Landmark Bancorp Inc (LARK) 2012 Q1 法說會逐字稿

Good morning and welcome to the Landmark Bancorp Inc. first-quarter 2012 earnings conference call. All participants will be in 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 Mr. Patrick Alexander, President and CEO. Please go ahead, sir.

Thank you. Good morning. Thank you all for joining our call today where we'll discuss our earnings and results of operations for the first quarter of 2012. I have with me Mark Herpich, our CFO, and Michael Schoepner, who is Credit Risk Manager for the Company.

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 meeting to 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 $1.727 million for the first quarter, which translates to net earnings per share of $0.62. This is an increase in earnings per share of 76.6% compared to the first quarter of 2011. The primary drivers of the improved earnings are an increase in gains on sale of loans, gains on sale of investment securities, and an increase in net interest income.

Gains on sale of loans almost doubled from $619,000 in the first quarter of 2011 to $1.204 million in the first quarter of 2012 as originations and loan pricing remained strong. Additionally, we took advantage of some high premiums caused by very low interest rates and monetized gains in the securities portfolio in an amount of $227,000 in the first quarter.

Net interest income increased approximately $180,000 as both deposit costs and borrowed funds expense continued to fall faster than interest income on earning assets. At the same time, non-interest expense declined $102,000 in the first quarter of 2012 compared to first quarter of 2011, a decrease of 2.1%.

We continue to remain pleased with our asset quality indicators in spite of the small uptick in nonaccrual loans of approximately $500,000 compared to year-end 2011.

On a positive note, loans past due 30 to 89 days decreased from 0.71% of gross loans outstanding at year-end 2011 to 0.48% at the end of the first quarter of 2012.

During our year-end 2012 conference call, I mentioned an uptick in delinquency of seasoned single-family residential loans that were showing some signs of payment stress. Collection efforts and economic effects have worked to reverse that uptick as that portfolio has returned to a delinquency level more in line with our historical trends.

The allowance for loan losses took total nonperforming loans is 257% versus 332% at year-end 2011, reflecting the increase in nonperforming loans I mentioned earlier.

Portfolio credit risk appears to remain stable to declining as we manage our loan portfolio, monitor asset quality indicators, and review our nonperforming and delinquent loans.

We feel good about our results this past quarter and hope to continue our trend of solid core earnings through 2012. Our biggest challenge at this time is relatively soft loan demand. We continue to focus our efforts on recruitment of new business relationships and meet our underwriting requirements.

Economic conditions within our markets remained stable with some showing signs of growth -- slow growth. However, we are still not seeing a rebound in either real estate -- in either commercial real estate or residential real estate valuations or sales activity across most of our markets.

We continue to monitor regulatory developments as they pertain to new regulations that are resulting from the Dodd-Frank Wall Street Reform and Consumer Protection Act. However, we realize that the best way to cope with these additional challenges is to grow both our assets and our profitability to ensure that we have adequate resources to properly address this increasing burden.

We successfully closed on the acquisition of the Wellsville Bank on April 1, 2012 with approximately $35 million in assets. This is a nice addition to our franchise and fits well within our existing footprint.

We hope that the economic recovery is sustainable and that the economies of our markets continue to improve. Not only will improved economic conditions continue to help the lending environment, ultimately we expect to see interest rates increase with an expanding economy. We are beginning to see some pressure on our net interest margin as deposits continue to increase and assets continue to price downward.

We feel to structure our -- we continue to structure our balance sheet in order to be well positioned for increasing rates. We feel positioning ourselves in this manner is only prudent in this historically low rate environment.

However, to hold our net interest margin at a satisfactory level, we need to grow our loans with quality credit relationships and meet our underwriting requirements. We continue to manage the organization, monitor our interest rate risk and underwrite loans and investments in a conservative manner 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?

Certainly. As Pat has already summarized our results for the first quarter of 2012, I would like to make a few additional comments on various elements comprising those results.

