Landmark Bancorp, Inc. (LARK) Q3 2014 Earnings Report, Transcript and Summary

Welcome to the Landmark Bancorp third quarter earnings call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Michael Scheopner, President and CEO. Please go ahead.

Good morning. Thank you for joining our call today to discuss Landmark's earnings and results of operations for the third quarter and year-to-date 2014. Joining the call with me today to discuss various aspects of our year-to-date and third 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 of 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 record net earnings of $2.2 million or $0.67 per share for the third quarter 2014, which represents a 69.2% increase in earnings when compared to the third quarter of 2013. Year-to-date, net earnings totaled $6 million, which is also a record for the company. The earnings increase is principally a result of our acquisition of Citizens Bank, which as we expected, has been accretive to our year-to-date financial performance. Our year-to-date 2014 earnings translate to net earnings per share $1.85 on a fully diluted basis. It's gratifying that the market for Landmark's stock in recent months has shown some recognition of the value created by delivering on the potential of this acquisition. Net interest income totaled $18.3 million for the first 3 quarters of 2014, up 36.7% from the same period in 2013. Noninterest income year-to-date 2014 totaled $11.2 million, up 41.2% from the first 3 quarters of 2013. Of particular note is an increase in gain on sale income. Gain on sale of loans year-to-date 2014 totaled $4.5 million compared to $3 million during the same period of 2013. We continue to focus on maintaining our relationships with realtors and other referral sources for purchase money mortgage activity supporting our single-family loan originations. We anticipate normal seasonality associated with gain on sale activity as we enter the winter season. However, as noted, our concentration on purchase transactions should continue to contribute to our profitability. Our mortgage lending activity has 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 $20.9 million, up 36.7%, principally in the categories of compensation, occupancy, other noninterest and data processing expense attributed to the acquired Citizens Bank locations. Mark and Brad will provide additional detail on Landmark's financial performance and asset quality metrics later in the call. I'm also pleased to report that our Board of Directors has declared a cash dividend of $0.19 per share to be paid November 28, 2014, to shareholders of record on November 17, 2014. The board also declared a 5% stock dividend to be issued December 16, 2014, to shareholders of record on December 2, 2014. This represents the 14th consecutive year that the board has declared a 5% stock dividend, a long-term strategy to support liquidity on the stock. In summary, I feel good about our record results for the third quarter and year-to-date 2014 and anticipate that our trend of solid earnings will continue as we progress through the balance of this year. I continue to be pleased with the process of the assimilation of the acquisition and the community reaction to Landmark in our newly acquired banking markets. Our loan production efforts continue to be 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 the continued improved economic conditions 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 organization 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 third quarter and 9 months ended September 30, I would like to make a few comments on various elements comprising those record earnings results. Starting with the third quarter financial highlights. Net interest income increased $1.7 million to $6.3 million in comparison to the prior year's third quarter. Net interest income was impacted by our net interest margin, which increased to 3.47% from 3.40% during the third quarter of 2013. In comparison to the net interest margin of 3.47% in the second quarter of 2014, our net interest margin has remained stable from a quarter-to-quarter perspective. The higher net interest income and net interest margin were primarily impacted by our acquisition of Citizens Bank, resulting in an increase in our interest-earning assets from $572.8 million in the third quarter of 2013 to $761.8 million during the third quarter of 2014. Looking at our provision, we provided $150,000 to the allowance for loan losses in the third quarter of 2014, which was a $50,000 reduction from the $200,000 we provided a year earlier. Noninterest income increased $1.1 million to $3.9 million for the third quarter of 2014 as compared to the same period of 2013. Our gains on sales of loans reflected an increase of $479,000 for the third quarter of 2014 compared to a year earlier, to which the mortgage business of Citizens Bank contributed. Other factors contributing to the increase in noninterest income were a $466,000 increase in fees and service charges and $138,000 in other noninterest income, also primarily a result of the Citizens Bank acquisition. Our third quarter noninterest expenses increased $1.4 million to $7.0 million on a linked-quarter basis, primarily resulting from increased expenses relating to operating 8 additional branch locations. These increases included a $1.1 million increase in compensation and benefits, $357,000 in occupancy and equipment, $139,000 in other expenses, $122,000 in data processing and $101,000 in amortization expense, primarily related to the acquisition of Citizens Bank. Moving on to some financial highlights for the first 9 months of 2014. We experienced an increase in our net interest margin in comparison to the first 9 months of 2013, improving from 3.37% to 3.48% on a tax equivalent basis. Similar to my quarterly comments, this resulted primarily from our acquisition of Citizens Bank. Accordingly, our net interest income increased $4.9 million to $18.3 million for the first 9 months of 2014 compared to the same period of 2013, an increase of 36.7%. Our acquisition of Citizens Bank helped to increase our average interest-earning assets 31.0% from $570.4 million during the first 9 months of 2013 to $747.1 million during 2014. We provided $600,000 to the allowance for loan losses in the first 9 months of 2014, which was a decline from an $800,000 provision during the first 9 months of 2013. Noninterest income totaled $11.2 million year-to-date in 2014, an increase of $3.3 million or 41.2% from the same period of 2013. Consistent with my quarterly