(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 reforms;
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.
In addition, this report also contains forward-looking statements regarding the Company's outlook or expectations with respect to the planned Merger with Nicolet. Examples of forward-looking statements include, but are not limited to, statements regarding the outlook and expectations of the Company and Nicolet with respect to the planned Merger, the strategic benefits and financial benefits of the Merger, including the expected impact of the Merger on the combined corporation's future financial performance including the timing of the closing of the transaction. Such risks, uncertainties and assumptions, include, among others, the following:
the possibility that any of the anticipated benefits of the proposed Merger will not be realized or will not be realized within the expected time period;
the risk that integration of the Company's operations with those of Nicolet will be materially delayed or will be more costly or difficult than expected;
the parties' inability to meet expectations regarding the timing of the proposed Merger;
changes to tax legislation and their potential effects on the accounting for the Merger;
the inability to complete the proposed Merger due to the failure of Nicolet's or the Company's shareholders to adopt the merger agreement;
the failure to satisfy other conditions to completion of the proposed Merger, including receipt of required regulatory and other approvals;
the failure of the proposed Merger to close for any other reason;
diversion of management's attention from ongoing business operations and opportunities due to the proposed Merger;
the challenges of integrating and retaining key employees;
the effect of the announcement of the proposed Merger on Nicolet's, the Company's or the combined company's respective customer and employee relationships and operating results;
the possibility that the proposed Merger may be more expensive to complete than anticipated, including as a result of unexpected factors or events;
dilution caused by Nicolet's issuance of additional shares of Nicolet common stock in connection with the Merger; and
risks and uncertainties relating to Nicolet's proposed acquisition of Mackinac Financial Corporation ("Mackinac"), including but not limited to the failure of the proposed acquisition to close for any reason and risks and uncertainties relating to the Mackinac's business, the combined business of Mackinac and Nicolet, and the combined businesses of Nicolet, the Company and Mackinac.
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 Form 10-K for the year ended December 31, 2020, by the Company with the SEC filed on March 12, 2021.
On June 22, 2021, the Company entered into an Agreement and Plan of Merger with Nicolet, pursuant to which the Company will merge with and into Nicolet. Following the Merger, the Bank will merge with and into Nicolet National Bank, Nicolet's wholly-owned bank subsidiary, with Nicolet National Bank continuing as the surviving bank, with all Bank branches operating under the Nicolet National Bank brand.
The Company and Nicolet have agreed to prepare and file with the SEC a registration statement on Form S-4, which will include a proxy statement/prospectus. As soon as practicable following effectiveness of the registration statement on Form S-4, the Company and Nicolet will each call a special shareholder meeting to approve the Merger Agreement.
Merger Consideration. Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the Merger, County shareholders shall receive for each share of County common stock, at the election of the shareholder, either 0.48 shares of Nicolet common stock or $37.18 in cash, subject to customary proration procedures so that the total consideration will consist of approximately 80% stock and 20% cash.
Closing Conditions. Consummation of the Merger is subject to certain customary closing conditions, including without limitation, (i) approval of the Merger Agreement by County and Nicolet shareholders, (ii) the receipt of all requisite regulatory approvals, and (iii) receipt of a tax opinion of Nicolet's counsel that the Merger will qualify as a tax-free reorganization.
In addition to these mutual conditions, each party's obligation to consummate the Merger is subject to certain other conditions, including, without limitation, (i) the accuracy of each party's representations and warranties; and
Representations, Warranties and Covenants. The Merger Agreement includes detailed representations, warranties and covenant provisions that are customary for transactions of this type.
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 and six months ended June 30, 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.
Effects on Our Business. The COVID-19 pandemic, federal, state, and local government responses to the pandemic, and the effects of existing and future variants of the disease, such as the Delta variant. have had and are expected to 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 may be adversely affected.
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 June 30, 2021, we processed 184 customer payment modification requests for customers who had loan balances of $200.4 million, and at June 30, 2021, four customers remained on payment relief with loan balances totaling $2.9 million.
The Bank processed 904 PPP loan applications in round one in 2020, totaling $106.2 million, and 497 applications in round two totaling $36.1 million during the first two quarters 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 June 30, 2021, there were $33.4 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 June 30, 2021. In our branch network, the drive thrus are open, and the lobbies reopened to the public on March 1, 2021.
We suspended our common stock buyback plan on June 17, 2021 in connection with entering the Merger Agreement described above. There are no current plans to suspend dividends paid on our common stock. 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 June 30, 2021 was $6.7 million, compared to $3.9 million and $2.7 million for the three months ended March 31, 2021 and June 30, 2020, respectively. Net income for the six months ended June 30, 2021 was $10.7 million compared to a net loss of $2.5 million for the six months ended June 30, 2020. This increase was primarily the result of $5.0 million of goodwill impairment during the first quarter of 2020 and a $7.4 million decrease in provision for loan losses for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 as a result of improved credit quality within the loan portfolio.
Total securities available-for-sale decreased $3.5/ million, or 1.0% from December 31, 2020 to $349.3 million at June 30, 2021, and increased $122.4 million, or 53.9%, since June 30, 2020.
Total loans increased $5.6 million, or 5.6%, from December 31, 2020 to $1.0 billion at June 30, 2021, and decreased $85.6 million, or 7.9%, from June 30, 2020.
Participated and sold loans that we continue to service totaled $853.2 million at June 30, 2021, an increase of $40.6 million, or 5.0%, since December 31, 2020, and an increase of $91.1 million, or 12.0%, since June 30, 2020.
