Landmark Bancorp, Inc.
Q3 2016 Earnings Call Transcript

Published: 30 Oct 2016

[Operator:]

Good morning and welcome to the Landmark Bancorp's Third Quarter Earnings Conference 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 to turn the conference over to Michael Scheopner, President and Chief Executive Officer. Please go ahead.

[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 of 2016. Joining the call with me today to discuss various aspects of our third quarter and year-to-date 2016 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 $2.1 million or $0.56 per share on a fully diluted basis for the third quarter of 2016. This compares to net earnings of $2.5 million during the third quarter of 2015. Year-to-date 2016 net earnings totaled $6.6 million compared to $7.9 million during the first nine months of 2015. The decline from the prior-year primarily relates to two factors. The first was a $1.2 million swing from a $700,000 net credit to the provision for loan losses during the first nine months of 2015 as a result of a large recovery on a previously charged-off construction loan to a fairly typical $500,000 provision during the same period of 2016. The second factor was a lower level of gain on sales of loans due to decreased production levels in 2016 after we lost several mortgage banking originators during the first half of 2016. We have had success in our recruiting efforts to replace the mortgage origination staff who left the company during the first half of the year and are continuing those efforts. Landmark's year-to-date 2016 return on average assets calculates to 0.99%. The company's year-to-date return on average equity was 10.24%. 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 in November 23, 2016 to shareholders of record as of November 9, 2016. This represents the 61st consecutive quarterly cash dividend since the company's formation, resulting from the merger of Landmark Bancorp Inc. with MNB Bancshares, Inc. in October 2001. The Board also declared a 5% stock dividend to be issued December 15, 2016 to shareholders of record as of December 1, 2016. This represents the 16th consecutive year that the Board has declared a 5% stock dividend. In summary, Landmark's banking operations continued to perform strongly during the first three quarters of 2016. Of particular note from a business operations standpoint, during the third quarter, Landmark successfully completed a conversion of our digital banking services platform. The conversion to this integrated digital platform has created a more robust operating system for our retail and commercial banking clients. Among the new or enhanced product offerings available to our retail clientele, our person-to-person money payment options, expanded account history research capability, a more robust bill payment system and the ability to initiate transfers to and from their Landmark account to accounts located at other financial institutions. Our commercial clients gained improved functionality and efficiency with upgraded ACH and wire features in addition to the improved research capability and bill payment system available to our retail clients. While our historic cyber security protections met or exceeded industry standards, the digital conversion allowed for additional cyber security enhancements, including the introduction of security tokens for certain commercial cash management clients. For retail clients, we implemented additional identity authentication questions associated with online and mobile banking enrollment, enhanced debit card management and text or email alert notifications have also been upgraded. We work hard as a community bank to provide personal-friendly service in each of our 29 locations, but we are also focused on delivering high-tech service to enable our busy clients to transact their banking securely and efficiently from their home, office or when they are out and about. Landmark's financial success is a credit to the continued efforts of our associates throughout the organization, who remain focused on good banking fundamentals. Your management team is 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 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 of 2016, I would like to make a few comments on various elements comprising those results. While our September 30, 2016 year-to-date net earnings were lower than the first nine months of 2015, earnings remained strong absent the impact of that first quarter of 2015 credit provision for a $1.0 million reversal of loan losses, which related to a large recovery last year on a previously charged-off loan. Our third quarter 2016 earnings were also impacted by reduced loan sales volumes and related gains on sales of loans, resulting from the departure of several mortgage lenders as Michael has already alluded. Starting with the third quarter income statement highlights. Net interest income was $6.6 million, an increase of $125,000 or 1.9% in comparison to the prior year's third quarter. The improvement in net interest income resulted from $25.3 million or 3.2% increase in average interest-earning assets to $809.9 million in comparison to the prior year third quarter period. Lower yields on interest-earning assets and higher rates on interest-bearing deposits and borrowings resulted in a decline in our net interest margin from 3.48% in the third quarter of 2015 to 3.45% in the same period of 2016. Looking at our provision for loan losses, we provided $150,000 to the allowance in the third quarter of 2016 compared to $100,000 in the third quarter of 2015. Non-interest income increased or decreased, excuse me $734,000 to $3.7 million in the third quarter of 2016, down 16.4%, as compared to the same period of 2015. The decrease was primarily related to $794,000 decline in the 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 lower gains on sales of loans were $261,000 of gains on sales of investment securities during the third quarter of 2016 as compared to $135,000 of investment securities