Q4 2019 Earnings Call

We reduced our classified.

Acid ratio from 57% to 39% finally reduced our wholesale funding by $203 million year-over-year almost doubling our goal of a hundred and twenty Million by your end.

The reduction in wholesale funding also shifted our mix from 38% of our funding to 27% year-over-year.

We remain optimistic about the current environment The Phase One China trade deal is signed and agreed to by both parties. And in the process of being implemented usmca is off but done we are just waiting for final ratification by Canada weather issues and wildfires in the Oceania 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 or dairy eggplant 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're going to move to acid.

a landslide for

we continue to be encouraged by the current level of milk prices a year ago for 12 months CME class 3 milk prices averaged 1588. We are now averaging $17.88 100.

As we show on the charts there has been clear correlation over the last few years between Rising milk prices and reduced coverage ratio. We hope this will continue to show Improvement in overall classified a Samsung m2020 as we embark on the 2019 year-end egg credit review process.

We were disappointed that one of our classified ad customers who totaled six million and one classified commercial customer totaling 3.9 million both split into non-accrual but this was offset by the payoff of on one commercial classified loan as well as several or or sales now. I'll turn the call over to Glenn to walk through our financials. Thanks Tim moving to slide v as as we announced during our fourth quarter 2018 conference call we continue to focus on delivering our balance sheet in the fourth quarter of nineteen by continuing to use mobile protection patience 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 incorrect service by 14.9 fourteen point nine million this quarter this combined with 17.8 million inclined deposit growth allowed us to continue to reduce wholesale funding by 58.7. Yep.

this order has to

In order we were really pleased with the change in our funding mix but we are still very focused on growing find deposits wholesale funding is now down 248.1 million and client deposits off 81.2 million 2019 client deposit fund now represents 73% of total funding compared to 7:57. I'm sorry 57% a year ago.

We believe our overall focus on reducing wholesale funding will level off and 2020 now in the future. We're going to look to utilize Wholesales of quitting and interest rate management tool and not a primary growth tool. We currently like the option out in Culver brokered CDs 3 year 3 month call will record are about 1.85% compared to one year bullets that 1.7 fhlb advances 1.79% for 1 year and 1.7% for three years. We really like the optionality with the lower cost of call protection that's currently offered.

Turning to slide six aren't interesting come decrease this quarter due to not a cruel activity on the loan side as well as continued loan participations moving balances off our balance sheet wage federally cut and Q4 also impacted overall loan yields. However, we we were able to continue to cut rates off and all the deposit products with an immediate impact to interest-bearing account such as now save money market. We also add positive impacts the net interest income from our reduction of national CDs and broker deposits during the quarter.

During the slide seven loans sold and serviced increase fourteen point nine million this quarter as I mentioned which helped our Loan Servicing fee income increase the 1.8 million for this month. We were also able to increase our Loan Servicing spread 494 basis points to 96 basis points in the fourth quarter are increase in loan sold in service in the fourth quarter. Also a tribute to one point 1 million and Loan Servicing right origination income.

During the slight 8 during the quarter. We had a historical tax credit which resulted in a point three million positive impact the net income the accounting for this required us to record a 1.5 million dollar and credits to income tax expense, which was off was which was offset by one point 1 million impairment to other expense resulting again in the zero point three million positive impact the net income.

As we loaded on our last call our incentive compensation expense increased in the fourth quarter as we accomplished the Strategic initiatives and mentioned his opening remarks.

No.

To my give a look into what it's coming in 2020.

Thanks Glenn as we look ahead to 20/20. We feel very optimistic about our overall outlook for for the year. We have five strategic initiatives going into twenty-twenty as you will see on slide 9 a.m. We're 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 profit Thursday at the client level and allows our account offices to have better visibility to help pricing decisions impact or overall profitability. We feel we have only scratched the surface on the use of this tool wage 2020. We will make an investment in a CRM system so that we can better serve and Market to our existing and prospective clients will be use the CRM system long-term to drive digital option and drive Ed core deposit growth in additional fee income opportunities.

We will also roll out our concierge.

Banking platform our concierge concierge Bankers will be focused on full banking relationships including residential mortgage lending opportunities that we currently are not reaching.

