Landmark Bancorp, Inc. (NASDAQ:LARK) Q3 2018 Results Earnings Conference Call October 31, 2018 11:00 AM ET
Michael Scheopner - President and CEO
Mark Herpich - Chief Financial Officer
John Rodis - FIG Partners
Good morning. And welcome to the Landmark Bancorp Incorporated Third Quarter 2018 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 third quarter and year-to-date 2018. Joining the call with me today to discuss various aspects of our third quarter 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.
We reported net earnings of $3 million or $0.72 per share on a fully diluted basis for the third quarter of 2018. Year-to-date, Landmark’s net earnings totaled $8 million or $1.92 per diluted share.
The company continues to deliver good performance on ROA and ROE, return on average assets calculates to 1.12% for the year-to-date 2018 period and return on average equity year-to-date is 12.39%.
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 on our loan portfolio, and 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 am pleased to report that our Board of Directors has declared a cash dividend of $0.20 per share to be paid November 28, 2018 to shareholders of record as of November 14, 2018. This represents the 69th consecutive quarterly cash dividend since the company’s formation resulting from the merger of Landmark Bancorp, Inc. with MNB Bancshares, Inc. in October of 2001.
Additionally, the Board of Directors has also declared a 5% stock dividend to be issued December 17, 2018 to shareholders of record as of December 3, 2018. This represents the 18th consecutive year that the Board has declared a 5% stock dividend, a demonstration of our long-term commitment to support growth in value and liquidity for our shareholders.
Our third 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 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.
Our 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 and asset quality indicators with you.
Thanks, Michael, and good morning to everyone. As Michael has already summarized our net earnings for the third quarter and nine months ended September 30, 2018, I would like to make a few comments on various elements comprising those results.
Starting with the third quarter income statement highlights, net interest income was $7.2 million or an increase of $578,000 or 8.8% in comparison to the prior year’s third quarter. The improvement in net interest income was attributable to a $41.3 million or 5% increase in average interest earning assets, which was almost entirely attributable to loan growth to $867.5 million.
Our net interest margin on a tax equivalent basis remained constant at 3.42% in both the third quarter of 2017 and 2018. The net interest margin, while unchanged was impacted by the 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 $450,000 to the allowance in the third quarter of 2018, as compared to $100,000 in the third quarter of 2017. This increase was primarily due to an increase in net loan charge-offs of $396,000 during the third quarter of 2018, compared to net loan charge-offs of $47,000 during the third quarter of 2017.
Non-interest income increased $615,000 to $4.6 million for the third quarter of 2018, up 15.6% as compared to the same period of 2017. This was primarily related to an $851,000 increase in other non-interest income, reflecting $888,000 of recoveries on a deposit related losses that occurred in the third quarter of 2017. Also contributing to the increase, was an increase of $256,000 in gains on sales of loans, partially offsetting the increases was a reduction of $354,000 in Bank owned life insurance.
Our third quarter non-interest expenses decreased by $7.9 million to $7.7 million in comparison to the third quarter of 2017. This large change was primarily due to the pretax deposit related loss of $8.1 million in the third quarter of 2017, an increase of $311,000 in compensation and benefits partially offset that decrease.
The effective tax rate was 15.8% in the third quarter of 2018, while we had an income tax benefit in the third quarter of 2017, primarily related to the deposit related loss.
Moving on to discuss some financial highlights for the first nine months of 2018, our net earnings of $8 million exceeded the $1.9 million in the first nine months of 2017. Earnings remained solid as evidenced by achieving a 1.12 return on average assets and were supported in large part by a $41.8 million increase in net loans since December 31, 2017.
In the first nine months of 2018, we experienced a $1.1 million increase in net interest income from a year earlier. As a result of our average interest earning assets increasing 3.1% from $826.8 million during the first nine months of 2017 to $852.5 million year-to-date in 2018, primarily as a result of the reduction in 2018 federal corporate income tax rates, our net interest margin on a tax equivalent basis decreased from 3.40% in the nine months of 2017 to 3.36% in the corresponding period of 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 the first nine months of 2018, compared to the same period of 2017.
During the first nine months of 2018, we provided $900,000 to the allowance, as compared to $250,000 in the first nine months of 2017. The increase in our provision for losses was a result of increased net charge-offs of $255,000 loan growth and an increase in our classified loan totals.
Non-interest income totaled $12.2 million for the first nine months of 2018, an increase of $427,000 or 3.6% from the prior year period. This increase results primarily from an increase of $1.4 million in other non-interest income, which includes the $1.4 million of recoveries on the deposit related loss that occurred in 2017.
Partially offsetting the recoveries were declines of $269,000 in Bank owned life insurance, $196,000 in gains on sales of loans due to lower volumes of loans sold in the secondary market, and $152,000 in fees and service charges.
Also offsetting the increase in non-interest income were lower gains on sales of investment securities, which were $20,000 during the first nine months of 2018, as compared to $363,000 during the comparable period of 2017.
Looking at non-interest expense, we reported a decrease of $7.6 million to $22.7 million for the first nine months of 2018 in comparison to the same period of 2017. This again relates to the pre-tax deposit related loss of $8.1 million in the third quarter of 2017, partially offsetting the decrease was an increase of $391,000 in compensation and benefits.
The effective tax rate was 13.6% in the first nine months of 2018, while the income tax benefit in the third quarter of 2017 was primarily related to the deposit related loss.
To touch on a few balance sheet highlights. Our total assets increased $32.8 million to $962.3 million at September 30, 2018, compared to $929.5 million at December 31, 2017.
