Landmark Bancorp, Inc.
Q3 2017 Earnings Call Transcript

Published: 5 Nov 2017

[Operator:]

Good day, and welcome to the Landmark Bancorp Third Quarter 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 Chief Executive Officer. Please go ahead, sir.

[Michael Scheopner:]

Thank you, 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 2017. Joining the call with me today to discuss various aspects of our 2017 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 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 a net loss of $2.7 million of $0.67 per share on a fully diluted basis for the third quarter of 2017. Year-to-date, Landmark's net earnings totaled $1.9 million or $0.49 per diluted share. The year-to-date 2017 return on average assets calculates to 0.28%. The company's return on average equity year-to-date was 2.93%. Landmark's net earnings of $1.9 million for the first nine months of 2017 were impacted by an $8.1 million deposit-related loss. This loss reduced net earnings by $5.1 million during the third quarter of 2017. As we previously disclosed, in the subsequent event section of our second quarter 10-Q filed on August 21, we discovered this situation on August 8, 2017, when the company was made aware that certain checks deposited by one of our customers from a third party were being returned by another financial institution due to uncollected funds related to the third party. This caused a $10.3 million of overdraft balance. Since August 8, 2017, Landmark's collection efforts have provided $2.2 million in funds to cover a portion of that overdraft. That includes an additional $500,000 recovery since our original disclosure in the second quarter 10-Q, bringing the pretax loss to $8.1 million. An investigation of the situation and efforts directed at potential recovery of losses are ongoing, and accordingly, no conclusions have been reached concerning the ultimate recoverability of this loss nor has there been a determination of whether or not existing insurance policies will cover any of the loss. The company intends to protect all of its rights pursuant to this matter and seek all available legal and equitable remedies. The recovery process is uncertain and is expected to require an extended period of time to resolve, and we will likely incur further legal expenses. In light of the uncertainties surrounding any additional recoveries, we recognize the after-tax loss of approximately $5.1 million during the third quarter of 2017. While we believe that we had appropriate controls in place as a result of this event, management has implemented additional controls and review procedures to enhance our detection of deposit accounts with uncollected funds. We believe these enhanced controls reduce the risk of future losses. These additional controls expanded our daily review of large dollar amounts and large deposit amounts and review of all deposit accounts with more than a minimal negative daily available balance. Negative collected balances over a certain threshold are now provided to senior management for review and approval. Excluding the deposit-related loss, Landmark continued our track record of delivering strong core earnings performance during the 9-month period. When the fraudulent deposit matter was discovered in August, immediate steps by the bank led to a partial recovery, and we continue to pursue all available options to protect the bank's rights, including legal and equitable remedies, aimed at recovering more funds if possible. While we are disappointed with this situation as I look at how Landmark is positioned from a big picture perspective, we remain financially very strong, we are very well capitalized and we have excellent credit quality in our loan portfolio. Our strong customer relationships and community banking presence across the state of Kansas positions Landmark well for future growth. Mark will provide additional detail on Landmark's financial performance and asset quality metrics. I am pleased to report that our Board of Directors has declared a cash dividend of $0.20 per share to be paid November 29, 2017, to shareholders of record as of November 15, 2017. This represents the 65th consecutive quarterly cash dividend since the company's formation resulting from the merger of Landmark Bancorp, Inc. with MNB Bancshares, Inc. in October 2001. Additionally, the Board of Directors has declared a 5% stock dividend to be issued December 15, 2017, to shareholders of record on December 1, 2017. This represents the 17th consecutive year that the board has declared a 5% stock dividend. I will now turn the call over to Mark Herpich, our CFO, who will review the financial results and asset quality indicators with you.

[Mark Herpich:]

