Landmark Bancorp, Inc.
Q2 2015 Earnings Call Transcript

Published: 28 Jul 2015

[Operator:]

Good morning and welcome to the Landmark Bancorp Inc. Second Quarter Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Mr. Scheopner, President and Chief Executive Officer. 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 second quarter of 2015. Joining the call with me today to discuss various aspects of our second quarter and year-to-date 2015 performance are Mark Herpich, Chief Financial Officer of the company, and Brad Chindamo, 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 discusses 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 obtain by contacting the company or the SEC. We reported net earnings of $2.6 million or $0.76 per share on a fully diluted basis for the second quarter 2015. This represents a 26% increase over our second quarter 2014 earnings level. Our 2015 year-to-date net earnings totaled $5.4 million, a 42.8% increase from the first half of 2014. Return on average assets for the first six months of this year calculates to 1.25%, the company's return on average equity was 14.67%. Net interest income for the second quarter 2015 increased 9% year-over-year totaling $6.6 million with good organic growth in interest assets and an incremental margin improvement. Total non-interest income for the quarter was $4.7 million, up 11.9% from the same period last year, mainly due to increased volumes of one-to-four family residential mortgage loan originations. Mark and Brad 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 $0.19 per share to be paid August 26, 2015 to shareholders of record as of August 12, 2015. This will represent the 56th consecutive quarterly cash dividend paid since the company's formation resulting from the merger of Landmark Bancorp Inc. with MNB Bancshares, Inc. in October 2001. If you're banked with Landmark, you'd probably notice recent upgrades in both, our online and mobile banking services. While we regard community banking as a high tech personal service business, we also offer high tech tools for our customers to do their banking. Services like banking by mobile or desktop device, transaction alerts and mobile deposits add value for our customers and enhance the efficiency of Landmark in serving them. In summary, I am pleased with our results for the second quarter and the company's year-to-date performance. I expect our trend of solid earnings to continue during the rest of 2015. Your management team remains focused on managing the organization in a conservative and discipline manner dedicated to the underwriting loans and investments prudently, monitoring interest rate risks 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. As Michael has already summarized our results for the second quarter and six months ended June 30th of 2015, I would like to make a few comments on various elements comprising those earnings results. Starting with the second quarter income statement highlights, net interest income increased 548,000 or 9% as Michael mentioned to $6.6 million in comparison to the prior year's second quarter. Net interest income was impacted positively by our net interest margin which increased to 3.56% from 3.47% during the second quarter of 2014. In comparison to the net interest margin of 3.47% in the first quarter of 2015, our net interest margin also increased from a quarter-to-quarter perspective. The higher net interest income was primarily driven by a 6.8% increase in our average interest earning assets from $742.3 million in the second quarter of 2014 to $792.5 million during the second quarter of 2015. Looking at our provision, we provided $200,000 to the allowance for loan losses in the second quarter of 2015, compared to a $300,000 provision in the second quarter of 2014. Non-interest income increased $496,000 to $4.7 million for the second quarter of 2015, as compared to the same period of 2014. Our gains on sales of loans reflected an increase of $405,000 for the second quarter of 2015 compared to a year earlier, which was primarily attributable to the increased volumes of mortgaged loans originated for sale. Also impacting our non-interest income for the second quarter of 2015 was a $236,000 gain associated with selling a closed overlapping branch facility in Ford Scot [ph]. Partially offsetting these gains was a decline of $109,000 of fees and service charges. Our