(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this Form 10-Q. This report contains statements that constitute forward-looking statements within the meaning of the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the use of words such as "estimate," "project," "predict," "believe," "intend," "anticipate," "assume," "plan," "seek," "expect," "may," "might," "should," "indicate," "will," "would," "could," "contemplate," "continue," "intend," "target" and words of similar meaning. These forward-looking statements are not historical facts and include statements of our goals, intentions, expectations, business plans, and operating strategies.
Forward-looking statements are subject to significant risks and uncertainties, and our actual results may differ materially from the results discussed in such forward-looking statements. The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
the effects of the COVID-19 pandemic, including its effects on the economic environment, our customers and our operations, as well as any changes to federal, state or local government laws, regulations or orders in connection with the pandemic;
government intervention in the U.S. financial system in response to the COVID-19 pandemic, including the effects of recent legislative, tax, accounting and regulatory actions and reformst;
adverse changes in the economic conditions of our market area and of the agriculture market generally, dairy in particular;
adverse changes in the financial services industry and national and local real estate markets (including real estate values);
competition among depository and other financial institutions, as well as financial technology (FinTech) companies and other non-traditional competitors;
risks related to a high concentration of dairy-related collateral located in our market area;
credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and in our allowance for loan losses and provision for loan losses;
the failure of assumptions and estimates underlying the establishment of our allowance for loan losses and estimation of values of collateral and various financial assets and liabilities;
interest rate risks associated with our business;
fluctuations in the values of the securities held in our securities portfolio;
changes in U.S. monetary policy, the level and volatility of interest rates, the capital markets and other market conditions that may affect, among other things, our liquidity, our net interest margin, our funding sources and the value of our assets and liabilities;
our success in introducing new financial products;
our ability to attract and maintain deposits;
fluctuations in the demand for loans, which may be affected by numerous factors, including commercial conditions in our market areas and declines in the value of real estate in our market areas;
changes in consumer spending, borrowing and saving habits that may affect deposit levels;
costs or difficulties related to the integration of the business of acquired entities and the risk that the anticipated benefits, cost savings and any other savings from such transactions may not be fully realized or may take longer than expected to realize;
our ability to enter new markets successfully and capitalize on growth opportunities, execute our strategic plan, and manage our growth;
any negative perception of our reputation or financial strength;
our ability to raise additional capital on acceptable terms when needed;
changes in laws or government regulations or policies affecting financial institutions, including changes in banking, consumer protection, securities, trade, and tax laws and regulations, and any increased costs of compliance with such laws and regulations;
changes in accounting policies and practices, including the implementation of CECL;
our ability to retain key members of our senior management team;
our ability to successfully manage liquidity risk;
the effectiveness of our risk management framework;
the occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-related incidents and our ability to identify and address such incidents;
interruptions involving our information technology and telecommunications systems or third-party servicers;
changes in benchmark interest rates used to price our loans and deposits, including the expected elimination of the London Interbank Offered Rate ("LIBOR") and the adoption of a substitute;
the extensive regulatory framework that applies to us and our compliance with governmental and regulatory requirements including the Dodd-Frank Act, the Basel III Rule and others relating to banking, consumer protection, securities and tax matters;
rapid technological change in the financial services industry;
the effects of severe weather, natural disasters, acts of war or terrorism, widespread disease or pandemics, including the COVID-19 pandemic, and other external events;
the impact of any claims, legal actions, litigation, and other legal proceedings and regulatory actions against us, including any effect on our reputation;
the effect of tariffs, trade agreements, and other domestic or international governmental policies impacting the value of the agricultural or other products of our borrowers; and
each of the factors and risks identified in the "Risk Factors" section included in this Form 10-Q and under Item 1A of Part I of our most recent Annual Report on Form 10-K.
These statements are only current predictions and are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from those anticipated by the forward-looking statements. You should not rely upon forward-looking statements as predictions of future events.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Forward-looking statements are made only as of the date of this report, and the Company undertakes no obligation to update any forward-looking statements contained in this report to reflect new information or events or conditions after the date hereof.
County Bancorp, Inc. is a Wisconsin corporation founded in May 1996 and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. Our primary activities consist of operating through our wholly owned subsidiary bank, Investors Community Bank, headquartered in Manitowoc, Wisconsin, and providing a wide range of banking and related business services through the Bank and our other subsidiaries.
In addition to the Bank, we have three wholly owned subsidiaries, County Bancorp Statutory Trust II, County Bancorp Statutory Trust III, and Fox River Valley Capital Trust I, which are Delaware statutory trusts. The Bank is the sole member of Investors Insurance Services, LLC and ABS 1, LLC, which are both Wisconsin limited liability companies.
Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans, and the interest we pay on interest-bearing liabilities, such as deposits. We generate most of our revenue from interest on loans and investments and loan- and deposit-related fees. Our loan portfolio consists of a mix of agricultural, commercial real estate, commercial, and residential real estate loans. Our primary source of funding is deposits. Our largest expenses are interest on these deposits and salaries and related employee benefits. We measure our performance through various metrics, including our pre-tax net income, net interest margin, net overhead ratio, return on average assets, earnings per share, and ratio of non-performing assets to total assets. We also utilize non-GAAP metrics, such as adjusted diluted earnings per share, efficiency ratio, return on average common shareholders' equity, tangible book value per share, ratio of tangible common equity to tangible assets, and adverse classified asset ratio, to evaluate the Company's performance. We are required to maintain appropriate regulatory leverage and risk-based capital ratios.
There have been no material changes to the critical accounting policies included in the 2020 Form 10-K filed on March 12, 2021.
Significant Developments - Impact of COVID-19
The COVID-19 pandemic in the United States has had an adverse impact on our financial condition and results of operations as of and for the three months ended March 31, 2021 and 2020, and has had a complex and adverse impact on the economy and the banking industry and is expected to continue to adversely impact the Company in future fiscal periods, all subject to a high degree of uncertainty.
Effects on Our Market Areas. Our commercial and consumer banking products and services are offered primarily in Wisconsin, where individual and governmental responses to the COVID-19 pandemic have led to a broad curtailment of economic activity beginning in March 2020. A stay-at-home order was imposed in March 2020, and on May 13, 2020, businesses and social gatherings began reopening based on local ordinances in a phased-in approach, subject to public health reopening guidelines, including social distancing and limitations on capacity.
The Bank and its branches remained open during these orders because banks were deemed essential businesses although lobbies were initially closed from March 18, 2020, to June 22, 2020 and again from October 13, 2020 to March 1, 2021. Based on the current environment, it is unclear how communities in Wisconsin will change, relax, or impose new stay-at-home and social distancing policies, including as a result of the availability of vaccines, and how that will impact the economy and our customers.
Across the United States, as a result of the curtailment of business activities since March 2020, many states have experienced a dramatic increase in unemployment levels. According to the U.S. Bureau of Labor Statistics, the unemployment rate in Wisconsin (on a seasonally adjusted basis) increased from 3.1% in March 2020 to 13.6% in April 2020, and subsequently decreased to 3.8% in March 2021 (based on preliminary numbers).
Policy and Regulatory Developments. Federal, state and local governments and regulatory authorities have enacted and issued a range of policy responses to the COVID-19 pandemic, including the following:
The Federal Reserve decreased the range for the federal funds target rate by 0.5% on March 3, 2020, and by another 1.0% on March 16, 2020, reaching the current range of 0.0 - 0.25%.
On March 27, 2020, President Trump signed the CARES Act, which established a $2.0 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the U.S. Small Business Administration ("SBA"), referred to as the PPP. The Bank participates as a lender in the PPP. After the initial $349 billion in funds for the PPP was exhausted, an additional $310 billion in funding for PPP loans was authorized. In addition in December 2020, President Trump signed the Consolidated Appropriations Act, 2021, a $900.0 billion COVID-19 relief package that included an additional $284.5 billion in PPP funding. In March 2021, President Biden signed the American Rescue Plan Act of 2021, a $1.9 trillion economic stimulus package that includes cash payments to individuals, supplemental unemployment insurance, and modifications and expansion of the PPP. In March 2021, President Biden also signed the PPP Extension Act of 2021, which extended the PPP application deadline to May 31, 2021.
The CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. In addition on April 7, 2020, federal banking regulators issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19, and stated that institutions generally do not need to categorize COVID-19-related modifications as TDRs and that the agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as TDRs. The FDIC and the Board of Governors of the Federal Reserve System, in consultation with state financial regulators, issued a revision to the Interagency Statement on Loan Modifications by Financial Institutions Working with Customers Affected by the Coronavirus issued on March 22, 2020. The revised interagency statement encourages financial institutions to work constructively with borrowers impacted by COVID-19, provides additional information regarding loan modifications, and clarifies the interaction between the interagency statement and related relief provided by the CARES Act. The Statement provides guidance on handling payment modification requests for impacted borrowers without triggering TDR classifications, by allowing up to 6-months of payment deferrals or interest only to assist our customers at this time.
