Landmark Bancorp Inc. (NASDAQ:LARK)
Q2 2016 Earnings Conference Call
August 3, 2016 11:00 AM ET
Michael Scheopner - Chief Executive Officer
Mark Herpich - Vice President, Secretary, Treasurer and Chief Financial Officer
Bradly Chindamo - Market President
Good morning and welcome to the Landmark Bancorp Q2 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.
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 2016. Joining the call with me today to discuss various aspects of our second quarter and year-to-date 2016 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 $2.2 million, or $0.61 per share on a fully diluted basis for the second quarter of 2016. This compares to net earnings of $2.6 million during the second quarter of 2015. Year-to-date 2016 net earnings totaled $4.5 million compared to $5.4 million during the first-half of 2015.
The decline from the prior year primarily relates to an $800,000 credit provision to loan losses in the comparable 2015 reporting period, as a result of a large recovery on a previously charged-off construction loan and a lower level of gain on sale of loans due to decreased production levels in 2016 after we lost a few mortgage banking originators during the first-halfhalf of 2016. We’ve had some success in our recruiting efforts to replace the mortgage origination staff members who left the company and we are continuing those efforts.
Landmark’s year-to-date 2016 return on average assets calculates to 1.02%. The company’s year-to-date return on average equity was 10.75%. Mark and Brad will provide additional detail on Landmark’s financial performance and asset quality metrics.
I’m pleased to report that our Board of Directors has declared a cash dividend of $0.20 per share to be paid August 31, 2016 to shareholders of record as of August 7, 2016. This represents the 60th 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-half of 2016. Our financial 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 it 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 our families and businesses.
I will now turn the call over to Mark Herpich, our Chief Financial Officer, who will review the financial results with you.
Thanks, Michael, and good morning to everyone. As Michael has already summarized our earnings for the second quarter and six months ended June 30 of 2016, I would like to make a few comments on various elements comprising those results. While our 2016 first-half net earnings were lower than the first six months of 2015, earnings remained strong, absent the impact of that first quarter 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 second quarter 2016 earnings were also impacted by reduced loan sales volumes and related gains on sales of loans resulting from the departure of a few mortgage lenders as Michael has already alluded.
Starting with the second quarter income statement highlights, net interest income was $6.6 million, a decrease of $62,000, or 0.9% in comparison to the prior year’s second quarter. The slightly lower net interest income resulted from lower yields on interest earning assets and higher rates on interest bearing deposits and borrowings resulting in a decline in net interest margin from 3.56% in the second quarter of 2015 to 3.46% in the same period of 2016.
The narrower margin overcame a 2.8%, or $22.6 million increase in our average interest earning assets from $792.5 million in the second quarter of 2015 to $815.1 million during the second quarter of 2016.
Looking at our provision for loan losses, we provided $300,000 to the allowance in the second quarter of 2016 compared to $200,000 in the second quarter of 2015. Non-interest income decreased $734,000 to $3.9 million in the second quarter of 2016, down 15.7% as compared to the same period of 2015. The decrease was primarily related to an $846,000 decline in 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 a few mortgage lenders as discussed. Also hurting the comparison in non-interest income was the inclusions in other non-interest income for the second quarter of 2015 of a $236,000 gain associated with selling a closed overlapping branch facility. Partially offsetting these reductions were $285,000 of gains on sales of investment securities during the second quarter of 2016, as compared to no investment securities gained during the same period of 2015.
Our second quarter non-interest expenses decreased by $232,000 to $7.2 million, or 3.1%, on a linked-quarter basis, primarily resulting from decreases of $249,000 in other non-interest expense and $68,000 in compensation and benefits. The decline in other non-interest expense reflects a $163,000 impairment in the second quarter of 2015 related to the residual real estate collateral associated with an affordable housing investment and the reduced mortgage banking activity in the second quarter of 2016, which also reduced compensation and benefits.
Moving on to discuss some financial highlights for the first-half of 2016, similar to my quarterly comments, we experienced a decrease in net interest margin in comparison to the first six months of 2015, declining from 3.51% to 3.47% on a tax equivalent basis. Our average interest earning assets increased 2.1% from $786.3 million during the first six months of 2015 to $803.5 million during 2016. With the combination of these two changes, our net interest income increased $48,000 to $13.0 million for the first-half of 2016, an increase of 0.4% compared to the same period of 2015.
During the first six months of 2015, as mentioned, we recorded a negative provision for loan losses of $800,000 compared to a provision for loan losses of $350,000 in the first-half of 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.
Non-interest income totaled $7.8 million for the first six months of 2016, a decrease of $603,000, or 7.1% in comparison to the same period of 2015. Consistent with my quarterly comments, this decrease results primarily from decreases of $995,000 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 $260,000 decline in other non-interest income driven by that $236,000 gain on the sale in 2015 of a closed branch location. Partially offsetting these reductions were $297,000 of gains on sales of investment securities during the first-half of 2016, as compared to a $254,000 loss on sales of investment securities during the first six months of 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 that were identified as part of our ongoing review of the portfolio.
