County Bancorp, Inc.
Q4 2019 Earnings Call Transcript

Published:

  • Operator:
    Good morning, and welcome to the County Bancorp, Incorporated Earnings Release for December 31, 2019 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. Please note, this event is being recorded.I would now like to turn the conference over to Tim Schneider, President of County Bancorp. Please go ahead, sir.
  • Timothy Schneider:
    Good morning, everyone. Welcome to our earnings call for the fourth quarter of 2019. We will ask you to advance the slides through the presentation on your own manually. We had a little glitch in that and we'll announce which slides we will be on as we move through the presentation.As a reminder, we have a disclaimer on the use of forward-looking statements on Slide 2 of our presentation. I'd like to start with the year end review.Before we get into the quarterly results, I want to take a step back and reflect on the year we had in 2019 on Slide 3. There was a lot of uncertainty going into 2019 as we faced lower milk prices, increase in classified assets and a challenging interest rate environment. To navigate these headwinds, we set three strategic goals behind our efforts throughout 2019. They included main profitability, reduce classified assets and deleverage our balance sheet.Thanks to the hard work of our team, I'm proud to say we have accomplished all three of these in 2019. We had a record year of profitability driven partly by our ability to sell loans off balance sheet with the servicing spread and associated loans servicing rights. We've reduced our classified asset ratio from 57% to 39%. Finally we reduced our wholesale funding by $203 million year-over-year almost doubling our goal of $120 million by year end.The reduction in wholesale funding also shifting our mix from 38% of our funding to 27% year-over-year we remain optimistic about the current Ag environment, the Phase one China trade deal is signed and agreed to by both parties and in the process of being implemented. The USMCA is all but done; we are just waiting for final ratification by Canada. Weather issues and wildfires in the Oceana region which are very unfortunate should also create opportunity for Wisconsin dairy exports.Lastly, feed costs remain low which combined with improved milk prices should positively impact our dairy-Ag client performance. We have seen some pockets of stress from the trade wars on the commercial side, but we do not see that as a major issue at this time.We are going to move to asset quality now on Slide 4. We continue to be encouraged by the current level of milk prices. A year ago forward 12-month CME Class III milk prices averaged $15.88. We are now averaging $17.88 a hundred. As we show on the charts, there has been clear correlation over the last few years between rising milk prices and a reduced coverage ratio. We hope this will continue to show improvement in overall classified assets in 2020 as we embark on the 2019 year end Ag credit review process.We were disappointed that one of our classified Ag customers who totaled $6 million and one classified commercial customer totaling $3.9 million, both split into nonaccrual, but this was offset by the payoff of on one commercial classified loan as well as several OREO sales.Now I'll turn the call over to Glen to walk through our financials.
  • Glen Stiteley:
    Thank you, Tim. Moving to Slide 5, as we are now starting our fourth quarter 2018 conference call, we continue to focus on deleveraging our balance sheet in the fourth quarter of '19 by continuing to use more participation sales with servicing income attached. This initiative has allowed us to continue to maintain profitability while also improving the funding mix on the right side of our balance sheet.We increased loans sold and serviced by $14.9 million this quarter. This combined with $17.8 million in client deposit growth allowed us to continue reduce wholesale funding by $58.7 million this quarter. As Tim noted, we are really pleased with the change in our funding mix, but we are still very focused on growing client deposits. Wholesale funding is now down $248.1 million and client deposits were up $81.2 million in 2019. Our client deposit funding now represents 73% of total compared to 57% a year ago.We believe our overall focus on reducing wholesale funding will level off in 2020. Now in the future we're going to look to utilize wholesale as liquidity and interest rate management tool and our primary growth tool. We currently would like to actually have a few other brokered CDs three year, three month call brokered about 1.85% compared to one year bonds at 1.7. FHLB advances are at 1.79% from one year and 1.73% for three years. We really like the optionality with the lower cost of corporate tax and that's currently offered.Turning to Slide 6, our net interest income decreased this quarter due to nonaccrual activity on the loan side as well as continued loan participations moving balances off our balance sheet. The Fed rate cut in Q4 also impacted overall loan yields. However, we were able to continue to cut rates off on all the deposit products with an immediate impact to interest bearing accounts such as NOW, savings, and money market. We also had positive impacts with net interest income from a reduction of national CDs and brokered deposits during the quarter.Turning to Slide 7, loans sold and serviced increased $14.9 million this quarter as I mentioned which helped our loan servicing fee income increase to $1.8 million for this quarter. We were also able to increase our loan servicing spread from 94 basis points to 96 basis points in the fourth quarter. Our increase in loans sold and service in the fourth quarter also attributed to $1.1 million of loan servicing right origination income.Turning to Slide 8, during the quarter we had historical tax credit which resulted in a $0.3 million positive impact to net income. The accounting for this required us to record a $1.4 million in credits to income expense which was offset by $1.1 million impairment to other expense, resulting again in a $0.3 million positive impact to net income.As we alluded on our last call, our incentive compensation expense increased in the fourth quarter as we accomplished the strategic initiatives that Tim mentioned in his opening remarks.Now Tim and I will give a look into what is coming in 2020.
