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Edited Transcript of LARK earnings conference call or presentation 1-May-19 3:00pm GMT

Q1 2019 Landmark Bancorp Inc Earnings Call

MANHATTAN May 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Landmark Bancorp Inc earnings conference call or presentation Wednesday, May 1, 2019 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. - VP, Secretary, CFO & Treasurer

* Michael E. Scheopner

Landmark Bancorp, Inc. - President, CEO & Director

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Conference Call Participants

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* John Lawrence Rodis

FIG Partners, LLC, Research Division - Senior VP & Research Analyst

* Michael Zuk

Oppenheimer & Co. Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Landmark Bancorp Quarter 1 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 CEO. Please go ahead.

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Michael E. Scheopner, Landmark Bancorp, Inc. - President, CEO & Director [2]

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Good morning. Thank you for joining our call today morning to discuss Landmark's earnings and results of operations for the first quarter ending March 31, 2019. 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 reported net earnings of $2.2 million or $0.50 per share on a fully diluted basis for the first quarter of 2019, an increase of 4% from the year earlier. The solid performance was driven by strong growth in Landmark's loan portfolio and net interest income.

The first quarter return on average assets calculates to 0.91% and return on average equity for the quarter was 9.52%. 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 May 29, 2019, to shareholders of record as of May 15, 2019. This represents the 71st consecutive quarterly cash dividend since the company's formation, resulting from the merger of Landmark Bancorp, Inc. with MNB Bancshares in October 2001.

Landmark's 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 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 strength risk and structuring the overall organizational risk profile in a way that will prepare us as well as any for any possible 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.

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Mark A. Herpich, Landmark Bancorp, Inc. - VP, Secretary, CFO & Treasurer [3]

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Thanks, Michael, and good morning to everyone. Michael mentioned our net earnings for the first quarter of 2019 were $2.2 million, a 4% increase. And now I'd like to make a few comments on the details of our March 31, 2019, financial statements.

Looking at the first quarter income statement highlights. Net interest income was $7.2 million, an increase of $602,000 or 9.1% in comparison to the prior year's first quarter. The improvements in net interest income was attributable to an increase of $48.8 million or 5.8% and average interest-earning assets to $883.0 million.

This growth was entirely attributable to loan growth as our average investment balance actually declined by $5.3 million. Net interest margin on a tax-equivalent basis also improved to 3.41% in the first quarter of 2019 as compared to 3.34% in the same period of 2018.

The net interest margin was impacted significantly by the increase in average loan balances as the yields on our interest-earning assets and short-term interest rates on deposits both increased at approximately the same rate.

Looking at our provision for loan losses, our analysis of the allowance for loan losses resulted in providing $200,000 to the allowance in both the first quarter of 2019 and 2018. Noninterest income decreased $145,000 or 4.3% to $3.3 million for the first quarter of 2019 compared to the same period of 2018.

This decline was related to decreases of $67,000 in fees and service charges and $41,000 in gains on sales of loans due to lower volumes of loans sold in the secondary market. Also contributing to the decline in the noninterest income, we had no gains on sales of investments during the first quarter of 2019 as compared to $35,000 in the first quarter of 2018.

Our first quarter noninterest expenses increased by $288,000 to $7.7 million in comparison to the first quarter of 2018, and this was primarily driven by an increase of $354,000 in compensation and benefits related, in part, to our commercial loan growth over the past 3 quarters as we added employees in this area and also to general increased compensation cost.

Income tax expense increased during the first quarter of 2019 as a result of increased pretax earnings and the recognition of $64,000 of excess tax benefits associated with the exercise of stock options during the first quarter of 2018. With no stock option exercises in the first quarter of 2019, our effective tax rate increased from 10.9% in the first quarter of 2018 to 13.5% in the first quarter of 2019.

To touch on a few balance sheet highlights. Total assets decreased $4.8 million to $981 million at March 31, 2019, compared to $985.8 million at December 31, 2018. Our loan portfolio increased $1.3 million during this quarter to $490.7 million at March 31, 2019, from $489.4 million at year-end 2018.

