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Edited Transcript of ICBK earnings conference call or presentation 18-Apr-19 6:30pm GMT

Q1 2019 County Bancorp Inc Earnings Call

MANITOWOC Apr 20, 2019 (Thomson StreetEvents) -- Edited Transcript of County Bancorp Inc earnings conference call or presentation Thursday, April 18, 2019 at 6:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Glen L. Stiteley

County Bancorp, Inc. - CFO & Treasurer

* Timothy Jon Schneider

County Bancorp, Inc. - President & Director

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Conference Call Participants

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* Brendan Jeffrey Nosal

Sandler O'Neill + Partners, L.P., Research Division - Director

* Feddie Strickland

* Joseph Anthony Fenech

Hovde Group, LLC, Research Division - Managing Principal & Head of Research

* Kevin Kennedy Reevey

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Terence James McEvoy

Stephens Inc., Research Division - MD and Research Analyst

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Presentation

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Operator [1]

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Good afternoon, and welcome to the County Bancorp Earnings Release First Quarter 2019 Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Tim Schneider, President of County Bancorp. Please go ahead.

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Timothy Jon Schneider, County Bancorp, Inc. - President & Director [2]

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Thank you. I'd like to start off by directing you to the second page of our slide deck for the disclosure on our forward-looking statements. Thank you all for joining us. First of all, I'd like to start by announcing 2 new director appointments that we've made in the past quarter. We're happy to announce the addition of 2 new directors during 2019, Patrick Roe and Jacob Eisen. Pat recently served as the President and Director of First Community Financial Partners, Inc. a $1.3 billion NASDAQ registrant. Prior to First Community, Pat was the President of Heritage Bank. Pat has over 40 years of experience in all facets of operating a community bank, including a public registrant.

Jacob brings more than 17 years of diversified financial services experience to County Bancorp. As a former financial services industry investment banker, he regularly served as a trusted adviser to publicly traded entities, including commercial banks and thrifts, financial technology, payments and specialty finance companies. Jacob currently serves as Chief Operating Officer and Director of ConnexPay, an innovative business-to-business payments company, which is venture capital backed. Earlier in his career, Jacob served as Head of the Financial Services practice for a boutique global investment bank with more than $3 billion in assets under management as a Head of Capital Markets for a broker-dealer specialized in community and regional banks. We're very excited to be able to attract Directors of Pat and Jacob's experience to our board.

Next, I'm going to touch on the ag and credit update a bit. We saw solid quarter of reduction in classified assets, which was driven by a combination of credit, classification upgrades in the substandard category, OREO sales and loan pay-offs. From an ag cultural perspective, we're about 1/3 of the way through our credit review process of our watch in lower classified credits. We expect by the end of second quarter, we'll have the majority of the reviews complete and we'll have a better sense on direction of classified assets.

We continue to manage as aggressively as possible a reduction of classifieds with a few liquidations of farm operations occurring in the spring and some solid activity on more of our ORE currently. We have seen some gradual improvement in milk prices on the CME Class III futures market over the past month or so. Again, we've mentioned this in the past, but we feel like the trade deal with China and the new NAFTA will be hopefully benefits to continuing to improve commodity prices for our farmers and increase export opportunities.

And now, I'll turn it over to Glen Stiteley, our CFO.

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Glen L. Stiteley, County Bancorp, Inc. - CFO & Treasurer [3]

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Thanks, Tim. As we noted during our last earnings call, we're still going to be focusing on reducing our overall wholesale funding. We are still targeting a reduction in loan balances of approximately $40 million sometime in Q2 2019 and the flattening growth throughout the remainder of 2019. Through Q1, we totaled $24.3 million of that loan reduction. As we talked about last quarter, we are targeting $120 million reduction in wholesale funding, mostly focused on the brokered CDs during 2019. So far this year, we're up -- we reduced our wholesale funding by $141.2 million -- sorry, $41.2 million. We still believe this will enhance our long-term profitability as well improve the liquidity risk profile of the bank.

