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Edited Transcript of LARK earnings conference call or presentation 27-Apr-17 3:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Landmark Bancorp Inc Earnings Call

MANHATTAN May 3, 2017 (Thomson StreetEvents) -- Edited Transcript of Landmark Bancorp Inc earnings conference call or presentation Thursday, April 27, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mark A. Herpich

Landmark Bancorp, Inc. - CFO, VP, Treasurer, Secretary, CFO of Landmark National Bank, EVP of Landmark National Bank and Secretary of Landmark National Bank

* Michael E. Scheopner

Landmark Bancorp, Inc. - CEO, President, Director, CEO of Landmark National Bank, President of Landmark National Bank and Director of Landmark National Bank

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Conference Call Participants

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* Justin Eun

FIG Partners, LLC, Research Division - Associate

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Presentation

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Operator [1]

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Good day, and welcome to the Landmark Bancorp Q1 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would like to turn the conference over to Michael Scheopner, President and Chief Executive Officer. Please go ahead.

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Michael E. Scheopner, Landmark Bancorp, Inc. - CEO, President, Director, CEO of Landmark National Bank, President of Landmark National Bank and Director of Landmark National Bank [2]

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Thank you, and good morning. I appreciate everyone taking the time today to join us to discuss Landmark's earnings and results of operations for the first quarter ending March 31, 2017.

Joining the call with me today to discuss various aspects of our first 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've reported net earnings of $2.2 million or $0.56 per share on a fully diluted basis for the first quarter 2017.

The first quarter 2017 return on average assets calculates to 0.98%. The company's return on average equity for the quarter was 10.46%. Mark will provide additional detail on Landmark's financial performance and asset quality metrics later in the call.

As I look at how Landmark is positioned as we move into 2017, from a big picture perspective, we are financially very strong. We're very well capitalized. We have excellent credit quality in our loan portfolio, and the company continues to deliver good performance on ROA and ROE.

I'm pleased to report that our Board of Directors has declared a cash dividend of $0.20 per share to be paid May 24, 2017, to shareholders of record as of May 10, 2017. This represents the 63rd consecutive cash quarterly dividend since the company's formation, resulting from the merger of Landmark Bancorp Inc. with MNB Bancshares, Inc. in October 2001.

Our first quarter performance continues our trend of strong earnings, and this success is a credit to the continued efforts of our associates throughout the organization. We 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 unperceived 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.

I will now turn the call over to Mark Herpich, our CFO, who will review the financial results and several asset quality indicators with you.

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Mark A. Herpich, Landmark Bancorp, Inc. - CFO, VP, Treasurer, Secretary, CFO of Landmark National Bank, EVP of Landmark National Bank and Secretary of Landmark National Bank [3]

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Thanks, Michael, and good morning to everyone. As Michael has already summarized our earnings for the first quarter of 2017, I would like to make a few comments on various elements comprising those results.

While our 2017 first quarter net earnings of $2.2 million were lower than the first quarter of 2016's net income of $2.4 million, earnings remained solid as evidenced by achieving a 0.98% return on average assets. The lower comparison for 2017's earnings versus 2016 related primarily to the reduced gains on sales of loans in 2017 resulting from the departure of a few mortgage lenders during the first few months of 2016.

Looking at the first quarter income statement highlights. Net interest income was $6.4 million, a decrease of $36,000 or 0.6% in comparison to the prior year's first quarter. The slight decline in net interest income was attributable to lower yields on loans and higher rates on interest-bearing deposits and borrowings, which resulted in a decline in our net interest margin from 3.47% in the first quarter of 2016 to 3.38% in the same period of 2017.

Partially offsetting the net interest margin decline was a $30.9 million or 3.9% increase in average interest-earning assets to $822.9 million in comparison to the prior year's first quarter period.

Looking at our provision for loan losses. Our analysis of the allowance for loan losses resulted in providing $50,000 to the allowance in both the first quarter of 2017 and 2016. Net interest income decreased $253,000 to $3.6 million for the first quarter of 2017, down 6.5% as compared to the same period of 2016.

The decrease was primarily related to a $405,000 decline in gains on sales of loans. The volume of mortgage loans sold and originated for sale declined in the period as a result of the departure of several mortgage lenders as previously discussed.

Partially offsetting the impact of the reduced gain on sale of loans, our gain on sales investments was $147,000 during the first quarter of 2017 as compared to a gain of $12,000 in the same period a year earlier.

Our first quarter noninterest expenses declined by $101,000 to $7.1 million or 1.4% on a linked-quarter basis. The decline related primarily to decreased volumes of one-to-four family residential real estate loans originated for sale in the first quarter of 2017 as compared to the same period of 2016 resulting in reduced compensation and benefits expense and other noninterest expense.