Investment securities decreased $2.7 million to $390.4 million at March 31, 2019, from $393.1 million at December 31, 2018. Deposits decreased $1.8 million to $821.8 million at March 31, 2019, compared to $823.6 million at year-end 2018.

Stockholders' equity increased to $96.8 million at March 31, 2019, with a book value of $22.15 per share compared to $91.9 million at December 31, 2018, which equated to a book value of $21.02 per share.

Our consolidated and bank regulatory capital ratios as of March 31, 2019, continue to exceed the levels considered well-capitalized. The bank's leverage capital ratio was 10.3 at March 31, 2019, while the total risk-based capital ratio was 17.3%.

I would now like to provide some additional details regarding our loan portfolio. As I mentioned earlier, our net loans outstanding as of March 31, 2019, totaled $490.7 million. Nonaccrual loans, which primarily consist of loans greater than 90 days past due, totaled $6.7 million or 1.35% of gross loans as of March 31, 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 $2.2 million or 0.45% of gross loans as of March 31, 2019.

This ratio has increased slightly from 0.34% of gross loans as of December 31, 2018. And we continue to monitor delinquency trends carefully in all loan categories. Our balance and other assets and real estate owned totaled $54,000 as of March 31. The other real estate owned balances are composed of residential houses, which are being marketed for sale.

We recorded net loan charge-offs of $27,000 during 2019, up from $15,000 for the same period in 2018. I will now turn the call back over to Michael to review our loan portfolio of segments and the credit risk outlook for the company.

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Michael E. Scheopner, Landmark Bancorp, Inc. - President, CEO & Director [4]

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Thanks for your comments, Mark. As Mark noted, net loans outstanding as of the end of the first quarter 2019 totaled $491 million, up slightly from our year-end 2018 total. Compared to the first quarter of 2018, we delivered an increase of $54 million or 12.6% in net loans outstanding.

The loan growth over the past year 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 in 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 will be housed in a loan production office that we are opening in Prairie Village during the second quarter of 2019.

As we pursue additional loan growth in 2019, 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 March 31, 2019, our construction and land loan portfolio balances totaled $18.4 million or 3.7% of our total loan portfolio.

Outstanding loan balances in the commercial real estate portfolio totaled $141 million, representing 28.4% of our total loan portfolio. The 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 $79.1 million as of the end of the quarter or 15.9% of the current portfolio. With regard to the agricultural loan portfolio, total balances were $94.9 million or 19.1% of our total loan portfolio as of the end of the first quarter 2019.

Our mortgage one-to-four family loan portfolio represented 27.4% of the portfolio and $135.9 million as of March 31, 2019. Our mortgage banking production continues to focus on purchase lending transactions versus refinancing.

Our current pipeline of commercial and mortgage banking loan activity remains strong, and I anticipate additional loan growth as we progress through 2019. Our team focuses on recruiting client relationships that meet our credit portfolio standards rather than trying to buy transactions through loan price for credit 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 restructuring 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, we are committed to growing our customer relationships and begin to diverse financially with 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 first quarter of 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 well for long-term organic or acquisitive growth. I anticipate our trend of solid earnings to continue.

With that, I will 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) And the first question comes from John Rodis from FIG Partners.

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John Lawrence Rodis, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [2]

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I guess first off, just the increase in nonperformers. In the press release, you said various loans and the largest was an ag credit. Can you provide any more detail just on, I guess, the ag loan and any of the other loans? And then just sort of your thoughts on the ag industry in general.

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Michael E. Scheopner, Landmark Bancorp, Inc. - President, CEO & Director [3]

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Sure. Thanks, John. With respect to the one agri business relationship that bumped up our nonaccruals as of the end of the quarter, it's very well-secured and collateralized loan. It's just been an issue with really timing and some communication issues with the borrower that we believe are being addressed during the second quarter, and we would expect that to really resolve itself during this time period without any exposure to the bank. I think the general ag conditions, John, remain in an economically stressed condition at this point in time. We've enjoyed some decent moisture in Kansas through the winter. And so we expect from a proxy endpoint, we'll see good production levels, but just the overall commodity pricing structure still remains stressed. And so -- and we're just continuing to actively work with our agri business customers and get through the cycle.