gains during the same period of 2015. Our third quarter non-interest expenses increased by $86,000 to $7.4 million or a 1.2% increase on a linked quarter basis, primarily resulting from increases of $58,000 in occupancy and equipment and $50,000 in foreclosure and other real estate owned expense. The slight increase in occupancy and equipment reflects a higher level of building repairs and maintenance, while additional real estate owned increased the related expenses during the current quarter. Moving on to discuss some financial highlights for the nine months of 2016, similar to my quarterly comment, net interest margin was compressed again in comparison to the first nine months of 2015 from 3.50% to 3.46% on a tax equivalent basis. However, our average interest earning assets increased 2.5% from $785.7 million during the first nine months of 2015 to $805.7 million during 2016. With the combination of these two changes, our net interest income increased $173,000 to $19.5 million for the first nine months of 2016, an increase of 0.9% compared to the same period of 2015. During the first nine months of 2015 as mentioned, we recorded a negative provision for loan losses of $700,000 net, compared to a provision for loan losses of $500,000 in the first nine months of 2016. That was a swing of $1.2 million. The negative provision in 2015 related to a recovery in the amount of $1.7 million during the first quarter of 2015 on a construction loan, which had been fully charged off during 2010 and 2011. Non-interest income totaled $11.6 million for the first nine months of 2016, a decrease of $1.3 million or 10.4% in comparison to the same period of 2015. Consistent with my quarterly comments, this decrease results primarily from decreases of $1.8 million in gains on sales of loans due to lower volumes of loans sold in the secondary market, resulting from fewer mortgage lenders on staff, plus a $271,000 decline in other non-interest income, a comparison driven by a $236,000 gain on the 2015 sale of a closed branch location. Partially offsetting these reductions were $558,000 of gains on sales of investment securities during the first nine months of 2016, as compared to $119,000 loss on sales of investment securities during the first nine months of 2015. 2015 loss was the result of selling $30.6 million of our federal agency insured mortgage-backed investment securities portfolio to reduce our exposure to rising interest rates. While our 2016 gain, primarily resulted from selling $14.3 million of municipal bonds and common stocks that were identified for sale as part of our ongoing review of the bank's investment portfolio. Looking at non-interest expense, we reported a decrease of 0.4% or $95,000 for the first nine months of 2016 in comparison to the same period of 2015. This decrease was the result of a $361,000 decline in other non-interest expense, reflecting the $163,000 impairment of the residual real estate collateral associated with an affordable housing investment recorded in 2015, as well as the reduced mortgage banking activity in the first nine months of 2016. Partially offsetting these decreased expense categories were increases of $65,000 in advertising related to costs associated with advertising our deposit programs and $121,000 in foreclosure and other real estate owned expenses. To touch on a few balance sheet highlights, our total assets increased $29.3 million to $907.7 million at September 30, 2016 compared to $878.4 million at December 31, 2015. Our loan portfolio increased $10.1 million or 2.4% to $430.1 million at September 30, 2016 compared to December 31, 2015. Our investment securities portfolio increased $21.4 million to $379.3 million at September 30, 2016 from $357.9 million at December 31, 2015. Stockholders' equity has increased by 11.4% to $89.8 million at September 30, 2016 or a book value of $24.52 per share compared to $80.6 million at year-end 2015 or a book value of $22.82 per share. That is a 7.4% increase in book value per share. Our consolidated and bank regulatory capital ratios as of September 30, 2016 continue to exceed the levels considered well capitalized. The bank's leverage capital ratio was 9.8% at September 30, 2016, while the total risk-based capital ratio was 17.1%. I would now like to provide some details regarding our loan portfolio. Net loans outstanding as of September 30, 2016 totaled $430.1 million. As I mentioned earlier, this is a $10.1 million increase from our net loan total of $420 million at December 31, 2015. The net growth was driven by the continued efforts of our commercial banking teams to focus on prospecting and expanding both new and existing high quality banking relationships as well as by slower repayment rates in our agricultural loan portfolio. Non-accrual loans, which primarily consists of loans greater than 90 days past due totaled $1.8 million or 0.41% of gross loans as of September 30, 2016. This compares to a level of 0.51% as of year-end 2015 and represents a decline from the year earlier level of $3.7 million or 0.94% as of September 30, 2015. 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 September 30, 2016 totaled $1.2 million or 0.29% of gross loans. This is a decline from 0.33% of gross loans as of December 31, 2015. We continue to monitor delinquency trends carefully in all loan categories. Our balance in other assets or real estate owned totaled $1.2 million as of September 30, a slight increase from $1 million at year-end 2015. 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 $295,000 during the third quarter of 2016. Net loan charge-offs for the year-to-date through September 30, 2016 were $915,000. This compares to net loan recoveries of $1.3 million in the first nine months of 2015. As mentioned, the significant recovery in 2015 was a result of continued collection efforts on a construction loan that had been charged off in 2010 and 2011. I will now turn the call back over to Michael to review our loan portfolio segments and the credit risk outlook.