As we talked about in the last earnings call, our current market cap is $114.6 million. We anticipate that our market cap would make us a target for falling out of the Russell 2000 Index as it stands today. As Tim talked about, we are encouraged by our positive trends in the classified asset front, but we still want to continue to conserve cash and capital until we see consistent in that trend and we're still not really looking at any stock buybacks currently at this time.

The next slide I've got up -- and we talked -- we touched on this a little bit last quarter, but I just want to walk folks through what we do from a capital stress testing perspective. So for the last 2 years, we've engaged Invictus Group, an outside third-party, to conduct capital stress testing. The stress testing is comparable to the big bank stress test under DFAST and CCAR and have it adapted to our bank's market. This degree of stress testing is not required for our bank, but we think that is a valuable tool to help manage our capital as well as our dairy concentration.

We updated the stress testing as of September 30, 2018. We utilized loan level data and assumed no growth or dividends as part of the stress testing. There is a severe adverse case, which mimics the recent recession on the commercial side and the 1980s crisis on the ag side. And you'll see some of the assumptions on the slide as well.

Under the severe adverse stress scenario, we experienced $67.7 million in loan losses in a 2-year stress period, which results in $31.2 million in loss capital after adding back earnings. This assumes no management action such as deleveraging the balance sheet to manage our capital ratios.

Even with that stress, we show $42.1 million in excess capital to stay in compliance with our internal policy limits. We believe this is sufficient capital of the bank to absorb losses and to continue provide dividend supports in the holding company at this time. Our earnings since 9/30/18 when we did the stress testing and recent deleveraging of our balance sheet is only going to continue to strengthen our capital ratios and provide additional cushion.

And now, Tim and I will put it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question will come from Brendan Nosal of Sandler O'Neill and Partners.

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Brendan Jeffrey Nosal, Sandler O'Neill + Partners, L.P., Research Division - Director [2]

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Just want to start off with a question on capital and I just want to make sure that I'm reading your prepared remarks and the comments in the deck correct, just given the comments from last quarter. I mean, it sounds like at this point, you no longer think that a capital raise to helping this ag cycle is necessary. Is that correct?

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Glen L. Stiteley, County Bancorp, Inc. - CFO & Treasurer [3]

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Yes. I mean, really the one caveat to that, Brendan, is just how we balance the adversely classified ratio. We don't think we need it from a pure regulatory capital perspective, which the stress testing shows. It's just the matter of really balancing that ratio. I think once that starts to claim towards the 60%, 70% slide, we start to get a little bit more regulatory pressure from that perspective, so.

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Timothy Jon Schneider, County Bancorp, Inc. - President & Director [4]

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And as I mentioned earlier, we're only 1/3 or maybe close to 50% somewhere in that range through our watch in below of classified asset review process. And until we get through that entire cycle of the reviews, we don't exactly know how things are shaking. Although, we feel we have a pretty good sense on most of our clients, but until you dig in the numbers, you don't know for sure how these are going to look.

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Brendan Jeffrey Nosal, Sandler O'Neill + Partners, L.P., Research Division - Director [5]

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Okay. All right, got it. And then, more of a modeling question here, but it looked like the non-loan average earning assets were down about $30 million quarter-over-quarter, but the period end balance was pretty stable and well above where the average was for the quarter. Is it fair to assume that the non-loan earning assets rebound in the second quarter just given where period end balances were?

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Glen L. Stiteley, County Bancorp, Inc. - CFO & Treasurer [6]

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Brendan, I'm not sure I saw what you're asking on that. You're talking about...

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Timothy Jon Schneider, County Bancorp, Inc. - President & Director [7]

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Securities?

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Brendan Jeffrey Nosal, Sandler O'Neill + Partners, L.P., Research Division - Director [8]

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I guess securities and then the deposits -- interest-earning deposits, they were, on an average basis, down pretty significantly quarter-over-quarter with the period end level was well above the average. Is that more of a timing discrepancy?

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Glen L. Stiteley, County Bancorp, Inc. - CFO & Treasurer [9]

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Yes, well, but -- and we do have some seasonality in our deposit base. Number one, we have a buildup of balances on the municipal side as well as on the ag side. But that tends to flaw pretty quickly after year-end. So that could be part of the discrepancy, so.