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John Lawrence Rodis, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [4]

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Michael, even though the industry is sort of stressed, I mean, in general, you still feel good about your overall portfolio, though, of bank loans?

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Michael E. Scheopner, Landmark Bancorp, Inc. - President, CEO & Director [5]

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I really do, John. We've been very proactive in working with our borrowers in -- from the standpoint of managing their balance sheets and such through the cycle, I really do feel good about where we're positioned.

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John Lawrence Rodis, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [6]

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Okay. And then I guess just a question on loan growth, so typically it looks like the first quarter is sort of seasonally weak for you. And you put up very strong growth last year, 12%, 13%. Do you think you can duplicate last year's growth? Or do you think it's probably maybe high single digits? Or how should we think about that?

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Michael E. Scheopner, Landmark Bancorp, Inc. - President, CEO & Director [7]

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Well, the -- really, as we've added the additional commercial bankers in the Kansas City Metro area at the end of the year, we expect their impact to be demonstrated during 2019. So I would say that with -- if we replicated the percentage growth that we saw last year that, that would be the metric we're kind of shooting for, John.

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John Lawrence Rodis, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [8]

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Okay. So low double digits or something probably?

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Michael E. Scheopner, Landmark Bancorp, Inc. - President, CEO & Director [9]

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High single, but very low double.

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John Lawrence Rodis, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [10]

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Okay. Okay. And Mark, maybe just a question for you on the margin. How do you sort of see that given the current rate environment and the fact that the Feds on hold may be who knows what, but do you think you can sort of hold the margins steady with the loan growth and I guess transitioning into higher-yielding loans?

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Mark A. Herpich, Landmark Bancorp, Inc. - VP, Secretary, CFO & Treasurer [11]

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I do, John. I think the -- as we saw a little bit in the first quarter here with the increase. I think the loan growth that we see and are expecting we're kind of hoping that we can hold to -- hold it steady to slightly increasing on the net interest margin line at this point. As we transition, it's going to be aided a little bit by transitioning out of some maybe investment securities into loan growth to obtain those higher yields.

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John Lawrence Rodis, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [12]

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Okay. Fair enough. And Michael, just maybe one last question for you. Just on the M&A environment as you see it right now.

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Michael E. Scheopner, Landmark Bancorp, Inc. - President, CEO & Director [13]

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We're still actively pursuing opportunities. Just haven't been able to find the right one at this point in time, John. I think the -- as far as the level of activity, I would say it is still strong in our footprint and we'll continue to look forward and pursue opportunities that we believe will be positive from a franchise value perspective.

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John Lawrence Rodis, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [14]

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What about the potential for any new lending teams or new lenders? Anything in the near term?

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Michael E. Scheopner, Landmark Bancorp, Inc. - President, CEO & Director [15]

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Nothing in the near term at this point, John. I mean that's really -- I mean, we talked about the traditional acquisition strategy briefly. That was really our acquisition strategy in 2018 -- was to pursue a couple of teams of lenders, and we're successful in doing that. And -- but in the near term, I don't anticipate that you'll see something on the near term with respect to that.

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John Lawrence Rodis, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [16]

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As far as new lenders and stuff?

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Michael E. Scheopner, Landmark Bancorp, Inc. - President, CEO & Director [17]

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As far as new lenders, yes.

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Operator [18]

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The next question comes from Michael Zuk from Oppenheimer.

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Michael Zuk, Oppenheimer & Co. Inc., Research Division - Research Analyst [19]

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I have a question regarding the SBA lending. What's the size of your SBA portfolio right now? Hello?

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Michael E. Scheopner, Landmark Bancorp, Inc. - President, CEO & Director [20]

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Yes, we're here. Mark and I are comparing notes. I mean we're -- from a total SBA portfolio standpoint, it's somewhere in the neighborhood of $10 billion to $12 million in total outstandings. The team that we acquired in mid-2018, the growth we've enjoyed there has been really more weighted on conventional than SBA lending.