Looking at non-interest expense, we reported a decrease of 1.2% or $181,000 for the first six months of 2016 in comparison to the same period of 2015. This decrease was the result of a $287,000 decline in other non-interest expense reflecting the previously mentioned $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 six months of 2016.
Partially offsetting these decreased expense categories were increases of $83,000 in advertising expenses relating to costs associated with advertising our deposit programs and $71,000 in foreclosure and other real estate owned expenses.
To touch on a few balance sheet highlights, our total assets increased $17.9 million to $896.3 million at June 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 June 30, 2016 compared to December 31, 2015. Our investment securities increased $13.2 million to $371.2 million at June 30, 2016 from $357.9 million at December 31, 2015.
Stockholders’ equity increased by 10.9% to $89.4 million at June 30, 2016 or a book value of $24.68 per share compared to $80.6 million at year-end 2015, or a book value of $22.82 per share. That is an 8.2% increase in book value per share. Our consolidated and bank regulatory capital ratios as of June 30, 2016 continued to exceed the levels considered well capitalized. The Bank’s leverage capital ratio was 9.5% at June 30, 2016, while the total risk-based capital ratio was 16.6%.
I’ll 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 June 30, 2016 totaled $430 million. This is a $10 million increase from our net loan total of $420 million on December 31, 2015, as well as our loan total on March 31, 2016, which was also $420 million. The net growth was driven by the continued efforts of our commercial banking team 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 consist of loans greater than 90 days past due, totaled $2.6 million, or 0.60% of gross loans as of June 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 $6.4 million, or 1.50% as of June 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 June 30, 2016 totaled $1.2 million, or 0.28% of gross loans. This is a decline from 0.33% of gross loans as of December 31, 2015. We had one loan in excess of 90 days past due, but still accruing interest as of June 30, 2016, totaling $218,000. That loan has been paid current since the end of the fiscal quarter.
We continue to monitor delinquency trends carefully in all loan categories. Our balance in other assets real estate owned totaled $718,000 as of June 30, 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 toward resolution. We continue to market for sale all properties held in real estate owned.
We recorded net loan charge-offs of $517,000 during the second quarter of 2016. Net loan charge-offs for the year-to-date through June 30, 2016 were $620,000. This compares to net loan recoveries of $1.5 million in the first-half of 2016. And as previously 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. 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, the resulting Landmark loan portfolio gross totals approximately $436 million as of June 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 risk management process, we review both construction and land and commercial real estate for loan type and geographic concentration issues on a quarterly basis.
As of June 30, 2016, our construction and land loan portfolio balances totaled $18.4 million, or 4.2% of our total portfolio. Outstanding loan balances in our commercial real estate portfolio totaled $119.0 million, representing 27.3% of our total loan portfolio. Landmark’s loan portfolio in the construction land category as of June 30, 2016 totals 20.5% of risk-based capital, which is well below the regulatory guideline of 100%, a level where regulators would view the total as a concentration required – requiring heightened risk management practices. Our commercial real estate portfolio was at 153% 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 $131.6 million for June 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 showed stable to increasing sales activity for the past year with improved equilibrium between supply and demand metrics in most markets. Performance of this segment of our portfolio continues to be strong to date with low levels of delinquency and collection issues.
With regard to our agricultural loan portfolio, total balances were $78.8 million, or 18.1% of our total loan portfolio as of June 30, 2016. This is an increase from $67.7 million, or 16% of the portfolio one year ago on June 30, 2015. That growth has come from the expansion of our ag portfolio base in both Southeast and Southwest Kansas, as well as decelerating repayment rates for ag borrowers impacted by lower commodity prices.
The agriculture outlook continues to be challenging driven primarily by depressed commodity prices. Continued weakness in commodity prices or further deterioration through the fall 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 the decline in commodity prices.
Farm land prices have shown modest declines in the past couple of quarters across Kansas, our exposure in the farmland lending segment remains limited as the majority of our agricultural loans are tied to the production cycle. We are operating with an increased focus on our agricultural loan portfolio as that sector enters potentially its most challenging environment in the past several years. We’ve identified borrowers experiencing pressure in this segment of our portfolio through the seasonal spring renewal cycle and we’ll continue to monitor trends closely throughout the fall cycle.
Our agriculture lending staff is made up 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 $62.1 million as of June 30, 2016 or just over 14% of the current portfolio. The total is up slightly from year-end 2015, which totaled $61.3 million. The current macroeconomic landscape in Kansas remains stable. The seasonally adjusted unemployment rate for Kansas as of June was 3.8% versus a 4.9% national rate according to the Bureau of Labor Statistics.
Continuing area of escalated risk at this time is the energy sector. The Bank’s direct exposure to this sector 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 that we believe the Bank’s exposure to the recent weakness in the energy sector is immaterial.
We’ll 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 underwriting and risk management practices that have supported our continued profitability reflect past several years.
Thanks again. And with that, I’ll hand it back over to Michael.
Thank you, Brad and Mark also for your comments. Before we go to questions, I want to summarize by saying we are pleased with Landmark’s operating results for the second quarter and first half of 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 organic or acquisitive growth and anticipate our trends of solid earnings to continue during the second half of 2016.
