Landmark Bancorp Inc (LARK) 2010 Q4 法說會逐字稿

Good day and welcome to the Landmark Bancorp, Inc. 2010 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 would now like to turn the conference over to Patrick Alexander, President and CEO. Mr. Alexander, the floor is yours, sir.

Thank you. Good morning, thank you for joining our call this morning where we will discuss our earnings and results of operations for both the fourth quarter and year end 2010. I have with me Mark Herpich, our CFO, and Michael Scheopner, who is Credit Risk Manager for the Company.

Before we get started I'd 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 the meeting 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 $844,000 for the fourth quarter which translates to net earnings per share of $0.32. For the year ending 2010 we're reporting earnings of $2,043,000 which is $0.78 per share. The decrease in net earnings in the fourth quarter compared to the third quarter of 2010 is primarily the result of an increased provision for loan losses as our provision increased from $500,000 in the third quarter to $700,000 in the fourth quarter.

This increase is the result of the decreased value on an appraisal of commercial real estate securing a previously identified impaired loan. Additionally, we wrote down a piece of other real estate owned, an additional $338,000, due to a new appraisal that came in significantly lower than one year prior.

Our focus remains on improving asset quality and we are pleased with the progress we've made this year. Non-accrual loans totaled $4.8 million or 1.5% of loans at year-end 2010 compared to $11.8 million at the end of 2009.

Loans past due more than 30 days and non-performing loans equal 1.9% of gross loans compared to 4.1% at year end 2009. Total non-performing assets to total assets equals 1.6% at the end of 2010 compared to 2.5% at year-end 2009. The allowance for loan losses to total non-performing loans is 103% versus 46% at year end 2009.

We feel good about the progress we've made in this area and are pursuing continued improvement. Portfolio credit risk appears to continue to remain stable as we manage our loan portfolio and review our non-performing and delinquent loans.

Our one to four family loan originations remained strong as we originated in excess of $56 million in residential mortgage loans in the fourth quarter for a total of $172 million in 2010. This activity resulted in $3.4 million in gains on sale of loans for the year.

We are also pleased that our fees and service charges increased $284,000 from $4.4 million in 2009 to $4.7 million in 2010 as we were able to mitigate the adverse impact that the changes to Regulation E might have had on our non-interest fee income. Although loans have declined from $343 million at year end 2009 to $307 million at year end 2010, our net interest margin has increased from 3.57% to 3.78% for the same period.

Overall for 2010 we are pleased with our core earnings before the provision for loan losses. We feel that our efforts in improving our asset quality have made substantial progress and should contribute to improved performance in 2011. Additionally, our lending staff is refocusing their efforts on finding new lending opportunities and growing our loan portfolio with quality credits.

While the economic environment could still present some difficulties as we go forward, we are hopeful that the recovery will be sustainable and the economic environment will continue to improve. I will now turn the call over to Mark Herpich, our CFO, who will review the overall financial results with you.

Certainly. As Pat has already mentioned our net results for the fourth quarter and full year of 2010, I would like to make a few comments on various elements comprising those net results. Starting with the fourth-quarter financial highlights, net interest income decreased $184,000 to $4.4 million in comparison to the prior year's fourth quarter.

While our net interest margin increased to 3.78% from 3.66% for the fourth quarter of 2009, which is a 12 basis point improvement, our improved net interest margin was more than offset by lower average balances of interest earning assets, which declined from $538 million in the fourth quarter of 2009 to $499.7 million in the fourth quarter of 2010.

Looking at our provision for the fourth quarter, Pat mentioned we provided $700,000 to the allowance for loan losses, which was an increase of $400,000 in comparison to the same period of 2009. This increase is reflective of a significant decline in the appraised value of the collateral securing an impaired commercial real estate loan.

Non-interest income was up $924,000 during the fourth quarter, primarily as a result of a $103,000 increase in fees and service charges and a $747,000 increase in gains on sale of loans as our originations of the one to four family residential loans that were sold into the secondary market increased in comparison to the same period of 2009. The low mortgage rate environment resulted in the increased level of refinancing activities.

Our fourth-quarter non-interest expenses increased $968,000 on a linked-quarter basis driven largely by a $381,000 increase in foreclosures and real estate owned expense and a $274,000 increase in professional fees. The increase in foreclosure and real estate owned expense was primarily the result of a provision to record valuation allowances to reflect declines in the fair value of certain real estate owned assets.

The increase in professional fees was primarily related to legal actions seeking payment from the guarantor of a construction loan that was partially charged off in the second quarter of 2010.

