Landmark Bancorp, Inc. (LARK) Q1 2014 Earnings Report, Transcript and Summary

Good day, and welcome to the Landmark Bancorp, Inc. Q1 Earnings Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Michael E. 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 our results of operations for the first quarter of 2014. 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, our 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 $1.7 million for the first quarter 2014, which represents an 18% increase in earnings when compared with the first quarter of 2013. This earnings increase is principally a result of our acquisition of the Citizens Bank Group, which was accretive to our first quarter results. Our first quarter 2014 earnings translates to net earnings per share of $0.53 on a fully diluted basis. As I noted, the acquisition of Citizens Bank, which closed on November 1, 2013, was accretive to our first quarter 2014 earnings. Net interest income totaled $6 million for 1Q '14, up 36.9% from our 1Q '13 level. Our 1Q '14 provision for loan loss totaled $150,000 compared to a provision of $300,000 during 1Q '13. Non-interest income for the first quarter 2014, totaled $3.2 million, up 22.9% from first quarter 2013. Of particular note is a slight increase in gain on sale income. Gain on sale for 1Q '14 totaled $1.1 million compared to $1 million during 1Q '13. Our focus on maintaining our relationships with realtor and referral sources for purchase money mortgage activity continues to support our single-family loan originations. I am pleased to note that our production pipeline, as of the end of the quarter, exceeds our total closing volume for the entire first quarter. We anticipate that, that mortgage production pipeline will turnover on an average of every 45 days. Our mortgage lending activity is further bolstered by the additional mortgage origination staff in Johnson County and Southeast Kansas, who joined Landmark as part of the Citizens acquisition. Total non-interest expense for the first quarter was $6.8 million, up 39.5%, principally in the categories of compensation and occupancy expense attributed to the acquired Citizens Bank locations. We successfully completed the scheduled first quarter data processing conversion associated with the acquisition. This will lead to some additional cost savings, which should be reflected beginning in 2Q '14. Mark and Brad will provide additional details on the company's financial performance and asset quality metrics. I'm also pleased to report that our Board of Directors has declared a cash dividend of $0.19 per share to be paid May 28, 2014, to our shareholders of record on May 14, 2014. In summary, I feel good about our results for the first quarter of 2014 and hope to continue our trend of solid earnings as we progress through the year. I continue to be pleased with the process of assimilation of the acquisition and the community reaction to Landmark in the newly acquired banking markets. Our loan production efforts will continue to remain focused on the recruitment of new business relationships that meet our underwriting requirements. The growth of Landmark's loan portfolio, specifically an increase in our overall loan-to-deposit levels, will be instrumental to the continued growth of the company's earnings. In 2014, the markets in which we operate are experiencing economic conditions that are stable and exhibiting signs of slow growth, not only will improved economic conditions continue to help the lending environment for Landmark; ultimately, we expect to see interest rates increase with an expanding economy. We continue to structure our interest rate risk profile in a manner that will benefit from increasing rates. We think that is only prudent in this historically low rate environment. 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 unforeseen economic events. 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 results for the first quarter ended March 31, I would like to make a few comments on various elements comprising those results. Starting with the first quarter financial highlights. Net interest income increased $1.6 million to $6.0 million in comparison to the prior year's first quarter. Net interest income was impacted by our net interest margin, which increased to 3.49% from 3.38% during the first quarter of 2013. In comparison to the net interest margin of 3.45% in the fourth quarter of 2013, our net interest margin has improved by 4 basis points from a quarter-to-quarter perspective. The higher net interest income and the net interest margin was primarily impacted by our acquisition of Citizens Bank, resulting in an increase in our interest-earning assets from $565.3 million in the first quarter of 2013 to $736.9 million during the first quarter of 2014. Looking at our provision. We provided $150,000 to the allowance for loan losses in the first quarter of 2014, which was a decline from a $300,000 provision during the first quarter of 2013, but represented an increase from the fourth quarter of 2013 when we did not make a provision for loan losses. Non-interest income increased $602,000 to $3.2 million for the first quarter of 2014 as compared to the same period of 2013. Despite the colder-than-typical weather experienced during January and February, our gains on sales of loans still reflected an increase of $86,000 for the first quarter of 2014 compared to a year earlier. Other factors contributing to this increase were a $362,000 increase in fees and service charges and $180,000 in other non-interest income, primarily a result of the Citizens Bank acquisition. Our first quarter non-interest expenses increased by $1.9 million to $6.8 million on a linked-quarter basis, primarily resulting from increased expenses related to operating 8 additional branch locations. These increases included a $1.0 million increase in compensation and benefits, a $411,000 increase in occupancy and equipment, $193,000 in other expenses and $152,000 in data processing. We also reported an increase of $181,000 in amortization expense, primarily related to the acquisition of Citizens Bank for the first quarter of 2014 as compared to the first quarter of 2013. I would also like to note that due to the timing of the Citizens Bank acquisition, we continue to operate on separate computer systems until March 17. As Mike has already mentioned, we anticipate the merger of our computer systems will allow for the potential of additional cost and operational efficiencies. Another item that will allow for additional cost savings is our ability to move forward with our previously announced plan to close one of our overlapping Fort Scott banking facilities. The Citizens Bank merger left us with 3 branches in Fort Scott, 2 of them located approximately one block apart. Now