With that, I’ll open the call up to questions that anyone might have.
[Operator Instructions] The first question today is from Matt Seeley of private investor. Please go ahead.
Hey, good morning guys. Thanks for taking call.
I want to start on the income here, a little soft during the quarter as you lost those mortgage lenders, but what happened here? Any color around that would be great. Was it just standard turnover or what exactly was that?
Well in essence, Matt, what happened was during the time period between January 1 and May 1, our – we had several mortgage bankers and support staff that were recruited away by a Louisiana based financial institution that opened a mortgage production office in Johnson County, Kansas.
And in one part, I believe that is somewhat of a reflection of the fact that we’ve been – we were extremely successful in that marketplace with respect to our mortgage banking operation. And really our efforts to recruit new origination and support staff members in that market have been successful.
Again because I believe our reputation as being a highly competent and capable mortgage banking operation with a focus on meeting the needs of our home buyers in our banking market, not only in the Johnson County market, but across the entire state of Kansas has really been a key to helping us recruit new staff.
So as we look forward to the second half of 2016, I expect that we’ll continue to have success in adding production and support staff as needed to increase our production volume in that market and I expect those efforts to payoff as we resell that pipeline later in the third quarter of 2016 with a focus on rebuilding that volume by late 2016 or early 2017.
Okay, great. I appreciate it. So you say that these recent hires are more than offsetting the few that left earlier in the year?
That’s our expectation based upon our review of their production levels historically.
Okay, excellent. And to get a feel for mortgage expectation in the back half of the year, should we expect this to kind of snap back to more normalized levels again on sale or will it be kind of a gradual build as those new producers bring on and to their portfolio?
Well, I think it’ll be a gradual build, Matt, obviously the ability to refill that pipeline and move production through that pipeline has a little bit of a drag time as we add staff, and so I’d expect it to be a ramp up through the second half of this year.
Right, that’s fair enough. And staying on fee income, obviously mortgage is a big piece of the overall pie. I think you did a little SPA. Would you consider expanding this product set and if so what would you add, are there any long-term goals building out the income platform in addition to mortgage?
And you’re referencing adding an additional product or…?
Yes, like if you wanted to tack on maybe some trust or AUM, treasury management maybe an insurance line anything else that would making sense right now?
Nothing on the near-term horizon, Matt, getting to critical scale on assets under management in a trust or through investment of brokerage services is – that’s a difficult model to get the critical mass on. And I think our opportunity is through fee income rather than initiation is probably through acquisition.
Right, that’s fair. Okay, and on to loan growth, it looked pretty good this quarter. Softer traction in CND and ag, I believe. Would you say that 6% annualized is a pretty good run rate going forward or just seasonally a little bit stronger this quarter?
It’s going to be a little bit seasonal with respect to that Matt. I think organically if you look at GDP growth in the state of Kansas, you are at less than a 2% rate. So if we were to view portfolio trends, if we get to that 5%, 6% level on an annualized basis that would be a pretty successful year for us in recruitment of new business.
Okay, great. Last thing I have is on M&A. You guys have historically been a pretty acquisitive bank. Last deal you did I think was in 2013. How are you ?thinking about M&A right now in the near-term Are you maintaining the active dialog, list of targets, and if so what are they saying?
We’re actively continuing our efforts to identify strategic acquisitions that we think would add a shareholder and enhance shareholder value. Those efforts are ongoing with respect to the feedback that we’re getting as we make contacts. I’d just qualify it as generally positive, Matt, based upon our historical performance and our business model that we operate under.
Okay. Would you guys ever consider expanding outside of Kansas, if so what kind of a deal would that have to look like?
That could strategically add value to the franchise that would be something that we’d absolutely consider to balance of this crossing the state line that would be proximate to us. Most likely would be to the east or potentially to the south, which would allow us to utilize existing management and human resource infrastructure to support that acquisitive growth. But for us to expand outside of a footprint that would it be complementary or would risk shareholder or franchise value, we’ll be pretty disciplined about that approach.
Okay. And just lastly, what are some of the criteria things you look for in targets I think historically a couple of hundred million in assets. But what’s a typical [indiscernible] and IRRs, what are some of the metrics you aim to get out of deals, if you could remind us on that that’ll be great?
Well, if I gave you a black and white answer on that, that’ll be a little bit tough. It’s going to be on each – dependent upon each deal. I would say probably our earn back our targets would be typically three years or less on the earn-backs on that. And obviously our goal is if we can saturate it where it’s accretive, we try to do that in an either an immediate or an extremely near-term time frame.
From the standpoint of size, as we’ve been able to grow our franchise, our opportunity to grow by scale has obviously – has been increased. And so in a complementary market or a market where we have some overlap, we might look at a smaller deal to expand our geography and be in that several hundred million dollar footprint that you referenced.
Okay. Fair enough. Yes, that answers all my questions. I appreciate it.
I appreciate the questions, Matt.
[Operator Instructions] There are no other questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Michael Scheopner for closing remarks.
Thank you and I want to thank everyone for participating in today’s earnings call. I appreciate your continued support and confidence in the company. I look forward to sharing news related to our third 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.
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