We will continue to focus on lending opportunities throughout our footprint 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 not real ending. 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 participation manager balance sheet growth relative to our core deposits as well as continuing to drive non-interest income opportunities. We continue to be laser focused on continuing to reduce our classified assets through diligent monitoring. We hope that current levels of milk price will continue to heal cash flows of our clients into twenty-twenty.

We will continue to focus on Commercial opportunities throughout our footprint and are continuing.

Continually looking to add commercial Talent with the ultimate goal of maximizing shareholder value We Believe improve milk prices and reduced classified assets allow us to deploy some over Access Capital. We're in the process of evaluating a stock buyback program and increased common dividend with our board and to hope to have an announcement soon on both fronts and I'll turn it back to Glen to give some insights into our twenty-twenty financials soon as you'll see on slide ten. We anticipate a 4% on balance sheet loan growth about a 5% growth Mark and client deposits as I mentioned earlier what we anticipate keeping wholesale funding flat shipping to more shifting to more Kabul broker during 2028 will always, you know, continue to look at that depending on where the interest rate environment is.

We look to expand margins in 2020 through a shift of excess cash into Investments and and bake whole life insurance and continued repricing of certificates of deposits and lower rates may be anticipated about an eight percent growth alone sold and serviced with about 15% of that in q1 16% and 25% Q3 and flat in thank you for who will be increasing overall salaries and benefits but this number should be more along the lines of our Q3 2019 expense on a quarter-by-quarter basis that you saw we expect occupancy to remain flat. We we making technology investments in a new website and we expect to see a spend about two hundred thousand on that line and spread across the last three quarters of 2020 and the Business Development line item and the professional fees side. We hope to see some reduction in relation to collection fees, but that will be somewhat offset by additional fees related to sarbanes-oxley law.

implementation

Information processing will go up about 600,000 do the investment in the CRM system is noted by Tim as well as continued upgrades on the it side. We expect more and not other non-interest expense as in in tax rate in 20 driven by the noise of this for a tax credit in Q4 2019.

And now I'd like to open it up to questions. Thank you. We will now begin the question-and-answer session to ask a question. You may press * then one on your telephone keypad using a speaker phone. Please pick up your handset before pressing the keys to withdraw your question, please press star and then to at this time. We will pause momentarily to assemble our roster.

And the first question will come from Brendan nozzle with Piper Sandler, please go ahead. Hey. Good morning, guys. How are you? Good Brandon. How are you? Good. Thanks. Just want to piss off here on the the two classified loans that moved into non-accrual on the quarter. I guess just one any more detail you can provide and and color it's too kind of what drove that and then I guess specifically on the dairy credit. I guess there's a liquid price to see the negative migration just given that we have higher milk prices today. So what was kind of the the Tipping Point on that credit, you know, this particular credit was a credit that expanded right after right after the the prices started to decline and had some challenges with the operation throughout this this lower milk price environment and ultimately had decided that they were going to file Chapter 12 bankruptcy, which we feel is a good thing as they should be able to flush their their accounts payable and then hopefully give them some longer-term viability dead.

This particular deal has strong emphasis 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.

All right, perfect. Thank you and then on credit more broadly, I guess there were some mixed signals this quarter, you know on the one hand no charge you all snow provision and classified assets improved and then on the other hand, you know negative my own Nation within classified into non-accrual. So I guess at a top-level just updated how you're thinking on on credit more broadly just as we contemplate, you know these cross-currents.

Well, it's you know, obviously we're in a much better milk price environment that the particular credit that you asked about I think is is potentially an outlier but there are some game options that have dug themselves from Fairly big holes and need to be able to dig out at this point. We we think pretty optimistically about the the future of our operations and we think we're going to see you know, Canaan improvement in our portfolio. We're already seeing some early reviews that are coming through in the numbers for 2019 are much looking much more solid from a performance perspective so dead, we feel pretty good about it. We do have some additional activity that's occurring in r or E bucket. That should see some more sales that should occur this first quarter and you know overall we're feeling much better about folio at this point, especially if no prices are maintained.

All right.