  • Timothy Schneider:
    Thanks Glen. As we look ahead to 2020 we feel very optimistic about our overall outlook for the year. We have five strategic initiatives going into 2020 as you'll see on Slide 9. We are going to make investments in technology and data analytic tools that help us to better serve our customers. We have already invested in a profitability system that allows us to dive into profitability at the client level and allows our corn [ph] officers to have better visibility into how pricing decisions impact our overall profitability. We feel we have only scratched the surface on the use of this tool.In 2020 we will make an investment in the CRM system so that we can better serve in markets we are existing and prospective clients. We will use the CRM system long-term to drive digital adoption and drive at core deposit growth and additional fee income opportunities. We will also roll out our concierge banking platform. Our Concierge bankers will be focused on full banking relationships including residential, mortgage, and lending opportunities that we currently are not reaching.We will continue to focus on ag lending opportunities throughout our footprints. Because of our strength in this area we continue to be able to attract talent with two additional new hires including one who is focused on nondairy lending. All of our lenders are seeing tremendous opportunities, especially those where we can push off balance sheet and drive servicing income and we will continue to utilize the loan participations to manage our balance sheet growth relative to our core deposits, as well as continuing to drive noninterest income opportunities.We continue to be laser focused and continue to reduce our classified assets through diligent monitoring. We hope that current levels of milk price will continue to heal cash flows of our dairy, ag clients into 2020. We will continue to focus on commercial opportunities throughout our footprint and are continually looking to add commercial talent. With the ultimate goal of maximizing shareholder value, we believe improved milk prices and reduced classified assets allow us to deploy some of our excess capital. We are in the process of evaluating our stock buyback program and increased common dividend with our Board in the hope to have an announcement soon on both fronts.And now I'll turn it back over to Glen to give some insights into our 2020 financials.
  • Glen Stiteley:
    Thanks Tim. As you'll see on Slide 10, we anticipate 4% on balance sheet loan growth with about 5% growth mark in client deposits. As I mentioned earlier, we anticipate keeping wholesale funding flat shifting to more brokered during 2020 and we will always continue to look at anticipating on where the interest rate environment is. We will look to expand margins in 2020 through a shift of excess cash in new investments and Bank Owned Life Insurance and continue repricing of certificates, deposits and loan rates.We anticipate about an 8% growth of loans sold and serviced was about 15% of that in Q1, 16% in Q2, and 25% in Q3 and flat in Q4. Will be increasing overall service and benefits, but this number should be more along lines of our Q3 2019 expense on a quarter-by-quarter basis that you saw. We expect occupancy to remain flat.We're making technology investments in our new website and we expect to see a spend of about $200,000 on that line item spread across the last three quarters of 2020 in the business development line item. On the professional fees side, we hope to see some reduction and solution of collection fees, but that will be somewhat offset by additional fees related to Sarbanes–Oxley implementation.Information processing will go up about $600,000 due to the investment in the CRM system as noted by Tim as well as continued upgrades on the IT side. We expect more normalized other noninterest expense and tax rate in 2020 driven by the noise of the historic tax credit in Q4 2019.And now I'd like to open it up to questions.
