Landmark Bancorp, Inc.
Q4 2017 Earnings Call Transcript

Published: 30 Jan 2018

[Operator:]

Good day, and welcome to the Landmark Bancorp Fourth Quarter Earnings Conference Call. [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 to turn the conference over to Michael Scheopner, President and Chief Executive Officer. Please go ahead.

[Michael Scheopner:]

Good morning. Thank you for joining our call today to discuss Landmark's earnings and results of operations for the fourth quarter and full year 2017. Joining the call with me today to discuss various aspects of our 2017 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 of 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 $2.4 million or $0.59 per share on a fully diluted basis for the fourth quarter of 2017. For the year ending December 31, 2017 Landmark's net earnings totaled $4.4 million or $1.06 per diluted share. The full year 2017 return on average assets calculates to 0.47%. The company's return on average equity for 2017 was 4.98%. As previously disclosed, Landmark's net earnings in 2017 were impacted by a $8.1 million deposit-related loss. This loss reduced net earnings by $5.1 million during the third quarter of 2017. The company continues to pursue collection and intends to protect all of its rights pursuant to this matter and seek all available legal and equitable remedies. Clearly, we are disappointed with the impact of this fraud on our 2017 financial results. While we believe 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. Excluding the deposit-related loss, Landmark delivered another year of strong core performance in 2017 and net earnings would have increased approximately 5.6% without that associated third quarter charge. As I look at how Landmark is positioned, 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, position Landmark well for future growth. 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 March 07, 2018 to shareholders of record as of February 21, 2018. This represents the 66th consecutive quarterly cash dividend since the company's formation resulting from the merger of Landmark Bancorp Inc. with MNB Bancshares Inc. in October 2001. Landmark's 2017 cash dividend rate represented a 5% increase over 2016 and in December 2017 we delivered a 5% stock dividend, our 17th consecutive year of providing this added shareholder benefit. We're proud of our consistent dividend record over the years. I will now turn the call over to Mark Herpich, our CFO 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 fourth quarter and year ended December 31, 2017, I would like to make a few comments on various elements comprising those results. Starting with the fourth quarter income statement highlights, net interest income was $6.6 million, an increase of $48,000 or 0.7% in comparison to the prior year's fourth quarter. The slight improvement in net interest income was attributable to a $14.7 million or 1.8% increase in our average interest-earning assets to $832.1 million in comparison to the prior year fourth quarter period. Higher rates on interest-bearing deposits offset the increased level of investments and loans, resulting in a slight decline in our net interest margin from 3.40% in the fourth quarter of 2016 to 3.38% in the same period of 2017. Looking at our provision for loan losses, our analysis of the allowance for loan losses resulted in providing $200,000 to the allowance in the fourth quarter of 2017 as compared to no provision during the fourth quarter of 2016. Noninterest income increased $200,000 to $3.5 million for the fourth quarter of 2017 up 6.1% as compared to the same period of 2016. The increase was primarily related to $135,000 of gains on sales of investment securities during the fourth quarter of 2017 as compared to none in the fourth quarter of 2016. Also contributing to the improvement in noninterest income in the fourth quarter of 2017 were increases of $44,000 in bank-owned life insurance income, $31,000 in gains on sales of loans and $11,000 in fees and service charges as compared to a year earlier. Our fourth quarter noninterest expenses decreased by $145,000 to $7.2 million as compared to $7.3 million for the fourth quarter of 2016. The reduction in noninterest expense was primarily related to decreases of $299,000 in compensation and benefits $44,000 in amortization, $37,000 in occupancy and equipment and $18,000 in data processing expenses. Partially offsetting these decreases were increases in professional fees of $129,000 and $73,000 in foreclosure and other real estate expense. The increased professional fees were driven by costs associated with additional costs associated with an audit of our internal controls over financial reporting, which will be required for 2017 as a result of changing to an accelerated filer status with the SEC as a result of an increase in our market capitalization. The tax reform legislation enacted in December 2017, lowering the federal income tax rates resulted in recording a $352,000 tax benefit to reflect the impact on our deferred tax assets and liabilities. Moving on to discuss some financial highlights for the full year of 2017, our net earnings of $4.4 million were impacted by the deposit-related loss, which reduced net earnings by $5.1 million during the third quarter of 2017. Excluding this deposit-related loss, our core earnings remain solid and our 2017 net earnings would have exceeded the $9 million in the year ended December 31, 2016 by approximately 5.6%. Similar to my quarterly comments, we experienced a decrease in net interest margin from a year earlier from 3.5% to 3.40% on a tax-equivalent basis. Our average interest-earning assets increased 2.4% from $808.6 million in 2016 to $828.1 million during 2017. With the combination of these two changes, our net interest income actually increased $76,000 to $26.1 million for 2017 an increase of 0.3% compared to the same period of 2016. During the year ended December 31, 2017, we provided $450,000 to the allowance as compared to $500,000 in the fiscal year ended December 31, 2016. Noninterest income totaled $15.2 million for 2017, an increase of $381,000 or 2.6% from 2016. This increase results primarily from increases of $404,000 in bank-owned life insurance income and $90,000 in fees and service charges during the year ended December 31, 2017 as compared to 2016. Partially offsetting these increases, were declines of $86,000 in gains on sales of loans and $60,000 in gains on sales of investment securities compared to 2016. Looking at noninterest expense, we reported an increase of $8.3 million for the full year 2017 in comparison to 2016. This increase relates primarily to the pretax deposit-related loss of $8.1 million mentioned earlier. Also contributing to the higher noninterest expense was an increase in professional fees of $614,000, which were driven by costs associated with the formation of a captive insurance subsidiary to enhance the bank's risk management strategy and by additional costs associated with an audit of our internal controls over financial reporting, which will be required for 2017. Partially offsetting these increased expense categories were decreases of $172,000 in compensation and benefits and $139,000 in amortization expense. To touch on a few balance sheet highlights, our total assets increased $18.1 million to $929.5 million at December 31, 2017 compared to $911.4 million at December 31, 2016. Our loan portfolio increased $13.2 million during the year to $433.7 million at December 31, 2017 from $420.5 million at December 31, 2016. Investment securities increased $2.5 million to $393.4 million at December 31, 2017 from $390.9 million at December 31, 2016. Our deposits increased $24.1 million or 3.2% to $765.6 million at December 31, 2017 compared to $741.5 million at December 31, 2016. Stockholders' equity increased by 3.1% to $87.6 million at December 31, 2017 for a book value of $21.47 per share compared to $85.0 million at December 31, 2016 for a book value of $20.92 per share. Our consolidated and bank regulatory capital ratios as of December 31, 2017 continue to exceed levels considered well capitalized. The bank's leverage capital ratio was 9.6% at December 31, 2017, while the total risk-based capital ratio was 17.5%. I would now like to provide some additional details regarding our loan portfolio. Net loans increased as of December 31, 2017, excuse me, net loans outstanding as of December 31, 2017 totaled $433.7 million. This represents a 3.2% increase in our net loan total of $420.5 million on December 31, 2016. Nonaccrual loans, which primarily consist of loans greater than 90 days past due, totaled $6.0 million or 1.38% of gross loans as of December 31, 2017 as compared to the year end 2016 level of 0.64%. This increase in nonaccrual loans relates primarily to a $3.6 million lending relationship consisting of a $1.8 million of commercial loans and $1.8 million commercial real estate loan all to the same lending relationship. 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 December 31, 2017 totaled $1.4 million or 0.31% 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 $436,000 as of December 31, a decline from $1.3 million at year-end 2016. The other real estate owned balances, primarily consist of a residential house and a commercial real estate property. We continue to market for sale all property sales in real estate owned. We recorded net loan charge-offs of $335,000 during 2017, down from $1.1 million for 2016. I'll now turn the call back over to Michael to review our loan portfolio segments and the credit risk outlook.