that our computer systems have merged, we have announced that May 16 will be our last day of operating the overlapping branch. To touch on a few balance sheet highlights. Our total assets decreased less than 1% to $825.4 million at March 31, 2014, compared to $828.8 million at December 31, 2013. Our loan portfolio also decreased slightly in the first quarter to $411.6 million from $414.0 million at the end of 2013. And our investment securities increased slightly to $306.6 million at March 31, 2014, from $305.5 million at December 31, 2013. Stockholders' equity increased by $2.8 million to $65.5 million at March 31, 2014, or a book value of $20.64 per share compared to $62.7 million at year-end 2013 or a book value of $19.96 per share. A slightly lower interest rates increased the fair value of our investment securities, resulting in an increase in accumulated other comprehensive income. Our consolidated and bank regulatory capital ratios continue to exceed the levels to be considered well capitalized as of March 31, 2014. The bank's leverage capital ratio was 8.1% at March 31, 2014, while the total risk-based capital ratio was 14.0%. 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 March 31, 2014, totaled $411 million. This is a $3 million decrease from the year-end 2013 net loan total of $414 million. We continue to focus on business development efforts to prospect new high-quality commercial banking relationships and to expand existing high-quality relationships. Non-performing loans, which primarily consists of loans greater than 90 days past due, totaled $12.4 million or 2.96% of gross loans as of March 31, 2014. This compares to a level of 2.35% as of year-end 2013. The increase in the March 31 non-performing loans included a $3.8 million in loans greater than 90 days past due but still accruing interest, as the value of collateral securing the loans exceeded the loan balances. This represented one land loan relationship that was in negotiation for renewal, subject to an agreement to begin auctioning the collateral at quarter end. The final agreement was reached shortly after March 31, and an auction is scheduled for late in the second quarter. The remaining balance of non-performing loans are principally associated with 2 credits: the commercial loan relationship consisting of $4.1 million in real estate and land loans, which was placed on nonaccrual status after the borrower filed Chapter 13 bankruptcy reorganization protection; and a commercial business loan that was in the middle a liquidation on March 31, with a balance at that time of $3.2 million, which is now reduced to $1.0 million. 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 March 31, 2014, totaled $2.6 million or 0.63% of gross loans. Of the loans in the 30- to 89-day past due category, 32% or $852,000 are associated with 1-to-4 family mortgage or other consumer retail-related credits. We continue to monitor consumer related delinquency trends. The totals also represent an agricultural loan of $410,000 that was just beyond 30 days past due at quarter end for which payment has since been received. Historically, Landmark has experienced very low levels of loss in these portfolios. Our balance in other assets, real estate-owned totaled $245,000 as of March 31, down from $400,000 the prior quarter and $2.2 million a year ago. The other real estate-owned balances have been reduced as a result of the sale of properties. We continue to market for sale the remaining properties held in real estate owned. We recorded net loan charge-offs of $50,000 during the first quarter of 2014 compared to a net loan charge-off of $247,000 during the first quarter of 2013. In terms of exposure to credit concentrations, we continue to focus on our portfolio management of commercial real estate and construction relationships. As of March 31, 2014, our construction and land loan portfolio balances totaled $24.0 million or 5.8% of our total portfolio. As of March 31, 2014, outstanding loan balances in our commercial real estate portfolio totaled $120.4 million, representing 29% of our total loan portfolio. As a part of our comprehensive credit risk management processes, we have reviewed both the construction land and commercial real estate portfolios for geographic concentration issues, and note that the bank has no material exposure outside the state of Kansas. On a consolidated basis, the resulting Landmark loan portfolio gross totals approximately $417 million at quarter end March 31, 2014. Mortgage 1-to-4 loans represent 30% of the portfolio. Commercial real estate loan is just over 29%. 14% of the loans are agribusiness-related. Construction and development loans are limited to 5.8% of the total portfolio. With regard to the current economic landscape for Kansas, the seasonally adjusted unemployment rate for Kansas as of March end, according to the Federal Reserve Bank of Kansas City, was 4.9%. The majority of the counties in which we have banking centers are reporting rates at or below the state-wide level. In 2013, the broader real estate economy across the state reported modest gains in both sales activity and valuation increases on residential real estate. A similar pattern is predicted for the full year 2014. The outlook for crop producers appears to be more challenging looking at 2014, as input costs remain high, with commodity prices at much lower levels than a year ago. On a more positive note, the lower commodity prices may provide some opportunity for cattle feeders in 2014. Farmland prices have increased notably in the past year across Kansas, but our exposure in this market segment remains limited. We continue to monitor all of these factors closely as it relate to our credit portfolio. 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 reasonably pleased with our operating results for the first quarter 2014. I'm also pleased with the progress we have made in the assimilation of the Citizens Bank acquisition and the community reaction to LNB in our newly acquired banking markets. The acquisition was accretive to earnings in the first quarter, and I expect that, that positive earnings impact will continue as we progress through 2014. With that, I'll open up to questions that anyone might have.

[Operator Instructions] Having no questions, this concludes our question-and-answer session. I would like to turn the conference back over to Michael Scheopner for any closing remarks.

Thank you, and I want to thank everyone for joining today's call. We truly do appreciate your support, and we look forward to our Annual Meeting next month in May and to having all of our friends join us for our conference call next quarter when we'll review our second quarter results. Thank you.

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