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Michael Zuk, Oppenheimer & Co. Inc., Research Division - Research Analyst [21]

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And going forward, are you going to continue to pursue SBA loans? Are you going to maintain your current effort or...

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Michael E. Scheopner, Landmark Bancorp, Inc. - President, CEO & Director [22]

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I mean I believe having the SBA product as a -- as something that we can offer to clients across really all of our geographies is a positive thing. From a strategy standpoint, we're not pursuing loans that are outside of our credit risk disciplines. When it's appropriate, adding that SBA guarantee as a part of the underwriting process is something that we will pursue. But from a risk discipline or from a concentration standpoint, Michael, I don't believe that you'll see anything that's materially different than what we've done in the past.

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Michael Zuk, Oppenheimer & Co. Inc., Research Division - Research Analyst [23]

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And do you hold the SBA loans? Or do you sell off the guaranteed portion?

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Michael E. Scheopner, Landmark Bancorp, Inc. - President, CEO & Director [24]

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We hold the loans and portfolio.

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Michael Zuk, Oppenheimer & Co. Inc., Research Division - Research Analyst [25]

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Okay. And then with regard to your loan-loss provision, it seems to me it's a little bit low considering the amount of loans that you have and the fact that you have so many nonrecurring loans over 90 days, and it looks like the 30 to 90 day -- or 89-day category is increasing a little bit. How do you feel about the adequacy of the reserves? Shouldn't it be a little higher?

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Michael E. Scheopner, Landmark Bancorp, Inc. - President, CEO & Director [26]

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Well, we will feel pretty good about our analysis of the allowance at this point in time, Michael. The balance represents about 1.2% of gross loans. But from a historic loss standpoint, we've had very limited historical losses and a slight bump up that we saw on accruals during the first quarter, we really do expect that should remedy itself in this first quarter based upon a couple of -- based upon relationship I referenced earlier, so...

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Michael Zuk, Oppenheimer & Co. Inc., Research Division - Research Analyst [27]

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So we should wait and see how the -- and what's the size of the large ag loans that should write itself for the quarter?

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Michael E. Scheopner, Landmark Bancorp, Inc. - President, CEO & Director [28]

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It's just under $1 million.

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Michael Zuk, Oppenheimer & Co. Inc., Research Division - Research Analyst [29]

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So if we back that out, that we can get -- what would you consider a more accurate number going forward?

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Michael E. Scheopner, Landmark Bancorp, Inc. - President, CEO & Director [30]

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I think that'd be fair.

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Operator [31]

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The next question comes from John Rodis from FIG Partners.

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John Lawrence Rodis, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [32]

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Mark, I just had one follow-up question on the tax rate. It's sort of bumped up this quarter, 13.5% effective. What sort of tax rate do you think is a good rate going forward?

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Mark A. Herpich, Landmark Bancorp, Inc. - VP, Secretary, CFO & Treasurer [33]

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I think the 13% rate is probably more appropriate for us, John. The earnings level, as I've mentioned in the call is a little bit impacted last year about a significant number of stock options that get exercised that have some tax implications. And we don't have blocks like that coming up in the -- that are in near maturity or anything or expiration this year. So it's a long question to say that I think 13% is probably about right.

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John Lawrence Rodis, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [34]

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Okay. And guys just maybe just one other question, I guess, just following up on the last question on credit. Any thoughts on CECL today? Or is it still too early?

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Michael E. Scheopner, Landmark Bancorp, Inc. - President, CEO & Director [35]

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Well, we're actively modeling and really we think we're positioned fairly well, John, from the standpoint of being prepared when the timing is -- when we're required from a timing standpoint. Actively working with not only our regulator but also our independent auditor to make sure that we're all in the same page with respect to the path we're headed on.

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Mark A. Herpich, Landmark Bancorp, Inc. - VP, Secretary, CFO & Treasurer [36]

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I think we're well underway and feel pretty good about where we are out in the CECL implementation. I think we made a lot of progress last year from getting the groundwork laid. And as recent as yesterday, we had an hour call with our co-independent auditors, just making sure they're ready to start testing our -- and reviewing our models here during the interim period of 2019.

