U.S. Markets closed

Edited Transcript of WTBA earnings conference call or presentation 26-Oct-18 3:00pm GMT

Q3 2018 West Bancorporation Inc Earnings Call

WEST DES MOINES Nov 1, 2018 (Thomson StreetEvents) -- Edited Transcript of West Bancorporation Inc earnings conference call or presentation Friday, October 26, 2018 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* David D. Nelson

West Bancorporation, Inc. - CEO, President & Director

* Douglas Ray Gulling

West Bancorporation, Inc. - Executive VP, Treasurer & CFO

* Harlee N. Olafson

West Bancorporation, Inc. - Executive VP & Chief Risk Officer

================================================================================

Conference Call Participants

================================================================================

* Andrew Brian Liesch

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

* Bryce Wells Rowe

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, and welcome to the West Bancorporation Quarterly Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Doug Gulling, Chief Financial Officer. Please go ahead.

--------------------------------------------------------------------------------

Douglas Ray Gulling, West Bancorporation, Inc. - Executive VP, Treasurer & CFO [2]

--------------------------------------------------------------------------------

Yes. Thank you, and good morning, everyone. Welcome to our third quarter earnings conference call. On the call today are Dave Nelson, our Chief Executive Officer; Harlee Olafson, our Chief Risk Officer; and myself. And I'll begin with our fair disclosure statement.

Comments made during this conference call may contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any forward-looking statement made by us during this call is based only on information currently available to us and speaks only as of today's date. The company undertakes no obligation to revise or update such statements to reflect current events or circumstances after this call or to reflect the occurrence of unanticipated events.

Dave Nelson will start us off.

--------------------------------------------------------------------------------

David D. Nelson, West Bancorporation, Inc. - CEO, President & Director [3]

--------------------------------------------------------------------------------

Thank you, Doug, and good morning, everyone. Thank you for joining us. We appreciate your interest in our company.

We had a record third quarter for earnings, which we'll provide more detail on, but just a few quick summary statements. Year-to-date average balances were all positive. In round numbers, loans were up 6%; deposits, up 16% and this growth caused earnings -- or caused expenses to increase 6.5%; and overall earnings were up 12%. Our credit quality remains very strong. Once again, year-to-date, we have -- we are in a net recovery position, and because of this, our Board of Directors approved a $0.20 dividend per common share to a record date as of November 7 and a payment date to shareholders, November 21 of this year.

With that, I'd like to turn the call over to Harlee Olafson for some more detail.

--------------------------------------------------------------------------------

Harlee N. Olafson, West Bancorporation, Inc. - Executive VP & Chief Risk Officer [4]

--------------------------------------------------------------------------------

Thanks, Dave. I'm going to talk a little bit about loan activity, growth, economy and credit issues.

And first of all, loan growth has been pretty good. I think it picked up in this quarter. And along with that, we've had some really good activity and growth in regard to picking up some nice C&I business. Unfortunately, with the C&I business, the usage on their lines has remained historically low. But from a good side of that, that has also helped drive better noninterest-bearing deposits, and also with the liquidity that the C&I customers have had, it has also driven some liquid deposits in the savings area.

As I said, the prospect list is strong. Prospects and loan pipeline is as high now as I think it has ever been. And it's across all 3 markets. All 3 markets have very strong pipelines at the current time. So we expect that our opportunity for continued growth, both from C&I and commercial real estate business, remains good.

On the economy, it's hard to think that any of the economies can be much better right now when you have unemployment that hovers in the 3% range. One -- a couple of the things that we are looking at, that we're staying cautious but still doing business, is that multifamily product, I think, has slowed. There's been a lot of that product put in the market, and there's a slowing in regard to new projects.

Housing, as you can see across the nation, I think new housing starts are probably going to decline a bit due to the consumer rates that are higher than what consumers have typically been used to the last few years. So what we're looking at is making sure that our development and any raw land-type debt is conservatively underwritten and not in an overabundance.