Moving on to discuss financial highlights for the full year of 2010, similar to the quarterly improvement I previously mentioned, we achieved a 21 basis point improvement in our net interest margin in comparison to the full year of 2009, increasing from 3.57% to 3.78% on a tax equivalent basis.

Net interest margin improvements result primarily from maintaining the yield on our loan portfolio while our investment portfolio, deposits and Federal Home Loan Bank advances repriced lower. The improvement in net interest margin from interest rates was more than offset by lower average balances of interest earning assets resulting in a decrease of $134,000 in net interest income for the full year 2010 in comparison to 2009.

Once again the largest impact on our reported earnings relates to our provision for loan losses which increased to $5.9 million during 2010 compared to a provision of $3.3 million during 2009. This reflects the increased charge-offs experienced during the second quarter of this year primarily related to a significant decline in appraised value of the collateral securing a previously identified and impaired construction loan.

This decline caused us to increase the provision for loan losses by $2.6 million beyond the previously allocated reserve. While it was prudent to charge off the loan, we are continuing to pursue collection efforts on the guarantors and, as I mentioned earlier with respect to the increase professional fees, we expect to achieve some level of recovery in the future.

Our non-interest income increased $704,000 during 2010, which partially results from a $355,000 increase in gains on sale of loans. Also contributing to the higher level of non-interest income was an increase in fees and service charges of $284,000. As Pat alluded earlier, we focused a lot of effort on the Regulation E opt-in process during the third quarter of 2010, which has resulted in maintaining and even improving our deposit fee income levels.

Another item affecting our earnings is a favorable change of $1.1 million experienced in our net gains and losses on investment security sales between 2010 and 2009. We realized $563,000 of gains on sales of investment securities resulting from the sale of $10.1 million of high-quality mortgage-backed investments as we capitalized on the premium pricing that we perceived to exist in the markets for these types of securities during the first quarter of 2010.

Additionally, we recognized a net credit related other than temporary impairment loss of $391,000 on our portfolio of pooled trust preferred investment securities during 2010, a decline from the $961,000 impairment loss recorded in 2009.

Looking at our non-interest expense, we reported an increase of 5.7% or $1.1 million for 2010 in comparison to 2009. The increase was driven primarily by an increase of $452,000 in compensation and benefits due in part from our May 2009 acquisition of a branch in Lawrence, Kansas.

Additionally, foreclosure and other real estate owned expense increased by $355,000, driven primarily by updated appraisals received to support the valuation of real estate properties foreclosed on in early 2010. Lastly, as discussed in the fourth-quarter comments, professional fees for 2010 were $153,000 higher than 2009.

To touch on a few balance sheet highlights, our total assets decreased to $561.5 million at December 31, 2010 as compared to $584.2 million at December 31, 2009, while our stockholders equity remained stable at $53.8 million at December 31, 2010 as compared to $53.9 million as of December 31, 2009. Our consolidated and bank regulatory capitals continue to see the levels to be considered well capitalized as of December 31, 2010.

The Bank's leveraged capital ratio was 10.5% at December 31, while the total risk-based capital ratio was 17.0%. The last comment I'll make on the quarter and full year is the fact that, absent the increased loan loss provision, the Company's core earnings elements remain strong. I will now turn over the call to Michael Scheopner to review highlights of our loan portfolio.

Thank you, Mark. I'd like to start my comments by addressing trends in our non-performing loan categories. Our non-accrual loans, which primarily consist of loans greater than 90 days past due, totaled $4.8 million as of December 31, 2010, which is a decline of $7 million from our December 31, 2009 non-accrual balance of $11.8 million.

Another loan indicator we monitor as part of our credit risk management efforts is our level of loans past due 30 to 89 days. I am pleased to report that the level of past due loans between 30 and 89 days has also declined from $2.5 million at December 31, 2009 to $1.4 million, or 0.4% of the gross loan portfolio as of December 31, 2010.

The monitoring of this past due loan category is an important part of our overall credit risk management process, an early identification of potential problem loans. These lower levels of delinquent loans, along with our efforts to resolve the remaining problem loans or move them out of the portfolio, as noted by the reduction in non-accrual loans, provides us with supporting data to feel that we have dealt with the most significant risk associated with our loan portfolio.

While our balance in real estate owned increased by $2.1 million during 2010 to $3.2 million as of December 31, 2010, historically once management has been able to assume control of the collateral securing problem loans, we have generally been successful in our efforts to liquidate the collateral.

Let me also say a few words about our exposure to credit concentrations. We continue to place additional emphasis on portfolio management of our commercial real estate and construction relationships. Management realizes that exposure to these industries in the current economic environment results in the potential for increased risk.

