Landmark Bancorp, Inc.
Q2 2017 Earnings Call Transcript

Published: 6 Aug 2017

[Operator:]

Good morning and welcome to the Landmark Bancorp Second Quarter Earnings 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 turn the conference over to Michael Scheopner, Chief Executive Officer and President.

[Michael Scheopner:]

Thank you and good morning. I appreciate you joining our call today to discuss Landmark's earnings and results of operations for the second quarter and year-to-date 2017. Joining the call with me today to discuss various aspects of our second quarter and year-to-date 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 to 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 $2.4 million or $0.60 per share on a fully diluted basis for the second quarter of 2017. Year-to-date, Landmark's net earnings totaled $4.6 million or $1.16 per diluted share. The year-to-date 2017 return on average assets calculates to 1.01%. The company's return on average equity year-to-date was 10.62%. 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. The company continues to deliver good performance on ROA and ROE. Mark will provide additional detail on Landmark's financial performance and asset quality metrics later in the call. I'm pleased to report that our board of directors has declared a cash dividend of $0.20 per share to be paid August 30, 2017 to shareholders of record as of August 16, 2017. This represents the 64th consecutive quarterly cash dividend since the company's formation resulting from the merger of Landmark Bancorp Inc. with MNB Bancshares Inc. in October 2001. Our second 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 for you.

[Mark Herpich:]

