Landmark Bancorp, Inc. (LARK) Q2 2014 Earnings Report, Transcript and Summary

Good day, and welcome to the Landmark Bancorp Inc. Second Quarter Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Michael E. Scheopner, President and CEO. Please go ahead, sir.

Thank you, and good afternoon. I want to start by thanking you for joining our call today to discuss Landmark's earnings and results of operations for the second quarter and year-to-date 2014. On the call with me today to discuss various aspects of our year-to-date and second quarter performance are Mark Herpich, CFO 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 for 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 record net earnings of $2.1 million for the second quarter 2014, which represents a 47.4% increase compared to the second quarter of 2013. That amounts to second quarter earnings per share of $0.65 on a fully diluted basis, up from $0.45 in the second quarter of 2013. Year-to-date, net earnings totaled a record $3.8 million. Our year-to-date 2014 earnings translate to net earnings per share of $1.18 on a fully diluted basis, up from $0.91 a year earlier. I feel good about our record results for the second quarter of 2014, and I anticipate that we will continue our trend to solid earnings as we progress through the remainder of the year. The second quarter and year-to-date earnings increases are principally a result of our acquisition of the Citizens Bank Group, which, as we expected, was accretive to our year-to-date financial results. I continue to be pleased with the assimilation of this acquisition and the favorable community reaction to Landmark in our newly acquired banking markets. To mention some of the business factors driving our year-to-date earnings, net interest income totaled $12.1 million for the first half of 2014, up 36.8% from the same period 2013. Noninterest income year-to-date 2014 totaled $7.4 million, up 42.6% from the first half of 2013. Of particular note is an increase in gain on sale income. Gain on sale of loans year-to-date 2014 totaled $3 million compared to $1.9 million during the first half of last year. We continue efforts to focus on maintaining our relationships with realtor and referral sources for purchase money mortgage activity that supports our single-family loan originations. Our mortgage lending activity had been additionally bolstered by the mortgage origination staff in Johnson County and Southeast Kansas, who joined Landmark as part of the Citizens acquisition. Total noninterest expense year-to-date 2014 was $13.9 million, up 42.7% principally in the categories of compensation, occupancy, other noninterest and data processing expense attributed to the acquired Citizens Bank locations. As we anticipated, the late first quarter 2014 data processing conversion associated with the acquisition led to some additional cost savings that have been reflected in 2Q '14. Both Mark and Brad will provide additional details on the company's financial performance and asset quality metrics later in the call. I'm also pleased to report that our Board of Directors have declared a cash dividend of $0.19 per share to be paid August 25, 2014 to shareholders of record on August 13, 2014. 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 the only prudent thing to do in this historically low-rate environment. In all of our markets across Kansas, our loan production efforts 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. Your management team also continues to manage 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 CFO, who will review the financial results with you in more detail.

