Q2 2020 County Bancorp Inc Earnings Call
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Now, let's turn the conference over to Jim Schneider.
Let me Bancorp. Please go ahead Sir.
Welcome everyone to earnings call for the second quarter of 2020.
As a reminder, we have our disclosure.
You some forward looking statements on slide two of our presentation.
Moving to slide three.
We've made some changes with our board of directors, Andrew Steinway, who has been an independent director on both our company and the banks Board. Since 2008 has been selected as the new chairman of both boards.
Yeah, the business in real estate attorney practicing in Wisconsin, and as a founding partner of Stanley burst Buck LLC.
He'll be a great chairman and I'm looking forward to working with him more directly moving forward.
We're also happy that William Censky or former chairman will remain on the boards of both the company in the bank.
I'm grateful for builds leadership and strategic contributions over the past 23 years.
Its focus on excellence as well as is unwavering support for the bank its employees in our communities has been vital to our success.
So I'm very happy that he'll remain a vital member of our board moving forward.
Lastly, we'd like to recognize that board that that board of directors have been appointed director Kathy Seifert as chair of the nominating and governance Committee and director Vicki Leinbach as chair of the compensation Committee.
He is Vicki have served our board well over the last few years, when we look forward to their expanded contribution.
I will talk about the quarter, one 2020 overview on slide four.
There were several positive trends to our financials this quarter, which resulted in a net income of 2.7 million.
Or 40 cents pretty per diluted share. Those included an increase in net interest income to 2.7 million.
Mostly due to a shift in balances from interest bearing deposits to investment securities.
The decrease in loan loss provision to 1.1 million with overall credit quality holding up well.
An increase in noninterest income to 3.4 million.
I didn't sixmillion in S.P.A.P.P.P. lawns approved to support our low oil customers through the cobot 19 crisis.
And finally client deposit growth of 101.9 million, which reflects our execution against our strategic initiatives.
I will talk a little bit about Copa 19 response, an employee safety moving to slide five.
I continued to be amazed at how our team has responded to the impacts of Cowen 19, the health and wellbeing of our employees remains our top priority and we have made significant improvements in investments to be able to safely serve our clients and communities.
During the quarter, we announced that together again plan.
Which will bring our employees back to the opposite phases. We just brought back the first phase and we will monitor local infection rates and trends as we evaluate tightening up the next phases.
We currently have approximately 80% of our workforce working from home with no drop in productivity.
We have also instituted several safety measures, including guidance on masks protective barriers and continued education.
Our team remains United around safety and again I've been very proud of our collective efforts to work through these difficult times without missing a beat.
In the provision of excellent service to our customers and communities.
Next slide.
Moving to slide six we have opened up our locations to customers with an emphasis on safety first supported by numerous initiatives as you'll see on this slide.
Our team has loved to getting to see our customers and person again, but we'll continue to prioritize safety as we move forward.
I'm also pleased to know that we have had 106 million an S.P.A.P.P.P. applications process during the quarter.
Which will be a great benefit for our local customers and communities that have been impacted by the pandemic.
In an effort to simplify the next steps of the process for our customers. We have recently partnered with the technology company to help support required online forgiveness applications as well, let's continue to have ongoing PPP educational needs and for communication with their customers.
Because of our speed to market, we were able to bring on 150, new customers through the PPP program.
And I'll turn it over to John fuel and Jim Chief Credit Officer for an update on credit John.
Thank you, Tim and good morning, everyone.
Moving to slide seven I'd like to provide an update to our covert payment relief metrics.
On the commercial side. We initially provided 90 days a payment relieved to customers who requested it and were negatively affected by the pandemic.
Well the inter agency guidelines issued in March of 2020 provide for longer term payment relief. The 90 day approach was taken given the uncertainty surrounding the potential impact and longevity of the business shutdowns.
The initial requests required the borrowers to certify that their businesses have been impacted by the covert crisis.
During the last quarter, our commercial bankers have contacted their customers that requested payment relief to determine the degree of the impact due to cope with 19.
At this time, we are highly encouraged to find that only five of the original 89 commercial customers have requested an additional 90 days a payment relief.
Also encouraged that Wisconsin's unemployment rate is 8.5% as compared to the national rate of 11%.
All request for payment modifications beyond the original 90 days require the borrower to provide financial update and an action plan. So that we can determine any necessary changes to risk ratings and servicing plans.