Our construction and land loan portfolio declined 36% from $36.9 million at December 31, 2009 to $23.7 million at December 31, 2010. This decrease in construction and land commitments has been a conscious risk management decision by Landmark over the past several years. As of December 31, 2010 our commercial real estate loan portfolio totaled $92.1 million; this represents a 7% decrease from the December 31, 2009 level of $99.5 million.

As part of our comprehensive credit risk management processes we have also reviewed the portfolio for geographical concentration issues and note that the Bank has no material exposure outside the state of Kansas.

I would also like to take a moment to address market conditions within the communities we serve. While the economies in our Kansas markets have been impacted by the current economic environment, our communities have not experienced the magnitudes noted in various other parts of the country.

The Southwest Kansas economy remains relatively strong, supported by continued favorable conditions related to the agricultural industry. This geography continues to enjoy low levels of unemployment and, contrary to national trends, is facing a shortage of available housing stock to meet current market demands.

The central Kansas communities of Manhattan, Junction City and Wamego continue to have good economic activity primarily driven by continued growth at Fort Riley, the pending construction of the National Bio & Agro Defense facility laboratory in Manhattan, and Kansas State University. Home sales activity in Manhattan was down slightly in 2010 with a total of 461 sales; the average sales price was $191,000 with average days on the market of 83.

The Topeka market and surrounding area remained economically steady dominated by the state government workforce and some significant private employers. The strength of the Topeka market was noted in 2010 by a real estate expert with the NBC Today show as one of the top 10 cities in the nation to purchase a house, by Kiplinger's Personal Finance magazine as one of the 10 most likely cities to enjoy prosperity in the next decade, and in a national survey conducted by Coldwell Banker Real Estate as one of the 10 most affordable housing communities in the United States.

The Northeast Kansas markets of Lawrence and Miami County are the markets within our franchise footprint that have experienced the greatest stress during this economic crisis. The markets are currently relatively stable and not showing much additional deterioration or decline in real property market values. Home sales in Lawrence totaled 1,230 units in 2010 which was a 14 unit decrease from the previous year. Average days on market for the properties was 81 days.

Our geographical distribution of loans across the state of Kansas helps mitigate our levels of risk exposure to any one market. Loan demand continues to be weak as customers are still cautious with respect to moving forward with new projects or expansionary plans. With that I'll hand it back over to Pat.

Thank you, Michael. Before we go to questions I just want to finalize by saying that we've been working very diligently on our asset quality and particularly on the level of non-performing assets. We feel we are making good progress in this area. As I mentioned previously, we are also looking for new lending opportunities for quality credits in an effort to grow our loan portfolio.

Additionally, we are continuing to be alert to acquisition opportunities that make sense from both a market and an asset quality perspective. With that I'll open up to any questions that you might have.

(Operator Instructions). [Brad Ness], [Rosenthal Partners].

Yes, guys, how are you doing?

Doing well, Brad, yourself?

Doing good, appreciate it. I would like to get your thoughts on future loan growth. Obviously that portfolio has been shrinking for the past -- more so the last couple years, but also even the past couple years before that. What's your outlook in the near term and kind of intermediate term for loan growth?

Brad, I'll let Michael Scheopner comment after I'm done. But one of the things that's been persistent in that loan portfolio has been as we have made historic acquisitions there's been a large number of one to four family mortgage loans in the portfolio that we've traditionally allowed to run off. Prior to the economic downturn we were essentially able to replace those with commercial -- primarily commercial and commercial real estate loans.

During the last couple, three years we've had a significant decrease in land and development loans and also construction loans that in this environment has been somewhat difficult to replace, because there really has not been very strong loan demand. In a lot of our markets we're seeing two things right now.

We're seeing, one, some of our businesses begin to stabilize and some of those business owners and managers looking for expansion opportunities. And two, we're seeing several banks within our markets because of asset quality problems they've got, whether it be formal agreements or whatever, not be able to take care of those customers.

So, we're expecting some increased demand from that area. We're also, as we've looked at our loan portfolio from an interest rate risk perspective we're probably looking at keeping some of the top quality one to four family residential loans in portfolio. And while we won't be growing that portfolio above what it is now, we anticipate trying to hold those numbers steady so we're not having to replace that bucket also.

So I would think we should -- if things go according to plan we should see loan portfolio totals stabilize. And hopefully, if we're successful in our business development efforts, see those increase also to some degree. Michael, do you want to add any comments to that?

No, Pat, I think you've covered the topic fairly well. The reference to the one to four family loan run-off, I think that amounted to right at $10 million of the loan decrease in 2010 and the strategy of maintaining some of that pool will help stabilize loans.