On our watch list. Our watch list currently is about 3% of total loans with almost zero past dues. We have $1.8 million in nonaccruals and all of those nonaccruals are currently making payments and are current.

The credit trends are good. I think the issues that we see right now are the product of a good economy. So we are continuing to pay very close attention to global cash flows, concentrations, and make sure that we're stress testing both our cash flows and loan to values on our commercial real estate portfolio.

Right now, on all 3 markets, I think we're very well positioned with strong customers with good prospects for the future.

And with that, I'll turn it back to Doug.

--------------------------------------------------------------------------------

Douglas Ray Gulling, West Bancorporation, Inc. - Executive VP, Treasurer & CFO [5]

--------------------------------------------------------------------------------

Okay. Thanks, Harlee. I'll add a few more comments.

During this quarter, we had 3 items that we would consider unusual or nonreoccurring, and I'll comment on those. First of all, we did collect a guarantee fee on a participation loan, $254,000. That doesn't happen very often and we wouldn't expect that to necessarily happen again in the foreseeable future.

And then we did take a negative loan loss provision of $400,000. We had recoveries of $555,000 in the quarter. About $508,000 of that was a recovery from a loan that had been charged off in 2008. And our legal department had been following that claim for the past 10 years. And in August, we were pleasantly surprised with $508,000. And so when we analyzed everything at the end of the quarter, we felt it was prudent to take a $400,000 negative provision, but we still added $155,000 to the allowance.

And then lastly, in late August, early September, we discovered that we had not updated the tax-exempt status code on a loan. And the loan was originated back in 2012. It was a participation loan. In late 2013, the status of that project turned to taxable and we did not change our internal code. When that was discovered, we immediately amended our prior year's tax returns and adjusted our current year accrual and caught that up as it should have been. It included $40,000 in interest and we calculated $57,000 in penalties, which we will try to get waived, but we did accrue them this quarter, and so that definitely would be something we would not expect to happen again. We don't have that many tax-exempt loans, but -- and so it was a little -- it was just kind of a one-off exception. But we are putting some other procedures now to make sure that that doesn't happen again, and I'm confident that it won't. And the total amount of the tax impact was -- prior year taxes was $448,000 and then a $45,000 adjustment to 2018.

And then lastly, just a comment on the margin. Yes, as the fed continues to increase and the yield curve remains relatively flat, it is putting pressure on our margin. We did have a slot become effective right at the end of the quarter on our trust preferred security that should benefit us to the tune of about $30,000 a quarter going forward at current LIBOR rates. And then we're pretty much at a breakeven now on the slot that will become effective at the end of the year, that is on $60 million worth of deposits. Those deposits right now are costing us 2.25%. And the effective cost of the slot will be 2.31. So when we get that next fed hike, those will be in the money, so to speak.

So with that, that concludes our prepared remarks, and we would be happy to answer any questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question comes from Andrew Liesch of Sandler O'Neill.

--------------------------------------------------------------------------------

Andrew Brian Liesch, Sandler O'Neill + Partners, L.P., Research Division - MD [2]

--------------------------------------------------------------------------------

Just following up here on the margin, just on the asset side. Just what was the blended average yield of the loan that you added this last quarter?

--------------------------------------------------------------------------------

Harlee N. Olafson, West Bancorporation, Inc. - Executive VP & Chief Risk Officer [3]

--------------------------------------------------------------------------------

Well, I don't know that I know that.

--------------------------------------------------------------------------------

Douglas Ray Gulling, West Bancorporation, Inc. - Executive VP, Treasurer & CFO [4]

--------------------------------------------------------------------------------

We don't have a specific --

--------------------------------------------------------------------------------

Harlee N. Olafson, West Bancorporation, Inc. - Executive VP & Chief Risk Officer [5]

--------------------------------------------------------------------------------

We could get that, but --

--------------------------------------------------------------------------------

Douglas Ray Gulling, West Bancorporation, Inc. - Executive VP, Treasurer & CFO [6]

--------------------------------------------------------------------------------

We could get that, yes, we don't...