Our loan portfolio increased $41.8 million during the first nine months to $475.5 million at September 30, 2018 from $433.7 million at December 31, 2017.
Investment securities decreased $12.3 million to $381.1 million at September 30, 2018 from $393.4 million at December 31, 2017.
Stockholders’ equity decreased by 0.9% to $86.8 million at September 30, 2018, or a book value of $20.85 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 $7.0 million increase in unrealized losses on our investment portfolio net of tax.
Our consolidated and Bank capital ratios on a regulatory basis as of September 30, 2018 continue to exceed the levels considered to be well capitalized. The Bank’s leverage capital ratio was 10.1% at September 30, 2018, while the total risk-based capital ratio was 17.3%.
I would now like to provide some additional details regarding our loan portfolio. As mentioned earlier, our net loans outstanding as of September 30, 2018 totaled $475.5 million. This represents a 9.6% increase from December 31, 2017.
Non-accrual loans, which primarily consist of loans greater than 90 days past due totaled $5.6 million or 1.15% of gross loans as of September 30, 2018, which 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 days to 89 days. The level of past due loans between 30 days and 89 days still accruing interests totaled $1.5 million or 0.31% of gross loans as of September 30, 2018. 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 in other real estates and other assets totaled $139,000 as of September 30th. The other real estate owned balances are comprised of residential housing and a commercial real estate property.
We continue to market for sale all properties held in real estate owned. We recorded net loan charge-offs of $470,000 during the first nine months of 2018, which was up from $215,000 for the same period in 2017.
I will now turn the call back over to Michael to review our Loan Portfolio segments and the credit risk outlook.
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. Net loans outstanding as of September 30, 2018 totaled $475.5 million and loan growth is evident across various portfolio segments.
As of September 30, our construction and land loan portfolio balances totaled $30.8 million or 6.4% of our total loan portfolio. Outstanding loan balances in our commercial real estate portfolio totaled $128.3 million, representing 26.6% of our total loan portfolio.
Landmark’s loan balances in the construction land category, as of September 30 totaled 30% 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 157% of risk based capital, far below the 300% regulatory guideline in that category. Commercial and industrial loans were $67.9 million as of September 30, 2018 or 14.1% of the current portfolio.
With regard to our agricultural loan portfolio, total balances were $91.4 million or 19% of the total loan portfolio as of September 30. Our 2018 commercial and agri business banking efforts have resulted in a 9.6% increase overall in net loans outstanding as of September 30, 2018 when compared to year end 2017.
Our mortgage one-to-four family loan portfolio represented 28.5% of the portfolio at $137 million as of September 30, 2018. Residential real estate activity across the State of Kansas continues to show stable sales, with a tight market supply of inventory in those markets.
Our mortgage banking production through the first nine months of 2018 involved an 87% concentration on purchase money transactions versus refinances. The performance of this segment of our portfolio continues to be strong to-date with low levels of delinquency and limited collection issues.
Across the portfolio segments, our pipeline of activity remained strong and I anticipate additional loan growth throughout the remainder of 2018. Our team remains focused on recruiting client relationships that meet our credit portfolio standards rather than trying to buy transactions through price or credit structure compromises.
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 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 third 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 our capital strength continue to position us well for long-term organic or acquisitive growth. I anticipate that our trend of solid earnings will continue.
With that, I will open the call up to questions that anyone might have.
[Operator Instructions] Our first question comes from John Rodis of FIG Partners. Please go ahead.
Good morning, guys.
Good morning, John.
Michael, just to follow up on your comment, you said the loan pipeline is strong, and obviously, you guys have put up, I mean, for you guys especially really good growth this year. By category, where does the pipeline stand, is it strong across all categories or commercial real estate or what?
Yeah. John, thanks. Really it is across all of the categories. We have had a good growth in each of the geographies in southeast and southwest Kansas in our agri business portfolio and really through the center part of the state and into our eastern geography into the Metro Kansas City area growth primarily in the commercial real estate and C&I categories in that central and eastern geography.
We have had -- and that growth has been really spurred by our the legacy team that we had in place and then we added a couple of lenders in the Kansas City area in the second quarter of 2018 and they contributed to our third quarter loan growth as a result of their addition.
Okay. How much did those new lenders add roughly there?
Roughly it was $12 million to $13 million in the third quarter.
Okay. Good. Any comments on the tariffs and what your customers are saying, has there been any real impact so far from your just feedback you are getting from your clients?
Yeah. John it’s -- I’d say it’s limited. Really we have got limited exposure in manufacturing and we have got one client that has been impacted a little bit by the tariffs on steel with respect to ag, overall, really our clients, they recognize the potential impact that out there. But now in visiting with our client relationship managers, at this point, I’d say that, that overall, we have seen a limited influence at this point.
Okay. And then guys just one more for me, just any update on sort of your M&A efforts and what you are seeing in the market today?
John, I’d say that we continue to have active discussions with potential partners where, I think, you know our history with respect to acquisitive efforts has been really disciplined and targeted with respect to either markets or partners that we think that can add franchise value.
So while there has been opportunities to grow for the sake of growth we -- we have really stayed fundamental to our disciplines and we are in active or we do have discussions going on currently and but nothing that would be immediate on the horizon.
Okay. Superb. Thanks, guys.
[Operator Instructions] There are no other questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Michael Scheopner for closing remarks.
Well, thank you and I want to thank everyone who participated and joined us in today’s earnings call. I truly do appreciate your continued support and confidence in the company and I do look forward to sharing news related to our year end 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.