Thanks Michael, and good morning to everyone. Michael has already summarized our earnings for the second quarter of six months ended June 30, 2017. I would like to make a few comments on various elements comprising those results. Starting with the second quarter income statement highlights, net interest income was $6.6 million or an increase of $14,000 or 0. 2% in comparison to the prior year second quarter. This slight improvement in net interest income was attributable to a $16.2 million or 2% increase in our average interest earning assets to $831.3 million in comparison to the prior year second quarter period. Lower average loan balances and higher rates on interest-bearing deposits resulted in a decline in our net interest margin from 3.46% in the second quarter of 2016 to 3.41% in the same period of 2017. Looking at our provision for loan losses, our analysis of the allowance for loan losses resulted in providing $100,000 to the allowance in the second quarter of 2017 as compared to $300,000 in the second quarter of 2016. The lower provision relates to a corresponding reduction in our level of net charge-offs of $101,000 during the second quarter of 2017 versus $517,000 during the second quarter of 2016. Non-interest income increased $240,000 to $4.2 million for the second quarter of 2017, up 6.1% as compared to the same period 2016. The increase was primarily related to $287,000 improvement in gains on sale of loans. Partially offsetting the impact of the reduced gains on sales of loans, our gains on sale of investments were $177,000 during the second quarter of 2017 as compared to a gain of $285,000 in the same period a year earlier. Our second quarter of non-interest expenses increased by $328,000 to $7.5 million or 4.6% on a linked-quarter basis. The increase relates primarily to increases in professional fees of $194,000 in compensation of benefits expense of $141,000. The increased professional fees were driven by costs associated with forming a captive insurance subsidiary to enhance the bank's risk management strategy and by additional audit related costs associated with an audit of our internal controls over financial reporting, which will be required for 2017 as a result of exceeding the market capitalization threshold at June 30, 2017. The increase in compensation and benefits related to increased salaries and stock-based compensation, partially offsetting these increases was a $37,000 reduction in Federal Deposit Insurance premiums. Our effective tax rate increased from 22.4% in the second quarter of 2016% to 23.7% in the second quarter of 2017, primarily as a result of a decrease in excess tax benefits from the exercise of stock options from $81,000 in the second quarter of 2016 to $13,000 in the second quarter of 2017. Income tax expense was recast for the second quarter of 2016 to reflect the early adoption of accounting standards update 2016-09 stock compensation. Moving on to discuss some financial highlights for the first half of 2017. While our net earnings of $4.6 million were lower than the $4.7 million in the first six months of 2016, earnings remain solid as evidenced by achieving 1.01% return on average asset. A lower comparison versus 2016 related primarily to a slightly higher effective tax rate in the first half of 2017 and pretax earnings were only lower by $62,000. The first half of 2017 similar to my quarterly comment, we experienced a decrease in net interest margin from a year earlier, declining from 3.47% to 3.41% on a tax equivalent basis. Our average interest earning assets increased 2.9% from $803.5 million during the first six months of 2016 to $827.1 million during 2017. A combination of these two changes, our net interest income decreased $22,000 to $12.9 million for the first half of 2017, a decrease of 0.2% compared to the same period of 2016. During the first six months of 2017, we provided a $150,000 to the allowance as compared to $350,000 in the first half of 2016. Lower provision relates to a corresponding reduction in our level of net charge-offs of $168,000 during the first six months of 2017 versus $620,000 during the first half of 2016. Non-interest income totaled $7.8 million for the first six months of 2017, a decrease of $13,000 or 0.2% from the prior year period. This decrease results primarily from a decline of $118,000 in gains on sales of loans due to lower volumes of loan sold in the secondary market, partially offsetting this reduction were $324,000 of gains on sales of investment securities during the first half of 2017 as compared to $297,000 of gains on sales of investment securities during the first six months of 2016. Looking at non-interest expense, we reported an increase of 1.6% or $227,000 for the first six months 2017 in comparison to the same period of 2016. Consistent with my quarterly comments, this increase relates to a $265,000 increase in professional fees and a $97,000 increase in compensation and benefits expense. Partially offsetting these increased expense categories was a decrease of $75,000 in Federal Deposit Insurance premiums. Effective tax rate increased from 22.4% in the first half of 2016 to 23.8% in the first six months of 2017, primarily as a result of a decrease in excess tax benefits from the exercise of stock options of $197,000 in the first half of 2016 to only $24,000 in the same period of 2017. Income tax expense was recast for the six months ended June 30, 2016 to reflect the early adoption of accounting standards update 2016-09 stock compensation. Just on a few balance sheet highlights, our total assets decreased $583,000 to $910.8 million at June 30, 2017, compared to $911.4 million at December 31, 2016. Our loan portfolio increased $2.3 million during the first six months to $422.7 million at June 30, 2017 from $420.5 million at December 31, 2016. Investment securities increased $4.3 million to $395.2 million at June 30, 2017 from $390.9 million at December 31, 2016. Stockholders' equity increased by 7.1% to $91.0 million at June 30, 2017 or a book value of $23.52 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 June 30, 2017 continue to exceed the levels considered well capitalized. Bank's leverage capital ratio was 10.08% at June 30th, while the total risk-based capital ratio was 18.8%. Both capital ratios continue to improve over 2017, reinforcing our strong financial position. I would now like to provide some additional details regarding our loan portfolio. Net loans outstanding as of June 30, 2017 totaled $423 million. This represents a slight increase from our net loan total of $420 million on December 31. Nonaccrual loans, which primarily consist of loans greater than 90 days past due totaled $2.5 million or 0.59% of gross loan as of June 30, 2017, staying essentially flat from the year-end 2016 level of 0.64%. 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. Level of past due loans between 30 and 89 days still accruing interest as of June 30, 2017 totaled $4.3 million or 1.0% of gross loans. This is an increase from 0.18% of gross loans as of December 31, 2016 and is primarily attributable to one past due credit relationship. We continue to monitor delinquency trend categories in all loan categories. Our balance in other asset real estate owned totaled $1.0 million as of June 30, a decline from $1.3 million at year-end 2016. The other real estate owned balances are primarily comprised of residential housing and commercial real estate properties. We continue to market for sale all property sales in real estate owned. We recorded net loan charge-offs of $168,000 during the first half of 2017. This is down from $620,000 for the same period of 2016. I will now turn the call back over to Michael to review our loan portfolio segments in the credit risk outlook.

