Landmark Bancorp, Inc.
Q1 2015 Earnings Call Transcript

Published: 3 May 2015

[Operator:]

Good morning and welcome to the Landmark Bancorp Incorporated First Quarter Earnings Conference Call. All participants will be in a 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’d now like to turn the conference over to the President and Chief Executive Officer, Mr. Michael Scheopner. Please go ahead Mr. Scheopner.

[Michael Scheopner:]

Thank you and good morning. Thank you for joining our call today to discuss Landmark’s earnings and results of operations for the first quarter of 2015. 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 discussion 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 of 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 $2.8 billion or $0.81 per share on a fully diluted basis for the first quarter of 2015. This represents a 63% increase over our first quarter 2014 earnings level. Earnings this quarter benefited from $1.7 million recovery on a previously charged-off commercial construction loan leading to a $1 million negative provision to loan losses. When we exclude two items that we consider to be non-recurring those being the impact of that reversal provision as well as a loss on the sale of some mortgage-backed securities. Core earnings for the first quarter 2015 increased in line with our expectations. Net interest income totaled $6.3 million for the first quarter of 2015 and increase of 4.9% from the first quarter of 2014. Total non-interest income for the quarter was $3.8 million up 16.3% from the same period of 2014. Driving the rise in non-interest income was an increase in the gain on sale income of $827,000 as mortgage volumes during the first quarter of 2015 were higher than one-year ago. We maintained our focus on mortgage lending as an integral part of our overall community banking strategy. Purchase loan volumes improved this quarter due in part to milder weather in Kansas compared to the harsh winter that we had during the first quarter of 2014. Refinancing activity also improved versus one-year ago little over interest rates. Our primary residential focus is on the sustainable business of purchase mortgage lending which represented 58% of our production volumes during the first quarter even with the higher level of refinancing activity. Mark and Brad will provide additional detail on Landmark’s financial performance and asset quality metrics later in this call. I am pleased to report that our Board of Directors has declared a cash dividend of $0.19 per share to be paid on May 27, 2015 to shareholders of record as of May 13, 2015. This represents the 55th consecutive quarterly cash dividends since the company’s formation resolving from the merger of Landmark Bancorp with MNB Bancshares, Inc. in October 2001. In summary, I am pleased with our results for the first quarter. I expect our trend of solid earnings to continue during 2015. Your management team remains focused on managing the organization in a conservative and discipline manner dedicated to underwriting loans and investments prudently, monitoring the interest rate risks and structuring the overall organizational risk profile in a way that will prepare us 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 families and businesses. I will now turn the call over to Mark Herpich, our CFO who will review the financial results with you.

[Mark Herpich:]

Thanks, Michael and good morning to everyone. As Michael has already summarized our results for the first quarter of 2015, I would like to make a few comments on various elements comprising those record earnings results. Starting with the first quarter income statement highlights, net interest income increased 294,000 or almost 5% as Michael mentioned to $6.3 million in comparison to the prior year’s first quarter. Net interest income was impacted by our net interest margin which decreased slightly to 3.47% from 3.49% during the first quarter of 2014. In comparison to the net interest margin of 3.46% in the fourth quarter of 2014, our net interest margin has remained relatively stable from a quarter-to-quarter perspective. The higher net interest income was primarily driven by 5.8% increase in our average interest earning assets from $736.9 million in the first quarter of 2014 to $780 million during the first quarter of 2015. Looking at our provisions to our allowance for loan losses, we received 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. As a result of our March 31, 2015 evaluation of the adequacy of the allowance for loan losses which takes into consideration various items such as our levels of non-performing loans, our classified loan totals and economic and interest rate outlooks we recorded a $1 million negative provision for loan losses was during the first quarter of 2015. That compares to a provision for loan losses of 150,000 in the first quarter of 2014. Non-interest income increased $527,000 to $3.8 million for the first quarter of 2015, as compared to the same period of 2014. Our gains on sales of loans reflected an increase of $827,000 for the first quarter of 2015 compared to a year earlier, attributable in part to expanding Landmark’s mortgage banking operations and also to lower mortgage interest rates prompting increased refinancing demand. Partially offsetting the increased gains on sales of loans was $254,000 loss on sales of investment securities during the first quarter of 2015. This loss was the result of selling $19.1 million of our federally agency issued mortgage-backed investment securities portfolio to reduce our exposure to rising interest rates. Our evaluation of the banks in 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. Our first quarter non-interest expenses increased by $300,000 to $7.1 million on a linked quarter basis, primarily resulting from increases of $237,000 in compensation and benefits and $137,000 in other non-interest expenses. These increased expenses during the first quarter of 2015, primarily relate to expenses associated with the expanded mortgage banking activity. Partially offsetting these increased expense categories or expense reduction of $52,000 in professional fees, $42,000 in occupancy and equipment expense and $22,000 in data processing. And the first quarter of 2014 did not fully reflect all of the cost savings achieved in the stimulation of Citizens Bank into Landmark. Touch on a few balance sheet highlights, our total assets increased $8.6 million to $872.1 million at March 31, 2015 compared to $863.5 million at December 31, 2014. Our loan portfolio increased slightly to $417.1 million at March 31, 2015 from $416.2 million at year end 2014. Our investment securities decreased $11.9 million to $341.1 million at March 31, 2015 from $352.9 million at December 31, 2014. Resulting from the sale of $19.1 million of mortgage-backed investment securities at the end of the first quarter. Stockholders equity increased by $3.6 million to $75.2 million at March 31, 2015 or a book value of $22.55 per share compared to $71.6 million at year end 2014 or a book value of 21.49 per share. In addition to 2015 retained earnings slightly lower interest rates increased the fair value of our investment securities resulting in an increase in the accumulated other comprehensive income. Our consolidated and bank regulatory capital rises continue to exceed levels to be considered well capitalized as of March 31, 2015. Banks leverage capital ratio was 8.8% at March 31, 2015 while the total risk based capital ratio was 14.9%. I will now turn the call over to Brad Chindamo to review highlights on our loan portfolio.