Starting with the first quarter financial highlights, net interest income increased $170,000 to $4.5 million in comparison to the prior year's first quarter. Our net interest margin decreased to 3.62% from 3.80% for the first quarter of 2011. Our increased net interest income resulted from an increase in our average balances of interest earning assets, primarily investment securities.

Average interest earning assets rose from $496.6 million in the first quarter of 2011 to $534.6 million in the first quarter of 2012. The decrease in our net interest margin resulted primarily from increasing our investment securities balances as well as cash during the first quarter of 2012, both of which are assets that typically earn lower yields than loans as our average deposit balanced increased and our average loan balances declined.

Looking at our provision, we provided $300,000 to the allowance for loan losses for the first quarter of 2012, a reduction of $100,000 in comparison to the first quarter of 2011 as our asset quality continues to improve.

Non-interest income increased $635,000 to $2.7 million for the first quarter of 2012 as compared to the same period of 2011. Non-interest income was primarily impacted by a $585,000 increase in gains on sales of loans as the volume of loans sold in the secondary market was higher in the first quarter of 2012 compared to a year earlier.

Our first-quarter non-interest expenses decreased $102,000 to $4.7 million on linked quarter basis primarily resulting from reductions of $83,000 in Federal Deposit Insurance premiums and $38,000 in advertising. Partially offsetting those declines in the first quarter of 2012 was a $32,000 increase in amortization of intangibles as the amortization of our mortgage servicing rights as compared to the same period of 2011 resulting from increased levels of refinancings experienced in our mortgage servicing portfolio.

During the first quarter of 2012, we recorded a net gain of $227,000 on our investment portfolio as a result of selling approximately $5.5 million of mortgage-backed investment securities.

Another item impacting our earnings is that we recorded a credit-related other than temporary impairment loss of $63,000 on one of our investments in a pool trust preferred security.

To touch on a few balance sheet highlights, our total assets increased to $619.5 million at March 31, 2012 compared to $598.2 million at December 31, 2011. Stockholders equity increased to $60.1 million at March 31, 2012, a book value of $21.59 per share compared to $59.1 million as of December 31, 2011, or a book value of $21.24 per share.

Our consolidated and bank regulatory capital ratios continue to exceed the levels to be considered well-capitalized as of March 31, 2011. The bank's leverage capital ratio was 10.3% at March 31 while the total risk-based capital ratio was 17.6%.

In summary, our results for the first quarter demonstrate that Landmark's core earnings elements remain strong as we begin 2012. Absent the increased gains on sales of loans and the net gains on investment securities, net income increased approximately 28%.

I will now turn the call over to Michael Schoepner to review highlights on our loan portfolio.

Thanks, Mark, and good morning to everyone. Net loans outstanding as of March 31, 2012 totaled $299 million. Loan balances have decreased 3.6% from the year-end 2011 totals. The decrease in loans is attributed to continued early payoffs in amortization of our one- to four-family loan portfolio balances, seasonal decreases in our agricultural portfolio, and the payoff of one agricultural related loan participation.

While loan demand remains soft, management continues to focus on business development efforts of quality commercial banking relationships.

Non-accrual loans, which primarily consist of loans greater than 90 days past due totaled $1.95 million or 0.64% of gross loans as of the end of the first quarter. As part of our credit risk management efforts, we also monitor our level of loans past due 30 to 89 days. The level of past due loans in that category totaled $1.5 million as of March 31, 2012, or 0.48% set of gross loans outstanding.

Of the loans in the 30 to 89 past due category, $761,000 or 51% of the balances are associated with one- to four-family mortgage or other retail related credits. Management continues to monitor the consumer-related delinquency trends. Historically, Landmark has experienced low levels of loss in these portfolios. We monitor this past due loan category as an important part of our overall credit risk management process, which is the early identification of potential problem loans.

The balance in our other assets real estate owned category totaled $2.3 million as of March 31, 2012. The majority of the total involves two properties, a commercial real estate asset and a grouping of residential building loans. We are currently marketing all of the properties held in real estate owned. During the first quarter of 2012, we recorded net loan recoveries of $7,000.