  • Operator:
    Thank you. [Operator Instructions] The first question will come from Brendan Nosal with Piper Sandler. Please go ahead.
  • Brendan Nosal:
    Hey, good morning guys, how are you?
  • Timothy Schneider:
    Good Brendan, how are you?
  • Brendan Nosal:
    Good, thanks. Just want to start off here on two classified loans that moved into nonaccrual in the quarter. I guess just any more detail you can provide and color as to kind of what drove that? And then I guess, specifically on the dairy credit, I guess I was a little surprised to see the negative migration just given that we have higher milk prices today. So what was just kind of the tipping point on that credit?
  • Timothy Schneider:
    Yes, this particular credit was a credit that expanded right after the prices started to decline and had challenges with the operation throughout this lower milk price environment and ultimately has decided that they are going to file Chapter 12 bankruptcy which we feel is a good thing as they should be able to flush their accounts payable and then hopefully give them some longer-term viability. This particular deal has strong FSA guarantee usage and we do not expect any substantial loss in this operation if it should fail, but we're much more confident that that operation will be able to succeed moving forward.
  • Brendan Nosal:
    All right, perfect, thank you. And then on credit more broadly, I guess there were some mixed signals this quarter. On the one hand no charge-offs, no provision and classified assets improved, and then on the other hand, you know, negative migration within classified into nonaccrual. So I guess at the top level just update us how you are thinking on credit more broadly just as we contemplate these cross currents?
  • Timothy Schneider:
    Well, obviously we're in a much better milk priced environment. The particular credit that you asked about I think is potentially an outlier, but there are some operations that have dug themselves some really big holes and need to be able to dig out at this point. We think pretty optimistically about the future of our operations and we think we're going to see continued improvement in our portfolio.We are already seeing some early reviews that are coming through the numbers for 2019 are looking much more solid from a performance perspective. So we feel pretty good about it. We do have some additional activity that's occurring in our ORE bucket that should see some more sales which should occur this first quarter and overall we're feeling much better about the portfolio at this point especially if milk prices are maintained.
  • Brendan Nosal:
    All right, fantastic, that's helpful. And then last one from me and then I'll step back. Just thinking about the margin you alluded to, you know, putting some cash to work throughout the year which is resulting in some expansion, just curious in terms of magnitude what do you think that opportunity can do for the NIM?
  • Glen Stiteley:
    Brendan, this is Glen. So I think it is going to be probably well 15 basis point bump. It is going to take a little bit of time to ramp it up. It is – the investment opportunities are – it has been a little bit just off the frame really great investment opportunities on the barn side, but we're slowly deploying the cash. We'll probably get the BOLI investment done probably January or February timeframe, so that's about $10 million.
  • Brendan Nosal:
    All right. So over the course of the year and it sounds like 15 basis points on the NIM, maybe a little bit slower at first, but net-net 15?
  • Timothy Schneider:
    Yes, we're, I mean we're continuing to see repricing of the CD portfolio, but that takes some time. The one thing that's just been difficult to estimate obviously is the drain from when things go on nonaccrual, so that's – probably been, there is much headwind as anything. So…
  • Brendan Nosal:
    Perfect, thanks so much for the color.
  • Operator:
    The next question comes from Jeff Rulis with D.A. Davidson. Please go ahead.
  • Jeff Rulis:
    Thanks, good morning.
  • Timothy Schneider:
    Good morning, Jeff.
  • Glen Stiteley:
    Good morning, Jeff.
  • Jeff Rulis:
    Glen, just following up on that, what was the basis point impact this quarter on the launch of nonaccrual to margin?
  • Glen Stiteley:
    It is around probably 7 basis points.
  • Timothy Schneider:
    In total, just 3…
  • Glen Stiteley:
    Does that answer your question?