Pasok that's helpful. And then last one for me and then I'll step back. Just thinking about the the margin you alluded to, you know, putting some some cash to work throughout the year, which is a result in some expansion. Just curious, you know, in terms of Mag to what you think that opportunity can do for them.

Brandon this is Glen. So, you know, I think it's going to be you know, probably probably about a 15 basis-point bump. It's going to take a little bit of time to ramp it up. It's it's you know, the investment opportunities are you know, it's been it's been it's been a little bit difficult to find really great investment opportunities on on the bond side, but we're slowly to bring the cash and probably have the bully investment done, you know, probably January February time frame, so that's about ten million dollars.

All right. So over the course of the year, it sounds like fifteen basis points on the on the you know, maybe a little bit slower at first but you know net 15. Yeah, we're I mean, we're we're we're continuing to Siri page in the CD portfolio. But that takes some time, you know, the one thing that's just been difficult to to estimate obviously is the is the drain from one things going on a cruel. So that's you know, that's probably been dead as much had one has anything so

Thanks so much for the color.

perfect.

The next question comes from Jeff with d a Davidson, please. Go ahead. Good morning, Jeff Jeff Gordon. Just pulling up on that wage. What was the basis point impact this quarter on the loans put on a cruel to margin?

You know, it's it's it's it's around probably 7 basis points.

Okay, I'm sorry.

Go ahead answer your does that answer your question? Yeah. No, so effectively absent that move is pretty steady.

And yeah, I mean the the recall is definitely had an impact too. So I don't want to I don't want to minimize the impact of those but the nautical activity definitely, you know, it's that's the part. That's the part that's been dead to predict also, right? Okay, and then just following up on that kind of guidance tackling maybe overall operating expense and and tax rate together kind of some moving pieces given that the tax credit. But what were those figures again?

so the tax rate so the

For tax credit was it was 1.1 million impact to non-interest expense, right? I guess the guide for twenty, you know, I guess absent thank you for kind of looking forward. What what would be the

tax rate

from a not interest expense. We're we're up. You know, I think when you back when you back that off, I think we're up about, you know, probably about six hundred grand for the year overall.

And so I I guess I pointed to 2:20 both on tax rate and expense. Are you looking for a similar bump Encore for expenses and tax rates revert wage, uh to to what level

me check the tax. You know, we don't have a ton of taxes got the income. So it's probably in the it's probably about the 26 range 2626. 5% off. Got you.

Okay, I will step back. Thanks. Yep. The next question comes from Terry McEvoy with Stephens, please. Go ahead.

Hey guys, good morning. Lauren Thierry. I guess the the year-end review will you see the results in the first quarter or will it take a few quarters for the review to be completed?

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 some upgrades and we think but the I think the the final conclusion on the entire book is going to be kind of the second quarter before we have the whole the whole picture.

And then Glen you talked about just time deposits taking some time for for costs yields to come down actually up a little bit in the fourth quarter six basis points. What are your thoughts on just progression of time deposit costs trending lower in in 2020. Are there any quarters that stand out where you see just some buckets of of repricing opportunities know it's just pretty smooth failure throughout the year. So

And then just last the commercial loan that moved to non-accrual was that a Gore dairy-related at at all? No, I wasn't it was a commercial Manufacturing Company kind of a specialized manufacturer in Central Wisconsin that we originated about four or five years ago. And one of the owners was was in a similar business office and it was kind of a quasi startup that we had an SBA 504 loan plan for and they just haven't hit the mark they continue to kind of struggle to find top line revenue off. So we ultimately decided to move it into non-performing we did have a reappraisal done which discounted some of the equipment to specialized equipment. Unfortunately because of that we had to take a little bit larger impairment than this one. There's still some hope and may be able to pull things out but time will tell

Okay. Thanks guys.

Again, if you have a question, please press * then 1 the next question will be from Brian Martin with Jenny, please go ahead. Hey, good morning guys Brad off the hey Glen or I guess I guess the with the Improvement you're seeing, you know kind of on the with the milk prices. Can you just talk a little bit about how you're thinking about provisioning this year with you know, I guess I don't know what percentage you're through that year-end review, but it sounds pretty minimal. But I guess she'll be see the, you know, provisioning come down a bit, you know, I guess given your optimism on you know, kind of the how the credit app going to maybe unfold in 2020.

