County Bancorp, Inc.
Q4 2020 Earnings Call Transcript

Published: 22 Jan 2021

[Operator:]

Good morning and welcome to the County Bancorp, Inc. Quarterly Earnings Conference Call. All participants will be in a listen-only mode. Please note, this event is being recorded. I would like now to turn the conference over to Tim Schneider, President of County Bancorp. Please go ahead.

[Timothy Schneider:]

Thank you. Welcome everyone. Thanks for joining us today for our fourth quarter and year-end 2020 earnings call. As a reminder, we have our disclaimer on the use of forward-looking statements on slide two of our presentation.

[Matt Lemke:]

Thanks Tim. Moving to slide five. I'm going to highlight a few key points as it relates to our funding transformation. As mentioned on previous calls since 2018, we set out to change the right side of our balance sheet primary by decreasing wholesale funding and high rate CDs. Instead focusing on generating non-maturity client deposits to decrease our cost of funds and enhance long-term franchise value. In fourth quarter 2020, we decreased wholesale funding by $27.8 million, bringing our total decrease for the fiscal year to $141 million. Additionally, since December 31, 2019, we decreased our consumer CD portfolio by $81.7 million. And we increased our client deposits by $18.4 million in the fourth quarter, bringing the total increase for the year to $80.4 million. In terms of the number of accounts since the end of 2019, we have increased transaction accounts by 11.8%. Commercial transaction accounts increased to 12.5%, ag transaction accounts increased by 10.6%, and consumer accounts increased by 11.6%. The client deposit graph on the slide illustrates the trajectory of our progress since fourth quarter 2018 when we became more heavily engaged in sourcing transaction account balances. To achieve these results, we executed on a variety of strategic initiatives. Specifically, we continue to focus on three main areas, people, infrastructure, and services. The time and effort spent on our people was evident during the PPP process, as we were able to convert 62% of the 145 non-customer PPP loan applicants to full depository relationships. The usage imbalances in these accounts continued to grow throughout the year. We will also continue to work on building a robust treasury management infrastructure, like hiring talent, adding the necessary digital tools to meet our customer's needs and creating internal processes. We were able to both grow deposits as well as generate increased non-interest income. Next, we returned to the mortgage origination business in March of 2020. This was a strategic move to retain relationships and gather new client deposits. We were selling these loans servicing released and have been using current staff as mortgage originators to maximize efficiency. Lastly, the increase in transaction accounts referenced earlier is a direct reflection of our frontline teams having more meaningful quality conversations with customers and prospects. These interactions will help us to continue to drive transaction accounts providing us a more stable base of deposits to lend on. These decisions and tactics led to the results that we produced in 2020 and will continue to be the foundation for us to build and improve our funding base moving forward.

[John Fillingim:]

Thanks Matt. Good morning, everyone. Moving to slide six, I'd like to provide an update to our COVID payment relief metrics. On the ag side, 17 customers remained on payment relief as of 12/31/20. Of those 17 remaining, 14 will come off of payment modification by the end of January, totaling $4.4 million. The remaining three customers will come off by the end of February. Our ag portfolio benefited from a significant amount of government assistance, which helped to rebuild many of our customers' balance sheets from a working capital and liquidity standpoint. Overall, we're encouraged by our ag portfolio and proud of the work our bankers have done to service our customers through a difficult macro economic environment. On the commercial side, we initially provided 90 days of payment relief to customers who requested it and were negatively affected by COVID-19. At 12/31/20, only seven commercial customers remain on some form of payment relief. Of those, four have requested an additional 90 days of payment relief. Of the four, two are hotels that are interest-only, one is a bar restaurant, and the limited service restaurant is a customer on interest-only in connection with an SBA 504 project that's near completion and was not impacted by COVID. Overall, we've seen very little direct impact from COVID other than one hotel property that was in the middle of a flag change and has gone dark since the beginning of the pandemic. Moving to slide seven, we want to highlight some of our key credit metrics. As Tim mentioned, our adverse classified ratio decreased to 39.43% at 12/31/20. Total substandard loans decreased by $1 million and watch credits increased by $4.8 million, primarily as a result of moving our three hotel -- three remaining hotel loans into the watch category. Our OREO levels decreased by $1.9 million as a result of several sales of property that occurred during the quarter. We continue to monitor the high concern watch and substandard credits on a quarterly basis to ensure a proper monitoring and follow-up on these accounts. Moving to slide eight. We're very pleased with a relatively -- what the relatively limited impact from COVID on our commercial book of business. We continue to monitor the industries we consider high risk as detailed on the bottom of slide eight. As you'll see, the loans in these categories are supported by satisfactory loan to values and risk ratings.

