Landmark Bancorp, Inc.
Q3 2015 Earnings Call Transcript

Published: 30 Oct 2015

[Operator:]

Good morning. And welcome to the Landmark Bancorp 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 also note today’s 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 and good morning. Thank you for joining our call today to discuss Landmark’s earnings and results of operations for the third quarter of 2015. Joining the call with me today to discuss various aspects of our third quarter and year-to-date 2015 performance are Mark Herpich, Chief Financial Officer of 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 discussion 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 obtain by contacting the company or the SEC. We reported record net earnings of $2.5 billion or $0.73 per share on a fully diluted basis for the third quarter 2015. This represents a 16.3% increase over our third quarter 2014 earnings level. Our 2015 year-to-date net earnings totaled $7.9 million, a 33.1% increase from the first three quarters of 2014. Earnings per share were $2.30 for the first nine months of 2015, up from a $1.76 in the same period last year. Our return on average assets for the first three quarters of this year calculates to 1.22%, the company's return on average equity was 14.14%. Mark and Brad will provide additional detail on Landmark’s financial performance and asset quality metrics later on this call. I am pleased to report that our Board of Directors has declared a cash dividend of $0.19 per share to be paid November 25, 2015 to shareholders of record as of November 12, 2015. This represents the 57th consecutive quarterly cash dividend since the company's formation resulting from the merger of Landmark Bancorp, Inc. with MNB Bancshares in October of 2001. The Board also declared a 5% stock dividend to be issued December 16, 2015 to shareholders of record on December 2, 2015. This represents the 15th consecutive year that the Board has declared a 5% stock dividend. In summary, Landmark is performing strongly and delivering earnings growth in 2015. This is a credit to the continued efforts of our associates throughout the organization, maintaining their focus on good banking fundamentals. Your 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 foreseen economic events. As a community bank with a strong presence across the state of Kansas, Landmark has 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 third quarter and nine months ended September 30, 2015, I would like to make a few comments on various elements comprising those earnings results. Starting with the third quarter income statement highlights, net interest income increased $164,000 to $6.4 million, a 2.6% increase in comparison to the prior year's third quarter. The higher net interest income was primarily driven by 3% increase in our average interest earning assets from $761.8 million in the third quarter of 2014 to $784.6 million during the third quarter of 2015. Net interest income also benefited from our net interest margin which increased to 3.48% in the third quarter of 2015 from 3.47% a year earlier. From a quarter-to-quarter perspective, third quarter margin decreased from 3.56% in the second quarter of 2015 due in part to higher average interest-earning assets total of $792.5 million in the second quarter. Looking at our provision, we provided $100,000 to the allowance for loan losses in the third quarter of 2015 compared to $150,000 provision in the third quarter of 2014. Non-interest income increased $622,000 to $4.5 million in the third quarter of 2015, up 16.1% as compared to the same period of 2014. Our gains on sales of loans reflected an increase of $487,000 for the third quarter of 2015 compared to a year earlier, which was primarily attributable to increased volumes of mortgaged loans originated for sale. Also impacting our non-interest income for the third quarter of 2015 was a $135,000 gain, associated with selling certain agency mortgage-backed investment securities to reduce our exposure to rising interest rates. Our third quarter’s non-interest expenses increased by $315,000 to $7.3 million on a linked quarter basis, primarily resulting from increases of $278,000 in compensation and benefits, $83,000 in other non-interest expense and $58,000 in advertising expense. The increased compensation and benefit expenses and the non-interest expense during the second quarter of 2015 relates primarily to the expanded mortgage banking activity, while the advertising expense was due to deposit-related promotions and rewards. Partially offsetting these increased categories was expense reductions achieved in occupancy and equipment expense, FDIC insurance premiums and foreclosure-related expenses. Moving onto discuss some financing highlights for the nine months of 2015. Similar to my quarterly comments, we experienced an increase in our net interest margin in comparison to the first nine months of 2014, improving from 3.48% to 3.50% on a on a tax equivalent basis. Our average interest earning assets increased 5.2% from the $747.1 million during the first nine months of 2014 to $785.7 million during 2015. With the combination of these two changes, our net interest income increased $1 million to $19.3 million for the first nine months of 2015, an increase of 5.5% compared to the same period of 2014. During the first nine months of 2015, we recorded a negative provision for loan losses of $700,000 compared to a provision for loan losses of $600,000 in the first nine months of 2014. 