Well there still remains uncertainty surrounding the long term impact of covert 19, we're encouraged by the minimal number of request for additional payment relief.
Moving to slide eight.
I'd like to highlight some of our key credit metrics.
We continue to focus heavily on or high risk industries that include hotels restaurants, and bars multifamily, including student housing.
Retail office and construction.
Our adverse classified ratio increased to 41 point, 73% quarter over quarter, which is where we began the year.
The increase was largely due to warn commercial credit and for AG credits migrating to sub standard.
On the positive side, we saw eight dairy relationships upgraded from watch to low satisfactory and three dairy relationships upgrade from special mention and substandard to watch.
Additionally, we reduced our Oreo exposure from the sale of two parcels of acquired property.
We continue to have our bankers report on their high concerned watch and substandard credits on a quarterly basis to ensure a proper monitoring and follow up on these accounts.
We've completed the enter views on 84% by dollar of our AG watch in worst rated credits and do not anticipate any additional significant downgrades in that book at this time.
Given the improved milk price environment, and a substantial amount of government assistance. That's been provided to our AG producers were encouraged that the overall outlook for our dairy portfolio.
And as previously mentioned, we continue to stay in close contact with our commercial customers determine the ultimate impact of cobot 19 on their businesses.
Moving to slide nine.
As of Q2, 2020, we had 18 and a half million dollars in construction loans outstanding.
5.3 of the $5.5 million and multifamily is related to a project that is complete and is awaiting conversion to permanent financing.
This particular project is supported by well capitalize owner and have seen very brisk leasing activity.
The limited service restaurant exposure is related to our franchise operator, that's supported by a SP fiber for though and it represents minimal risk to the backup.
Moving to slide 10.
You can see that are seeing <unk> and owner occupied commercial real estate portfolio as well diversified based on the breakdown on the left of this slide.
Additionally, the loans that are included in the high risk industries as detailed on the right side of the slide carry satisfactory ltvs and risk ratings and continued to be closely monitored by our banking teams.
Moving to slide 11.
You'll see the breakdown of our investor commercial real estate by industry as well as those industries, we have identified as higher risk.
As you'll see we do have limited exposure to retail hotels and assisted living operations. However, it's important to note that we have comfortable levels of ltvs and risk ratings on these credits.
At this time I'd like to turn it over to Dave Coggins, Our Chief banking officer to give an update on the overall AG environment. They.
Thanks, John.
Moving to slide 12.
A second quarter provided substantial volatility for our dairy customers.
Shutdown orders started in March.
Dramatic temporary oversupply problem.
Foodservice okay.
We shut down and much of the domestic dairy consumption is done through that.
That sector.
Some dairy plant started requiring their farmers to cut that back production or no.
Last three futures prices plummeted, and any customer who wasn't protected with no marketing positions with facing some strong headwinds.
Fortunately the situation was short lived as prices went from.
Well.
Four cents for class three in April to $21 imports that's in June.
The current outlook for the balance of 2020 looks solid with forecasted average.
Futures a combination of actual for the first six months and futures for the last six months, what 17 46.
This puts most of our customers in pretty good in a pretty good place for 2020 with substantially above breakeven prices in most cases.
Some of the drivers of the significant improvement include.
The ramp up to the opening up created significant demand to stock restaurant.
An important consideration that that limited service and quick service restaurant.
Recovered nicely and they drive a lot of cheese sale places like Mcdonald Dominos and some of the limited service.
Type.
Published some have driven much of that.
Improvement.
Retail dairy consumption has been very solid.
Exports.
Hey, we're much better than expected.
She is a nonfat dry milk continued to be the export stars.
China is now.
As a result of a their commitment to the.
Trade agreements that have been that didn't have developed between our two countries.
Some color.
He heard and cut back.
Milking frequency have had an impact.
And as farmers were trying to.
Deal with some of the limit that the their dairy plants, we're putting on it.
And the U.S. government has been buying a lot of dairy products through some of their programs, which has been supported.
And finally, the global milk production continues to expand but at a much smaller right and that's something that has also had an impact.
A few other factors.
Looking forward regarding.
Things that are affecting the industry and our dairy customers forecast suggests that a price high is near that's been bean and predicted.
And we expect that that's going to happen this quarter.
Because next two months still have really high price forecast on them.
Many producers have utilized management tool to predict protect their margin.
And that's been there are many tools available to them, but very affordable prices.
He price is an important component of every farms expenses have softened due primarily to ethanol and energy price.