In terms of exposure to credit concentrations, we continue to focus on our portfolio management of commercial real estate and construction relationships. As of the end of the first quarter, our construction and land loan portfolio balances totaled $20.5 million or 6.8% of our total loan portfolio. This portfolio peaked for Landmark in the first quarter of 2007 at a balance of $52.8 million.

A decrease in the construction and land commitments has been a conscious risk management decision by Landmark over the past several years. As of March 31, 2012, outstanding loan balances in our commercial real estate portfolio totaled $92.5 million. As part of our risk management process, we have reviewed both the construction land and the commercial real estate portfolios for geographic concentration issues and note that the bank has no material exposure outside of the state of Kansas.

The economies in our Kansas markets have certainly been impacted by the current economic environment. However, we have not experienced the magnitude of stresses noted in various other parts of the country. Current agricultural conditions reflect mixed results at this point.

The Kansas Agricultural Statistics Service reports that the state produced the lowest level of alfalfa hay in 2011 since the crop of 1956. 2011 production of other types of hay was the lowest since 1983.

The Service reported the condition of the state winter wheat crop is improving with only 11% rated in the poor to very poor category; 8% of the crop is considered excellent, 45 percent good, and 36% fair. Predictions of future crop expectations released by the Service indicate the planting of corn at the third largest acreage level since 1936. Soybean plantings is also forecasted at the third largest acreage level in history.

A major economic development event in the community of Manhattan suffered a setback as the future of the National Bio and Agro-Defense Facility, otherwise known as NBAF, became uncertain following a request for a reassessment of the project from the White House. This has resulted in the formation of a National Research Council Committee at the request of the Department of Homeland Security.

The Committee conducted its first meeting in April and will consider three alternatives; building NBAF as currently designed, building a scaled-down version of NBAF, or maintaining the current facility at Plum Island, New York. The government originally estimated NBAF would cost $650 million but current estimates now exceed $1 billion. The Committee's assessment is expected to be completed this summer.

With that, I will hand it back over to Pat.

Thank you, Michael. Before we go to questions, I just want to summarize by saying we are pleased with our operating results for the first quarter of 2012. We are working hard to grow the balance sheet and looking for new business development opportunities.

We recognize the challenges of the economic environment and the low interest rates and are managing the Company accordingly. Additionally, we continue to be alert for other expansion opportunities that are an attractive fit for our existing franchise, that would bring enhanced value for our shareholders.

With that, I'll open it up to questions that anyone might have.

(Operator Instructions). Michael Brilley, Sit Investment Associates.

Yes, my question relates to future potential acquisitions. There is a type of bank that is commonly referred to as a zombie bank, meaning banks that are in very difficult capital positions. My question is when you consider possible future acquisitions, are you focused exclusively on quote healthy banks or might you also consider so-called zombie or banks that are on a tight leash or might be, if you will, auctioned off?

Incidentally, are there many of that type of banks, zombie banks, in the state of Kansas? Thank you.

Thanks for the question. In answer to that, yes, frankly, we have looked at some zombie banks in the last several months. We never could quite get over some of the asset quality issues versus capital they had in place. And thus we didn't get too far down the road in those discussions.

So short answer to your question is yes, we would look at the zombie banks if they were structured properly and we felt we could do it without endangering the rest of the balance sheet and -- but we are also looking at the healthy banks. We are finding more and more of the family-owned healthy banks are not appreciating the regulatory scrutiny that is coming and have not planned adequately for management succession going on down the timeline and we are finding more and more opportunities in that area also.

(Operator Instructions). This will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Alexander for any closing remarks.

Okay, I would just like to thank all of you that tuned in today. We appreciate your interest and appreciate your support and would like to ask as things evolve and you study the numbers or in the 10-Q when it's filed, if you have any questions, please feel free to contact us and we will be happy to answer those for you.

Once again, thank you for your interest and support and we'll look forward to visiting with you next quarter. Thank you.

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