  • Jeff Rulis:
    Yes. No, so effectively absent that move core margin is pretty steady.
  • Glen Stiteley:
    Yes, I mean the rate cuts definitely had an impact too, so I don’t want to minimize the impact to those, but the nonaccrual definitely it is best to part – that is the part that has been difficult to predict out so…
  • Jeff Rulis:
    Right, okay and then just following up on that kind of guidance to tackling maybe overall operating expense and tax rate together kind of some moving pieces given that the tax credit, but what were those figures again?
  • Glen Stiteley:
    So the historic tax credit was $1.1 million impact to noninterest expense.
  • Jeff Rulis:
    Right, I guess the guide you put 20 I guess absent Q4 kind of looking forward what would be there?
  • Glen Stiteley:
    From a noninterest expense we're up, but I think when you back that off I think we're up about probably about 600 grand for the year overall.
  • Jeff Rulis:
    And so I guess I'm pointing to 20 both on tax rate and expense are you looking for a similar bump on core expenses and tax rate to revert to what level?
  • Glen Stiteley:
    The tax rate, we don’t have a ton of taxes out of the income, so it is probably in the – it is probably about the 26% range, 26%, 26.5%.
  • Jeff Rulis:
    Okay, got you. Okay, I will step back, thanks.
  • Glen Stiteley:
    Yep.
  • Operator:
    The next question comes from Terry McEvoy with Stephens. Please go ahead.
  • Terry McEvoy:
    Hey guys, good morning.
  • Timothy Schneider:
    Good morning, Terry.
  • Terry McEvoy:
    I guess the year end Ag review will you see the results in the first quarter or will it take a few quarters for the review to be completed?
  • Timothy Schneider:
    We will see some results in the first quarter and as I mentioned earlier we're already seeing some early reviews that are seeing some upgrades and we think, but I think the final conclusion on the entire Ag book is going to be kind of in the second quarter before we have the whole picture.
  • Terry McEvoy:
    And then, Glen you talked about just time deposits taking some time for cost yields to come down. They are actually up a little bit in the fourth quarter 6 basis points. What are your thoughts on just progression of time deposit costs trending lower in 2020. Are there any quarters that stand out where you see just some buckets of revising opportunities?
  • Glen Stiteley:
    No, it's pretty smooth Terry throughout the year, so…
  • Terry McEvoy:
    And then just last, the commercial loan that moved to nonaccrual, was that Ag or dairy related at all?
  • Timothy Schneider:
    No, it wasn’t. It was a commercial manufacturing company kind of a specialized manufacture in Central Wisconsin that we originated about four or five years ago and one of the owners was in a similar business and it was kind of quasi startup that we had an SBA 504 loan plan for and they just happened to hit the mark. They continue to kind of struggle to find topline revenue. So we ultimately decided to move it into nonperforming. We did have a reappraisal done which discounted some of the equipment, the specialized equipment, and unfortunately because of that we had to take a little bit larger impairment on this one. There's still some hope and maybe able to pull things out, but time will tell.
  • Terry McEvoy:
    Okay, thanks guys.
  • Operator:
    The next question will be from Brian Martin with Janney. Please go ahead.
  • Brian Martin:
    Hey, good morning, guys.
  • Timothy Schneider:
    Hi, Brian.
  • Brian Martin:
    Hey Glen, or I guess Tim, I guess, the – what the improvement you're seeing kind of with the milk prices, can you just talk a little bit about how you are thinking about provisioning this year with, I think what percentage you are through that year end review, but it sounds pretty minimal, but I guess should we see the provisioning come down a bit, I guess given your optimism on kind of the, how the credit picture is going to maybe unfold in 2020?
  • Glen Stiteley:
    Brain, it is Glen. We think it is going to be probably similar to what the dollar amount is or was this year. If we start to see more upgrades than expected then that will obviously improve. So we feel pretty good that we've got things washed out overall though, so…
  • Brian Martin:
    Okay, in the – just remind me, with in the Ag portfolio, I mean are there, I guess it is pretty granular as far as the size of these credits where there is some chunkier credits in there, in this portfolio that could kind of move things in any given quarter.