Lapses and export disruption.
Expectations are for China that continued to be a more active buyer.
And energy prices do drive a lot of cost.
On the farm income statement and that's continuing to have a positive impact on input costs.
As you drive on Wisconsin cropping conditions are generally very good and should result in a strong supply of feed this fall.
Yes.
The P. program has insisted many of our.
And Doug something called <unk> producer price differential, which is a factor when class repricing.
Hi year than class one there are some rules in the federal milk marketing order that.
Great.
Negative basis for some plan.
And that's a temporary problem right now, but that's expected to be short list.
Finally.
Let's see fab or the Corona virus food assistant program that the government developed out of U.S. has provided a big boost for most producers.
And now I'd like to turn it over to Glenn.
Financial officer for an update on the rest of our financial performance.
Glenn.
Thanks, Dave moving to Slide 13, we recently raised 22.4 million in sub debt at a fixed rate of 7%.
Callable after five years, even though our capital ratios are very strong we've decided to raise this additional capital as an abundance of caution the hopes that it will turn into office of capital.
Based on our current capital levels and credit quality metrics, we plan on continuing with our common stock repurchase plan that we announced in January this year.
Well can they continue to be prudent and balancing our risk profile against our desire to be opportunistic with this program.
We purchased 122606 shares at a weighted average price of $20.62 in the quarter.
We currently have no plans for change in our dividend per share and as always management on the board will adjust our capital plans as we know more about the credit Unpacks from Cobot 90.
Turning to slide 14, you'll see the break out of our our allowances made up for this quarter. We continue with our cold at 19 qualitative factor, which totaled 1.9 million this quarter.
And as you will see we also added 1.7 million and specific reserves related to one commercial relationship.
Turning to slide 15, we had strong client deposit growth during the quarter by 119 million, which included an estimated 58 million in growth from customers, who took PPP loans.
Similar to last quarter, we continued to Lincoln wholesale funding maturities, where we can somebody get mitigate our liquidity risk and take advantage of the overall.
Lower interest rate environment.
Turning to slide 16.
Loan yields that are being impacted by the fed rate cuts in the first quarter as well as feed PPP loans, which was about four basis points impact emerging.
We have aggressively cut deposit rates, but haven't seen outflow from that just yet.
We'll go into investor excess cash during the third quarters that we should have a positive impact to our net interest margin going forward into 2020.
We did incur a penalty on calling some higher re brokered Cds, which we refinanced the lower interest rates.
Turning to slide 17.
Well unsold and service increased $10.3 million during the quarter, along with a four basis point improvement in loan servicing spirit.
Our loan servicing rights origination income increased due to the originations this quarter as well as an increase in servicing spread.
Turning to slide 18, we'd have improvement in noninterest expenses this quarter due due to some of the noise from the first quarter related to our goodwill impairment in an Oreo write down that happened in the first quarter.
We continue to see lower costs, especially with employees traveling less the clients as well as education opportunities.
Salaries and benefits decreased in Q2 due to the deferred cost impact from the S.P.A.P.P. loans.
Turning to slide 19.
Want to give a little bit of color on what we think is going to happened I'm in the third and fourth quarter and into 2021 related to the P.P.P. loans.
As of the ended the quarter, we had $106 million loans on our books.
At a yield of 1%.
Which are largely funded with our with federal reserve funding at 35 basis points.
We had deferred the fee income of 3.8 million and deferred loan costs of 1.3 million.
As we're looking forward, we expect about 20% of a loan balances being forgiven on a monthly basis in September through December of 2020.
With the remainder with the remaining 20% being forgiven.
2021.
Deferred fees and costs will amortize to loan income and we'd give me a little bit of color on this slide is what we think those amounts could be based on the 20% forgiveness assumptions.
Average balances for the quarter.
On the P.P.T. loans in the in the second quarter were $68 million and the interest income infusion related this were 97000 that tough to help with model.
To conclude and where to reiterate some of Tim's comments from earlier was extremely proud of this organization our people in the role we play in supporting our local customers and communities.
Our team rose to the challenge this quarter and navigated a truly newell.
Their dedication to seek in service drove strong performance, but most importantly.
Helps support our customers through these difficult times.
We look forward attacking the third quarter with the same passion.
And now I'd like to open it up to questions.
Thank you well then I'll begin my question answer session.
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Today's first question comes from John Lewis with da Davidson. Please go ahead.