You know Brian is Glen, you know it we think it's going to be probably similar to what the what the what the dollar amount is what this year, you know, if we start to see more, you know more upgrades than expected then that'll obviously improved. So, you know, we feel pretty good at that. We've got things flushed out overall though, so

Okay in the in just remind me within the within the portfolio, I mean they're you know, I guess is a pretty granular as far as the size of these credits are there's chunkier credits in there in this portfolio. They could kind of move things, you know any given quarter. Well, obviously we have some larger credits of you know, as these operations have continued to expand, you know, we've got sick, you know larger exposure but you know as I mentioned before we we used the Memphis a guarantee program again, very broadly and position those in the right position m e not provide a lot of impact from an impairment perspective as if there are any that slide down the scale.

Got you. Okay, and just the the loan origination this year, you know the new loans. I mean is it I guess you anticipate most of that to be the commercial or is you still going to continue to grow the you know, the egg, you know part of the portfolio assume but just how are you thinking about the you know the growth you put on this year and kind of that that mix? Yeah, I think it'll be it'll be a combination or commercial Bankers are continuing to see opportunities out there as well. And as we mentioned in the in the the script, we also have a couple of Newegg Bankers that we've hired recently from one of our primary competitors one. That's a kind of a non-dairy specialist in the xbase. So that'll help from a diversification standpoint. We will continue to manage the on balance sheet growth there to make sure it's kind of matching age or funding but as you know, our non-interest income model with some of the participation in sales and nice spreads we can make as well as with the FSA guarantees should should help us drive. Yep.

You're fairly strong not interested in coming.

About going forward. I think you call. One one item. I thought it was like two hundred fifty Grand but am I thinking about that, right?

Brian I'm sorry. I'm not sure if all you're asking just on the fee in the the fee income part of the p&l. Just had to think about that going forward is this quarter's run-rate a pretty good level think about as you go into twenty-twenty. Yeah. I mean on the servicing fee income. We should we should see some some increased their you know, we are baking in about an 8% 503 during the year. So you should see that continue to creep up the origination side should the origination right side should should back off a bit from what you saw levels this year. But you know, as long as the origination remain, you know kind of over that what I would say, you know, ten million a quarter, you know, that that should usually lead to some some origination income. So Mom reservation right in, I'm sorry, we've got a continued really 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 the new

Bankers that we've hired, I think we'll continue to see some some decent non-interest income both as I said from FSC guarantee origination standpoint and participation standpoint. Got you off. That's helpful that takes care of my questions. Thanks so much.

The next question is a follow-up from Brandon rozzell with Piper Sandler, please go ahead. Hey guys, just one more from me on the potential for a buy back. And I appreciate that. It's being considered Nazi probably should see a ton. But just trying to you know gauge how active you might eventually be and I think about it you obviously have, you know, ample capital from both you a regulatory and and a t person but it kind of feels like the classified asset ratio might be the the boundary on that that fifty percent level. Just how do you kind of weigh those factors in terms of how aggressive you you might be down the road?

Okay, and was this maybe I missed the Glen but you see this level of fee income this quarter, I guess is this a pretty good level to think?

Yeah, I mean we're still in the process of running. This is Gwen's we're still in the process of valuing at the board. So I don't want to comment too much on it. You know, we're going to you know, we're going to you know, we're fairly cautious when we do things. So we'll definitely watch watch the classified racial milk prices as a as a boundary to kind of how we look at the buyback on a month by month or quarter quarter basis still dead. You know, I I I don't want to comment too much on how aggressive we're going to be on that yet.

Yep. Nope.

No worries things taken the follow-up 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.

Thank you all for joining us. We felt we had a pretty strong 2019 and as well as a a strong fourth-quarter, especially given the fact that we had the three major strategic initiatives that we were driving for and we feel like we we had some success on all three of those so solid year and we're looking forward to you know, a decent year in 2020 as well. As long as no pricing you to stay strong which were fairly optimistic about so thank you all for joining us. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Thursday