Landmark Bancorp, Inc.
Q4 2016 Earnings Call Transcript

Published: 31 Jan 2017

[Operator:]

Welcome to the Landmark Bancorp Quarter Four Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Mr. Michael Scheopner, President and CEO. Please go ahead.

[Michael Scheopner:]

Thank you and good morning. Thank you for joining our call today, to discuss Landmark's earnings and results of operations for the fourth quarter and the fiscal year ending December 31, 2016. Joining the call with me today, to discuss various aspects of our fourth quarter and full-year performance, are Mark Herpich, Chief Financial Officer for the Company; and Brad Chindamo, the Company's Credit Risk Manager. 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 that 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. Landmark reported net earnings of $2.1 million or $0.53 per share on a fully diluted basis for the fourth quarter of 2016 and our full-year 2016 net earnings totaled $9 million. Landmark's 2016 return on average assets calculates to 1%, the Company's return on average equity for 2016 was 10.34%. By way of perspective, Landmark's net earnings in 2016 were approximately double our level five years earlier in 2011 and total assets have grown more than 50% in that time. Mark and Brad 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 March 1, 2017 to shareholders of record as of February 15, 2017. This represents the 62nd 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 2016 cash dividend rate represented a 10.5% increase over 2015. In addition to another strong year of financial performance, the successes that we enjoyed in 2016 were evident in every operating area of the bank. Retail banking efforts led to another year of net deposit account growth in both our retail and commercial account portfolios, our commercial banking team was successful in recruiting additional new or significantly expanded banking relationships while maintaining asset quality levels that reflect high underwriting and relationship management standards. And our mortgage banking team enjoyed another highly successful year helping clients across the state of Kansas meet their goal of homeownership. Single family loan volume in 2016 exceeded $230 million which while less than our record 2015 level of $300 million was still a very successful year. The $230 million in originations in 2016 pushed our total mortgage production to more than $1 billion over the past five years. During 2016, we also successfully converted our digital banking platform to an integrated and more robust operating system providing an enhanced customer experience and cyber security protections, enabling our retail and commercial clients to transact their banking securely and efficiently from their home, office or when out and about. Landmark's success is a credit to the continued efforts of our associates throughout the organization who remain focused on good banking fundamentals. The 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 with you.

[Mark Herpich:]

Thanks, Michael and good morning to everyone. Michael has already summarized our earnings for the fourth quarter and year ended December 31, 2016. I would like to make a few comments on various elements comprising those results. While our full-year 2016 net earnings of $9 million were lower than 2015's net income of $10.5 million, earnings remained solid as evidenced by achieving a 1% return on average assets. The lower comparison for 2016 earnings versus 2015, related primarily to the impact of a first quarter 2015 credit provision for a $1 million reversal of loan loss expense which followed a large recovery on a previously charged off loan and the reduced volumes and gains on sales of loans in 2016 resulting from the departure of a few mortgage lenders. Turning to the fourth quarter income statement highlights net interest income was $6.5 million, a decrease of $50,000 or 0.08% in comparison to the prior year's fourth quarter. The slight decline in net interest income was attributable to lower yields on interest-earning assets and higher rates on interest-bearing deposits and borrowings which resulted in a decline in our net interest margin from 3.54% in the fourth quarter of 2015, to 3.4% in the same period of 2016. Partially offsetting the net interest margin decline was a $32.3 million or 4.1% increase in average interest-earning assets to $817.4 million in comparison to the prior year fourth quarter period. Looking at our provision for loan losses, we did not provide to the allowance in either the fourth quarter of 2016 or 2015 as we concluded the allowance for loan losses was adequate at December 31 in both years. Noninterest income decreased $823,000 to $3.3 million for the fourth quarter of 2016, down 20.1% as compared to the same period of 2015. The decrease was primarily related to a $728,000 decline in gains on sales of loans. The volume of mortgage loan sold and originated for sale declined in the period, as a result of the departure of several mortgage lenders as previously discussed. Also contributing to the lower level of noninterest income was a decrease of $95,000 in fees and service charges pertaining to our deposit accounts during the fourth quarter of 2016, as compared to the same period of 2015. Our fourth quarter noninterest expenses of $7.3 million will remain relatively constant as noted by the $3,000 increase on a linked quarter basis. The most significant fluctuations involved a decrease of $110,000 in advertising, reflecting lower costs associated with deposit programs and an increase of $72,000 in foreclosure [indiscernible] and other real estate owned expense due to additional real estate owned during the current quarter. Moving on to discuss some financial highlights for the full year of 2016, similar to my quarterly comments, we experienced a decrease in net interest margin in comparison to the 2015 full year, declining from 3.51% to 3.45% on a tax equivalent basis. However our average interest-earning assets increased 2.9% from $785.6 million in 2015, to $808.6 million during 2016. With the combination of these two changes our net interest income increased $123,000 to $26 million for 2016, an increase of 0.5% compared to the same period of 2015. During the year ended December 31, 2015, as mentioned, we recorded a negative provision for loan losses of $700,000 compared to a provision for loan losses of $500,000 in 2016. The negative provision in 2015, relates 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. Noninterest income totaled $14.9 million for 2016, a decrease of $2.2 million or 12.7% from 2015. Consistent with my quarterly comments, this decrease results primarily from decreases of $2.5 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 $251,000 decline in other noninterest income 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 2016, as compared to a $119,000 loss on sales of investment securities during 2015. The 2015 loss, was the result of selling $19.1 million of our federal agency issued, mortgage-backed investment securities portfolio to reduce our exposure to rising interest rates. While our 2016 gain primarily resulted from selling $11.8 million of municipal bonds and common stocks that were identified for sale as part of our ongoing review of our portfolio. Looking at noninterest expense we reported a decrease of 0.3% or $92,000 for the full year 2016, in comparison to 2015. This decrease was the result of a $443,000 decline in other noninterest 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 2016. Partially offsetting these decreased expense categories was an increase of $193,000 in foreclosure and other real estate owned expenses. Now to touch on a few balance sheet highlights, our total assets increased $33 million to $911.4 million at December 31, 2016, compared to $878.4 million at December 31, 2015. Our loan portfolio increased slightly during the year to $420.5 million at December 31, 2016. Our investment securities increased $33 million to $390.9 million at December 31, 2016. Stockholders equity increased by 5.4% to $85 million at December 31, 2016 or a book value of $21.96 per share, compared to $80.6 million at year-end 2015 or a book value of $21.73 per share. Our consolidated and bank regulatory capital ratios as of December 31, 2016 continued to exceed the levels considered well-capitalized. The bank's leverage ratio was 10% at December 31, 2016, while total risk based capital ratio was 18.3%. Both capital ratios improved over 2015, reinforcing our strong financial position. I will now turn the call over to Brad Chindamo to review highlights our loan portfolio.