  • Glen Stiteley:
    Well, obviously we have some larger credits. As these operations have continued to expand, we've got larger exposure. But as I've mentioned before, we use the FSA guarantee program again very broadly and position those in the right position to really not provide a lot of impact from and impairment if there are any that will slide down the scale.
  • Brian Martin:
    Okay got you, okay. And then just the loan originations this year, the new loans, I guess do you anticipate most of that to be the commercial or are you still going to continue to grow the Ag part of the portfolio is still, but just how are you thinking about the growth you put on this year in front of that mix?
  • Timothy Schneider:
    Yes, I think it will be a combination. Our commercial bankers are continuing to see opportunities out there as well and as we mentioned in the script, we also have a couple of new Ag backers that we've hired recently from one of our primary competitors, one that's a kind of a nondairy specialist in the Ag's base, so that will help from a diversification standpoint.We will continue to manage the on balance sheet growth there to make sure it is going to manage your core funding, but as you know our noninterest income model with some of the participations in sales and nice spreads we can make as well as with the FSA guarantee should help us drive continued fairly strong noninterest income.
  • Brian Martin:
    Okay and was this, maybe I missed it Glen, but this level of fee income this quarter, I guess is this a pretty good model to think about going forward? I think you called out one item, I thought it was like $250,000 but am I thinking about that right?
  • Glen Stiteley:
    Brain, I'm sorry, I'm sorry, I'm not sure I follow what you are asking?
  • Brian Martin:
    Just on the fee income part of the P&L, just how to think about that going forward, is this quarter's run rate a pretty good level to think about as you go into 2020?
  • Timothy Schneider:
    Yes, I mean on the servicing fee and income we should see some increase there. We are baking in about an 8% growth rate during the year, so you should see that continue to creep up. The origination side should – the origination right side should back off a bit from what you saw levels this year, but those loans originations remain kind of over there, what I would say, $10 million a quarter, that should usually lead the sum origination income.
  • Brian Martin:
    Some origination right and [indiscernible]
  • Timothy Schneider:
    We've got to continue a fairly strong pipeline and the FSA guarantees I looked at our pipeline this morning, probably not as strong as third and fourth quarter, but first quarter is generally a little slower. And with the new Ag bankers that we've hired I think we'll continue to see some decent noninterest income, both as I said from FSA guarantee origination standpoint and participation standpoint.
  • Brian Martin:
    Got you, okay. That's helpful. That takes care of my questions. Thanks so much.
  • Operator:
    The next question is a followup from Brendan Nosal with Piper Sandler. Please go ahead.
  • Brendan Nosal:
    Hey guys, just one more from me on the potential for a buyback and I appreciate that it is being considered and actually probably I cannot say a ton, but just trying to gauge how active you might eventually be and as I think about it, you obviously have ample capital from both your regulatory and a PC perspective, but it kind of feels like the cost right asset ratio might be the boundary on that, that 50% level, just how do you kind of weight those factors in terms of how aggressive you might be down the road?
  • Glen Stiteley:
    Yes, I mean we're still in the process of and this is Glen. So we're still in the process of evaluating with the Board, so I don’t want to comment too much on it. We're going to – we're fairly cautious when we do things, so we will definitely watch the classified ratio milk prices as a boundary to kind of how we look at the buyback on a month-by-month or quarter-to-quarter basis. I don’t want to comment too much on how aggressive we're going to be on that.
  • Brendan Nosal:
    No worries, thanks for taking the followup.
  • Glen Stiteley:
    Yep.
  • Operator:
    Ladies and gentlemen, 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, all for joining us. We felt we had a pretty strong 2019 and as well as a strong fourth quarter, especially given the fact that we had the three major strategic initiatives that we are driving from we feel like we had some success on all three of those. So a solid year and we are looking forward to a decent year in 2020 as well as long as milk prices continue to stay strong which we're fairly optimistic about. So thank you all for joining us.
  • Operator:
    The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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