Landmark Bancorp, Inc. (NASDAQ:LARK) Q3 2019 Earnings Conference Call October 30, 2019 11:00 AM ET
Michael Scheopner - President and Chief Executive Officer
Mark Herpich - Chief Financial Officer
Conference Call Participants
John Rodis - Janney
Good morning, and welcome to the Landmark Bancorp Q3 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference over to Michael Scheopner. 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 2019. Joining the call with me to discuss various aspects of our third 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 those 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 $2.6 million or $0.60 per share on a fully diluted basis for the third quarter of 2019. Year-to-date, Landmark's net earnings total $7.4 million or $1.69 per diluted share. We've delivered loan growth of 6.3% year-to-date and strong core earnings. The year-to-date return on average assets calculates to 1%, and return on average equity to date is 10.02%.
As I look at how Landmark is positioned, we are financially very strong, very well capitalized, and we have a strong credit quality in 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 27, 2019, to shareholders of record as of November 13, 2019. This represents the 73rd consecutive quarterly cash dividend since the company's formation, resulting from the merger of Landmark Bancorp Inc. with MNB Bancshares, Inc. in October 2001.
The Board also declared a 5% stock dividend to be issued December 16, 2019, to shareholders of record as of December 2, 2019. This represents the 19th 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 performance in the third quarter and year-to-date 2019 continues our trend of strong earnings. This success is accredited 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 has delivered across our footprint, and I'll comment in a few minutes on our expanded lending team. Your 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 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. Michael mentioned our net earnings for the third quarter and nine months ended September 30, 2019, and now 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 $7.7 million, an increase of $479,000 or 6.7% in comparison to the prior year's third quarter. The improvements in net interest income was attributable to a $43.6 million or 5.0% increase in average interest-earning assets to $911.1 million in comparison to the prior year third quarter period. This growth was entirely attributable to loan growth of $54.8 million or 11% as our average investment balance actually declined by $10.9 million.
Net interest margin on a tax-equivalent basis improved to 3.44% in the third quarter of 2019, as compared to 3.42% in the same period of 2018. The net interest margin benefited significantly from the increase in average loan balances as the yield is 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 third quarter of 2019 as compared to $450,000 in the third quarter of 2018.
Noninterest income remained constant at $4.6 million for the third quarters of 2019 and 2018. Whilst total noninterest income remained flat, our core banking fee income sources increased significantly with a $605,000 increase in gains on sales of loans and a $245,000 increase in fees and service charges.
These increases were able to offset the comparison with the $888,000 of recoveries received during 2018 on a deposit-related loss that occurred in the third quarter of 2017, which drove the $876,000 reduction in other noninterest income for the third quarter of 2019 versus the third quarter of 2018.
The increased gains on sales of loans were driven by higher volume of one-to-four family residential real estate loans originated for sale and improvement in fees and service charges due to higher fee income on deposit accounts.
Our third quarter noninterest expenses increased by $906,000 to $8.6 million in comparison to the third quarter of 2018. This was primarily driven by an increase of $434,000 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 increased during the third quarter of 2019 despite lower pretax earnings due to a lower amount of tax-exempted income during the third quarter of 2019, as compared to the third quarter of 2018. Our effective tax rate increased from 15.8% in the third quarter of 2018 to 18.2% in the third quarter of 2019.
Moving on to discuss some financial highlights for the first nine months of 2019, our net earnings of $7.4 million were $570,000 lower than the $8.0 million in the first nine months of 2018. The 2018 period included $1.4 million in recoveries related to a 2017 deposit-related loss, plus, absent the deposit loss recoveries in 2018, our 2019 bank earnings improved. The solid core performance is evidenced by achieving a 1.00% return on average assets and a 10% return on average equity, supported in large part by our increase in net loans.
In the first nine months of 2019, we achieved a $1.7 million or 8.4% increase in net interest income from a year earlier as a result of average interest-earning assets increasing 5.4% from $852.5 million during the first nine months of 2018 to $898.5 million during 2019. Consistent with my comments earlier on the third quarter, net interest margin benefited significantly from a $56.1 million increase in average loan balances on a comparable nine-month period basis, resulting in our net interest margin on a tax-equivalent basis improving from 3.36% in the nine months of 2018 to 3.43% in the corresponding period of 2019.