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 was fully charged off during the years 2010 and 2011. Non-interest income totaled $12.9 million for the first nine months of 2015, an increase of $1.6 million or 14.6%, in comparison to the same period of 2014. Consistent with my quarterly comments, this increase results primarily from an increase of $1.7 million in gains on sales of loans due to higher volumes of loans sold in the secondary market. That resulted from expanding our mortgage banking operations and also lower interest rates prompted increased refinancing demand in the first quarter of 2015. We also had a $236,000 gains on the sale of an extra facility in Fort Scott. Partially offsetting these increases was $119,000 loss on sales of investment securities during the first nine months of 2015. This was a result of selling certain federal agency insurance, mortgage-backed investment securities to reduce our exposure to rising interest rates. Our evaluation of the bank’s investment portfolio and identifying certain investments acquired in 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 recorded an increase of 4.6% or $965,000 for the first nine months of 2015 in comparison to the same period of 2014. This increase was the result of increases of $866,000 in compensation and benefits and $320,000 in other non-interest expense. If you look at my second quarter comments, these higher levels of expense in 2015 primarily reflected expenses associated with the expanded mortgage banking activity. The increase in other non-interest expense also reflected $153,000 impairment of the residual real estate collateral associated with an affordable housing investment. Partially offsetting these increased expense categories were expense reductions of $124,000 in occupancy and equipment expense and $117,000 in professional fees. Now turn to few balance sheet highlights. Our total assets increased $3.4 million to $856.9 million at September 30, 2015, compared $863.5 million at December 31, 2014. Our loan portfolio increased $607,000 to $416.8 million at September 30, 2015 from $416.2 million at year end 2014. Our investment securities increased $4 million to $356.9 million at September 30, 2015 from $352.9 million at December 31, 2014. Stockholder’s equity increased by 10.4% to $79.1 million at September 30, 2015, a book value of $23.67 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 the levels to be considered well capitalized as of September 30, 2015. 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 September 30, 2015 totaled $417 million. This was a $1 million increase from our year end total of $416 million in net loans and a $4 million decrease from the June 30, 2015 total. We remain focused on prospecting new and expanding existing high-quality commercial banking relationships. Non-performing loans, which primarily consist of loans greater than 90 days past due, totaled $4 million or 0.94% of gross loans as of September 30, 2015. This compares to a level of 1.44% as of year end 2014 and represents a decline from $6.4 million or 1.50% as of June 30, 2015. Our credit risk and collection efforts continue to be focused 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, 2015 totaled $719,000 or 0.23% of gross loans. We continue to monitor delinquency trends carefully in all loan categories. Our balance and other assets real estate owned totaled $101,000 as of September 30th, an increase from $46,000 in the prior quarter and a decrease from $255,000 at the previous year end. The other real estate owned balances have been reduced as a result of the sales properties. We continue to market for sale the remaining properties held in real estate owned. We recorded net loan recoveries of $1.3 million during the first nine months of 2015. This compares to net loan charge-offs of $918,000 for the first three quarter of 2014. The significant recovery in the first nine 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 heightened focus on our portfolio management of commercial real estate and construction relationships, as well as increased focused on our agriculture loan portfolio. As of September 30, 2015, our construction and land loan portfolio balances totaled $14.3 million or 3.4% of our total loan portfolio, down from $21.9 million or 5.2% of our portfolio as of year end 2014. As of September 30, 2015, outstanding loan balances in our commercial real estate portfolio totaled $116.1 million, representing 27.5% of our total loan portfolio, down from $118.4 million at year end 2014, which was 28.1% of the total. Total balances in our agricultural loan portfolio were $67.9 million or 16% of our total loan portfolio as of September 30, 2015, up from $64.3 million at year end 2014 or 15.3% of our portfolio at that time. As part of our comprehensive credit risk management processes, we review the 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 portfolios gross totals approximately $423 million at quarter end September 30, 2015. Mortgage one-to-four loans represent just under 32% of the portfolio and commercial loans are just under 15% of the portfolio. The current economic landscape in Kansas remains stable. The seasonally adjusted unemployment rate for Kansas as of September was 4.4% versus a 5.1% national rate according to the Bureau of Labor Statistics. The broader real estate economy across the state is showing stable sales activity and limited inventories year-to-date in 2015. 2015 Fall Harvest in Kansas is forecasting increased yields compared to last year although those higher yields will be offset by generally lower commodity prices. Livestock feeders are facing tighter margins that are being aided by lower feeding costs. Farmland prices have remained generally flat in 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 many factors impacting our credit portfolio closely going forward. Thanks again. And with that, I'll hand it back over to Michael.

[Michael Scheopner:]

Thank you, Brad. And 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 third quarter of 2015, as well as our overall performance year-to-date. We believe that the company's risk management practices and that our capital strength continues to position us well for long-term growth. I anticipate our trends of solid earnings to continue during the remainder of 2015 and going forward into 2016. With that, I'll open the call up to questions that anyone might have.

[Operator:]

Thank you, sir. [Operator Instructions] Seeing no question, 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 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 in fiscal year ending 2015 results at our next earnings conference call. Thank you.

[Operator:]

And thank you sir. Today’s conference has now concluded.