second quarter non-interest expenses increased by $350,000 to $7.4 million on a linked quarter basis, primarily resulting from increases of $351,000 in compensation and benefits and $100,000 in non-interest expense. The increased compensation and benefit expenses during the second quarter of 2015 primarily relate to the expanded mortgage banking activity. The increase in other non-interest expense reflected a $163,000 impairment of the residual real estate collateral associated with an affordable housing investments. Partially offsetting these increased categories were expense reductions of $70,000 in professional fees and $35,000 in occupancy and equipment expense. Moving on to discuss some financial highlights for the first half of 2015. Similar to my quarterly comments, we experienced an increase in our net interest margin in comparison to the first six months of 2014, improving from 3.48% to 3.51% on a tax equivalent basis. Our average interest earning assets increased 6.3% from $739.6 million during the first six months of 2014 to $786.3 million during 2015. With the combination of these two changes our net interest income increased $842,000 to $12.9 million for the first half of 2015, an increase of 7% compared to the same period of 2014. During the first six months of 2015, we reported a negative provision for loan losses of $800,000 compared to a provision for loan losses of $450,000 in the first half of 2014. Negative provision in 2015 relates to a recovery and amount of $1.7 million during the first quarter of 2015 on a construction loan which was fully charged off during 2010 and 2011. Non-interest income totaled $8.4 million for the first six months of 2015, an increase of $1.0 million or 13.8% in comparison to the same period of 2014. This with my quarterly comments, this increase results primarily from the increase of the $1.2 million and gains on sales of loans due to higher volumes of loans sold in the secondary market resulting from our expanding or mortgage banking operations and also lower mortgage interest rates prompting increased refinancing demand, along with a $236,000 gain on the sale of that extra facility on Ford Scot. Partially offsetting these increases was $254,000 loss on sales of investment securities during the first six months of 2015. This loss was the result of selling $19.1 million of our federal agency insured, mortgage backed investment securities or follow to reduce our exposure to rising interest rates. Our evaluation of the banks investment portfolio had identified certain investments acquired in the past acquisitions that did not meet our investment parameters with respect to their performance in rising rate environments. Looking at our non-interest expense, we reported an increase of 4.7% or $650,000 for the first six months of 2015, in comparison to the same period of 2014. This increase was the result of increases of $588,000 in compensation and benefits, and $237,000 in other non-interest expense. In order to my second quarter comments, these levels of expense in 2015 primarily reflected expenses associated with the expanding mortgage banking activity, while the increase in other non-interest expense reflected $163,000 impairment of the residual real estate collateral associated with an affordable housing investment. Partially offsetting these increased expense categories or expense reduction of $122,000 in professional fees and $77,000 in occupancy and equipment expense. Touch on a few balance sheet highlights, our total assets increased $26.2 million to $889.7 million at June 30, 2015 compared to $863.5 million at December 31, 2014. Our loan portfolio increased $4.9 million to $421.1 million at June 30, 2015 from $416.2 million at year end 2014. Our investment securities increased $10.6 million to $363.5 million at June 30, 2015 from $352.9 million at December 31, 2014. Stockholders' equity increased by $3.6 million to $75.2 million at June 30, 2015 or a book value of $22.53 per share, compared to $71.6 million at year end 2014 or a book value of 21.49 per share. Our consolidated and bank regulatory capital ratios continue to exceed levels to be considered well capitalized as of June 30, 2015. The bank's leverage capital ratio was 9.0% at June 30, 2015 while the total risk-based capital ratio was 15.2%. I will now turn the call over to Brad Chindamo to review highlights on our loan portfolio.