In our markets we are seeing -- I would still qualify the demand across the franchise as relatively weak loan demand, but we are seeing a little bit of increased activity with respect to inquiries from potential clients, existing clients and prospective clients. So, our lending team as a whole, part of their 2011 focus is increased efforts with respect to the recruitment of quality loan customer relationships and that will be a large part of our effort during this year.

Okay, appreciate it, guys. I have a couple more here. The other question relates to asset liability management. I was thinking that you guys were probably positioned to have a rather stable net interest margin in a flat rate environment we'll call it over the next year. And then in an increasing rate environment you may be negatively impacted over the short-term due to some of your floors on your loans. But you are kind of asset sensitive in the long term, so you would actually benefit once you get past those floors. Is that an accurate assessment of your asset liability management and net interest margin?

I would say that matches up very closely with our analysis.

Okay, great. And another thing I try to do is look at long-term net interest margin capabilities of various firms. And looking at your margin just over the last 10 years it's been as low as 2.90% and it's been as high as 3.90%. And you're at the higher end of that margin. Do you think that your long-term margin, call it a margin five years out, is closer to where it is now, or is there maybe some mean reversion where it goes maybe to more a settled level is at 3.50% level?

I'd be interested in Mark's comments on this. My thoughts would be I think we'll be closer to where we're at now than going to a mean reversion. Our last acquisition of First Savings Bank we incurred -- we got some liabilities there and some lower yielding assets, if I recall correctly, that brought that down and we've kind of been working out of that here the last few years. But, Mark, what are your thoughts on that?

Brad, I think while we are getting to the high end, I think 3.78% is where we're showing our tax equivalent margin for 2010, which is higher, I think it was closer in the 3.50's over the last two previous years. But maintaining the 3.80-ish range or so I think could be difficult, but I don't see us dropping off significantly over the next two, three, four, five years. I think we'd still be in that mid to upper threes would be my projection and feeling on our asset liability management, Brad.

Okay, appreciate it. Lastly -- one more then have someone else jump on. looking at the compensation and benefits line item for the fourth quarter, it spiked a little bit more than I was projecting. Is there anything in that regarding any new hires or initiatives that I should be aware of?

From initiatives, we actually are not adding on any new employees at this point in time. I think what drove that up in the fourth quarter over maybe the third quarter was, as you saw our gain on sale of loans went up quite a ways as well, and some of the related commissions also went up during the fourth quarter associated with those.

But absent that, I mean I would -- as the loan volumes probably start going, I would see them decline a little bit now. With rates ticking up a little bit I think we'll still be fairly strong into 2011, but not probably at the record levels we saw last year, especially in the fourth quarter of 2010. But that accounts for some of the increase you're seeing there.

Okay, that makes sense. I appreciate it.

Ross Haberman, Haberman Management Corporation.

Good morning, gentlemen. How are you?

Doing well.

Could you talk about -- are you seeing any real inklings of loan demand presently or perhaps you do see some in some of your markets. And are we done in terms of the refi activity now?

Ross, I'd still -- this is Michael Scheopner. I'd still categorize the loan demand as fairly weak across the franchise. We are seeing some inquiries from customers that are current clients that are interested in increased activity in 2011, but it's a pretty modest level of inquiry. We're also increasing our efforts to call on prospective clients that may not be able to obtain credit at their current institutions because of issues that those institutions are facing. And so -- but overall I'd still qualify loan demand as fairly weak.

The question with respect to refinance, one of the things that is a positive from the Company's standpoint is our production activity in 2010 -- we actually had a high level of purchase activity in 2010 than refinance activity in 2010. So our ratio of purchase to refi transactions would represent that we've got good market share activity in our primary mortgage production markets with respect to purchase activities.

So while I do think that we'll see a decrease in refinance activity just because of the change in the rate curve or -- I do think that we'll see continued activity or production levels in our one to four family pipeline. Our current pipeline still reflects a decent level of activity both in a purchasing and a little bit in a refi mix. So I'm still somewhat optimistic with respect to our production levels forecast in 2011.

Thanks, guys.

(Operator Instructions). Mr. Alexander, gentlemen, it appears that we have no further questions at this time.

Okay. Well, I'd like to thank all of you for joining us on this conference call. And if you have any additional questions, we always remain available for a phone call if you'd like to discuss anything in detail further. And we look forward to visiting with you after our first quarter and thank you for your attendance. Thank you very much, we will talk to you later. Bye.

And we thank you, gentlemen, for your time. The conference has now concluded and we thank you all for attending today's presentation. At this time you may disconnect your lines. Thank you.