Landmark Bancorp, Inc.
Q4 2014 Earnings Call Transcript

Published: 3 Feb 2015

[Operator:]

Good day everyone welcome to the Landmark Bancorp Incorporated Q4 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] I’d now like to turn the conference call over to Mr. Michael Scheopner, President and CEO. Sir, please go ahead.

[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 fourth quarter as well as the fiscal year-end 2014. Joining the call with me today to discuss various aspects of our year-end and fourth quarter performance are Mark Herpich, Chief Financial Officer for 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 into 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 net earnings of $2.1 billion or $0.62 per share for the fourth quarter 2014. Year-end 2014 net earnings totaled $8 million which is a record for the company. The year-end 2014 earnings represent a 72.9% increase from our 2013 earnings level. Year-end 2014 earnings translate to net earnings per share of $2.38 on a fully diluted basis up from $1.42 in 2013. The big step up in our earnings in 2014 came principally from Landmark’s acquisition of Citizens Bank which moves the needle not only with the larger scale for the bank but also with increased returns per shareholders. Our team delivered on what we expected, an accretive value building acquisition. Net interest income totaled $24.7 million in 2014 up 29.6% from the previous year. Non-interest income in 2014 totaled $15 million up 39.9% from 2013. Of particular note, riding the rise in non-interest income was an increase in gain on sale income of 1.7 million a $2.1 million increase in fees and service charges and an increase of $535,000 in other non-interest income all principally a result of the Citizens acquisition. The support recurring levels of gain on sale income we continue to focus on maintaining the relationships we have with (realtors) [ph] and other referral sources for purchase money mortgage activity supporting our single family loan originations. Total originations in 2014 exceeded $222 million with 84% of that activity involving purchase money transactions. Our mortgage lending activity in 2014 was additionally bolstered by our origination staff in Johnson County in Southeast Kansas to join me and Mark as part of the Citizens acquisition. Total non-interest expense in 2014 was $28.1 million up 19.2% primarily under categories of compensation, occupancy, other non-interest 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 March 4, 2015 to shareholders of record as of February 18th. This represents the 54th consecutive quarterly cash dividends since the Company’s formation resulting from the merger of Landmark Bancorp Inc. with M&T Bank in October 2001. Combining steady cash dividends with our 5% annual stock dividends, Landmark has delivered an attractive total return to shareholders. In summary I’m very pleased with our results for the fourth quarter and our record results for fiscal year end 2014. I expect our trend of solid earnings to continue in 2015. The successful integration of the Citizens acquisition in 2014 represented a milestone in our disciplined approach to building the scale of Landmark national bank. We substantially increased earnings per share and profitability in 2014 primarily through the higher levels of interest earning assets, net interest margin and non-interest income of our combined banking presence. The management team remains focused on managing the organization in the conservative and disciplined manner dedicated to underwriting loans and investments prudently non-agreeing 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.

[Mark Herpich:]