Thanks, Michael, and good afternoon to everyone. As Michael has already summarized our results for the second quarter and 6 months ended June 30, I would like to make a few comments on the various elements comprising those record earnings results. Starting with the second quarter financial highlights. Net interest income was $6.1 million, an increase of $1.6 million in comparison to the prior year's second quarter. Net interest income benefited from our net interest margin, which increased from 3.47% -- or to 3.47% from 3.34% during the second quarter of 2013. Net interest margin remains relatively stable quarter-to-quarter and in comparison to the margin of 3.49% in the first quarter of 2014. Both the higher net interest income and the net interest margin were impacted primarily by our acquisition of Citizens Bank, resulting in an increase in the average interest-earning assets from $573.0 million in the second quarter of 2013 to $742.3 million during the second quarter of 2014. Looking at our provision, we provided $300,000 to the allowance for loan losses in the second quarter of 2014, as we did a year earlier. Noninterest income increased $1.6 million to $4.1 million for the second quarter of 2014 as compared to the same period of 2013. Our gains on sales of loans reflected an increase of $967,000 for the second quarter of 2014 compared to a year earlier, to which our acquisition of Citizens Bank contributed. Other factors contributing to this increase were a $517,000 increase in fees and service charges and $129,000 in other noninterest income, primarily a result of the Citizens Bank acquisition. Our first (sic) [second] quarter noninterest expenses increased by $2.2 million to $7.1 million on a linked-quarter basis, primarily resulting from the increased expenses related to operating 8 additional branch locations. These increases included a $1 million increase in compensation and benefits, $361,000 in occupancy and equipment, $332,000 in other expenses and $99,000 in data processing primarily related to the acquisition of Citizens Bank. We also reported an increase of $314,000 in amortization expense for the second quarter of 2014 as compared to the second quarter of 2013. Amortization expense was higher in comparison to the prior year in part due to the absence of a $212,000 valuation allowance reversal against our mortgage servicing rights portfolio, which we reported in the second quarter of 2013. Moving on to discuss some financial highlights for the first half of 2014. Similar to my quarterly comments, primarily resulting from our acquisition of Citizens Bank, we experienced an increase in our net interest margin in comparison to the first 6 months of 2013, improving from 3.36% to 3.48% on a tax equivalent basis. Our acquisition of Citizens Bank helped increased our average interest-earning assets 29.9% from $569.2 million during the first 6 months of 2013 to $739.6 million during 2014. With the combination of these 2 changes, our net interest income increased $3.2 million to $12.1 million for the first 6 months of 2014, an increase of 36.8% compared to the same period of 2013. We provided $450,000 to the allowance for loan loss in the first 6 months of 2014, which was a decline from a $600,000 provision during the first half of 2013. The second quarter provision of $300,000 represented an increase from the first quarter of 2014, when we provided $150,000 to the allowance for loan losses. Noninterest income totaled $7.4 million for the first 6 months of 2014, an increase of $2.2 million or 42.6% in comparison to the same period of 2013. Consistent with my quarterly comments, this increase results primarily from increases of $1.1 million in gains on sale of loans due to higher volumes of loans sold in the secondary markets and $879,000 in fees and service charges received on deposit accounts and service fee income on 1-to-4 family residential real estate loan service for others. Additionally, other noninterest income increased $309,000, driven by higher lease revenue. Each of these increases were primarily attributable to our Citizens Bank acquisition. Looking at our noninterest expense, we reported an increase of 42.7% or $4.2 million for the first 6 months of 2014 in comparison to the same period of 2013. This increase was the result of increases of $2.1 million in compensation and benefits, $772,000 in occupancy and equipment, $525,000 in noninterest expense, $395,000 in amortization and $251,000 in data processing. Similar to my second quarter comments, these higher levels of expense in 2014 primarily reflected the operating costs relating to the 8 additional branches assumed in the Citizens Bank acquisition, while the comparison on amortization expense was impacted by the previously mentioned valuation allowance reversal against our mortgage servicing rights in the prior period. As mentioned in our first quarter earnings conference call, due to the timing of the Citizens Bank acquisition, we continue to operate the Citizens locations on a separate computer system from Landmark until the close -- until close to the end of March 2014. Implementing a single computer system for all branches during the past quarter allowed us to obtain additional cost and operational efficiencies. Additionally, on May 16, we completed our previously announced plan to close one of our overlapping Fort Scott banking facilities. To touch on a few balance sheet highlights, our total assets increased $7.3 million to $836 million at June 30, 2014 compared to $828.8 million at December 31, 2013. Our loan portfolio decreased slightly in the first 6 months to $412.7 million from $414.0 million at year-end 2013, while our investment securities increased to $322 million at June 30, 2014 from $305.5 million at December 31, 2013. Stockholders' equity increased by $6 million to $68.7 million at June 30, 2014, or a book value of $21.64 per share, compared to $62.7 million at year-end 2013, or a book value of $19.96 per share as 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 capital ratios continued to exceed the levels to be considered well capitalized as of June 30, 2014. The bank's leverage capital ratio was 8.3% at June 30, 2014, while the total risk-based capital ratio exceeded 14%. I will now turn the call over to Brad Chindamo to review the highlights on our loan portfolio.