[Michael Scheopner:]

Thanks, Mark and 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. On a consolidated basis, Landmark's gross loan portfolio totaled approximately $435.6 million as of September 30, 2016. 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 publications have emphasized increased emphasis on these portfolio categories. As part of our comprehensive credit risk management process, we review construction land and commercial real estate for loan type and geographic concentration issues on a quarterly basis. As at September 30 2016, our construction and land loan portfolio balances totaled $16.1 million or 3.7% of our total loan portfolio. Outstanding loan balances in our commercial real estate portfolio totaled $116.4 million, representing 26.7% of our total loan portfolio. Landmark's loan portfolio in the construction land category as of September 30, 2016 totaled 17.6% 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 144.7% of risk-based capital, which is far below the 300% regulatory guideline in that category. The mortgage one-to-four family loan portfolio represents just over 30% of the portfolio at $133.7 million for September 30, 2016 compared to $131.9 million or just under 31% as of year-end 2015. The broader residential real estate economy across the State of Kansas showed stable to increasing sales activity for the past year with improved equilibrium between supply and demand metrics in most markets. The Manhattan, Kansas market was recently recognized as one of the Top 10 healthiest housing market MSAs in a publication by Nationwide Mutual Insurance Company. The performance of the residential segment of our loan portfolio continues to be strong with low levels of delinquency and collection issues. With regard to our agricultural loan portfolio, total balances were $80.6 million or 18.5% of our total loan portfolio as of September 30, 2016. That's an increase from $67.9 million or 16% of the portfolio one year-ago on September 30, 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 the 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 fall and spring cycles, may pose additional challenges for our ag borrowers, while crop yields are currently predicted to be stronger, offsetting some of the continued weakness in commodity prices. Livestock feeders continue to operate with margin pressure, operating costs are lower, but not in proportion to the declines in commodity prices. Farmland prices have shown modest declines in the past few quarters across Kansas. Our exposure in the farmland lending segment remains limited however, as the majority of our agricultural loans are tied to the production cycle. We are continuing to operate with a heightened focus on our agricultural loan portfolio as that sector enters its most challenging environment in the past several years. 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 the sector. They will continue to monitor our credit risk and sector dynamics carefully going forward. Commercial and industrial loans were $61.6 million as of September 30, 2016, just over 14% of our current portfolio. That total is up slightly from the year-end 2015 total of $61.3 million. The current macroeconomic landscape in Kansas remains stable. The seasonally adjusted unemployment rate for Kansas as of September was 4.4% versus 5.0% national rate, according to the Bureau of Labor Statistics. A continuing area of escalated macroeconomic risk at this time is the energy sector. Landmark's direct exposure to this industry represents less than 1% of risk-based capital and a very small fractional percentage of the entire loan portfolio. There may be limited instances of indirect exposure in certain industries or geographies, but we believe that the bank's exposure to the recent weakness in the energy sector is immaterial. We will continue to carefully monitor the many factors impacting our credit portfolio going forward and will remain diligent and disciplined in applying the same high quality recruiting, 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 we are pleased with Landmark's operating results for the third quarter and year-to-date 2016. These results continue a trend of strong core 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 growth. I anticipate that our trend of solid earnings will continue during the remainder of 2016. With that, I'll open the call up to questions that anyone might have.

[Operator:]

[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.

[Michael Scheopner:]

Thank you. I want to thank everyone for participating in today's earnings call. I appreciate your continued support and confidence in our company. I look forward to sharing news related to our fourth quarter 2016 results at our next earnings conference call. Thank you and good morning.

[Operator:]

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