[David Coggins:]

Thanks John. Moving to slide 10. Class III milk prices for the three months of quarter four averaged 20.22, making it a solid quarter for our dairy producers and bringing the Class III price for 2022 to $18.16. Despite the COVID shock early in the year, that is above the $16.96 observed in 2019 and $14.61 seen in 2018. While there was still some negative producer price differential experience for some producers in October/November, the mailbox price for most dairy producers was the best they have experienced since 2014. Strong mailbox prices combined with the PPP program and the coronavirus Food Assistance Program reinforces our expectation that 2020 will be a strong cash flow year for most of our dairy customers, which strengthens their liquidity position.

[Glen Stiteley:]

Thanks, Dave. Turning to slide 11. We continue to see strong growth in loans sold and serviced and continued improvement in our whole -- overall wholesale funding levels. Additionally, we continue to invest the excess cash in the securities portfolio. Turning to slide 12. Loan yields are being offset by deposit rate cuts, PPP forgiveness and continued growth in investments. Turning to slide 13. You'll see the breakout of our allowance for loan loss. We charged off a portion of our specific reserves as John had mentioned earlier in this quarter, which impacted our general reserves title loan losses history. However, this was offset by the reversal of our COVID reserves tied to our ag portfolio, which resulted in the credit to provision for loan losses you saw this quarter.

[Timothy Schneider:]

I'd like to make one, couple final comments here. Just to add to Glen's comments, I am very pleased how our team responded to this challenging year. The improvement in our dairy environment has also been very encouraging. And finally, the strategic transformation of the right side of our balance sheet has been impressive. And as mentioned earlier, we're poised to move into a more offensive direction in 2021. Now, I'll open it up to questions.

[Operator:]

We will now begin the question-and-answer session. And our first question will come from Brendan Nosal of Piper Sandler. Please go ahead.

[Brendan Nosal:]

Hey, good morning everybody. How are you?

[Timothy Schneider:]

Good morning, Brandon.

[Brendan Nosal:]

Just want to start off on the hotel loan that was charge off here. Do you happen to have the original balance of the loan prior to the mark this quarter and what the LTV was prior to the charge off?

[Timothy Schneider:]

John, do you have that information?

[John Fillingim:]

Yeah. It was – Brendan, it was approximately $6 million was the total debt on that property. The original or the we had initially as a going concern, we were at the high 70% loan to value. Once the hotel -- again, it was right in the middle of converting flags when the pandemic hit, once it went dark, we had another appraisal done as a dark hotel and that's what dropped the value down. And -- but we have been working with the borrowers now, and there's a potential buyer where they have executed a purchase contract, as I mentioned. So, we don't anticipate any further write-down on this property. There may depending on closing costs may be a slight gain from what we wrote down too, but we were conservative when we took our write-down.

[Brendan Nosal:]

Okay. Fantastic. That's helpful. And then, just on the remainder of the hotel book. Can you just kind of compare and contrast what's left with this one credit this quarter. I get that it was in the middle of a flag change. But just any color on whether they're in similar markets or are the primary uses are similar, just help us understand those dynamics?

[John Fillingim:]

Yeah. So, the hotel where we took the charge was down in the Milwaukee area near the airport. We only have three remaining hotels. We have one in Madison and we have the other two up in the Fox Valley. We've got good guarantors there. Their occupancy rates have then impacted, but nothing -- I mean, nothing to the extent of what happened in Milwaukee, they're still operating. We've got good guarantor support there. These are multiple location hotel operators. And we're starting to see some recovery in that industry, generally speaking. So, we did place them in the watch bucket precaution, as a precaution. We continue to watch them closely. One of them is still making full P&I payments, the other two are on interest-only. But again, we're comfortable with the loan to buyers that we have there. They're still operating, albeit not at historical levels, but enough to keep things going at this point. So, completely different situation than what we were dealing with the hotel in Milwaukee.