[Michael Scheopner:]

Thank you for your comments Mark. We continue to maintain a diversified mix in loan portfolio both in loan types and in geography across the state. As part of our comprehensive credit risk management process, we review construction land and commercial real estate on a quarterly basis for loan type and geographic concentration issues. As of December 31, 2017, our construction and land and loan portfolio balances totaled $19.4 million or 4.4% of our total loan portfolio. Outstanding loan balances in our commercial real estate portfolio totaled $120.6 million representing 27.5% of our total loan portfolio. Landmark's loan portfolio in the construction land category as of the end of the year totals 21% of risk-based capital, 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 151% 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% of the portfolio at $136.2 million as of December 31, 2017. Residential real estate activity across the State of Kansas 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 $83 million or 18.9% of our total loan portfolio as of December 31, 2017. The agricultural outlook continues to be challenging. We've identified borrowers in this portfolio who are subject to increased risk in this segment through an intentional risk assessment of the portfolio and we will continue to monitor those trends closely. Commercial and industrial loans were $54.6 million as of December 31, 2017 or 12.4% from 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 same disciplined 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 negatively impacted our 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. I anticipate our trend of solid core earnings will continue. With that, I'll open the call up to questions that anyone might have.

[Operator:]

Thank you. we will now begin the question-and-answer session. [Operator instructions] And our first question comes from Michael Brilley of Sit Investment. Please go ahead.

[Michael Brilley:]

Okay. I have two questions. First of all, I've heard other banks particularly larger banks, indicate that their compliance costs and the number of people they have to hire continue to be a major cost problem for them, but I've also heard that may be smaller banks like yourself may be getting less regulatory pressure. Could you comment on that? And my second question is regarding the $8.1 million loss, I believe you have indicated that the customer was well known to you and had a history of these large transactions and deposits and withdrawals. My question is I know bad things can happen. My question is are you eliminating client relationships of this type where there is a pattern of high risk transactions or are you letting other customers continue to do this type of activity? Thank you.

[Michael Scheopner:]

Okay. Michael, thank you for the questions. I'll address the compliance costs question first. We have increased our staffing with respect to audit and compliance and that's been a trend over the last several years. As of the end of 2017, we consider ourself to be fully staffed in that area in both the audit and in the compliance related areas and while it is a significant cost, we think our current staffing is appropriate relative to any kind of ease of burden on the compliance or regulatory front, while we have visited with our regulators about specific compliance-related fatigue that we feel given our efforts to continue to meet their expectations and demands, we haven't seen a significant easing or a adjustment in expectations at the regulatory level or from the regulatory -- or from our regulators at this point. Related to eliminating client relationships, part of our enhanced controls that we put in place following the deposits related loss, involved a higher level of scrutiny or higher level of review with respect to client relationships that demonstrated patterns related to negative collected balances, we have identified several relationships that represented a higher risk and have eliminated those relationships based upon the enhanced controls or review of those accounts. And so again from a -- while we believe we had appropriate controls in place, the enhanced controls have that resulted in some additional monitoring that from a risk standpoint we felt it was appropriate to eliminate those relationships.

[Michael Brilley:]

Thank you.

[Operator:]

[Operator instructions] As we have no further questions, I would like to turn the conference back over to Michael Scheopner for any closing remarks.

[Michael Scheopner:]

Thank you. And I want to thank everyone for participating and joining us in today's earnings call. I do appreciate your continued support and the confidence that you've shown in our company and I look forward to sharing news related to our first quarter 2018 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.