--------------------------------------------------------------------------------

Andrew Brian Liesch, Sandler O'Neill + Partners, L.P., Research Division - MD [7]

--------------------------------------------------------------------------------

My only sense is that the -- just looking at the quarter-over-quarter, is the average yield went up in the portfolio. So I'm just wondering, is that just from originating loans at higher yields? Is it from repricing of variable rate product that's already there? That's really what the -- what I'm trying to get at.

--------------------------------------------------------------------------------

Harlee N. Olafson, West Bancorporation, Inc. - Executive VP & Chief Risk Officer [8]

--------------------------------------------------------------------------------

Well, I can address that to a certain degree. The -- if you would look back -- and again, if you look at back a quarter or a year, the typical 5-year term loan right now is yielding a percent more than it did a year ago. That would be -- if you figure, a lot of our commercial real estate matures maybe about 1 60 a month. So they added the new stuff coming in as a significant impact on total yield because you're adding it all incrementally to your loan portfolio and you're probably repricing your commercial real estate portfolio in that neighborhood, maybe a little bit quicker than that. So loans of a 5-year, 7-year, 3-year category are all starting with 5s now instead of maybe last year, starting with 4s. And a lot of the C&I stuff, of course, is variable. But as I talked about earlier, a lot of that has very low usage on the lines right now because of the liquidity of our customers.

--------------------------------------------------------------------------------

Andrew Brian Liesch, Sandler O'Neill + Partners, L.P., Research Division - MD [9]

--------------------------------------------------------------------------------

Got you. And then on the funding side, where is most of the competition? Is it with municipalities? Is it large companies with treasures paying attention to their deposits? Where are you seeing the biggest competition?

--------------------------------------------------------------------------------

Douglas Ray Gulling, West Bancorporation, Inc. - Executive VP, Treasurer & CFO [10]

--------------------------------------------------------------------------------

Well, it would be all of those. It's the high balance -- really high balance accounts that we need to keep current on rates and are more sensitive. So it's a cross-section of customers.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

(Operator Instructions) The next question is from Bryce Rowe of Baird.

--------------------------------------------------------------------------------

Bryce Wells Rowe, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [12]

--------------------------------------------------------------------------------

Harlee, I wanted to ask you about some credit trends, and you talked about a little bit of this in your prepared remarks. But notice in the Q that there was an uptick in the watch list credits and also kind of a subsequent downtick in substandard-rated credit as well. Just curious what you're seeing within the portfolio that's pushed those watch list credits not as much as they did.

--------------------------------------------------------------------------------

Harlee N. Olafson, West Bancorporation, Inc. - Executive VP & Chief Risk Officer [13]

--------------------------------------------------------------------------------

Probably the biggest adjustment we had is substandard credit that is a multi-owned property that they had -- the one property they had in as a substandard credit. It was an owner-operated property that's been experiencing some negative cash flow. Well, they also had another property that has significant cash flow. So what we ended up doing is combining those 2 properties together, and the one property has more than adequate cash flow to pay for all the debt service for both. So we dropped it from a substandard to a watch, but it actually increased our watch category and decreased our substandard area. On another credit, we have a fairly significant C&I credit that has been expanding, have a good base operation, but they're outside expansion areas, have taken off a little slower than expected. So we did add them to our watch category, even though in both cases, they are well-collateralized and have good plans for the future. So I don't know. The total watch list substandard and nonaccrual amounts to -- r right at about 3% of loans, and we know that we can't run at zero, but we had been running at such a low level, it's probably unsustainable. But the add to the watch list is really -- one fairly significant C&I credit that still has good equity, good prospects and strong guarantors.