[Brendan Nosal:]

Yeah. That's fantastic color. Thank you for that. And then final one, maybe before I step back. Can you just spend a minute on the broker strategy that you guys mentioned a few minutes ago? I guess just one, what are you guys trying to accomplish? And then two, what can you anticipate from a spread point of view between what you're bringing on sheet on the asset side versus the liability side?

[Timothy Schneider:]

Glen, do you want to respond to that?

[Glen Stiteley:]

Yeah. So Brendan, we're using brokered CDs to with some flexibility. So, there are longer term brokered CDs with call options. Again, just to give us maximum flexibility as rates change. And then on the assets side, we're looking at -- we started doing investments in bank sub-debt, as well as municipal and CMOs. So, it’s largely going to be a liquid strategy when it comes to the balance sheets. And the spread -- sort of spreads are probably about -- it's just -- it's over 2%.

[Brendan Nosal:]

Got it. All right. Thanks for taking my questions.

[Operator:]

The next question comes from Terry McEvoy of Stephens. Please go ahead.

[Terry McEvoy:]

Hi, good morning guys.

[Timothy Schneider:]

Hey, morning, Terry.

[Terry McEvoy:]

Maybe Tim, a question for you. Within that expense outlook, what are your thoughts on new hires, new branches and what I'll just generically call growth initiatives for 2021?

[Timothy Schneider:]

Yeah. New hires, we definitely scrutinized the additional new hires that we added to the budget for this year. It's just a handful of them. We ended up pulling a few of them out, given the current environment. Most of them are our frontline producers. That'll be generating revenue for us and/or deposits. So, we feel like we've done a pretty good. I guess, scour of that list of our workforce plan for the year. Relative to -- you mentioned de novo branches, I'm not sure that we're strategizing any additional de novo branches. I think as most of you know, we are in the process of building a new location in Appleton, and that market's been outstanding for us from a growth perspective, both on the deposit side and the commercial loan side. And we feel the location and the visibility of this new facility will give us even better exposure in that market considering our current location is kind of hidden. And what was your last question, Terry?

[Terry McEvoy:]

I think you hit both, just kind of growth initiatives and how that played into expenses. So, I think you talked about individuals and branches, so that was good.

[Timothy Schneider:]

And we've got a pretty solid pipeline at this point too. I just attended the commercial banking meeting the other day, and there's some nice activity there that we're excited about. Opportunities that I think we're going to see here in 2021.

[Terry McEvoy:]

That's great. And then, maybe a question for Matt. Appreciate you running through some of the new account openings. If you look at just total deposit growth in 2020, is there a way to think about how much of that came from existing customers that just built up liquidity or PPP versus new customers in terms of that kind of 12% increase in transaction accounts that's referenced here on the slide?

[Matt Lemke:]

Yeah. I think, it was a good combination of both, but certainly when we add north of 650 new accounts, a lot of that deposit growth is going to have come from relationships that we brought on. The treasury team has become much more focused and robust on gathering deposits and have built some great partnerships with commercial, which has led to a lot of what you've seen from the deposit growth. And certainly, we've gotten better at selling through our existing customers. So, I think, it's fair to say it was a decent balance. We're going to continue to have a heavier focus on prospects and new money where and when we can, but there's always an opportunity to get greater shareable wallet from any of our existing customers, because they've already chose to buy from us once.

[Terry McEvoy:]

Thanks. And then just last question for Glen. The net interest income increasing with a margin of 2.5%, is that -- that 2.5% net interest margin -- just what are your thoughts on -- how is PPP come into play and what on a quarterly basis? Any thoughts on how the margin trajectory as well as with the leverage strategy that was discussed? Thanks.

[Glen Stiteley:]

Yeah. Terry, so, I mean, overall margin growth, we do have some goals projected in here, so that's probably the biggest governors as far as why the net interest income is going to grow this year? On the PPP side, we have not factored in anything on the new program into that. So, anything we add on that will obviously add to the growth of net interest income during the year. We do have some of our PPP loans that are still forgiving from 2020 and that's being reflected. I look at the overall margin, it's probably going to drop kind of from where it's at today, but again, it should settle down into that 252 level overall for year-to-date.

[Terry McEvoy:]

Okay. Thanks guys. Have a nice weekend. Appreciate it.

[Operator:]

The next question comes from Jeff Rulis of D.A. Davidson. Please go ahead.

