Landmark Bancorp, Inc. (NASDAQ:LARK) Q4 2015 Earnings Conference Call February 4, 2016 11:00 AM ET
Michael Scheopner - CEO
Mark Herpich - CFO
Brad Chindamo - Credit Risk Manager
Good day and welcome to the Landmark Bancorp 4Q Earnings 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 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.
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 2015. Joining the call with me today to discuss various aspects of our fourth quarter and year ending 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 $2.6 billion or $0.71 per share on a fully diluted basis for the fourth quarter 2015. This represents a 23.1% increase over our fourth quarter 2014 earnings level.
Our full year 2015 net earnings totaled a record $10.5 million, a 30.5% increase from our previous record earnings reported for the full year 2014. Earnings per share for the year were $2.91 in 2015, up from $2.27 in 2014.
Our 2015 return on average assets calculates to 1.21%, the Company's return on average equity for 2015 was 13.81%. Mark and Brad will provide additional detail on Landmark’s financial performance and asset quality metrics later on this call.
Best in part as a result of our record financial performance in 2015, I am pleased to report that our Board of Directors has declared a cash dividend of $0.20 per share to be paid March 2, 2016 to shareholders of record as of February 17, 2016. This represents the 58th 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 $0.20 per share dividend payout presents a 10.5% increase in our cash divided compare to the previous quarter when adjusting for the effect of the 5% stock dividend which we paid during December 2015. In summary, Landmark performed strongly and delivered record earnings growth in 2015. This is a credit to the continued efforts of our associates throughout our organization focused on good banking fundamentals.
Our 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.
Thanks, Michael and good morning to everyone. As Michael has already summarized our results for the fourth quarter and year ended December 31, 2015, I would like to make a few comments on various elements comprising those earnings results.
Starting with the fourth quarter income statement highlights, net interest income increased $246,000 to $6.6 million, a 3.9% increase in comparison to the prior year's fourth quarter. The higher net interest income was primarily driven by 2% increase in our average interest earning assets from $769.7 million in the fourth quarter of 2014 to $785.1 million during the fourth quarter of 2015.
Net interest income also benefited from our net interest margin which increased to 3.54% in the fourth quarter of 2015 from 3.46% a year earlier. From a quarter-to-quarter perspective, fourth quarter margin increased from 3.48% in the third quarter of 2015 due in part to higher average interest-earning assets in the fourth quarter.
Looking at our provision for loan losses, we did not provide the allowance in either the fourth quarter of 2015 or 2014 as we concluded the allowance for loan losses was adequate at December 31 in both years. Non-interest income increased $294,000 to $4.1 million in the fourth quarter of 2015, up 7.8% as compared to the same period of 2014. Our gains on sales of loans reflected an increase of $394,000 in the fourth quarter of 2015 compared to a year earlier, which was primarily attributable to increased volumes of mortgaged loans originated for sale.
Our fourth quarter non-interest expenses increased by $181,000 to $7.3 million on a linked quarter basis, primarily resulting from increases of $140,000 in other non-interest expense and $69,000 in professional fees.
The increased other non-interest expense during the fourth quarter of 2015 primarily related to the expanded mortgage banking activity, while the professional fee increase was related due to timing of various consulting or outsource projects as full year 2015 professional fees were less than 2014. Partially offsetting these increased categories were expense reductions achieved in occupancy and equipment expense, FDIC insurance premiums and foreclosure-related expenses.
Moving on to discuss some financing highlights for the full year 2015. Similar to my quarterly comments, we experienced an increase in our net interest margin in comparison to the 2014 full year, improving from 3.47% to 3.51% on a tax equivalent basis.
Our average interest earning assets increased 4.4% from the $752.8 million in 2014 to $785.6 million in 2015. With the combination of these two changes, our net interest income increased $1.3 million to $25.9 million for 2015, an increase of 5.1% compared to the same period of 2014.
During the year end in December 31, 2015, we recorded a negative provision for loan losses of $700,000 compared to a provision for loan losses of $600,000 in 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 2010 and 2011.
Non-interest income totaled 17.0 million in 2015, an increase of 1.9 million or 12.9% from 2014. Consistent with my quarterly comments, this increase results primarily from an increase of 2.1 million in gains on sales of loans due to higher volumes of loans sold in the secondary market which resulted in a record year of mortgage loan originated and sold during 2015. That resulted from expanding our mortgage banking operations and also lower mortgage interest rates during a portion of 2015 prompted increased refinancing demand.
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 2015. This was a result of selling certain federal agency issued, mortgage-backed investment securities to reduce our exposure to rising interest rates.
Our evaluation of the bank’s investment portfolio had identified certain investments acquired in past acquisitions that did not meet our investment parameters with respect to their performance in rising rate environments. During 2014, we recognized $99,000 in gain on sales of investment securities.
Looking at our non-interest expense, we reported an increase of 4.1% or 1.1 million for 2015 in comparison to 2014. This increase was the result of increases of $883,000 in compensation and benefits and $460,000 in other non-interest expense.
Similar to my fourth 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 reflects a $163,000 impairment on the residual real estate collateral associated with an affordable housing investment. Partially offsetting these increased expense categories were expense reductions of $145,000 in occupancy and equipment expense.