[Brad Chindamo:]

Thanks Mark and good morning to everyone. Net loans outstanding as of March 31, 2015 totaled $417 million. This is a $1 million increase from the previous quarter end total of $416 million in net loans. Our lending efforts continue to focus on prospecting new high quality commercial banking relationships and expanding existing high quality relationships. Non-performing loans, which primarily consist of loans greater than 90 days past due totaled $5.9 million or 1.40% of gross loans as of March 31, 2015. This compares to a level of 1.44% as of year-end 2014. Significant part of non-performing loans is principally associated with one credit. The commercial loan relationship consisting of $3.1 million in real estate and land loans, which was placed on non-accrual status after the borrower filed for Chapter 13 bankruptcy in 2012. Another indicator we monitor as part of our credit risk management effort 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, 2015 totaled $1.541 million or 0.36% of gross loans. Of the loans in the 30 to 89-day past due category 49% or $748,000 is associated with two loans in commercial real estate loan and residential mortgage loan. We continue to monitor delinquency trends carefully in all loan categories. Our balance and other assets real estate owned totaled $198,000 as of March 31, a decrease from $255,000 in the prior quarter. The other real estate owned balances have been reduced as a result of the sale properties. We continue to market for sale the remaining properties held in real estate owned. We recorded net loan recoveries of $1.585 million during the first quarter of 2015. This compares to net loan charge-offs of 820,000 for the prior year ending December 31, 2014 and net charge offs of 50,000 for the first quarter of 2014. The significant recovery in the first quarter was a result in ongoing collection efforts on a construction loan that was fully charged-off in 2010 and 2011. In terms of exposure to credit concentrations, we maintain a height and focus on our portfolio management of commercial real estate and construction relationships, as well as increase focused on our agriculture loan portfolio. As of March 31, 2015, our construction and land loan portfolio balances totaled $17.7 million or 4.2% of our total loan portfolio compared to $21.9 million or 5.2% of our portfolio as of the prior year end. As of March 31, 2015 outstanding loan balances in our commercial real estate portfolio totaled $123.1 million representing 29.1% of our total loan portfolio. Total balances in our agriculture loan portfolio were $63.3 million or 15% of our total loan portfolio as of March 31, 2015. As part of our comprehensive credit risk management processes we review the construction of 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 $423.1 million at quarter-end March 31, 2015. Mortgage one-to-four loans represent 31% of the portfolio. Commercial loans are just over 15% of the portfolio, commercial real estate loans are under 30%, 15% of the loans are agri business related. Construction and development loans are limited to just over 4% of the total portfolio. The current economic landscape in Kansas is stable. The seasonally adjusted unemployment rate for Kansas as of March was 4.2% versus a 5.5% national rate according to the Bureau of Labor Statistics. The broader real estate economy across the state showed modest growth in sales activity and value appreciation in 2014 on residential real estate and is expected to be flat are modestly higher in the 2015 in most markets. The outlook for crop production in 2015 is expected to be more challenging then in the past several years due to lower commodity prices. [Indiscernible] are expected to face tighter margins in the coming year, but will be aided by lower feeding costs. Our land prices have remain generally flat in the past few quarters across Kansas with some modest weakening in certain land used categories. Our exposure in the farm land market segment remains limited with the majority of our agriculture programs tied to production. We will continue to monitor all of these factors closely as they related to our credit portfolio. Thanks again. And with that I’ll hand it back over to Michael.

[Michael Scheopner:]

Thank you, Brad. I also want to thank Mark for his comments earlier in the call. Before we go to questions, I just want to summarize by saying we are pleased with Landmark’s operating results for the first quarter of 2015. As noted during our comments while the quarter results were impacted by two non-recurring events, even without these events core earnings performance for the quarter continues to meet our expectations. With that, I’ll open the call up to questions that anyone might have. Q -

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] At this time, Mr. Scheopner we have no one entering the queue.

[Michael Scheopner:]

Okay. Thank you, and I appreciate everyone joining the call today and for your continued support of the company and we look forward to joining you next quarter to discuss our results for the second quarter of 2015. Thank you.

[Operator:]

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.