[Jeff Rulis:]

Thanks. Good morning.

[Timothy Schneider:]

Morning, Jeff.

[Jeff Rulis:]

Just a follow-up on the -- so the expense levels, I get the kind of the guide. I just wanted to narrow that down a little bit. We exclude the OREO and goodwill impairment. The comp line has been pretty lumpy. Could we maybe talk about a base level? Is this sort of like a quarterly expense level around $8 million and kind of moderately grow off of that? Is that fair?

[Timothy Schneider:]

Yeah. Jeff, if you back out the noise like you talked about, I'm looking at a mid single digit growth. So, about $0.5 million. If you -- yeah -- that onto the 2020 results, I think that's where we're going to be at. I mean, you'll see a little bit of dip, I think, in the first core, because we did have a little lumpiness with the incentive comp. So, yeah.

[Jeff Rulis:]

Okay. So, again, if -- it's something -- it's growth of something in that low 30, 32 range, is kind of what you're using is the base for 20 and then just mid single digit growth from there.

[Timothy Schneider:]

Yeah. Like I said, probably about $0.5 million, maybe $0.5 million in growth, I think.

[Jeff Rulis:]

Got it. Okay. Yeah. And then on the -- it's kind of reserve management and a lot of moving pieces in there. I think the charge-offs -- given a 20% reduction in reserves kind of maybe indicates your comfort level with what's remaining. Just if you could speak to the broad level kind of reserve management through the balance of the year, could we expect maybe rebuilding of that? If you do have some loan growth and then just kind of interested in a pretty big chunk down in the reserve, but then as we go forward, how does that look?

[Timothy Schneider:]

Yeah. So, I'm -- we're envisioning -- I think we -- I think hopefully you've heard kind of the highlights that we think that -- we see some really good ag improvement during 2021. Milk prices have been very stable and it's been really good from a profitability perspective from our clients. So, I think any provisions for growth are going to really get the offset by -- as you see we put in amounts for loan grading in our reserves. So, I think anything from growth is going to be offset by improvement in the overall credit rating in the portfolio. So, we're looking at a very low loan loss provision year for 2021 based on what we know today.

[Jeff Rulis:]

Okay. And then, just another quick one on fee income side, talk it about shrinking slightly. And I assume that's sort of the loan servicing rights was a bit heady in the quarter. So, I mean, anything you could speak to kind of a normalized level -- is the shrinking guidance from 4.4 level in Q4, or is it full year?

[Timothy Schneider:]

Yeah. It's for the full year, Jeff. So that -- if you back off the gains on securities and back off the OREO -- yeah, the noise from the gain on sale of assets, I'm looking at kind of low six figure shrinkage, so, 200,000 to 300,000 shrinkage off, off the 2020 levels. So, again, there's like you notice there's just -- they're there -- I mean, because of the heavy originations in the fourth quarter that just builds up on the loan servicing, right? So.

[Jeff Rulis:]

Okay. Thanks for the color. Appreciate it.

[Timothy Schneider:]

Yeah. Yeah.

[Operator:]

The next question comes from Bryce Rowe of Hovde. Please go ahead.

[Bryce Rowe:]

Thanks. Good. Good morning everyone.

[Timothy Schneider:]

Hey, good morning, Bryce.

[Glen Stiteley:]

Hey, Bryce.

[Bryce Rowe:]

Hi. Wanted to -- maybe talk about the transformation of the right side of the balance sheet. It's something that certainly you all have really focused on since the get-go of going public. But wanted to understand what the -- maybe what the opportunity is today in terms of continuing what we saw in 2020, obviously a little bit of benefit from all the liquidity that got pushed into the system. But are you seeing opportunities to continue the transformation of that right side of the balance sheet?

[Timothy Schneider:]

Matt, do you want to speak to that?

[Matt Lemke:]

Sure. Yeah. Bryce, I think there's opportunity, especially given the market and continued talks of liquidity, that's going to stay and come into the system. We've got a robust pipeline already starting this year with prospects on a variety of fronts. The addition of a new treasury sales person, that we just recently announced, is also going to be a key to driving some of that, as well as our continued development in the mortgage side. So, I think we've got a really good opportunity to continue to diversify where we get our deposits from and drive those transaction accounts. Certainly, as a community bank, you're always going to have a portion of that in individual CDs, but our heavier focus will continue to be on those non-maturity deposits.

