Landmark Bancorp, Inc. (NASDAQ:LARK)
Q1 2016 Earnings Conference Call
April 28, 2016 11:00 AM ET
Michael Scheopner – President and Chief Executive Officer
Mark Herpich – Chief Financial Officer
Brad Chindamo – Credit Risk Manager
Good day and welcome to the Landmark Bancorp 1Q Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]
Please note that this event is being recorded. I would now like to turn the conference over to Mr. Michael Scheopner, President and CEO. Please go ahead, sir.
Good morning. Thank you for joining our call today to discuss Landmark’s earnings and results of operations for the first quarter of 2016. Joining the call with me today to discuss various aspects of our first quarter 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 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 $2.3 million or $0.62 per share on a fully diluted basis for the first quarter 2016. This compares to net earnings of $2.8 million during the first quarter of 2015. The climb from the prior year relates to a $1 million credit provision to loan losses during the first quarter of 2015 as a result of a large recovery one a previously charged off construction loan.
Apart from this prior year credit earnings increased in comparison to the first quarter of last year. Landmark’s first quarter of 2016 return on average assets calculates to 1.04%. The Company’s return on average equity for the first quarter was 11.04%.
Mark and Brad will provide additional details 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 $0.20 per share, to be paid May 25, 2016, to shareholders of record as of May 11, 2016. This represents the 59th consecutive quarterly cash dividend since the Company’s formation resulting from the merger of Landmark Bancorp Inc with MNB Bancshares Inc in October 2001.
In summary Landmark’s banking operations performed strongly during the first quarter of 2016 and factoring in the effects of the 2015 credit provision on the comparison delivered growth in earnings compared to the same period last year. This is a credit to the continued efforts of our associates throughout our organization focusing 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 pair us as well as possible for any adverse economic events.
As a community bank with a strong presence across the State of Kansas Landmark is committed to growing our customer relationships meeting the diverse financial meeting of families in businesses.
I will now turn the call over to Mark Herpich, our CFO, who will review the financial results with you.
Thanks, Michael and good morning to everyone. As Michael has already summarized our earnings for the first quarter of 2016, I would like to make a few comments on various elements comprising those results.
While our 2016 first quarter net earnings were lower than the first quarter of 2015 earnings remained strong, since the impact of that first quarter 2015 credit provision for loan losses of $1 million it offers which related to a large recovery last year on a previously charged off loan. Excluding the after tax of the provision for loan losses for the first quarter of 2016 and 2015 earnings increased about $160,000 compared to the first quarter of last year.
Starting with the first quarter income statement highlights net interest income increased $110,000 to $6.4 million, a 1.8% increase in comparison to the prior year's first quarter. The higher net interest income was primarily driven by a $12 million or 1.5% increase in our average interest earning assets from $780 million in the first quarter of 2015 to $792 million during the first quarter of 2016.
While our net interest margin was 3.47% in both quarter our net interest income benefited from an increase in the tax equivalent yields and higher investment securities balances during the first quarter of 2016.
Looking at our provision for loan losses, we provided $50,000 to the allowance in the first quarter of 2016 compared to a credit provision for loan losses of $1 million in the first quarter of 2015. The negative provision for loan losses in 2015 related to a recovery in the amount of $1.7 million on a construction loan which have been fully charged-off during 2010 and 2011.
Non-interest income increased to $131,000 to $3.9 million for the first quarter of 2016, up 3.5% as compared to the same period of 2015. The increase was primarily related to sales of investment securities, as we recorded $12,000 gain in the first quarter of 2016 compared to recognizing a $254,000 loss in the first quarter of 2015. Partially offsetting the impact of these investment securities transactions our gains on sales of loans reflected a decrease of $149,000 for the first quarter of 2016 compared to a year earlier, which was primarily attributable to a decreased volume of mortgage loans originated for sale.
Our first quarter non-interest expenses increased by $51,000 to $7.2 million or less than 1% on a linked quarter basis, primarily resulting from increases of $80,000 in compensation and benefits a 2.2% increase, $42,000 in advertising expenses related to cost associated with advertising or deposit programs. And $40,000 in foreclosure and other real estate owned expense.
The increase in foreclosure expense relates to higher property taxes and legal fees associated with the other real estate properties, partially offsetting these increases or expense reductions achieved in occupancy and equipment expense, professional fees, data processing, FDIC insurance premiums and other non-interest expenses.
To touch on a few balance sheet highlights, our total assets increased $14.1 million to $892.5 million at March 31, 2016 compared to $878.4 million at December 31, 2015. Our loan portfolio remained at $419.9 million for both March 31, 2016 and March – December 31, 2015. Our investment securities increased $19.9 million to $377.8 million at March 31, 2016 from $357.9 million at December 31, 2015.
Stockholder’s equity increased by 5.7% to $85.2 million at March 31, 2016 or a book value of $23.79 per share compared to $80.6 million at year end 2015 or a book value of $22.82 per share. That is a 4.3% increase in book value per share. Our consolidated and bank regulatory capital ratios as of March 31, 2016 continue to exceed the levels considered well capitalized. The bank's leverage capital ratio was 9.5% at December 31, 2016 while the total risk based capital ratio was 16.4%.