[Brad Chindamo:]

Thanks, Mark and good morning to everyone. Net loans outstanding as of June 30, 2015 totaled $421 million. This is a $4 million increase from the previous quarter end total of $417 million and a $5 million increase from our year-end total of $416 million in net loans. We remained focused on prospecting new high quality commercial banking relationships and expanding existing high quality relationships. Non-performing loans, which primarily consist of loans greater than 90 days past due totaled $6.4 million or 1.50% of gross loans as of June 30, 2015; this compares to a level of 1.44% as of year-end 2014. A significant part of non-performing loans is principally associated with one credit, the commercial loan relationship consisting of $2.6 million in real estate and land loans which was placed on non-accrual status after the borrower filed for Chapter 13 bankruptcy reorganization in 2012. Since the bankruptcy filing, the principal balance of the loans have been reduced from $4.4 million to $2.6 million from asset sales and cash flows from the properties securing the loans. Another indicator we monitor as part of our credit risk management effort 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 June 30, 2015 totaled $1.7 million or 0.40% of gross loans. Of the loans in the 30 to 89-day past due category, 51% or $854,000 are associated with one loans, a commercial real estate loan. We continue to monitor delinquency trends carefully in all loan categories. Our balance and other assets real estate owned totaled $46,000 as of June 30, a decrease from $198,000 in the prior quarter. The other real estate owned balances have been reduced as a result of the sales properties. We continue to market for sale of the remaining properties held in real estate owned. We recorded net loan recoveries of $1.5 million during the first half of 2015. This compares to net loan charge-offs of $841,000 in the first half of 2014. The significant recovery in the first six months was a result of ongoing collection efforts on a construction loan that was fully charged-off in 2010 and 2011. In terms of exposure to credit concentrations, we maintain a high end focus on our portfolio management of commercial real estate and construction relationships, as well as increased focused on our agriculture loan portfolio. As of June 30, 2015, our construction and land loan portfolio balances totaled $17.3 million or 4.0% of our total loan portfolio, compared to $21.9 million or 5.2% of our portfolio as of year-end 2014. As of June 30, 2015 outstanding loan balances in our commercial real estate portfolio totaled $118.6 million representing 27.8% of our total loan portfolio. Total balances in our agricultural loan portfolio were $67.7 million or 15.9% of our total loan portfolio as of June 30, 2015. As part of our comprehensive credit risk management processes we review construction land, commercial real estate and agricultural loan portfolios for loan type and geographic concentration issues on a quarterly basis. On a consolidated basis, the resulting Landmark loan portfolio gross totals approximately $427 million at quarter-end June 30, 2015. Mortgage one-to-four loans represent 31% of the portfolio and commercial loans are just over 15% of the portfolio. The current economic landscape in Kansas remains stable. The seasonally adjusted unemployment rate for Kansas as of June was 4.5% versus a 5.3% national rate according to the Bureau of Labor Statistics. The broader real estate economy across the state is showing positive sales activity and declining inventories year-to-date in 2015. The 2015 winter wheat harvest in Kansas is being forecasted at significantly increased yields compared to last year, and compared to previous predictions according to the USDA. Increased precipitation across the state compared to the prior couple of years has created optimism for fall crop yields as well. Livestock feeders are expected to face tighter margins in the coming year that are being aided by lower feeding costs. Farmland prices have remained generally flat the past few quarters across Kansas with some modest weakening in certain land used categories. Our exposure in the farmland market segment remains limited as the majority of our agricultural loans are tied to the production cycle. We will continue to monitor the factors impacting our credit portfolio closely going forward. Thanks again. And with that I'll hand the call back over to Michael.

[Michael Scheopner:]

Thank you, Brad. I also want to thank Mark for his comments earlier in this call. Before we go to questions, I just want to summarize by saying that we are pleased with Landmark's operating results for the second quarter of 2015, as well as our overall performance year-to-date. We believe that the company's risk management practices and capital strength continue to position us well for long term growth. I anticipate our trends of solid earnings to continue during the remainder of 2015. With that, I'll open the call up to questions that anyone might have. Thank you. We will now begin the question-and-answer session. [Operator Instructions] And we do have a question from Bill Haney, a private investor. Please go ahead with your question.

[Unidentified Analyst:]

Yes, I was really impressed with the work that you've done with your municipal portfolio. Could you speak just a moment about what your philosophy is on your securities portfolio and maybe give us a hand about what the average class, the effective duration? Are you primarily going with obligations or revenue bonds as your municipal portfolio?

[Michael Scheopner:]

Good morning, Bill, and thanks for that question. I guess with respect to our investment portfolio on the municipal bonds, I guess to start out with; we're focused primarily on probably 100% just on municipal general obligation bonds. We do not look at industrial revenue new bonds, we get any of those we treat those as loans and classify those in our loan portfolio, subject to additional credit underwriting. But we're really looking at safe bonds, we're kind of attempted to create a barbell structure at some extent and if we go out longer on the curve we want to make sure that either Kansas bonds that are in our communities and we know the areas or they are double layer better. At shorter end we're looking there as well and we want high quality bonds but our average duration I think is – I think getting into the 3.5 years or so range at this point in time. So our average life might be a little longer than that, I think it might be closer to 4.5 years, which is probably about as long as we wanted to be at this point in time but that's why we're focused on high quality Midwestern bonds. We still think there is lot of value in those bonds at this point.

[Unidentified Analyst:]

Very good. Thank you for your answer and you're doing a good job. Keep it up.

[Michael Scheopner:]

Thanks, Bill.

[Operator:]

[Operator Instructions] At this time, I'm not showing any additional questions. So that concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Scheopner for any closing remarks.

[Michael Scheopner:]

Thank you. And I want to thank everyone who called in and participated 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 third quarter results at our next earnings conference call. Thank you.

[Operator:]

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