.
Michael thanks for the question and it is a combination of recoveries from multiple avenues and we're pursuing, we continue to pursue multiple avenues of recovery and we would anticipate additional recoveries in the future.
Now this concludes our question-and-answer session. I would like to turn the conference back over to Michael Scheopner for any closing remarks.
Thank you. And I do want to thank everyone for participating in today's earnings call. I appreciate your continued support and confidence in our company. And I look forward to sharing news related to our third quarter 2018 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.