[Brad Chindamo:]

Thanks Mark and good morning to everyone. Net loans outstanding as of December 31, 2016 totaled $420.5 million, this is a small increase from our net loan total of $420 million on December 31, 2015. The net totals were impacted by two large payoffs in December that totaled in excess of $10 million. These payoffs were anticipated and included a large previously criticized loan. Nonaccrual loans which primarily consist of loans greater than 90 days past due, totaled $2.7 million or 0.64% of gross loans as of December 31, 2016, this compares to a level of 0.51% as of year-end 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 December 31, 2016, totaled $756,000 or 0.18% 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 are loan categories. Our balance and other assets, real estate owned, totaled $1.279 million, as of December 31, 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 $1.1 million during 2016, primarily from a previously identified problem commercial loan and two agricultural loans, one of which is now in troubled debt restructure status, this compares to net loan recoveries of $1.3 million in 2015. Significant recovery in 2015 was a result of continued collection efforts on a construction loan that had been previously charged off in 2010 and 2011. We continue to maintain a diversified mix in the loan portfolio, both in loan types and geography across the state. On a consolidated basis, Landmark's gross loan portfolio totaled $426.5 million as of December 31, 2016. In terms of exposure to credit concentration, 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 of December 31, 2016 our construction and land loan portfolio balances totaled $13.7 million or 3.2% of our total loan portfolio. Outstanding loan balances in our commercial real estate portfolio totaled $118.1 million, representing 27.7% of our total loan portfolio. Landmark's loan portfolio in the construction land category as of December 31, 2016 totals 14.7% 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 140.9% of risk-based capital which is far below the 300% regulatory guideline in that category. Mortgage one-to-four family loan portfolio represents just over 32% of the portfolio, at $136.8 million for December 31, 2016, compared to $131.9 million or just under 31% as of year-end 2015. The broader residential real estate economy across the state showed stable sales activity for the past year with declining market supply in most markets. The performance of this segment of our portfolio continues to be strong today with low levels of delinquency and collection issues. With regard to our agricultural loan portfolio, total balances were $78.4 million or 18.4% of our total portfolio as of December 31, 2016. The year-end balance represents a small decline of $2.2 million, compared to September 30, 2016 total which suggests some pay down from fall ag activity across the state. The total does represent growth from a total of $71 million as of year-end 2015. 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 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 spring cycle may pose additional challenges for ag borrowers. Livestock feeders continue to operate with margin pressure; operating costs are lower, but not in proportion to declines in commodity prices. Farmland prices have shown declines in the past few quarters across Kansas. Our exposure in the farmland lending segment remains limited as the majority of our agricultural loans continue to be tied to the production cycle. We're operating with increased scrutiny on our agricultural loan portfolios as that sector enters its most challenging environment in the past several years. We've identified borrowers who are subject increased risk in this segment of our portfolio through an intentional risk assessment of the portfolio in the fourth quarter and we will continue to monitor trends closely throughout the spring cycle. 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. Commercial and industrial loans were $54.5 million as of December 31, 2016, just under 13% of the portfolio. The total is down from year-end 2015 totals of $61.3 million, the decline is primarily driven by a large payoff that occurred in December on a previously criticized credit relationship. The current macroeconomic landscape in Kansas remains stable. While we're operating at a high level of caution related to the agricultural loan portfolio, we're optimistic from a broader macroeconomic perspective on what opportunities may lie ahead in 2017. Our commercial banking staff is highly focused on recruiting and expanding high-quality banking relationship and has set high expectations for themselves this year. We will continue to carefully monitor the many risks impacting our credit portfolio going forward and will remain diligent and disciplined in applying the same high-quality underwriting and risk management practices that have supported our continued profitability these past several years. Thanks again and with that I'll hand it back over to Michael.

[Michael Scheopner:]

Thank you Brad and Mark, thank you also for your comments. Before we go to questions, I want to summarize by saying that we're pleased with Landmark's operating results for the fourth quarter and for the fiscal year ending 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. And I anticipate our trend of solid earnings will continue in 2017. 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 the confidence that you have in our Company. And I look forward to sharing news related to our first 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.