During the first nine months of 2019, we provided $1 million to the allowance as compared to the $900,000 in the first nine months of 2018, in large part due to the increased loan balances. Noninterest income totaled $11.8 million for the first nine months of 2019, a decrease of $422,000 or 3.5% from the prior year period. This results primarily from a decline in other noninterest income for the $1.5 million of recoveries during 2018 on a deposit-related loss from 2017.
Also contributing to the reduction in noninterest income was a loss on sales of investment securities of $146,000 during the first nine months of 2019, as compared to a gain of $20,000 during the comparable period of 2018. Consistent with my quarterly comments, we achieved significant increases of $838,000 in gains on sales of loans and $301,000 in fees and service charges during 2019 to partially offset the 2018 deposit-related loss recoveries.
Looking at noninterest expense. We reported an increase of 7.0% or $1.6 million for the first nine months of 2019 in comparison to the same period of 2018. And consistent with my third quarter comments, this increase primarily relates to a $1.1 million increase in compensation 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.
While our pretax earnings for the first nine months of 2019 were lower than the comparable period of 2018, the effective tax rate increased from 13.6% in the first nine months of 2018 to 16.2% in the first nine months of 2019, primarily as a result of the recognition of $139,000 of excess tax benefits from the exercise of stock options during the first nine months of 2018.
To touch on a few balance sheet highlights. Total assets increased $22.9 million to $1.0 billion at September 30, 2019, compared to $985.8 million at December 31, 2018. Our loan portfolio increased $30.8 million to $520.1 million at September 30, 2019 from $489.4 million at year-end 2018.
Investment securities decreased $20.6 million to $372.5 million at September 30, 2019, from $393.1 million at December 31, 2018. Deposits increased $10.1 million to $833.8 million at September 30, 2019, compared to $823.6 million at year-end 2018.
Stockholders' equity increased to $106.0 million at September 30, 2019, or a book value of $24.23 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 of available-for-sale investment securities.
Our consolidated and bank regulatory capital ratios as of September 30, 2019, continue to exceed the levels considered well-capitalized. The bank's leverage capital ratio was 10.4% at September 30, 2019, while total risk-based capital was 16.8%.
I would now like to provide some additional details regarding our loan portfolio. As I mentioned earlier, net loans outstanding as of September 30, 2019, totaled $520.1 million. Nonperforming loans, which primarily consist of loans greater than 90 days past due, totaled $5.9 million or 1.13% of gross loans as of September 30, 2019. This represents an increase 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 loans past due 30 to 89 days. The level of past-due loans between 30 and 89 days still accruing interest totaled $2.1 million or 0.40% of gross loans as of September 30, 2019. This ratio has increased slightly from 0.34% of gross loans as of December 31, 2018. We continue to monitor delinquency trends carefully in all categories.
Our balance in other real estate owned totaled $473,000 as of September 30. The other real estate owned balances are composed primarily of residential houses, which are being marketed for sale. We recorded net loan charge-offs of $486,000 during 2019, up slightly from $470,000 for 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.
Thank you for your comments, Mark. As Mark noted, net loans outstanding as of the end of the third quarter 2019 totaled $520 million, up 6.3% from our year-end 2018 total of $489 million. Compared to the third quarter of 2018, we delivered an increase of $45 million or 9.4% in net loans outstanding.
The loan growth over the past year has been boosted by the mid-year 2018 addition of a team of commercial bankers with a specialty in small business SBA lending located in our Johnson County, Kansas market. We also added another team of commercial bankers in Kansas City at the end of 2018 and in early 2019 who are located in a loan production office that opened in Prairie Village, Kansas in May.
After receiving regulatory permission, we converted the LPO to a bank branch during the third quarter of 2019. As we pursue additional loan growth, we will continue our credit risk focus of maintaining the diversified mix in the loan portfolio, both in loan types and in geography across the state.