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John Lawrence Rodis, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [37]

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Okay. So you'll have more details maybe in another quarter or 2, I guess, fair to say?

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Mark A. Herpich, Landmark Bancorp, Inc. - VP, Secretary, CFO & Treasurer [38]

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Yes, we probably -- we may not have disclosures until the third quarter potentially, with giving guidance on any changes. But at this point in time, we don't see any material changes, I guess, from our current methodology as we convert to the CECL.

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Operator [39]

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(Operator Instructions) Our next question comes from Michael Zuk of Oppenheimer.

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Michael Zuk, Oppenheimer & Co. Inc., Research Division - Research Analyst [40]

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A follow-up. What's your strategy right now with branch rationalization, transitioning from brick-and-mortar to more Internet and technology-based banking services? Do you have a plan in place? And are you a happy with your current branch situation? Or are there branches that could be rationalized?

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Michael E. Scheopner, Landmark Bancorp, Inc. - President, CEO & Director [41]

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We review that on a routine basis from a branch rationalization standpoint. At this point, we don't have any plans from a -- based on our current modeling to make any adjustments in our network. From a digital platform strategy, I mean, we actively evaluate that on an ongoing basis. We've got a project team that's currently in place working with our core provider to make sure that from a strategy standpoint, we maintain a competitive presence in the digital space. We're in the process of an upgrade here in the second quarter on our business online banking platform. And so from a -- from an activity standpoint, Michael, it's something that we actively manage as part of our overall delivery of service strategies.

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Michael Zuk, Oppenheimer & Co. Inc., Research Division - Research Analyst [42]

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And it looks like the banking world is transitioning to digital transactions and digital services. I'm just curious as to the methodology you're going to employ to take advantage of that. I mean young people don't particularly utilize branches anymore.

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Michael E. Scheopner, Landmark Bancorp, Inc. - President, CEO & Director [43]

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Right. And we've got again both our retail and business online banking and digital platforms are -- I've been calling them somewhat robust from the standpoint of offering the products that are appropriate from a digital strategy standpoint. I mean we have, to my knowledge, from a product standpoint and listening to our younger clients, we're not missing any specific product or service at this point.

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Michael Zuk, Oppenheimer & Co. Inc., Research Division - Research Analyst [44]

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And then one final question, what is your effort, if any, in originating home mortgages? And when you originate mortgages, do you retain or do you sell?

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Michael E. Scheopner, Landmark Bancorp, Inc. - President, CEO & Director [45]

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Yes, we have a very strong mortgage origination platform and presence really in the state of Kansas. On an annual basis, we'll generate something in the neighborhood of $200 million in one-to-four family originations at an average unit size and about $140,000 a unit. We have purchased money penetration in excess of 85% of the volume. So as long as consumers and clients are buying homes in the state of Kansas, we'll continue to see recurring revenue from gain on sale based upon our market share in the markets in which we do business.

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Michael Zuk, Oppenheimer & Co. Inc., Research Division - Research Analyst [46]

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And how is that pipeline evolving going into the second quarter? Is it growing slightly or level or declining?

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Michael E. Scheopner, Landmark Bancorp, Inc. - President, CEO & Director [47]

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We actually have winter in the first quarter here in -- so it didn't mute the volumes just a little bit in the first quarter, but we're seeing strong pipeline since we're moving into the second quarter of the year and a little pent-up demand across the state. And I think maybe you asked about whether or not we retain or sell the servicing. We do a combination of both. We've got a -- just over 0.5 billion asset -- $0.5 billion in mortgage assets that we service on the books and really from a client standpoint, we offer them servicing retained or servicing released, but everything we do is investor-grade.

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Operator [48]

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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. - President, CEO & Director [49]

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Thank you. And I do want to thank everyone for participating in today's call -- today's earnings call, and I appreciate the questions and interest in the company. Also appreciate your continued support and confidence in Landmark, and I look forward to sharing news related to our second quarter 2019 results at our next earnings conference call. Thank you.

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Operator [50]

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This concludes our conference. Thank you for attending today's presentation. You may now disconnect, and have a good day.