Thanks, Good morning, certainly appreciate the detail on the on the slide deck. So thanks for that on the.
The deferral side.
The five that requested extensions that I follow that right that the out of the 89.
There was only by but was or their extensions beyond that.
That number or or that was that was it.
Yeah. This is John filling Jim no, though there have only been five customers are those original 89 that have come back you know a lot of those initial 90 days either matured at the end of June or the first part of July and a we've reached up again to all those customers and at this point those are the only once at this point who about.
As for an additional 90 day payment really.
So that deferral number of 200 million at the ended the quarter has that come in.
Okay and or decline then.
It has yes.
Okay.
Got it and then.
On the AG deferrals on the on the six month timeline, so maybe a while before we see actual.
Activity, but any early indication.
Approached by any of the those folks that maybe requested to go back garden payments status.
Yeah. This is Tim Schneider I'll respond to that question.
Dave alluded to the the very low milk price environment for those couple of months that we saw in April and May and.
We basically were proactive in providing that six month deferral given some of the regulatory guidance just to give them breathing room. It's a very expensive expense heavy time of year as they are putting the crops in the ground.
Good point, we didn't really see prices are rising like they have so I would anticipate after this initial six month period, we would not have many additional borrowers that are going to ask for further extensions, yes, the futures market for milk as it sits today falls <unk>. This is John go into them I would just add to that end.
Question to the deferrals I mean since then you know there's been Pvp funds. There has been several programs well from the government did have allowed our dairy customers to be able to build a rebuild some working capital and some liquidity and so go again as we mentioned during the during the time, that's a really pretty encouraged by where our.
Dairy book is right now with the support with the milk price, where they are so we don't anticipate any additional need on that side of the book at this time.
Got it that's a good detail on the on the margin side glad I think you mentioned.
You said the PPP was a 12 basis point headwind good margin this quarter.
Yes, correct.
Okay, and and I guess, you know if we kind of look for do you had a lot to kind of moving pieces in there at called subsidies and you know as you look to put cash into investments and permit that margin.
Any kinda outlook type a commentary I'm on the <unk> what to expect from here.
Yeah, Jeff and just like you said, it's just there's so many moving parts to our margin right now, it's it's getting really challenging the kind of forecasting predicted so.
No we're trying our best especially with the with the PPP and you know kind of detail. We gave you that maybe help with that but it's like I am.
I'm challenge to kind of predict what our margins going to do this next quarter. So.
I'm, hoping investment some cash is going to help take away. Some of the impacts of you know there's still going to be some some headwinds because you know the rate cuts haven't fully impacted everybody. We've tried to aggressively cut our deposit rates were continuing to look at least the cut those deposit rates, but it's just going to be extended its somewhat challenging to predict the margin.
You know we should have some some uptick as loans are forgiven, though because that will pull back in and it is into its interest income so but it's unfortunate just can you kind of a bumpy margin right the rest of year.
Right.
On a core side, though is it safe to assume that.
Less volatility than we saw in it because the jump off point on on rates of Q1 into Q2 was large, but maybe we sort of settling a little bit leased the magnitude of change might mitigate a bit is that fair.
Yeah, well it if you check the PPP impact you know yet, but since you introduce that you're going to.
Yeah, it's going to be it's going to jump so.
Fair enough all right I'll step back thanks.
Your next question comes from Brendan those with.
Uh huh.
Hey, good morning, everybody how are you.
Morning, Brandon. Good are you good thing just want to follow up on deferrals.
I know the number quarter was 200 million, but kind of based on your commentary or the number is a lot lower today do you have kind of what the balance of current loans under for old is I'm, just because it's such a closely watched number and it sounds like a lot better than.
Kind of what was in the release.
Sam.
We don't have that number at our fingertips, Brendan but weekend, we can definitely follow up with you on that end up and others on this call.
Okay, Great and then just want to move on to kind of the allowance today.
Yes, just thinking about the need for further reserve build.
I guess on one hand, you have one of the higher reserves of any bank of your size today, and then of course and other had you know problem asset levels are more elevated for you guys. So just what is your sense as you look out over the next few quarters grade that for the need for further reserve bills.
When you want to start that one maybe I'll, let John jamming up to you.
Yeah. That's the that's the that's the million dollar questioning it.
No.
It's just really tough to tell brand right now I mean, we you know we're kinda preference for the worse as I think everybody wasn't in the first quarter, we loaded up.