Effects on Our Business. The COVID-19 pandemic and the specific developments referred to above have had and will continue to have an impact on our business. In particular, we anticipate that a significant portion of the Bank's borrowers in retail shopping centers, limited service restaurants, hotels, assisted living and nursing homes and residential rental industries may continue to endure significant economic distress, which may cause them to draw on their existing lines of credit and adversely affect their ability and willingness to repay existing indebtedness, and may adversely impact the value of collateral. These developments, together with economic conditions generally, may impact our commercial real estate portfolio, particularly with respect to real estate with exposure to these industries and the value of certain collateral securing our loans. As a result, we anticipate that our financial condition, capital levels and results of operations will be adversely affected, as described in further detail below.
Our Response. We have taken numerous steps in response to the COVID-19 pandemic, including the following:
In response to the interagency statement encouraging financial institutions to work with borrowers impacted by COVID-19, between March 31, 2020 and March 31, 2021, we processed 184 customer payment modification requests for customers who had loan balances of $200.4 million, and at March 31, 2021, five customers remained on payment relief with loan balances totaling $6.1 million,
The Bank processed 904 PPP loan applications in round one, totaling $106.2 million, and 461 applications in round two totaling $32.6 million in the first quarter of 2021. These loans are being funded through borrowings from the Federal Reserve's PPP Liquidity Facility so as not to reduce the Bank's available liquidity. As of March 31, 2021, there were $46.3 million of PPP loans (rounds one and two) outstanding. We are currently working with PPP borrowers to help them through the process of forgiveness of their PPP loans.
Approximately 80% of the Bank's employees are working remotely as of March 31, 2021. In our branch network, the drive thrus are open, and the lobbies reopened to the public on March 1, 2021.
There are no current plans to suspend our common stock repurchase plan or common stock dividend. The Board and management will continue to evaluate our capital plans as our credit metrics and capital levels change. In addition, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020, we will not be permitted to make capital distributions (including for dividends and repurchases of stock) or pay discretionary bonuses to executive officers without restriction if we do not maintain greater than 2.5% in Common Equity Tier 1 Capital attributable to a capital conservation buffer.
Net income for the three months ended March 31, 2021 was $3.9 million, compared to $4.5 million for the three months ended December 31, 2020, and a net loss of $5.2 million for the three months ended March 31, 2020. The year-over-year increase was primarily the result of $5.0 million of goodwill impairment during the first quarter of 2020 and $2.0 million decrease in provision for loan losses for the three months ended March 31, 2021.
Total securities available-for-sale increased $32.4 million, or 9.2% from December 31, 2020 to $385.2 million at March 31, 2021, and increased $139.1 million, or 56.5%, since March 31, 2020.
Total loans increased $15.4 million, or 1.5%, from December 31, 2020 to $1.0 billion at March 31, 2021, and decreased $0.8 million, or 0.1%, from March 31, 2020.
Participated and sold loans that we continue to service totaled $841.9 million at March 31, 2021, an increase of $29.3 million, or 3.6%, since December 31, 2020, and an increase of $94.3 million, or 12.6%, since March 31, 2020.
Non-performing assets increased $2.0 million, or 4.7%, since December 31, 2020, to $44.7 million at March 31, 2021, and increased $9.4 million, or 26.7%, since March 31, 2020.
Client deposits (demand, NOW accounts and interest checking, savings, money market accounts, and certificates of deposit) decreased $2.8 million, or 0.3%, since December 31, 2020, to $913.2 million at March 31, 2021, and increased $121.5 million, or 15.3%, since March 31, 2020.
Cost of funds on interest bearing deposits decreased 22 basis points since the quarter ended December 31, 2020 to 0.91%, and decreased 92 basis points since the quarter ended March 31, 2021.