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Brendan Jeffrey Nosal, Sandler O'Neill + Partners, L.P., Research Division - Director [10]

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Okay. All right. That's helpful. And then, I guess, last one for me and then I'll step back here. Just given the decision to reduce loans by roughly $40 million and then wholesale funding by $120 million, I mean, there's more or less an $80 million gap that you need to fill with core deposits. Just talk about your confidence and your ability to more or less plug that hole throughout the course of the year?

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Glen L. Stiteley, County Bancorp, Inc. - CFO & Treasurer [11]

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Tell me how you're -- tell me how the rest of the banks are answering that question, I'll be able to tell you. No, I mean, it's a challenging deposit environment right now. I mean, it's uber-competitive. Rates in our Wisconsin markets are -- they're aggressive. And so, we're having to compete on a lot of different fronts. I mean, all I can say is we continue to stress test everybody from top to bottom the deposits are key to this franchise moving forward. So we're starting to see some -- a little bit of traction here in March. But the first couple of months, like I said, we just had some seasonality that tends to impact that. I think what concerns me is just on the cost of client deposit because of how competitive it is, it's just out of whack. If you can look at the FHLB curve, I mean, right now, FHLB advances, it's almost an inverted yield curve once you get past 1-year. So there's going to be a true disconnect between wholesale funding and trying to get our client deposits, probably more so than we've seen in a long time, so.

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Timothy Jon Schneider, County Bancorp, Inc. - President & Director [12]

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I think, as Glen mentioned, our strategies that we put into place last year are starting to take hold a little bit this year. And definitely, there's a sense of urgency throughout the organization, not just on the front lines to be seeking and finding additional core deposit relationships for our organizations because we know it's that important. And it continues to be stressed with our entire staff. So we feel pretty confident we're getting to meet that bogey.

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Operator [13]

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The next question will come from Kevin Reevey of D.A. Davidson.

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Kevin Kennedy Reevey, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [14]

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So a couple of questions on your capital stress testing analysis, which I really appreciate you sharing with us and updating. Firstly, the $42 million that you would have in excess capital after the 2-year stress, is that based on risk-based capital or tangible common equity? And then, could you clarify kind of the bank when you say -- can you clarify the bank policy limits that you state here?

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Glen L. Stiteley, County Bancorp, Inc. - CFO & Treasurer [15]

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Yes, Kevin, so -- it's -- this is Glen. So the $42.1 million, basically what happens during the stress testing, you find which capital ratio you move through first, right, on the well-capitalized perspective. So the leverage ratios where that falls through first, but from a -- from our bank internal policies, we look at 11.5% total risk base and a 9.5% Tier 1 leverage ratio. So that's even above the well-capitalized. We just try to build in some cushion just because even though we do the stress testing, we just want to make sure that we've got additional cushion even on top of that, really mostly for our ag concentration, I would say, so.

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Kevin Kennedy Reevey, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [16]

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So in other words, the $42 million is that's above the leverage ratio of 9.5%?

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Glen L. Stiteley, County Bancorp, Inc. - CFO & Treasurer [17]

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Correct.

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Kevin Kennedy Reevey, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [18]

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Great. And then, I'm assuming based on this analysis, we shouldn't expect assuming everything else holds firm, we shouldn't expect to see any additional cuts in your common stock to dividend. Is that correct?

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Glen L. Stiteley, County Bancorp, Inc. - CFO & Treasurer [19]

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As of right now, no. I mean, we are providing dividend support from the bank to the holding company still, so we don't anticipating currently that we're going to cut that any further.

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Kevin Kennedy Reevey, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [20]

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And then lastly, how are land prices holding up so far this year?

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Timothy Jon Schneider, County Bancorp, Inc. - President & Director [21]

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Land prices from what we're seeing are still holding up very well and we're paying attention to those transactions that are occurring. As a matter of fact, 2 of our ORE properties that we sold in first quarter sold at or above appraised values on per acre value. So in 2 different markets, one in the western side of the state and one on the eastern side of Wisconsin. So there are obviously pockets maybe where it's not as strong, but we have not seen any significant decline in ag land values in the state yet to this point.