I will now turn the call over to Brad Chindamo to review highlights on our loan portfolio.
Thanks, Mark, and good morning to everyone. Net loans outstanding as of December 31, 2016 totaled $420 million. This is a $3 million increase from our March 31, 2015 total of $417 million in net loans and flat compared to December 31, as Mark mentioned previously. Our commercial banking team continues to focus on prospecting and expanding both new and existing high quality banking relationships.
Non-performing 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 and represents a decline from the year earlier level of $5.9 million or 1.40% as of March 31, 2015. The increase this year-end primarily represents one loan that entered into the foreclosure process in the first quarter of this year. Our credit risk and collection efforts continue to be focused on reducing these totals.
Another indicator we monitor is 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 March 31, 2016 totaled $957,000 or 0.22% 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 and other assets real estate owned totaled $310,000 as of March 31, a decline from $1 million at year-end 2015. The other real estate owned balances have declined as a result of efforts to move problem loans through the collection process towards resolution. We continue to market for sale properties held in real estate owned.
We recorded net loan charge-offs of $103,000 during the first quarter of 2016. This compares to net loan recoveries of $1.5 million in the first quarter of 2015. The significant recovery in 2015 has mentioned previously, it was a result of ongoing collection efforts on a construction loan that it’s previously been charged-off in 2010 and 2011. We continue to maintain a diversified mix in the loan portfolio in both loan types and geography across the state. On a consolidated basis the resulting Landmark loan portfolio gross totals approximately $433 million as of March 31, 2016.
In terms of exposure to credit concentrations, we maintain a heightened focus on our portfolio management of commercial real estate and construction and land relationships. Recent regulatory publications have emphasized increased emphasis of 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 March 31, 2016, our construction and land loan portfolio balances totaled $15.3 million or 3.6% of our total loan portfolio. Outstanding loan balances in our commercial real estate portfolio totaled $118.5 million, representing 28.2% of our total loan portfolio, which is a slight decline from year-end 2015. Landmark loan portfolio and the construction land category ended March 31, 2016 at 17.5% of risk based capital, well below the regulatory guideline of 100%, a level where regulators could view the total as a concentration requiring heightened risk management practices.
Our commercial real estate portfolio was at 153% of risk based capital which if far below the 300% regulatory guideline in that category. Mortgage one-to-four family loan portfolio represents just under 32% of the portfolio at $132.3 million for March 31, 2016, compared to $131.9 million or just under 31% as of the year-end 2015. The broader residential real estate economy across the state showed stable to increasing sales activity for the past year. The 2016 forecast according to the WSU Center for real estate is for sales across Kansas dry icing more than 8% in 2016. The performance of this segment of our portfolio remains strong to-date, with low levels of delinquency and collections issues.
With regard to our agricultural loan portfolio, total balances were $73.2 million or 17.4% of our total loan portfolio as of March 31, 2016, which represents an increase from $63.3 million or 15% of the portfolio one year ago on March 31, 2015. The growth has come from an expansion of our Ag portfolio base in both Southeast and Southwest Kansas, as well as decelerating repayments from Ag borrowers impacted by lower commodity prices.
The agriculture outlook appears to be challenging primarily due to continued depressed commodity prices. Livestock feeders are operating with shrinking margins compared to prior years, although appear to have stabilized in the past few months. Row crop producers will face a challenging year looking forward due to lower commodity prices combined with relatively flat input costs. Farmland prices have declined modestly in the past couple of quarters across kicking into this with more softness in certain land use categories and others.
Our exposure in the farmland lending segment remains limited, as the majority of our agricultural loans are tied with the production cycle. We're operating with an increased focus on our agricultural loan portfolio as that sector enters potentially its most challenging environment in the past several years. Risk trends in that portfolio are not showing signs of material deterioration at this time and we remain confident in our credit risk practices.
Our agriculture lending staff has made out with some of the most seasoned and qualified Ag bankers in the state most of whom have experienced multiple downward cycles in this sector. Commercial and industrial loans were $59.4 million as of March 31, 2016, just over 14% of the current portfolio. The total is down slightly from year end 2015 at a total of $61.3 million. The current macroeconomic landscape in Kansas remains stable. The seasonally adjusted unemployment rate for Kansas as of March was 3.9% versus a 5.0% [national rate according to the Bureau of Labor Statistics.
A noted area of escalated risk at this time is the energy sector. The bank’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 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 portfolios going forward and we 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 quarters.
Thanks again and with that, I'll hand it back over to Michael.
Thank you, Brad. And I also want to thank Mark for his comments.
Before we go to questions, I just want to summarize by saying that we are pleased with Landmark's operating results for the first quarter of 2016, as results continue a trend of strong core earnings across all of our community banking lines of business. Our asset quality metrics continue to reflect extremely high credit quality standards, we believe that the company’s risk management practices and our capital strength continue to position us well for long term growth.
I anticipate our trend of solid earnings to continue going forward into 2016. With that I’ll open the call up to questions that anyone might have.
Okay thank you. I want to thank everyone for participating in today’s earnings call I appreciate your continued support and the confidence in our company. I look forward to sharing news related to our second quarter 2016 results at our next earnings conference call. Thank you.
The conference has now concluded, thank you for attending today’s presentation. You may now disconnect the lines.
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