comments, this increase results primarily from growth of $1.5 million in gains on sales of loans due to higher volumes of loans sold in the secondary market and $1.3 million 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 $447,000, driven by higher lease revenue. Again, these increases were primarily attributable to our Citizens Bank acquisition. Looking at our noninterest expense. We reported an increase of 36.7% or $5.6 million for the first 9 months of 2014 in comparison to the same period of 2013. This increase was the result of increases of $3.1 million in compensation and benefits, $1.1 million in occupancy and equipment, $664,000 in other noninterest expense, $496,000 in amortization and $373,000 in data processing. Similar to my third 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. As discussed in our earlier conference calls this year, due to the timing of the Citizens Bank acquisition, we continue to operate on separate computer systems until close to the end of March 2014. Integration of the systems allowed us to obtain additional costs and operational efficiencies during the past few quarters. Additionally, on May 15, we completed our previously announced plan to close one of our overlapping Fort Scott banking facilities. Thus, the third quarter results for 2014 represent our first full quarter subsequent to completing the most significant operational efficiencies related to the assimilation of Citizens Bank into Landmark. To touch on a few balance sheet highlights, our total assets increased $21.3 million to $851.9 million at September 30, 2014, compared to $828.8 million at December 31, 2013. Our loan portfolio increased slightly in the first 9 months to $415.9 million from $414.0 million at year-end 2013. Our investment securities increased $34.7 million to $340.2 million at September 30, 2014, from $305.5 million at December 31, 2013. Stockholders’ equity increased by $7.3 million to $70.0 million at September 30, 2014, a book value of $22.06 per share, compared to $62.7 million at year-end 2013, or a book value of $19.96 per share. A slightly lower interest rate 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 September 30, 2014. The bank's leverage capital ratio was 8.4% at September 30, 2014, while the total risk-based capital ratio was 14.7%. 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 September 30, 2014, totaled $416 million. This is a $3 million increase from the previous quarter-end net total of $413 million. We continue to focus on business development efforts to calculate [ph] 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 $6.1 million or 1.45% of gross loans as of September 30, 2014. This compares to a level of 2.35% as of year-end 2013. A significant part of nonperforming loans is principally associated with loaned credit, the 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. 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 to 89 days still accruing interest as of September 30, 2014, totaled $2.0 million or 0.48% of gross loans. Of the loans in the 30 to 89 days past due category, 43% or $870,000 is associated with one commercial real estate loan. We continue to monitor delinquency trends carefully in all loan categories. Our balance in other assets, real estate owned, totaled $159,000 as of September 30, down from $191,000 the prior quarter and $400,000 as of year-end 2013. 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 $77,000 during the third quarter of 2014, and $918,000 year-to-date in 2014, compared to a net loan charge-off of $255,000 during the first 3 quarters 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 September 30, 2014, our construction and land loan portfolio balances totaled $23.4 million or 5.6% of our total loan portfolio. As of September 30, 2014, outstanding loan balances in our commercial real estate portfolio totaled $117 million, representing 28% of our total loan portfolio. As a part of our comprehensive credit risk management processes, we've reviewed the construction/land, commercial real estate and agricultural loan portfolios for loan type and geographic concentration issues on a quarterly basis. On a consolidated basis, the resulting Landmark loan portfolio gross totals approximately $421 million at quarter-end September 30, 2014. Mortgage 1-to-4 loans represent 30% of the portfolio. Commercial loans are just over 15% of the portfolio. Commercial real estate loans just under 28%, 14% of the loans are agribusiness-related. And construction and land development loans are limited to 5.6% of the total portfolio. With regard to the current economic landscape for Kansas, the seasonally adjusted unemployment rate for Kansas as of September was 4.8% according to the Bureau of Labor Statistics. 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 is showing modest growth in sales activity and value appreciation compared to prior year levels on residential real estate. The commercial real estate occupancy levels are stable and showing signs of value appreciation in certain markets. The fall crop harvest in Kansas is resulting in record yields in several areas. However, substantially lower commodity prices are offsetting much of the gain in yield. Cattle feeders have had a good year in 2014 to date, but the outlook for 2015 points towards shrinking margins. Farmland prices remain generally flat year-to-date across Kansas with some early signs of softness in certain land-use categories. Our exposure in this market segment remains limited, with the majority of our agricultural loans tied to production. We continue to monitor all of these factors closely as they relate to our credit portfolio. Thanks again, and 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 morning's call. Before we go to questions, I just want to summarize by saying we are pleased with our operating results for the third quarter and year-to-date 2014. I'm also pleased with the progress we've made in the assimilation of the Citizens Bank acquisition and the community reaction to Landmark 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 for the remainder of the year. With that, I'll open up the call to questions that anyone might have.

[Operator Instructions] No questions at this time. 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 appreciate everyone joining the call today and your continued support of our company. We look forward to our next call, which will summarize the results for the fourth quarter and year-end 2014. Thank you.

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