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Operator [22]

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The next question comes from Terry McEvoy of Stephens.

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Terence James McEvoy, Stephens Inc., Research Division - MD and Research Analyst [23]

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Just a question on kind of time deposits and how competitive you are on pricing within your markets. How are you making sure you're not just getting hot money, if I look at some of the TD rates, particularly in the first quarter high relative maybe to national peers. And so you just comment on where you're pricing in the market and whether you think those are sustainable customers?

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Timothy Jon Schneider, County Bancorp, Inc. - President & Director [24]

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Yes. We have a deposit pricing committee that meets on a every other week basis and we have local market data and information on the various time deposit pricing throughout our footprint here in Northeast Wisconsin and even in Central Wisconsin. And it includes also some credit union pricing. And we have needed to stay competitive and stay at or near the top of the market to drive some of these core deposits into the bank. Our franchise has always been sort of a high deposit paying institution. And we can do that given our small footprint from a branch location standpoint and our efficiency ratio and still generate a decent return. But we're paying very close attention to that and we're also attempting to with these clients when they do come into the bank and then maybe it's a brand-new customer and they're enticed by some of our CD rates to try to solicit additional business from them, whether it be their checking accounts or money market funds that might be available as well. So we're trying to make them a little more sticky and making sure it's a relationship, not just a transaction.

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Glen L. Stiteley, County Bancorp, Inc. - CFO & Treasurer [25]

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Terry, this is Glen. I mean, historically, the bank has always paid kind of at the top, not at the -- towards the top of the rate in our markets. So we tend not to lose kind of the hot money clients because they find a competitive rate with us and don't have to leave, so.

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Timothy Jon Schneider, County Bancorp, Inc. - President & Director [26]

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But to your other commentary, I think, as we've seen it, this market here and I know there's other places where it's competitive, but our rates are definitely near the top of, I think, a lot of areas in the country right now, just very competitive here.

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Terence James McEvoy, Stephens Inc., Research Division - MD and Research Analyst [27]

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And just as a follow-up, Glen, the fee income there was unfunded loan commitment impacted noninterest income. What are your thoughts on kind of run rate for noninterest income and LS maybe expenses as well as you think about the second quarter or maybe full year '19?

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Glen L. Stiteley, County Bancorp, Inc. - CFO & Treasurer [28]

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Yes. So I mean, on the noninterest income, Terry, there was 2 pieces that were what I consider kind of more onetime. It's -- what you just mentioned, the allowance for the unfunded commitments. And then, there was the loan servicing right valuation allowance of $200,000. Those are kind of unique events for us. The $200,000 on the loan service rights will be a consistent number you'll see quarter-over-quarter throughout 2019. But that -- they don't go away this year -- after the end of this year. So as far as the rest of it goes, we didn't have as much, what I'd call, servicing fee income. We didn't have as many loan sales until probably March. January and February were pretty slow because of the -- partially because of the government shutdown. So we may see a little bit pick up there, but I think if you back off those 1x, there is the $475,000, I think that will be pretty good run rate for the rest of the year. On the expense side, wasn't a ton of noise there. We had -- unfortunately, we had some additional snowplowing expenses that we paid in March, but other than that I think the run rate should be fairly consistent, I think, so.

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Operator [29]

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The next question will come from Joe Fenech of Hovde Group.

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Joseph Anthony Fenech, Hovde Group, LLC, Research Division - Managing Principal & Head of Research [30]

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A couple of questions here. Tim, you mentioned that you were 1/3 of the way through your review of the ag credits. What was the approach that you took in terms of which credits you looked at first? Were there credits that you looked at with certain characteristics first or was it more random? Just trying to get a sense of whether you're maybe looking at the more troubled stuff first or last or whatever the case may be?