[Bryce Rowe:]

Okay.

[Glen Stiteley:]

Bryce, this is Glen. Just from the wholesale funding perspective, we're really trying to govern our loan growth with using the client deposits. We're going to use our wholesale funding to be more strategic as we talked about the leverage strategy. So.

[Bryce Rowe:]

Okay. That's helpful, Glen. And wanted to understand -- I mean, obviously, there was a question about PPP and the contribution that it could make here in 2021 with this new round, have you have seen -- and we certainly heard other banks talk about kind of early success with this latest round or with clients -- some clients signing up for new loans. Just any commentary that you guys could have around that would be helpful? What you're seeing from clients at this early stage of this round?

[Timothy Schneider:]

Sure. Bryce, so I'm going to have Dave respond to that. He's been kind of our in-house expert on that topic and staying on top of it. So, Dave?

[David Coggins:]

Sure. We as a community bank over $1 billion, we were able to start originated these loans on this week on Tuesday. And we have a technology partner that helped us with online portal that we can use. That's pretty -- makes it pretty easy for our customers. We weren't sure what to expect the early going. We've tried to tamp down the tendency for some people to think that this is another mad dash, like the first time around back in April. And the technology platform that we have has helped with that, but we've had good second draw activity. The average size of the deals is going to be smaller, but we think that there's probably more qualifying second round or second draw notes than we might've thought of originally. The other thing that's an important change in the new rules for first draw is that our -- a lot of our ag customers that file schedule F's had to use their net income on their schedule F as a basis for determining their eligibility for sole proprietors and for self-employed. And this round that was changed to using growth for farms. And so, we had a lot of farmers that weren't eligible the first time around because of their tax planning and tax referral strategies. But now this round, they will qualify. Now, it's not -- like I said, the average sizes aren't going to be as big, but we're pleased with the activity and the pace of the activity so far, and we're less than a week into it, of course, but we think that this round will be meaningful, but not near to the level of the first go around.

[Bryce Rowe:]

That's a good detail, Dave. I appreciate it. And Tim, wanted to ask about the buyback. I mean, clearly a good opportunity to pick up your stock trading below tangible book value. Just -- is there a way to think about what the appetite is at current levels and if you see some level of increasing your stock, will you pull back from -- does the buyback intention, or do you think you'll move ahead? Assuming that the stock didn't get good -- doesn't get too high in terms of price.

[Timothy Schneider:]

Yeah. I would say that we're committed to continue to buyback shares at this level, and we're still quite a ways from our book value obviously. And I think it makes sense to continue to repurchase shares. Our current authorization is almost up and we're anticipating we'll get approval from our board to reauthorize another tranche of buybacks here shortly to continue it for the balance of the year. As long as -- unless we start trading at a significant premium to our book value, then I'd say we might consider pulling back, but we're a long ways from that today.

[Bryce Rowe:]

That's great. Appreciate the answers, and it's good to talk to you guys again.

[Timothy Schneider:]

Thanks, Bryce.

[Operator:]

The next question comes from Howard Henick of Scurlydog Capital. Please go on.

[Howard Henick:]

Hey, thanks gentlemen. Thanks for taking my question. I'm going to follow-up on Brendan and maybe I'm slow. But I want to really flush out the $3.4 million of charge-offs. And what concerns me is you guys have always been a bank with high NPAs, but very low charge-off. So, I was comfortable with a high NPAs and obviously I'm less comfortable when they start having high charge-offs. So is the three -- could you flush out the details of the $3.4 million? Is that all on that one Milwaukee hotel? And if not, where else did it go? And do you still have these loans? You said -- mentioned that AB structure, could you give me more details on that? So, is it possible that we get some of those charges-off back? Thank you.

[Timothy Schneider:]

John, do you want to just reiterate what you mentioned earlier?