Selected Financial Data As of and for the As of and for the Three Months Ended Year Ended March 31, 2021 March 31, 2020 December 31, 2020 (unaudited) (Dollars in thousands, except per share data) Selected Income Statement Data: Interest income $ 13,715 $ 14,095 $ 55,475 Interest expense 3,497 5,297 18,499 Net interest income 10,218 8,798 36,976 Provision for loan losses 242 2,218 2,984 Net interest income after provision for loan losses 9,976 6,580 33,992 Non-interest income 3,712 2,703 14,250 Non-interest expense 8,764 15,018 39,645 Income tax expense (benefit) 996 (547 ) 3,118 Net income $ 3,928 $ (5,188 ) $ 5,479 Per Common Share Data: Basic earnings (loss) per common share $ 0.62 $ (0.79 ) $ 0.79 Diluted earnings (loss) per common share $ 0.62 $ (0.78 ) $ 0.79 Adjusted diluted earnings (loss) per common share (1) $ 0.62 $ (0.04 ) $ 1.56 Cash dividends per common share $ 0.10 $ 0.07 $ 0.31 Book value per share, end of period $ 25.99 $ 24.17 $ 26.42 Tangible book value per share, end of period (1) $ 25.98 $ 24.15 $ 26.42 Weighted average common shares - basic 6,202,260 6,700,329 6,477,173 Weighted average common shares - diluted 6,236,725 6,749,401 6,505,198 Common shares outstanding, end of period 6,094,450 6,496,790 6,197,965 Selected Balance Sheet Data: Total assets $ 1,491,328 $ 1,354,974 $ 1,472,358 Securities available-for-sale 385,240 246,148 352,854 Total loans 1,011,664 1,012,436 996,285 Allowance for loan losses (15,082 ) (17,547 ) (14,808 ) Total deposits 1,098,528 1,019,960 1,040,826 Other borrowings and FHLB advances 148,674 111,593 178,006 Subordinated debentures 67,179 44,896 67,111 Total shareholders' equity 166,337 165,046 171,776 Performance Ratios: Return on average assets (annualized) 1.06 % (1.53 )% 0.38 % Return on average shareholders' equity (annualized) 9.11 % (11.97 )% 3.22 % Return on average common shareholders' equity (1) 9.29 % (12.81 )% 3.15 % Equity to assets ratio 11.15 % 12.18 % 11.67 % Net interest margin 2.95 % 2.74 % 2.68 % Interest rate spread 2.73 % 2.37 % 2.37 % Non-interest income to average assets (annualized) 1.00 % 0.80 % 1.19 % Non-interest expense to average assets (annualized) 2.37 % 4.43 % 2.58 % Net overhead ratio (annualized) (2) 1.36 % 3.64 % 1.40 % Efficiency ratio (1) 62.79 % 74.92 % 66.09 % Dividend payout ratio 16.13 % (8.97 )% 39.24 % Asset Quality Ratios: Adverse classified asset ratio (1) 39.61 % 32.35 % 39.43 % Non-performing loans to total loans (3) 4.35 % 3.17 % 4.18 % Allowance for loan losses to: Total loans 1.49 % 1.73 % 1.49 % Non-performing loans 34.30 % 54.75 % 35.58 % Net charge-offs to average loans 0.00 % (0.01 )% 0.32 % Non-performing assets to total assets (3) 3.00 % 2.61 % 2.90 %
(1) Adjusted diluted earnings per common share, tangible book value per share, return on average common shareholders' equity, efficiency ratio, and adverse classified asset ratio are not recognized under GAAP and are therefore considered to be non-GAAP financial measures. See below for reconciliations of these financial measures to their most comparable GAAP measures.
(2) Net overhead ratio represents the difference between noninterest expense and noninterest income, divided by average assets.
(3) Non-performing loans consist of nonaccrual loans. Non-performing assets consist of nonaccrual loans and other real estate owned.
As of March 31, 2021 March 31, 2020 (unaudited) Capital Ratios: Shareholders' common equity to assets 10.62 % 11.59 % Total capital to risk-weighted assets (Bank) 16.68 % 17.95 % Tangible common equity to tangible assets (1) 10.62 % 11.58 %
(1) Tangible common equity to tangible assets is not recognized under GAAP and is therefore considered to be a non-GAAP financial measure. See below for reconciliations of this financial measure to its most comparable GAAP measure.
Non-GAAP Financial Measures
"Efficiency ratio" is defined as non-interest expense, excluding goodwill impairment, historical tax credit investment impairment, and gains and losses on sales and write-downs of other real estate owned, divided by operating revenue, which is equal to net interest income plus non-interest income excluding gains and losses on sales of securities. In our judgment, the adjustments made to non-interest expense and non-interest income allow investors to better assess our operating expenses in relation to our core operating revenue by removing the volatility that is associated with certain one-time items and other discrete items that are unrelated to our core business.
Three Months Ended Year Ended March 31, 2021 March 31, 2020 December 31, 2020 (dollars in thousands) Efficiency Ratio GAAP to Non-GAAP reconciliation: Non-interest expense $ 8,764 $ 15,018 $ 39,645 Less: goodwill impairment - (5,038 ) (5,038 ) Less: historical tax credit investment impairment - (1,364 ) - Less: net loss on sales and write-downs of OREO (17 ) - (1,195 ) Adjusted non-interest expense (non-GAAP) $ 8,747 $ 8,616 $ 33,412 Net interest income $ 10,218 $ 8,798 $ 36,976 . . .
May 07, 2021
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