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Timothy Jon Schneider, County Bancorp, Inc. - President & Director [31]

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No. We're definitely looking at the more troubled stuff first. We looked at classification, some of the substandard credits and even some of the watch credits that we had some concerns about. We also did a pretty deep analysis of breakeven, historically what breakeven milk prices were and try to kind of prioritize some of the reviews based on maybe the ones we felt that had higher breakeven points and just see if performance was improving. And we're making good progress on that review cycle, but as I mentioned, we have aways to go. And the third might be a little bit light, I think we might actually be a little bit higher than that from a review percentage standpoint. Our Chief Credit Officer just gave me some notes here. We're at about 50% of the dollars year-to-date, this is like through today, and 31% of the number of relationships, watch or worse within our portfolio today. So the number I mentioned was a little light, we've made more progress on that than I mentioned.

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Joseph Anthony Fenech, Hovde Group, LLC, Research Division - Managing Principal & Head of Research [32]

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Okay. Good to hear. And then, guys, what are the upcoming events that you kind of look to as mile markers for measuring progress from here? In other words, if such and such event happens, we feel much better. And then, hey, if this particular scenario unfolds, whether it be with milk prices, trade policy, interest rates, whatever the case may be, then maybe we don't feel quite as good as about the outlook. I know that's a big picture question. But anything you can give us to look to as measuring sticks over the next couple of months?

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Timothy Jon Schneider, County Bancorp, Inc. - President & Director [33]

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Yes. It's difficult to predict. As I mentioned earlier, we're starting to see some uptick over the last 2, 3 weeks probably on the CME Class III futures market for milk, which is what our farmers ship their milk into the Class III portion. We don't know if that's because of some of the optimism that's being created because of the China deal that they keep saying is getting closer to being done. There's really -- that might be a factor in it. We're starting to see as you probably -- if you're reading on the dairy industries, we're starting to see some reduction in a number of herds throughout the state of Wisconsin and even the cattle numbers are declining a little bit. So that may be correcting some of the supply/demand situation that's out there. We're also seeing in some of the other countries where dairy is fairly heavy, including in Oceana, more of a heavier drought type situation, which is impacting some of their milk production. So it's maybe opening up some export opportunities for our dairy products as well. So the milk price side is really hard to predict. I mean, we're feeling a little bit better above where things are trending right now. The futures markets out into the summer are above $16 and approaching $17 on the base price, which is generally a pretty profitable level for most of our operations. But again, will it hold is the big question mark and what's impacting that.

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Glen L. Stiteley, County Bancorp, Inc. - CFO & Treasurer [34]

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Joe, this is Glen. So I mean, we keep the classified under 50% and see that continuing going down in a good trend quarter-over-quarter. And continuing to see some stabilization in milk price. I think, that's really, just from my perspective, that's kind of where we're in and feel better overall.

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Joseph Anthony Fenech, Hovde Group, LLC, Research Division - Managing Principal & Head of Research [35]

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Got it. And what's the latest scuttlebutt on the U.S. with the new NAFTA, I guess, they'll call it? It seemed like the position that there was bipartisan support based on historical positions that each side had maybe taken in each party, but obviously with the current political environment, it seems like there's unwillingness to do anything that resembles kind of bipartisanship. So where does the -- what's the scuttlebutt in terms of where things stand on the new NAFTA agreement?

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Timothy Jon Schneider, County Bancorp, Inc. - President & Director [36]

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Yes. And I think as you all read and perceived, and I think the general public perceived this as when Trump came out and stood side-by-side with the Mexican President and the Canadian President back in fall that this deal was a done deal. Well, it's not. And really haven't heard much about it until of recent and there's been a few publications that have got in the Wall Street that there may be some conversations occurring. We even had a congressman in here from our region not too long ago, and he had to call one of his aids to talk to him about it because he hadn't heard anything. So it's been kind of quiet. My sense has been that they've been focused on the China deal first and maybe the new NAFTA is secondary, but we haven't heard much.

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Joseph Anthony Fenech, Hovde Group, LLC, Research Division - Managing Principal & Head of Research [37]

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Okay. And then, in an engaging Invictus Group for the stress testing, how did that update, I guess, turn out relative to what you thought going in, Tim? Just trying to get a sense for whether or not you were surprised in any way by the findings or the findings more validated the initial thought that you had going in?