A $38,000 reduction in federal deposits insurance premiums also contributed to the decline in noninterest expense. The effective tax rate increased from 22.5% in the first quarter of 2016 to 23.9% in the first quarter of 2017, primarily as a result of a decrease in excess tax benefits from the exercise of stock options from $116,000 in the first quarter of 2016 to $12,000 in first quarter of 2017. Income tax expense was recast for the first quarter of 2016 to reflect the early adoption of Accounting Standards Update 2016-09 Stock Compensation.

To touch on a few balance sheet highlights, our total assets increased $11.6 million to $923.0 million at March 31, 2017, compared to $911.4 million at December 31, 2016. Our loan portfolio decreased $2.5 million during the quarter to $418 million at March 31, 2017, from $420.5 million at December 31, 2016.

Investment securities increased $11.3 million to $402.2 million at March 31, 2017, from $390.9 million at December 31, 2016. Stockholders' equity increased by 2% to $86.7 million at March 31, 2017, a book value of $22.40 per share, compared to $85.0 million at December 31, 2016, or a book value of $21.96 per share.

Our consolidated and bank regulatory capital ratios as of March 31, 2016, continue to exceed the levels considered well capitalized. The bank's leverage capital ratio was 10.0% at March 31, 2017, while the total risk-based capital ratio was 18.4%. Both capital ratios continued to improve over 2016 reinforcing our strong financial position.

I would now like to provide some additional details regarding our loan portfolio. Net loans outstanding as of March 31, 2017, totaled $418.0 million. This is a small decline from our net loan total of $420.5 million at December 31, 2016. Nonaccrual loans, which consists primarily of loans greater than 90 days past due totaled $2.7 million or 0.63% of gross loans as of March 31, 2017.

These totals are essentially flat compared to year-end 2016 comparing to a level of 0.64% as of year-end 2016. 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 our 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 March 31, 2017, totaled $1.4 million or 0.32% of gross loans. This is an increase of -- excuse me, this is an increase from 0.18% of gross loans as of December 31, 2016.

We continue to monitor delinquency trends carefully in all loan categories. Our balance in other assets and other real estate owned totaled $1.0 million as of March 31, a decline from $1.3 million at year-end 2016. The other real estate owned balances are primarily comprised of residential housing properties. We continue to market for sale all properties held in real estate owned.

We recorded net loan charge-offs of $67,000 during the first quarter of 2017. This compares to net loan charge-offs of $103,000 for the same period of -- in 2016.

I'll now turn the call back over to Michael to review our loan portfolio segments and the credit risk outlook.

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Michael E. Scheopner, Landmark Bancorp, Inc. - CEO, President, Director, CEO of Landmark National Bank, President of Landmark National Bank and Director of Landmark National Bank [4]

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Thank you for your comments, Mark. And as Mark said, I'll add a couple of additional comments regarding our loan portfolio and credit conditions in our franchise footprint.

We continue to maintain a diversified mix in the loan portfolio, both in loan types and in geography across the State of Kansas. On a consolidated basis, Landmark's gross loan portfolio totaled approximately $423.4 million as of the end of the first quarter 2017.

In terms of exposure to credit concentrations, we continue to focus on portfolio management of commercial real estate and construction and land relationships. Recent regulatory guidance stresses increased emphasis on these portfolio categories.

As part of our comprehensive credit risk management process, we also review construction and land and commercial real estate for loan type and geographic concentration issues on a quarterly basis. As of March 31, 2017, our construction and land loan portfolio balances totaled $16.3 million or 3.9% of our total loan portfolio.

Outstanding loan balances in our commercial real estate portfolio totaled $114.8 million, representing 27.1% of our total loan portfolio. Landmark's loan portfolio in the construction and land category as of March 31, 2017, totaled 17.2% of risk-based capital, 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 at 138.4% of risk-based capital, which is far below the 300% regulatory guideline in that category.

The mortgage one-to-four family loan portfolio represents just over 32% of the portfolio at $137.3 million for March 31, 2017, compared to $136.8 million as of year-end 2016. The broader residential real estate economy across Kansas continues to show stable to brisk sales activities for the past few quarters with tight market supply of inventory in most markets.

The performance of this segment of our portfolio continues to be strong to-date with low levels of delinquency and limited collection issues. With regard to our agricultural loan portfolio, total balances were $76.1 million or at 18% of our total loan portfolio as of March 31, 2017.

The quarter-end balance represents a small decline of $2.2 million compared to the December 31, 2016, total. This is the second consecutive quarter of moderately declining balances, which suggests some paydown from fall agricultural activity across the state. The total does represent growth from a total of $71 million as of the year-end 2015.

The growth has come from expansion of our ag portfolio base in both Southeast and Southwest Kansas as well as decelerating repayment rates from ag borrowers impacted by lower commodity prices. The agricultural outlook continues to be challenging driven primarily by depressed commodity prices. Continued weakness in commodity prices or further deterioration through the next harvest cycle may pose additional challenges for ag borrowers.