[John Fillingim:]

Yeah. Well, so, there were two charge-off, so it wasn't all associated with the Milwaukee hotel, is probably split kind of 50-50. I would say I don't have the numbers right in front of me what we did there. But on the Milwaukee hotel again, the owners do have a signed purchase contract. We may see a slight recovery on some of the charge-off there, just based on closing costs, how that all shakes out. The other one where we're looking at an AB node, this was a -- it's a commercial customer was a start-up a few years ago. They just did, and they haven't. At this point, they haven't hit the revenue projections that they thought that they would get to. However, they are making enough money to service a portion of the debt -- actually more than half of the debt. So, setting it up on the AB note structure, we would be able to over time -- over some period of time be able to return that A note back to an accrual status, the B note stays there. If they continue to perform and the business grows, we always have the opportunity to recover that amount of charge-off that went through the B note. So, both of these were on the commercial side, both of them we had adequate specific reserves that had been established that more than covered the charge-off that we took. Again, we've looked at all of our substandard and our impaired loans from a collateral standpoint, validated those numbers to make sure that we're comfortable with what's left. At this point, what we know we don't have anything else that we are concerned of any kind of a charge-off. And this was one of the probably first charge-off of this side that this bank had in quite some time. So, really see it, especially on the hotel side directly involved with COVID. The other side again, it was just -- it was a start-up business that we had financed a few years ago. Again …

[Howard Henick:]

Is the second one C&I loan? I'm sorry. Sorry, but is that …

[John Fillingim:]

Yeah.

[Howard Henick:]

Okay.

[John Fillingim:]

Yes, it is.

[Howard Henick:]

A little collateral with the second loan other than cash flow?

[John Fillingim:]

No, no, no. We have real estate, we have equipment. So, there is collateral. There's hard collateral there.

[Howard Henick:]

Okay. But are there reserves established -- well, do either of those loans still have reserves? I guess, at this point you don't have any specific reserves against either along, is that correct? And was the charges in excess of the specific reserves, or was it only specific reserves?

[John Fillingim:]

The specific reserves were in excess of the amount of charges that we took there.

[Howard Henick:]

So, where -- are those specific reserves still held against those loans that are still on the books, the restructured loans, or are they go back into general reserves now?

[Timothy Schneider:]

Glen, you can answer that. I believe -- Glen, I'll let you answer that part.

[Glen Stiteley:]

Yeah. I think, it just goes all -- it just goes into our overall evaluation. So, if there was -- if we had an excess reserves, it would just go back into our whole calculation. And we adjusted whatever the calculation is at the end of the year. So.

[Howard Henick:]

Well, but I'm going to ask you is you don't think at this point you have no specific reserves against either of these two loans, because at this point you think they're adequately reserved for their current structure.

[Glen Stiteley:]

That's correct. Okay. Okay. Thank you.

[Timothy Schneider:]

And they're both supported by recent appraisals as well.

[Glen Stiteley:]

Correct.

[Operator:]

The next question comes from Evan Lyle of Janney Montgomery Scott. Please go ahead.

[Evan Lyle:]

Hey, guys. Good morning. I'm on for Brian Martin.

[Timothy Schneider:]

Hey. Good morning, Evan.

[Evan Lyle:]

Just a few quick questions. Most of mine have been asked. I think I'll just start on the loan side. I know you guys have been a lot of color on the slides in this call. But I'm just curious about any particular areas of your footprint that stand out in terms of potential growth, just kind of here for 2021, possibly. Any color there, would be appreciated.

[Timothy Schneider:]

Yeah. I guess, I'll start. I mentioned earlier Appleton's been a great market for us and we think there's even more to come, given our team up there and our new facility that we're constructing for our growing team. And that's been a typical mix on the C&I side and a little bit of commercial real estate mixed in there. We think there's continued opportunity in the Green Bay market for us. We hired recently a senior associated bank banker who joined us within the last 90 days. And unfortunately, he's got a non-solicitation he has to deal with, but he is well known in that market and we think that'll bear some fruit over time. And then, I guess, shifting to the agricultural side, our three new bankers that we added during 2020 from BMO, have continued to bring in new relationships, including some diversified ag in the potato business that we referenced earlier, as well as the row crop cash green space. So, we think there's some nice opportunities for some growth, both on and off balance sheet as Glen alluded to in some of the guidance information. So, we're optimistic for 2021.

[Evan Lyle:]

Awesome. Appreciate that. Next thing, I think, I'm just going to move to PPP loans. I know you mentioned some stuff about that and on the conference call and everything. But I was just curious, what are the remaining unearned fees to collect? And what's left as we go through the balance of the year.

[Timothy Schneider:]

Glen, you want to respond to that?