Thanks, Michael, and good morning to everyone. As Michael has already summarized our earnings for the third quarter and nine months ended September 30, 2017, 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 $6.6 million or an increase of $50,000 or 0.8% in comparison to the prior year's third quarter. The slight improvement in net interest income was attributable to a $16.3 million or 2% increase in average interest earning assets to $826.2 million in comparison to the prior year third quarter period. Lower average loan balances and higher rates on interest-bearing deposits resulted in a decline in our net interest margin from 3.45% in the third quarter of 2016 to 3.42% 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 third quarter of 2017 as compared to $150,000 in the third quarter of 2016. The lower provision relates to a corresponding reduction in our level of net charge-offs of $47,000 during the third quarter of 2017 versus $295,000 charged off during the third quarter of 2016. Non-interest income increased to $194,000 to $3.9 million for the third quarter of 2017, up 5.2% as compared to the same period of 2016. The increase was primarily related to a $389,000 increase in bank-owned life insurance income in the third quarter of 2017. Partially offsetting the increase in bank-owned life insurance income, our gains on sales of investments declined to $39,000 during the third quarter of 2017 as compared to the gain of $261,000 in the same period a year earlier. Our third quarter non-interest expenses increased by $8.2 million to $15.6 million as compared to the $7.4 million for the third quarter of 2016. The increase related primarily to the deposit-related loss of $8.1 million discussed by Michael earlier in the call. Also contributing to the increased non-interest expense was an increase in professional fees of $220,000, which were driven by costs associated with 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 a regulatory market capitalization threshold as of June 30, 2017. Moving on to discuss some financial highlights for the first nine months of 2017; our net earnings of $1.9 million were impacted by the deposit-related loss, which reduced net earnings by $5.1 million during the third quarter of 2017. Absent to substantial deposit-related loss, our core earnings remain solid and the earnings would have exceeded to $6.9 million of net earnings in the first nine months of 2016. In the first nine months of 2017, similar to my quarterly comments, we experienced a decrease in net interest margin from a year earlier from 3.46% to 3.40% on a tax equivalent basis. Our average interest earning assets increased 2.6% from $805.7 million during the first nine months of 2016 to $826.8 million during 2017. With the combination of these two changes, our net interest income increased $28,000 to $19.5 million for the first nine months of 2017, an increase of 0.1% compared to the same period of 2016. During the first nine months of 2017, we provided $250,000 to the allowance as compared to $500,000 in the first nine months of 2016. Once again, the lower provision relates to a corresponding reduction in our level of net charge-offs of $215,000 during the first nine months of 2017 versus $915,000 during the first nine months of 2016. Non-interest income totaled $11.8 million for the first nine months of 2017, an increase of $181,000 or 1.6% from the prior year period. The increase results primarily from an increase of $360,000 in bank-owned life insurance income during the nine months ended September 30, 2017, as compared to the same period of 2016. Partially offsetting this increase in bank-owned life insurance income was a decline in gains on sales of investment securities to $363,000 during the first nine months of 2017 as compared to $558,000 of gains on sales of investment securities during the first nine months of 2016. Looking at non-interest expense; we reported an increase of $8.5 million for the first nine months of 2017 in comparison to the same period of 2016. Consistent with my quarterly comments, this increase relates primarily to the deposit-related loss of $8.1 million. Also contributing to the higher non-interest expense was an increase in professional fees of $485,000, which were driven by costs associated with forming a captive insurance subsidiary to enhance the bank's risk management strategy and by adding additional audit-related cost -- 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 a regulatory market capitalization threshold at June 30, 2017. To touch on a few balance sheet highlights; our total assets increased $18.8 million to $930.1 million at September 30, 2017, compared to $911.4 million at December 31, 2016. Our loan portfolio increased $8.0 million for the first nine months of -- to $428.4 million at September 30, 2017, from $420.5 million at December 31, 2016. Investment securities increased $3.9 million to $394.8 million at September 30, 2017, from $390.9 million at December 31, 2016. Stockholders' equity increased by 2.4% to $87.0 million at September 30, 2017, or a book value of $22.46 per share compared to $85.0 million at December 31, 2016, with a book value of $21.96 per share. Our consolidated and bank regulatory capital ratios as of September 30, 2017, continued to exceed the levels considered well capitalized. The bank's leverage capital ratio was 9.58% at September 30, 2017, while our total risk-based capital ratio was 17.31%. I would now like to provide some additional details regarding our loan portfolio. Net loans outstanding as of September 30, 2017, totaled $428.4 million. This represents a 1.9% increase from our net loan total of $420.5 million on December 31, 2016. Non-accrual loans, which primarily consist of loans greater than 90 days past due, totaled $5.5 million or 1.26% of gross loans as of September 30, 2017, as compared to the year-end 2016 level of 0.64%. This increase in non-accrual loans relates primarily to a $3.1 million lending relationship consisting of a $1.3 million of commercial loan and a $1.8 million commercial real estate loan. 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 as of September 30, 2017, totaled $2.9 million or 0.67% of gross loans. 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 or real estate owned totaled $677,000 as of September 30, a decline from $1.3 million at year-end 2016. The other real estate-owned balances are primarily comprised of a residential house and two commercial real estate properties, one of which was sold during October 2017. We continue to market for sale all remaining property sales in real estate owned. We recorded net charge-offs of $215,000 during the first nine months of 2017, which was down from $915,000 for the same period of 2016. I will now turn the call back over to Michael to review our loan portfolio segments and the credit risk outlook for your company.

[Michael Scheopner:]

Thank you for your comments, Mark. We continue to maintain a diversified mix in the loan portfolio both in loan type and in geography across the state. As part of our comprehensive credit risk management process, we reviewed construction land and commercial real estate on a quarterly basis for loan type and geographic concentration issues. As of September 30, 2017, our construction and land portfolio balances totaled $15.9 million or 3.7% of our total loan portfolio. Outstanding loan balances in our commercial real estate portfolio totaled $120.8 million, representing 27.8% of our total loan portfolio. Landmark's loan portfolio in the construction land category as of September 30, 2017, totaled 17.4% of risk-based capital, which is well below the regulatory guideline of 100%, a level where regulators review the total as a concentration, requiring heightened risk management practices. Our commercial real estate portfolio was a 149.7% of risk-based capital, which is far below the 300% regulatory guideline in that category. The mortgage one-to-four family loan portfolio represents 31.5% of the portfolio at $136.8 million for September -- as of September 30, 2017, and that is unchanged from year-end 2016. Residential real estate activity across the state continues to show stable to brisk sales activity with tight market supply 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 $84.1 million or 19.4% of our total loan portfolio as of September 30, 2017. The agricultural outlook continues to be challenging. We are operating with increased scrutiny on our agricultural loan portfolio as that sector remains in a challenging environment. We identified borrowers who were subject to increased risk in this segment of our portfolio through an intentional risk assessment and will continue to monitor trends closely. Our agricultural lending staff is made up of some of the most seasoned and qualified ad bankers in the state, most of whom who have experienced multiple downward cycles in this sector. Commercial and industrial loans were $50.9 million as of September 30, 2017, or 11.7% of the current portfolio. 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 underwriting and risk management practices that have supported our continued profitability these past several years. Before we go to questions, I want to summarize by saying that while the deposit fraud loss that we experienced in the third quarter has negatively impacted our standard 2017 earnings, excluding this event, Landmark continued to demonstrate a history of delivering strong core earnings performance across all of our community banking lines of business. We continue to believe that the company is well positioned for long-term organic and acquisitive growth, and I anticipate our trend of strong core earnings will continue. With that, I'll open the call up to questions that anyone might have.

[Michael Scheopner:]

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

[Operator:]

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