Thanks, Michael and good morning to everyone. As Michael has already summarized our earnings for the fourth quarter and year-ended December 31, I would like to make a few comments on various elements comprising those record results. Starting with the fourth quarter financial highlights, net interest income increased 714,000 to 6.3 million in comparison to the prior year’s fourth quarter. The higher net interest income was primarily a result of our acquisition of Citizens Bank, leading to an increase in our average interest earning assets from 681.7 million in the fourth quarter of 2013 to 767.7 million in the fourth quarter of 2014. Our net interest margin in the fourth quarter also increased slightly to 3.46% from 3.45% during the fourth quarter of 2013. In comparison to the net interest margin of 3.47 in the third quarter of 2014, our net interest margin has also remained relatively stable from a quarter-to-quarter perspective. Looking at our provision, we did not provide to the allowance in either the fourth quarter of 2014 or 2013, as we concluded the allowance for loan losses was adequate at December 31 in both years. We did receive a recovery in the amount of a $151,000 during the fourth quarter of 2014 on a previously charged-off commercial real estate loan. Non-interest income increased $986,000 to 3.7 million for the fourth quarter of 2014, as compared to the same period of 2013. Our gains on sales of loans reflected an increase of $571,000 for the fourth quarter of 2014 compared to a year earlier, to which the mortgage business of Citizens Bank contributed. Other factors contributing to the increase in non-interest income were a $322,000 increase in season service charges and $88,000 in other non-interest income, also primarily a result of the Citizens Bank acquisition. Our fourth quarter non-interest expenses decreased by 1.1 million to 7.2 million on a linked quarter basis, primarily resulting from merger related expenses associated with our acquisition of Citizens Bank totaling 1.7 million in the fourth quarter of 2013. Partially offsetting the non-recurring merger related expenses in 2013 were increased expenses primarily related to operating eight additional branch locations. These increases included a $634,000 increase in compensation and benefits, $74,000 in advertising and $51,000 each in data processing and amortization expense, primarily related to the acquisition of Citizens Bank. Moving on to some financial highlights for the full year 2014, we achieved an increase in our net interest margin in comparison to the 2013 full year improving from 3.40% to 3.47% on a tax equivalent basis. Similar to my quarterly comments, this resulted primarily from our acquisition of Citizens Bank. For the year our net interest income increased 5.6 million to 24.7 million in 2014 compared to 2013, an increase of 29.6%. Our acquisition of Citizens Bank helped increase our average interest earning assets 25.8% from 598.3 million in 2013 to 752.8 million during 2014. We provide $600,000 to the allowance for loan losses in 2014, which was a decline from an $800,000 provision in 2013, as our asset quality improved. Non-interest income totaled 15 million in 2014, an increase of 4.3 million or 39.9% from 2013. Consistent with my quarterly comments, this increase results primarily from growth of 2.1 million in gains on sales of loans due to higher volumes of loans sold in the secondary market and 1.7 million in fees and service charges received on deposit accounts and service fee income of one-to-four family residential real estate loan service for others. Additionally, other non-interest income increased $535,000 driven by higher leased revenue. These increases were attributable to both our internal organic growth as well as our Citizens Bank acquisition. Looking at our non-interest expense, we reported an increase of 19.2% or 4.5 million for 2014 in comparison to 2013. This increase was a result of increases of 3.8 million in compensation and benefits, 1.1 million in occupancy and equipment, 705,000 in other non-interest expense, $547,000 in amortization and $424,000 in data processing. Consistent with my fourth quarter comments, these higher levels of expense in 2014 primarily reflected a full year of operating cost relating to the 8 additional branches assumed in the Citizens Bank acquisition. In addition to the acquisition impact was a reversal of $212,000 valuation allowance against our mortgage servicing rights recorded in 2012, which reduced amortization expense during 2013. Partially offsetting these increases for 2014 reductions of 1.9 million of acquisition cost and $268,000 in foreclosure and other real estate expense as 2013 reflected the expenses associated with acquiring Citizens Bank and higher cost of liquidating other real estate. As discussed in our conference call over the past year, due to the timing of the Citizens Bank acquisition, we continue to operate on separate computer systems close to the end of the March 04, 2014 quarter. Integration of the systems allowed us to obtain additional cost and operational efficiencies over the course of 2014. Additionally on May 16, we completed our previously announced plan to close one of our overlapping [indiscernible] banking facilities. Thus since we completed the most significant operational efficiencies related to the assimilation of Citizens bank into Landmark during the first and second quarters of 2014, these results for 2014 are still not indicative of an entire fiscal year’s results post assimilation. The third quarter represented our first of all quarters subsequent to completing the most significant operational efficiencies related to the assimilation of Citizens Bank into Landmark. We touched on a few balance sheet highlights, our total assets increased 34.7 million to 863.5 million at December 31, 2014 compared to 828.8 million at December 31, 2013. Our loan portfolio increased slightly at year end 2014 to 416.2 million from 414.0 million at year end 2013. Our investment securities increased 47.4 million to 352.9 million at December 31, 2014 from 305.5 million at December 31, 2013. Stockholders’ equity increased by 8.9 million to 71.6 million at December 31, 2014 or a book value of $21.49 per share compared to 62.7 million at year end 2013 or a book value of $19.01 per share. In addition to 2014 retains earnings 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 continued to exceed the levels we considered well capitalized as of December 31, 2014. The Bank’s leverage capital ratio was 8.5% at December 31, 2014 while the total risk based capital ratio was 15.2%. I will now turn the call over to Brad Chindamo, to review the highlights on our loan portfolio.

[Brad Chindamo:]