[Glen Stiteley:]

Yeah. This is on one of the slides in the slide deck if you need to refer to it back. I'm just turning to that right now. I'll get you the slide number here in one second. It's on our margin slide on slide 12. So, we've got $38.5 million left. You can see how it's funded and we're using the fed funding. You have got a deferred fee income net of about $1 million bucks left to be recognized, and we anticipate that being recognized in 2021.

[Evan Lyle:]

Okay. Perfect. Yeah. And then I think, probably lastly, just -- you touched on the reserve level, where do we expect that to go if credit holds up? Just how are you thinking about that?

[Glen Stiteley:]

Yeah. Credit holds up -- we expect to be very low loan loss provision this year. We'll obviously put some in for loan growth. But as you can see how the allowance allow has built up on slide 13, we do put in general reserves based on loan grading. So, the watch and worst loans get a heavier allocation between 1% and 5%, depending on if it's a watcher. So, special measures substandard performing. If we see the ag portfolio improve as we think it is, those balances are going to move out of those buckets and start to move up the migration chain. So that'll definitely help reduce our allowance requirements just because of that. So, I envision kind of the improvements on the ag side offsetting against any growth provision. So.

[Evan Lyle:]

Okay. So, would you guys -- I was just curious, you think a criticize and class size levels, do you think that peak or do you think we're going to see that level kind of rise going into 2021? Are you just curious on, your thoughts on that?

[Timothy Schneider:]

Yeah. We clearly think they've peaked and we should see some downward migration and that ratio throughout 2021 as we get through the review cycle, especially on the ag side.

[Evan Lyle:]

Okay. Perfect. I appreciate the color. That's all for me.

[Operator:]

The next question comes from Ross Haberman of RLH Investments. Please go ahead.

[Ross Haberman:]

Good morning, gentlemen. How are you? I just want to go back generally to the overall loan growth expectations or hopes. You talked a little bit about it just now. Do you see any real net loan growth in the first half of 2021 from what you're seeing in terms of your backlog today?

[Timothy Schneider:]

I would say yes, given the deals that I've heard about in the commercial Q the other day. I think we will see some net loan growth. I hate to venture a guess on a number, but again, ex PPP, but we think we've got some pretty solid pipeline on both sides of the house to see some loan growth first half of the year.

[Ross Haberman:]

And just one further question about the spread of the margin. Ex the PPP, which you did or what you're going to do. It looks like it went up this quarter. Do you see it's a slowly going up over the next six to nine months, assuming rates are stable to, I guess, going up a little bit over the next year, go along and at least?

[Glen Stiteley:]

Yeah. Ross, this is Glen. So, there's a big jump in the -- there's jump in the margin this quarter because of the PPP loan and the fee income they can recognize. So, you're definitely going to see a drift downwards from just that level overall in 2021. We think it's going to level off to about -- again on a year-to-date average about a 252. And again, from a dollar perspective as we believe it's going to grow just from overall loan growth as well as, again, some of the PPP income that's going to be recognized too. So.

[Ross Haberman:]

And one final thing, have you bought any of these subordinated debt or trust preferreds of other banks, which have been very political say the last three or six months? Have you bought from other banks? And if so, in total, how much have you bought?

[Glen Stiteley:]

Yeah. So, we have started to buy that this year. It's -- I think we've bought probably 20 million to 30 million. Again, having rated we've got a proprietary grading system that we use for those. So, we do some due diligence on those just to make sure that we're buying in the sound paper. So.

[Ross Haberman:]

I got it. Okay. Thanks a lot. The best of luck. Have a good weekend, guys.

[Glen Stiteley:]

Thank you.

[Operator:]

And the next question will come from Brian Martin of Janney Montgomery. Please go ahead.

[Brian Martin:]

Hey, guys. It's Brian. I apologize. My associate jumped on for me. So congrats on the quarter and thanks for getting information for us.

[Timothy Schneider:]

Thanks, Brian.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Tim Schneider for any closing remarks.

[Timothy Schneider:]

Thank you again all for joining us. As I alluded to we had a challenging year like everyone else and felt like we weathered it pretty well. We're excited about the opportunities in 2021 and for good things to come we feel. So, thank you.

[Operator:]

The conference is now concluded. Thank you for attending today's presentation and you may now disconnect.