[Michael Scheopner:]

Mark, thank you for your comments. We continue to maintain a diversified mix in the loan portfolio, both in loan types and in geography across the state. In terms of exposure to credit concentrations, we continue to focus on our portfolio management of commercial real estate and construction and land relationships. Recent regulatory guidance has emphasized increased importance of monitoring these portfolio categories. As part of our comprehensive credit risk management process, we reviewed construction land and the commercial real estate on a quarterly basis for both loan type and geographic concentration issues. As of June 30, 2017, our construction and land loan portfolio balances totaled $16.6 million or 3.9% of our total loan portfolio. Outstanding loan balances in our commercial real estate portfolio totaled $116.6 million, representing 27.2% of our total loan portfolio. Landmark's loan portfolio in the construction land category as of June 30, 2017 totaled 17.2% of risk-based capital, which is well below the regulatory guideline of 100%, a level where regulators will view the total as a concentration which would require heightened risk management practices. Our commercial real estate portfolio was 137.8% of risk-based capital, far below the 300% regulatory guideline in that category. The mortgage one-to-four family loan portfolio represents 32.5% of the portfolio at $138.9 million as of June 30, 2017 compared to $136.8 million at year-end 2016. The broader residential real estate economy across the state of Kansas continues to show stable to brisk sales activity for the past few quarters with tight market supplies of inventory in most of our markets. The performance of this segment of our portfolio continues to be strong today with low levels of delinquency and limited collection issues. With regard to our agricultural loan portfolio, total balances were $79.3 million or 18.5% of our total loan portfolio as of June 30, 2017. This represents an increase of approximately $3 million in outstanding loan balances from the end of the first quarter, which our loan advances associated with the summer production season. The agricultural outlook in Kansas continues to be challenging. We are operating with increased scrutiny on our agricultural loan portfolio as that sector remains and is most challenging economic environment for the past several years. We've identified borrowers who were subject to increased risk in this segment of our portfolio through an intentional risk assessment of the portfolio and we'll continue to monitor trends closely throughout the summer production cycle. Our agricultural lending staff is made up of some of the most seasoned and qualified ad makers in the state, most of whom who have experienced multiple downward cycles in this sector. Commercial and industrial loans were $51.6 million as of June 30, 2017 or 12.1% of the portfolio. This represents a slight decline from the year in total of $54.5 million. The current macroeconomic landscape in Kansas remained stable, while we are operating at a high level of caution related to our agricultural loan portfolio. The residential real estate market remains good in our larger markets and commercial borrowers are by and large are operating profitability. Our commercial banking staff is highly focused on recruiting and expanding high quality banking relationships in the set high expectations for themselves. 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 underwriting and risk management practices that have supported our continued profitability these past several years. Before we go to questions, I want to summarize today by saying that we are pleased with Landmark's operating results for the second quarter and year-to-date 2017. 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 and acquisitive growth. Anticipate our trend to strong and solid earnings to continue. With that, I'll open the call up to questions that anyone might have.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Michael Brilley with Sit investments.

[Michael Brilley:]

My question is your equity-to-asset ratio is now at 10% and grew quite sharply in the last six months and has done very well. What are your plans in terms of not letting that ratio get to much higher what are you contemplating?

[Michael Scheopner:]

Well, Mike. I appreciate the question. I mean obviously we continue to -- I guess from a market standpoint, continue to evaluate opportunities to deploy that equity whether it be through -- most likely through some form of a growth in an acquisition-type transaction, that market remains -- I would say dialogs remain active with respect to that, Mike and while we don't have anything definitive that we can speak to, our efforts with respect to finding a right fit for the franchise continue, so that be the primary strategy.

[Michael Brilley:]

How about the possibility of doing stock repurchases?

[Michael Scheopner:]

We've had a stock repurchase plan in place. Historically, but our -- I guess our strategic approach has been to retain that equity for the use in a potential acquisitive manner.

[Operator:]

[Operator Instructions] At this time, there are no more questions in the queue. So, like turn it back over to Michael Scheopner for any closing remarks.

[Michael Scheopner:]

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

[Operator:]

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