You know we were looking you know should we load up again in the second quarter, but we just don't have anything Thats point to you know we need to keep loading up. So we're just going to continue to watch the deferrals very closely continue to watch the classified asset levels. No. It's kind of leveled off are known and I think we're encouraged by John kind of pointed a couple things.
Yes, I'm just I'm, an a macroeconomic perspective, you know unemployment has been lower in Wisconsin, Wisconsin tends not to be kind of a hot normal state and even during the crisis no losses were lower than probably nationwide. This is obviously a little bit different kind of animal that we're talking about today, but we just.
We haven't seen the metrics that say, we got to continue to loaded so as of right. Now we're not planning on you know big look big loads of the provision the rest of year, but you know that could change obviously pretty pretty quickly. If if some of those metrics are going into different direction.
Yeah.
And then last one for me before I step back up just a ticky tack question here the prepayment penalty on the brokered CD did that flow through.
Non interest expense or did it flowed through net interest income this quarter.
Net interest income so that interest expense.
Perfect. Thanks for taking the questions.
And ladies and gentlemen, as a reminder to ask a question. Please press Star then one today's next question comes from Terry Mcevoy with Stephens. Please go ahead.
Good morning.
[noise] monetary.
And thanks for all the work that went into the presentation. Appreciate it just starting with dairy I've seen nice to see milk prices higher in the quarter.
My question is can farmers are your farmers lock in at these prices or do anything to protect themselves on the downside should does should prices move and the other direction.
Dave I'll, let you respond to that you'd expert.
Yes. Some carriers are there certainly are a number of tool maybe talked about in previous.
Called one is just.
Just two onto the board and hedging.
Many mills plants have offer a forward contract type programs.
And then in addition, there's a couple of programs that authored by U.S.J., one called the dairy revenue protection program, which is sort of a margin type insurance product and the other in livestock gross margin insurance, which is also an insurance product, but it protects it allows farmers to protect the margin not just the price.
And all those tools are available the key to what is.
They work with advisors, including our own insurance division of the bank to make sure that they've got strategy, because you can't unlike corn and beans, and things like that you can't just lucky in the years production in one contract you have to lock in each month and the futures market moving month by month.
So there's a lot of strategies involved but yes, they can for those that.
Didn't do that for April and May those are the two months that really hurt producers, but going forward. Most of them are in pretty good shape and have been able to do take position most of them. The predominant tool has been the dairy revenue protection on your tool that's been offered by.
By the you got to <unk>.
Thank you there and Glenn question on expenses.
The $1.3 million of deferred cost that reduce salaries and benefits.
What are your thoughts on the third quarter as it relates to that line and maybe operating expenses overall specific to the third quarter.
Yeah security, so I mean, the noise from that you know shouldn't the as drastic it'll just you know we actually have origination deferred cost originations that come out of seller in expense every every quarter. This just drastic. This this quarter because of the PPP loans. So you know, obviously I don't anticipate that kind of.
Large number coming out in Q3.
Generally are we've been trying really hard to demands cost as best we can again, we you know people are traveling less we don't have as many people in the branches. So overall our costs should be pretty maintainable I think going into the next couple of quarters here. So so again back off that that.
That impact from the deferred costs. It I think that's a pretty good number.
Thanks, and then just one last one area I mean, you mentioned culver's right on slide 10 here 11 plus million dollars of loans.
How does their business and is the cold result by the Walmart and in your cities that are the lines in the drive through extending into the parking lot and the activity in volume pretty strong there.
This was relative to the limited service restaurants that when I heard you said correct, yes, slide 10 that the culver's rest, yes, yes theres a covers that's you know half mile here from the bank you need a lot of a Walmart and those lines are continuously busy and we've heard the same from called.
Corporate which we have a good relationship with throughout their footprint Didnt cover. So they've responded very well to other corporate environment and think we continue to hear that with the drive through service through call. The they were doing.
65% to 75% of of their normal sales through the drive through so it's a they've responded quite well.
Okay. Thanks, everyone.
Thank you ladies and gentlemen. This concludes your question answer session.
A buck or was it the management team for any final remarks.
So.
Oh, yes. Thank you everyone for joining us today, I think we had a relatively solid quarter given the code environments and.
We appreciate your support than if you have any further follow up questions. After the call feel free to reach out to any of us. Thank you again.
Thank you serve this concludes todays conference call you may now disconnect your lines another wonderful day.