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Glen L. Stiteley, County Bancorp, Inc. - CFO & Treasurer [38]

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Joe, it's Glen. So this is the second run we've done -- we started this 12/31 of '17, so that was kind of the first blush of it, and continued it this year. Honestly, it was -- I'd say it was better than we expected. Until you kind of go through that, you really don't know what kind of cushions you really think you have. I mean, historically, just like most community banks, I think we kind of back of the envelope came up with what we thought our policy limits are, but problem is you're really going blind as you really dive in your loan data, which is really where our loan -- where our losses come from. It's really hard to tell. So I mean, we were pleased with the results and it really helps us kind of manage our capital. Once we get through this kind of ag stress, I'm hoping that we're going to be able to use that from an offensive perspective on hunting for deals and looking for things that can help us even more accelerate the change of our funding structure, so.

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Timothy Jon Schneider, County Bancorp, Inc. - President & Director [39]

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And as you know, Joe, the continued broad use of the FSA guaranteed programs throughout our ag portfolio and we've mentioned it before that 70% to 75% of our relationships have some form of an FSA guarantee. And with the new additional bump of additional $350,000 or so that we could use per operation, that also continues to help us to kind of buffer any significant loss exposure that we might have on dairy portfolio.

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Joseph Anthony Fenech, Hovde Group, LLC, Research Division - Managing Principal & Head of Research [40]

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Okay, great. And then, last one for me in terms of funding. I thought it was interesting that your overall cost to funds is up 8 basis points, which is what it was up in the fourth quarter. So would you say that fourth quarter for whatever reason was really the inflection point where that trajectory really slowed and if so, why do you think that is? And then looking out from here, with the set on hold, do you expect that trajectory of that increase to decline further?

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Glen L. Stiteley, County Bancorp, Inc. - CFO & Treasurer [41]

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Yes. Joe, if I had to guess, I mean, because of our wholesale funding base and how much we have in our books, I mean, we're just really subject to rate increases. I mean, the fact that we're not going up again, I think, helps. But part of it, I think, that's going to be going forward is, with us reducing our brokered and not relying on that as much, I'm hoping that that's going to start to level off what our cost of funds look like. And hopefully, won't be subjected to these when rates increase how kind of that short-term pain of rates going up, so.

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Operator [42]

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(Operator Instructions) Our next question will come from Freddie Strickland of FIG Partners.

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Feddie Strickland, [43]

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This is Feddie on for Brian. Just a quick question. Great to see brokereds and national time deposits balances go down. But noticed DDAs went down a decent bit as well. I know they did last year. Is this seasonal? Or what should we expect in the DDA arena?

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Glen L. Stiteley, County Bancorp, Inc. - CFO & Treasurer [44]

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Yes. I mean, that's a challenge for us every first quarter, Feddie. We just -- again, we have a -- quite a bit of municipal deposits from a tax perspective, a real estate tax deposits as well as, again, we have a buildup of -- we have a lot of milk checks that come in at the end of the year and then flaw off pretty quickly shortly thereafter. So we just -- we've always got that challenge in Q1, especially on the DDA side, so.

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Timothy Jon Schneider, County Bancorp, Inc. - President & Director [45]

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And also, I'd say the other thing on the ag front, which the dollars haven't floored milk prices; first quarter milk prices are pretty soft, especially January and February, probably a lot lower than our dairy farmers expected. They've rebounded since then, but that impacts a big chunk of our DDA balances as well.

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Operator [46]

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And this concludes our question-and-answer session. I would like to turn the conference back over to Tim Schneider for any closing remarks.

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Timothy Jon Schneider, County Bancorp, Inc. - President & Director [47]

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Well, we feel overall we had a very solid quarter, had some nice reduction in our classified assets as we mentioned and elaborated on a bit. And also drove some of our strategic initiative to move our wholesale funding reliance down a bit. And overall, feel really solid about the quarter, and hopefully, you all feel the same. And if you have any follow-up questions, feel free to reach out to Glen or I and we do appreciate you being on the call today.

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Operator [48]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.