Thanks, Mark, and good afternoon to everyone. Net loans outstanding as of June 30, 2014 totaled $413 million. This is a $1 million increase from the previous quarter-end net loan total of $412 million. We continue to focus on business development efforts to prospect new, high-quality commercial banking relationships and to expand existing high-quality relationships. Nonperforming loans, which primarily consist of loans greater than 90 days past due, totaled $6.6 million or 1.57% of gross loans as of June 30, 2014. This compares to a level of 2.35% as of year-end 2013. A large part of the portfolio's nonperforming loans is associated with 1 credit, a commercial loan relationship consisting of $3.2 million in real estate and land loans, which was placed on nonaccrual status after the borrower filed for Chapter 13 bankruptcy reorganization protection in 2012. I should further note that this loan had an $846,000 principal payment in the second quarter as a result of the auction of properties in the bankruptcy plan. Another indicator we monitor as part of our credit risk management efforts is our level of loans past due between 30 and 89 days. The level of past-due loans between 30 and 89 days still accruing interest as of June 30, 2014 totaled $1.4 million or 0.34% of gross loans. Of the loans in the 30 to 89 day past due category, 61% or $867,000 are associated with 1-to-4 family mortgage or other consumer retail-related credits. We continue to monitor consumer-related delinquency trends. Historically, Landmark has experienced very low levels of loss in these portfolios. Our balance in other assets, real estate owned, totaled $191,000 as of June 30, down from $245,000 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 $791,000 during the second quarter of 2014 and $841,000 year-to-date in 2014 compared to a net loan charge-off of $276,000 during the first half 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 June 30, 2014, our construction and land loan portfolio balances totaled $23.0 million or 5.5% of our total loan portfolio. As of June 30, 2014, outstanding balances in our commercial real estate portfolio totaled $118.2 million, representing 28% of our total loan portfolio. As part of our comprehensive credit risk management processes, we've reviewed both 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 $418 million at quarter-end June 30, 2014. Mortgage 1-to-4 loans represent 31% of the portfolio. Commercial loans are just over 13% of the portfolio. 15% of the loans are agribusiness-related. As I mentioned, commercial real estate loans are just over 28%, and construction and land development loans are limited to 5.5% of the total portfolio. With regard to the current economic landscape for Kansas, the seasonally adjusted unemployment rate for Kansas as of May, according to the Federal Reserve Bank of Kansas City, was 4.8%. The majority of the counties in which we have banking centers are reporting rates at or below the state-wide level. The broader real estate economy across the state has been generally flat compared to prior year levels in both sales activity and valuation increases on residential real estate. The wheat crop in Kansas is predicted to be one of the lowest production levels in years. However, increased moisture in the late spring and early summer has created optimism for fall crop harvest expectations. Cattle feeders have had a solid year-to-date as inventories remain low and prices high. Farmland prices have moderated year-to-date across Kansas, and our exposure in this market segment remains limited. We continue to monitor all these factors closely as they relate to our credit portfolio. With that, I'll hand it back over to Michael.

Thank you, Brad. I also want to thank Mark for his comments earlier in this afternoon's call. Before we go to questions, I just want to summarize by saying we are pleased with our operating results for the second quarter and year-to-date 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. As we anticipated, the acquisition has been accretive to earnings in 2014, and I expect that positive earnings impact to continue as we progress through the remainder of the year. With that, I'll open up to questions that anyone might have.

[Operator Instructions] At this time, I'm showing no questions in the queue, so we will conclude our question-and-answer session. I would like to hand the conference back over to Mr. Scheopner for his closing remarks.

Well, thank you, and thank you for joining us on our call today. I truly appreciate your support of the company, and I look forward to sharing our third quarter and year-to-date results on our conference call next quarter. Thank you.

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.