--------------------------------------------------------------------------------

Bryce Wells Rowe, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [14]

--------------------------------------------------------------------------------

Okay. Just what I was looking for. That's really good, really good detail. Wanted to kind of shift gears and talk about deposit growth. Clearly, you guys had exceptional deposit growth in 2017, and it's essentially continued here in 2018 when you look at -- at least kind of average deposit balances, quarter by quarter, throughout 2018. I'm just kind of curious what your outlook is for deposit growth? And what, in particular, if anything, is driving the strong deposit growth?

--------------------------------------------------------------------------------

Douglas Ray Gulling, West Bancorporation, Inc. - Executive VP, Treasurer & CFO [15]

--------------------------------------------------------------------------------

Well, in the near term, for the fourth quarter, sitting here today, we would expect our deposits to decline slightly, and that's because some of the deposits that came in, in the second quarter will -- we were notified even at that time that there would be cash needs at the end of the year, and so some of those -- we will see a little bit of -- we expect to see a little deposit decline in the fourth quarter. Now going beyond that, deposits are harder to predict than loans. I mean, we have a loan pipeline, and we also have a deposit pipeline to a degree, but it's not as extensive and in as much detail as a loan pipeline. But our bankers are out prospecting for both sides of the balance sheet. And we would expect to have, I guess, what I will describe as normal deposit growth next year.

--------------------------------------------------------------------------------

Bryce Wells Rowe, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [16]

--------------------------------------------------------------------------------

Doug, is there any -- the end-of-period balances kind of have been jumping around for the last 3 or 4 quarters. Anything, in particular, that's driving that, especially relative to the consistent growth in average balances?

--------------------------------------------------------------------------------

Douglas Ray Gulling, West Bancorporation, Inc. - Executive VP, Treasurer & CFO [17]

--------------------------------------------------------------------------------

No, not really. I mean, it's the cash needs of our customers: Corporations, public entities. We were down a little bit at the end of September but made that up in mid to late October when our public unit customers received their tax receipts from the state of Iowa. In Iowa, property taxes are collected on March 31 and September 30, and then throughout the following month, the state distributes -- divides it up and distributes it to cities and school districts and so forth, and then we typically see an increase in that following month in those categories.

--------------------------------------------------------------------------------

Bryce Wells Rowe, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [18]

--------------------------------------------------------------------------------

Great. Okay. And then maybe a question about the margin. Clearly, the margin is headed lower like it has with many, many banks that we're seeing here in the earnings season. Kind of you talked in the 10-Q about maybe continued pressure on the margin with the rate outlook the way it is. What -- do you kind of expect the same degree of margin pressure that we've seen over the last couple of quarters? I think it's about 10 to 11 basis points per quarter of compression. I'm assuming the swap activity coming online can help kind of put that into a single-digit compression range.

--------------------------------------------------------------------------------

Douglas Ray Gulling, West Bancorporation, Inc. - Executive VP, Treasurer & CFO [19]

--------------------------------------------------------------------------------

Correct. We would expect the margin compression to slow down and not be as great as it has in the last couple of quarters. Due to the swaps, we do add some variable rate loans. We've added -- in the second quarter, we did add a few variable rate investments. So we would expect it to be less than it had been the last couple of quarters.

--------------------------------------------------------------------------------

Harlee N. Olafson, West Bancorporation, Inc. - Executive VP & Chief Risk Officer [20]

--------------------------------------------------------------------------------

I would also say that in the last 3 to 6 months, the emphasis on making sure that the loan product that's going out is at a higher level of variable rate than it had been. Maybe we got a little complacent with rates having been stagnant for so long. But a lot of -- a lot more variable rate product being booked, and hopefully, that'll be beneficial to us also.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

This concludes our question-and-answer session. I would like to turn the conference back over to Doug Gulling for closing remarks.

--------------------------------------------------------------------------------

Douglas Ray Gulling, West Bancorporation, Inc. - Executive VP, Treasurer & CFO [22]

--------------------------------------------------------------------------------

Well, thank you, again, for joining us. We appreciate your interest in our company, and we will talk again at the end of January. So thank you.

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

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