To touch on few balance sheet highlights. Our total assets increased 14.9 million to 878.4 million at December 31, 2015, compared to 863.5 million at December 31, 2014. Our loan portfolio increased 3.7 million to 419.9 million at December 31, 2015 from 416.2 million at year end 2014. Our investment securities increased 5 million to 357.9 million at December 31, 2015 from 352.9 million at December 31, 2014. Stockholder’s equity increased by 12.6% to 80.6 million at December 31, 2015, for a book value of $22.82 per share, compared to 71.6 million at year end 2014, or a book value per share of $20.47, that is an 11.5% increase in book value per share. Our consolidated and bank regulatory capital ratios continue to exceed the levels we considered well capitalized as of December 31, 2015. The bank's leverage capital ratio was 9.4% at December 31, 2015 while the total risk based capital ratio was 15.8%.
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, 2015 totaled 420 million. This was a $4 million increase from our 2014 yearend total of 416 million in net loans and a $3 million increase from the September 30, 2015 total of 470 million. Our marketing efforts in commercial banking remained focused on building high quality commercial banking relationships.
Non-performing loans, which primarily consist of loans greater than 90 days past due, totaled 2.2 million or 0.51% of gross loans as of December 31, 2015. This compares to a level of 1.44% as of yearend 2014 and represents a decline from 4.0 million or 0.94% as of September 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. The level of past due loans between 30 and 89 days still accruing interest as of December 31, 2015 totaled $1.4 or 0.33% of gross loans. This represents an increase from 0.26% in gross loans as of December 31, 2014. We continue to monitor delinquency trends carefully in all loan categories.
Our balance and other assets real estate owned totaled $1 million as of December 31st, an increase from $101,000 in the prior quarter and $255,000 at the previous year end. The other real estate owned balances have grown 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 recoveries of $1.3 million during the 2015. This compares to net loan charge-offs of $820,000 in 2014. The significant recovery in 2015 was a result of ongoing collection efforts on a construction loan that was fully charged-off in 2010 and 2011. We continue to maintain a good mix of diversification in the portfolio in both loan types and geography across the state. On a consolidated basis the resulting Landmark loan portfolio gross total was approximately $426 million at year end December 31, 2015.
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 December 31, 2015, our construction and land loan portfolio balances totaled $15 million or 3.5% of our total loan portfolio, down from $21.9 million or 5.2% of our portfolio as of year-end 2014.
As of December 31, 2015, outstanding loan balances in our commercial real estate portfolio totaled $119 million, representing 27.9% of our total loan portfolio, and increase from $118.4 million at year end 2014, which was 28.1% of the total. The Landmark construction and land portfolio ended the year at 17.5% of list [ph] based capital, well below the regulatory guideline of 100%, a level on which regulators view the total as a concentration requiring heightened risk management practices.
Our commercial real estate portfolio was at 155.8% of risk based capital which if far below that 300% regulatory guideline in that category. Mortgage one-to-four family loan portfolio represents just under a 31% of the portfolio at $131.9 million for December 31, 2015 compared to $127.6 million or just over 30% as of the year end 2014. 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 derives 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 $71.0 million or 16.7% of our total loan portfolio as of December 31, 2015 which represents an increase from $64.3 million or 15.3% of the portfolio at year end 2014. The agricultural outlook appears to be challenging primarily due to continued depressed commodity prices.
Livestock feeders are operating with shrinking margins that are being aided by lower feeding costs. Farmland prices have remained generally flat in the past year across Kansas with signs of weakening in certain land used categories are increasing.
Our expo [ph] during the farmland lending segment remains limited, as the majority of our agricultural loans are tied with the production cycle. We're further operating with an increased focus on our Ag loan portfolio as that sector enters potentially its more 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 in this segment of our portfolio.
We believe our agriculture lending staff is some of the seasoned and qualified Ag bankers in the state most of whom have experienced multiple downward cycles in this sector. Commercial and industrial loans were 61.3 million as of December 31, 2015, which is an increase from 60.0 million at year-end 2014. This represents just over 14% of the current portfolio. The current macroeconomic landscape in Kansas remains stable. The seasonally adjusted unemployment rate for Kansas as of December was 3.9% versus a 5.9% [ph] national rate according to the Bureau of Labor Statistics.
A noted area of escalated risk at this time is the energy sector. The banks 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 in summary what 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 portfolio 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 years.
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 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 fourth quarter of 2015, as well as our record financial performance for the year ending 2015.
I want to recognize all of my fellow associates at Landmark who deserve efforts that are responsible for our success in 2015. As Mark noted our mortgage loan production levels and the related gain on the sale of loans were also company records. This was accomplished while maintaining a focus on purchase money transactions, the type of transaction that represents a recruiting source of income.
Brad detailed our asset quality metrics which reflect extremely high credit quality standards comprised of a portfolios that is diversified and is managed by a team of commercial bankers that compete for high quality business banking relationships to meet these portfolio standards versus competing for loan transaction based on low-price short credit structure compromises.
Our efforts to grow our core deposit portfolio resulted in the growth in our gross deposit total of approximately $10 million in 2015. This 2015 growth was focused on what I consider to be truly core deposits, an increase of approximately $28 million and lower cost deposits made up of non-public fund checking accounts, money market accounts, and savings accounts. For our 2015 financial included some first quarter 2015 non-recurring events which both Mark and Brad referenced.
The strong core earnings capacity of the Company is evidenced by our results during the remainder of 2015. We believe that the Company's risk management practices and capital strength continue to position us well for long-term growth and I anticipated our trend of solid earnings to continue going forward into 2016.
With that, I'll open the call u to questions that anyone might have.
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 and I look forward to sharing news related to our first quarter 2016 earnings at our next earnings conference call.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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