As of September 30, 2019, our construction and land loan portfolio balances totaled $19.7 million or 3.7% of our total loan portfolio. Outstanding loan balances in our commercial real estate portfolio totaled $136 million, representing 26% of our loan portfolio. Loan balances in both the construction land and commercial real estate portfolios remain significantly below the regulatory percentage concentration thresholds that would require heightened risk management practices.
Commercial and industrial loans were $101.2 million as of September 30, 2019, or 19.2% of the current portfolio. With regard to our agricultural loan portfolio, total balances were $101 million or 19.2% of our total loan portfolio as of the end of the third quarter 2019. Our mortgage one-to-four family loan portfolio represented 26.9% of the portfolio at $141.8 million as of September 30.
While we experienced an increase in refinancing activity during the second and third quarters as a result of declining interest rates, our mortgage banking production for 2019 is approximately 70% focused on purchase money transactions versus refinances. Our pipeline of commercial and mortgage banking loan activity remains strong at this point.
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. 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 remains 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 third 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 continue to position us as well as possible 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 Instructions] Our first question comes from John Rodis of Janney.
Good morning, guys.
Good morning, John.
It was a big win for [indiscernible] the other day.
Yes, it was.
So, just turning to banking but that's – football is probably more exciting, but is – just your thoughts on the sort of the ag economy and so forth in your markets, just a quick update.
That's still pretty stressed, John. We're getting through the fall harvest, and those are – that's wrapping up really across the state. And I think that'll give us a bigger picture. We're actively engaged with our agri business clients across the state. As they finish this fall production cycle, we'll have a pretty good update and understanding as to where they're positioned.
From an overall standpoint, we –I would say that, really, our agri business clients are doing, as well as possible given the continued depressed commodity prices and such and the impact of the tariffs, but as we look forward to 2020, most of our clients are still adequately positioned from the standpoint of having adequate collateral on their balance sheets to continue to withstand the economic pressures even as we move into the next production season.
Okay. Okay. And then Mark, maybe a question or two for you just regarding the margin. If the Fed cuts rates today and potentially toward, you know in December, do you still think you can sort of keep the margin relatively stable, if not up slightly?
I do still have that feeling, John. I think as we're continuing to see some loan growth and some transitioning of our balance sheet from – between the asset mix of investments and loans, coupled with an immediate rate drop in some of our interest costs on the deposit or borrowing side, I think we can see that migrate steady to slightly up a little bit over the next few quarters.
And then just another question, Mark, just on expenses. You sort of – you talked about in your prepared remarks about higher expenses driven by the new hires and so forth, which makes sense. But for the quarter, operating expenses were $8.6 million. Is this a pretty good run rate going forward? Or do you think that could pull back a little bit if mortgage slows down too?
I think that it may come back. I think there was – I mean with the mortgage, there are some expenses that go along in the other expenses with their fees and filing fees and stuff that go along with the loan – mortgage loan area, and their expenses may come down. I think that as a comparison to prior year where we didn't have all the commercial loan teams in a year ago, now they're in, so quarter-over-quarter, that's not as much of an impact.
There was a couple of guys that joined us maybe during the second quarter, so that was a little reason for the uptick as well. But I think we should see a little bit of a decrease because that's what I'm kind of counting on and hoping to make sure happens in the fourth quarter, John. So...
Okay. And then, Mark, maybe just one final question, the tax rate you sort of see going forward or at least for the fourth quarter.
Yes. I think this tax rate's a little more indicative of where we're at as we've – some of our municipal income as a percentage has decreased. So, we don't – the tax rate goes up a little bit. Fourth quarter, I'd say historically, has been a little lower tax rate for us as we have some REIT strategies that have an accrual reversal usually after some statutes expire in the fourth quarter as you look back historically. And I think that those will happen again. But from normal operations, this is probably a little more indicative of where we'll be. I don't see it going much higher than this, I guess. I would think that we'd see a lower tax rate in the fourth quarter.
Okay, super. Thank you.
This concludes our question-and-answer session. I would now like to turn the conference back over to Michael Scheopner for any closing remarks.
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 fourth quarter 2019 results at our next earnings conference call. Thank you.