Client deposits (demand, NOW accounts and interest checking, savings, money market accounts, and certificates of deposit) increased $42.0 million, or 4.6%, since December 31, 2020, to $958.0 million at June 30, 2021, and increased $64.4 million, or 7.2%, since June 30, 2020.
Cost of funds on interest bearing deposits decreased 19 basis points since the quarter ended March 31, 2021 to 0.72% for the three months ended June 30, 2021, and decreased 88 basis points since the quarter ended June 30, 2021. For the six months ended, June 30, 2021, cost of funds on interest bearing deposits decreased 90 basis points to 0.81% compared to the six months ended June 30, 2020.
Selected Financial Data As of and for the As of and for the As of and for the Three Months Ended Six Months Ended Year Ended June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 December 31, 2020 (unaudited) (unaudited) (Dollars in thousands, except per share data) Selected Income Statement Data: Interest income $ 14,537 $ 13,565 $ 28,252 $ 27,643 $ 55,475 Interest expense 3,099 4,800 6,596 10,097 18,499 Net interest income 11,438 8,765 21,656 17,546 36,976 Provision for (recovery of) loan losses (4,278 ) 1,142 (4,036 ) 3,360 2,984 Net interest income after provision for loan losses 15,716 7,623 25,692 14,186 33,992 Non-interest income 2,251 3,501 5,964 6,221 14,250 Non-interest expense 8,765 7,465 17,530 22,482 39,645 Income tax expense 2,459 926 3,455 379 3,118 Net income $ 6,743 $ 2,733 $ 10,671 $ (2,454 ) $ 5,479 Per Common Share Data: Basic earnings (loss) per common share $ 1.08 $ 0.40 $ 1.70 $ (0.40 ) $ 0.79 Diluted earnings (loss) per common share $ 1.07 $ 0.40 $ 1.69 $ (0.40 ) $ 0.79 Adjusted diluted earnings per common share (1) $ 1.07 $ 0.40 $ 1.69 $ 0.36 $ 1.56 Cash dividends per common share $ 0.10 $ 0.07 $ 0.20 $ 0.14 $ 0.31 Book value per share, end of period $ 27.68 $ 25.18 $ 27.68 $ 25.18 $ 26.42 Tangible book value per share, end of period (1) $ 27.68 $ 25.16 $ 27.68 $ 25.16 $ 26.42 Weighted average common shares - basic 6,161,641 6,504,898 6,181,839 6,604,187 6,477,173 Weighted average common shares - diluted 6,208,079 6,533,409 6,223,791 6,643,735 6,505,198 Common shares outstanding, end of period 6,026,748 6,375,150 6,026,748 6,375,150 6,197,965 Selected Balance Sheet Data: Total assets $ 1,517,072 $ 1,513,917 $ 1,517,072 $ 1,513,917 $ 1,472,358 Securities available-for-sale 349,334 226,971 349,334 226,971 352,854 Total loans 1,001,890 1,087,524 1,001,890 1,087,524 996,285 Allowance for loan losses (11,466 ) (18,569 ) (11,466 ) (18,569 ) (14,808 ) Total deposits 1,135,726 1,073,053 1,135,726 1,073,053 1,040,826 Other borrowings and FHLB advances 123,557 195,247 123,557 195,247 178,006 Subordinated debentures 67,519 61,910 67,519 61,910 67,111 Total shareholders' equity 174,812 168,525 174,812 168,525 171,776 Performance Ratios: Return on average assets (annualized) 1.80 % 0.74 % 1.43 % (0.23 )% 0.38 % Return on average shareholders' equity (annualized) 15.82 % 6.55 % 12.45 % (2.88 )% 3.22 % Return on average common shareholders' equity (1) 16.40 % 6.63 % 12.86 % (3.28 )% 3.15 % Equity to assets ratio 11.52 % 11.13 % 11.52 % 11.13 % 11.67 % Net interest margin 3.22 % 2.54 % 3.08 % 2.63 % 2.68 % Interest rate spread 3.03 % 2.24 % 2.88 % 2.30 % 2.37 % Non-interest income to average assets (annualized) 0.60 % 0.92 % 0.80 % 0.86 % 1.19 % Non-interest expense to average assets (annualized) 2.34 % 2.03 % 2.35 % 3.19 % 2.58 % Net overhead ratio (annualized) (2) 1.74 % 1.11 % 1.55 % 2.32 % 1.40 % Efficiency ratio (1) 64.98 % 63.83 % 67.32 % 69.32 % 65.63 % Dividend payout ratio 9.35 % 17.50 % 11.83 % (35.00 )% 39.24 % Asset Quality Ratios: Adverse classified asset ratio (1) 24.72 % 41.73 % 24.72 % 41.73 % 39.43 % Non-performing loans to total loans (3) 4.39 % 3.26 % 4.39 % 3.26 % 4.18 % Allowance for loan losses to: Total loans 1.14 % 1.71 % 1.14 % 1.71 % 1.49 % Non-performing loans 26.08 % 52.37 % 26.08 % 52.37 % 35.58 % Net charge-offs (recoveries) to average loans (0.07 )% 0.01 % (0.07 )% 0.01 % 0.32 % Non-performing assets to total assets (3) 2.95 % 2.52 % 2.95 % 2.52 % 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 June 30, 2021 June 30, 2020 December 31, 2020 (unaudited) Capital Ratios: Shareholders' common equity to assets 11.00 % 10.60 % 11.12 % . . .
Aug 06, 2021
Is there a problem with this press release? Contact the source provider Comtex at firstname.lastname@example.org. You can also contact MarketWatch Customer Service via our Customer Center.
(c) 1995-2021 Cybernet Data Systems, Inc. All Rights Reserved