Thanks Mark and good morning to everyone. Net loans outstanding as of December 31, 2014 totaled to 416 million, this is a $2 million increase from the previous year end net loan total of 414 million and flat compared to the prior quarter ending total. In 2015, we’ll continue to be focused on prospecting new, high quality commercial banking relationships and expanding the existing high quality relationships. Non-performing loans, which primarily consist of loans greater than 90 days past due totaled 6.0 million or 1.44% of gross loans as of December 31, 2014. This compares to a level of 2.35% as of year-end 2013 and 1.45% at the end of the third quarter. Significant part of non-performing loans is principally associated with one credit, commercial loan relationship consisting of 3.1 million in real estate and land loans which was placed on non-accrual status after borrower filed for Chapter 13 bankruptcy reorganization protection 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 past due loans between 30 and 89 days still accruing interest as of December 31, 2014 total $1.1 billion or 0.26% of gross loans. All the loans in the 30 to 89 day past due category 50% or $480,000 is associated with one agricultural real estate loan. We continue to monitor delinquency trends carefully in all loan categories. Our balance and other assets real estate owned totaled 255,000 as of December 31st, an increase from 159,000 in the prior quarter and down from 400,000 as of the year-end 2013. 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 98,000 during the fourth quarter of 2014 and net loan charge-offs of 820,000 for the year ending December 31, 2014 compared to net loan recoveries of 159,000 during the year ending 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 December 31, 2014 our construction and land portfolio balances totaled 21.9 million or 5.2% of our total loan portfolio. As of December 31, 2014 outstanding loan balances in our commercial real estate portfolio totaled 118.4 million representing 28% of our total loan portfolio. As part of our comprehensive credit risk management processes we review 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 resolving Landmark loan portfolio gross totals approximately $421.2 million at year-end 2014. Mortgage one to four loans represent 30% of the portfolio. Commercial loans are just over 14% of the portfolio, commercial real estate loans are 28%, 15% of the loans are agri business related. Construction and development loans are limited to just over 5% of the total portfolio. Current economic landscape in Kansas is stable. Seasonally adjusted unemployment rate for Kansas as of December was 4.2% according to the Bureau of Labor Statistics. 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. Commercial real estate occupancy levels are stable and showing signs of value appreciation in certain markets. Bulk crop harvest in Kansas resulted in record yields in several areas however substantially lower commodity prices are offsetting much of the gain in yield. The outlook for crop production in 2015 looks to be more challenging than it’s been in several years due to the lower commodity prices and changes in the new farm build. (Cattle feeders) [ph] had a good year in 2014 with the outlook for 2015 points toward shrinking margins. Farm land prices remain generally flat year-to-date across Kansas with similarly signs of softness in certain land used categories. Our exposure in the farm land market segment remains limited with the majority of our agricultural loans (to add to) [ph] production. We will 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.

[Michael Scheopner:]

Thanks, Brad. I also will 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 fourth quarter and the record results for fiscal year end 2014. As we anticipated, the Citizens Bank acquisition was accreted to earnings in 2014 and I expect that positive earnings impact to continue in 2015. With that, I’ll open it to up to questions that anyone might have.

[Operator:]

Ladies and gentlemen, at this time we’ll begin the question-and-answer session. [Operator Instructions]. Our first question comes from Ross [indiscernible] Management. Please go ahead with your question.

[Unidentified Analyst:]

Could you talk about the bank you bought to the lot of residential originations and sales and they generated nice fees, could you talk about sort of the pipeline today? The drop in rates is that getting better in the recent past? And what’s your expectation in terms of that volume for the coming calendar year, assuming rates stay flat on a pro-argument sake through most of the year.

[Michael Scheopner:]

Assuming rate stay flat as we progress through 2014, we saw a fairly steady pipeline, we started a little bit early in 2014 because of winter weather conditions, but we rebounded in the second quarter. So our strong pipeline activity really across the entire State of Kansas relative to par our production activity or our pipeline activity across the entire geography. As we go forward into 2015, as I mentioned in my comments, our focus really is on maintaining a strong penetration in purchase market activity or purchase money activity in all of our markets. Our total production volumes in 2014 included an 84% purchase money make up of that volume. So, I feel fairly good about the fact that we can maintain a recurring income stream through mortgage originations based upon that purchase money focus as we move into ’15. We really saw limited refi impact if you look at those production volumes. I know -- we saw rates that (table) [ph] down even lower than some of our production rates during ’13 and ’14, so we haven’t really seen any refi activity in the results of the change in rates, but we’re prepared to handle increase refi activity if rates predict that in addition to our purchase money focus.

[Unidentified Analyst:]

And just one follow-up question, all these banks are listening to or singing the blues about the shrinking margins and spreads, what’s your expectation again, let's assume the rate stay flattish for most of the year?

[Unidentified Company Representative:]

I guess if the rate stay flat where we are today with the 10 year in the 160 range which is down quite a bit from where we started the year even like things are going to continue to add pressure on our net interest margin ratio and unless we continue to reinvest the maturing investment securities, we’re going to see pressure to keep that but we’ve been fighting that battle for the last two or three years and we have been able to kind of keep it very steady in the mid-340s range and I am hopeful that were we’ve kind of stabilized off but it's still going to be challenging with these even lower interest rates that we’re seeing here in the start of 2015, unless we’ve got some pipeline activity in the loan portfolio and we hope the thing that will offset that is our ability to originate and grow our loan portfolio or even potentially as we have in the past kept a [indiscernible] one-to-four family high quality mortgage loans that we originate to kind of put it through help with our mix of investments and loans as we look at our margin going forward.

[Operator:]

[Operator Instructions] And sir at this time we’re showing no additional questions I’d like to turn the conference call back over for any closing remarks.

[Michael Scheopner:]

Thank you, I appreciate everyone’s attendance on the call today and for your continued support of our company and we look forward to visiting again following our first quarter results. Thank you.

[Operator:]

Ladies and gentlemen that does conclude today’s conference call. Thank you for attending, you may now disconnect your telephone lines.