Livestock feeders continue to operate with margin pressure. Operating costs are lower, but not in proportion to declines in commodity prices. Farmland prices have shown declines in the past few quarters across Kansas. Those declines have been more prevalent in certain geographic pockets across the state.

Our exposure in the farmland lending segment remains limited as the majority of our agricultural loans continue to be tied to the production cycle. We are operating with increased scrutiny on our agricultural loan portfolio as that sector enters its most challenging environment in the past several years.

We've identified borrowers who are subject to increased risk in this segment of the portfolio through an intentional risk assessment of the portfolio during the fourth quarter of 2016 and first quarter of 2017, and we'll continue to monitor trends closely throughout the spring cycle.

Our agricultural lending staff is made up of some of the most seasoned and qualified ag bankers in the state, most of whom have experienced multiple downward cycles in this sector.

Commercial land industrial loans were $54.1 million as of March 31, 2017, just under 13% of the current portfolio. This represents a slight decline from the year-end total of $54.5 million. The current macroeconomic landscape in Kansas remains stable. While we are operating at a high level of caution related to the agricultural loan portfolio, the residential real estate market remains good in our larger markets and commercial borrowers are, by and large, operating profitably.

Our commercial banking staff is highly focused on recruiting and expanding high-quality banking relationships and have set high expectations for themselves in 2017. We will continue to carefully monitor the many risk factors impacting our credit portfolio going forward, and we'll remain diligent and disciplined in applying the same disciplined underwriting and risk management practices that have supported our continued profitability these past several years.

Before we go to questions today, I want to summarize by saying that we are pleased with Landmark's operating results for the first quarter 2017. These results continue a trend of strong earnings across all of our community banking lines of business. I believe that the company's risk management practices and capital strength continue to position us well for long-term growth, and I anticipate our trend of solid earnings to continue in 2017.

With that, I'll open the call up to questions that anyone might have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from of Justin Eun of FIG Partners.

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Justin Eun, FIG Partners, LLC, Research Division - Associate [2]

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So my only question -- or actually I have 2 questions. First is what are the opportunities you guys see as far as M&A opportunity?

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Michael E. Scheopner, Landmark Bancorp, Inc. - CEO, President, Director, CEO of Landmark National Bank, President of Landmark National Bank and Director of Landmark National Bank [3]

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Okay. Obviously, we continue to review and pursue attractive M&A opportunities in the State of Kansas. We are still in excess of 230 bank charters located in Kansas, and I expect consolidation in that landscape will continue in the next several years. While we've been actively looking for the right fit, we have yet to find anything that we can speak about publicly. But our efforts related to M&A activity will continue. Our history with respect to acquisitive growth has -- we've demonstrated a history of being able to do that in a manner that's accretive to our shareholders and in the long run inherits(inaudible) the shareholder value and will remain consistent with those disciplines.

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Justin Eun, FIG Partners, LLC, Research Division - Associate [4]

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All right. And the second question, can we get some more color on the NPAs as a percentage of the agricultural loans and the indirect exposures loan?

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Mark A. Herpich, Landmark Bancorp, Inc. - CFO, VP, Treasurer, Secretary, CFO of Landmark National Bank, EVP of Landmark National Bank and Secretary of Landmark National Bank [5]

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We've got limited to no indirect exposure relative to ag industry. I mean, it would be mostly tangential to the service industries and the communities in which we have ag concentrations in Southwest and Southeast Kansas. Generally, overall, our historic losses in the ag loan portfolio have been negligible. And when we look at the current stresses that our ag borrowers are facing, one of the things that we've been disciplined about is making sure that during the good years, our agribusiness borrowers are disciplined in utilizing their own cash to fund operations and to build liquidity in their balance sheets and they better be(inaudible) tougher cycles. We have been able to work with those agribusiness customers to utilize the leverage that they have in their balance sheets so that they can either reposition that or be positioned to the best possible to sustain prolonged cycles. So from a metric standpoint, I'd say -- from an overall -- just percentage standpoint, it's a pretty limited exposure that we've got in that ag portfolio.

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Michael E. Scheopner, Landmark Bancorp, Inc. - CEO, President, Director, CEO of Landmark National Bank, President of Landmark National Bank and Director of Landmark National Bank [6]

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If you look at our nonaccrual ratios at the nonperforming assets category, I mean, it must change during the first quarter. But in our 10-K, it would have shown we had about 31% of our $2.7 million non-accruals in ag loans. The percentage or the 2(inaudible) borrowers in that category really haven't changed since December 31.

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Operator [7]

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(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Michael Scheopner for any closing remarks.

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Michael E. Scheopner, Landmark Bancorp, Inc. - CEO, President, Director, CEO of Landmark National Bank, President of Landmark National Bank and Director of Landmark National Bank [8]

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Thank you. And I want to thank everyone for taking the time to participate in today's earnings call. I truly appreciate your continued support and the confidence that you have in our company. And I look forward to sharing news related to our second quarter 2017 results at our next earnings conference call. Thank you.

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Operator [9]

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