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Edited Transcript of WTBA earnings conference call or presentation 25-Oct-19 3:00pm GMT

Q3 2019 West Bancorporation Inc Earnings Call

WEST DES MOINES Oct 31, 2019 (Thomson StreetEvents) -- Edited Transcript of West Bancorporation Inc earnings conference call or presentation Friday, October 25, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brad Lee Winterbottom

West Bancorporation, Inc. - EVP

* 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

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Conference Call Participants

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* Andrew Brian Liesch

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

* Kevin McLaughlin;McLaughlin Investment;Financial Advisor

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Presentation

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Operator [1]

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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 Mr. Doug Gulling. Please go ahead.

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

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Thank you. Good morning and welcome to our third quarter conference call. On the call this morning are Dave Nelson, our Chief Executive Officer; Harlee Olafson, Chief Risk Officer; Brad Winterbottom, West Bank President; and Jane Funk, our Chief Accounting Officer.

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. So at this time, Dave Nelson will begin.

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

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Thank you, Doug, and good morning, everyone. Thank you for joining us. Very pleased and proud to report that we had an all-time record quarter. Despite the earnings drag of our investment in our Minnesota expansion, we still have the best quarter in the 126-year history of our company. Perhaps even better news is that we are fast approaching a breakeven point on our expansion and achieving a positive and profitable run rate, hopefully, by year-end, which will translate into a big year-over-year swing for our company.

Also, locally here in Iowa, we were once again selected as one of the top Iowa workplace employers for the sixth consecutive year. And our Board of Directors approved a quarterly dividend of $0.21 with a record date of November 6 and payable to shareholders on November 20.

I also had some exciting news in the appointment of a new director. Our Board appointed Patrick J. Donovan to our Board of Directors. Mr. Donovan is a retired career banker with an extensive background in the banking industry spanning nearly 4 decades and it's all been in Minnesota. We are very pleased and proud to welcome Mr. Donovan to our Board.

And with that, I'd like to turn the call over to our Bank President, Brad Winterbottom.

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Brad Lee Winterbottom, West Bancorporation, Inc. - EVP [4]

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Thanks, Dave. I'll be brief in my comments. Loan activity were up 6.7% from the beginning of the year, and then in the third quarter, our loans were up roughly 2.5%. Despite that, we had over $50 million in unexpected payoffs in the third quarter. So our growth, which would be coming from really all markets, including our Minnesota directive, we had -- we've had good volume in the third quarter.

Pipeline for the fourth quarter is very robust. We have a lot of construction loans that we anticipate continued draws on. We have some big closings that we anticipate happening here in the next 30, 45 days. So I think our fourth quarter will be very robust in terms of loan volume.

Deposit growth has been good. It will be better when we get Minnesota more onboard with our strategy with ITMs. And I would anticipate our deposit growth to improve in the fourth quarter.

That ends my comments, and I'll turn it over to Harlee to talk about credit trends.

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

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Thanks, Brad. Just a couple of things to talk about. Our watch list is currently less than 3% of our total loans. And our nonaccruals and substandard credit is really at a record low. We had some developments within the quarter that we actually got paid off in full on 2 or 3 credits that have been very sticky, both in -- that were in our nonaccrual area and actually received all principal and interest on those credits. In fact, the nonaccrual area is down to such a low level right now, it doesn't compute to some type of percentage.

We have significant commercial real estate presence in our portfolio. And I'm pleased to report that there are 0 past dues on that commercial real estate, nothing over 30 days. And in fact, I don't think there is a commercial real estate credit we have that's 15 -- has a 15-day past due on it.

Due to our loan growth, really starting in the last quarter of last year until now, it's been fairly significant. Sometimes, it doesn't always occur in 1 year, but it occurs in different quarters. We did take a $300,000 provision and with that, we believe our allowance is appropriate based upon the quality of our loan portfolio.

In our new markets, we have really good momentum. In opening up those markets, I think we got behind a little bit in regard to technologically getting all of the pieces in place to be able to provide the best depository services we can. We think that we will have the type of technology and machines and those type of things in place in November that will help us accelerate our depository growth in our new markets.

In looking at our pipeline, which Brad talked about, the portion of our pipeline that we consider to be loans that have been committed to by us and accepted by the customer that are just waiting to close, I believe is at the highest level that I've ever seen it. It is at a significant level going into this last quarter of the year.

On the economies that are in, part of our -- the magic of West Bank is that we are in really good communities. We're in Des Moines, Iowa City, Rochester, St. Cloud, Mankato and Owatonna. All of those communities have strong economies, and we have good momentum in all those markets. Better than being in really good communities is that we don't have any locations in any shrinking or communities that are losing population or really strength.

So that does bode well for us in the future. Our customer base is strong and stable and continues to give us an opportunity to build future business. Along with that, I believe we have an incredibly good staff that is seasoned and has the ability to continue to provide the best in customer service that we can along with continued growth.

With that, I would turn it back over to Doug.

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

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Okay. Thanks, Harlee. I've got just a few more comments on some details of the financial statements. We had -- we did have some nonrecurring interest income items in the third quarter. We -- on the nonaccrual loans that Harlee mentioned, we're paid in full. We did collect $175,000 of back interest. And then on some of the prepayments that Brad mentioned, we collected $340,000 between prepayment penalties and recognizing the unamortized deferred fee. So we would point that out.

In the expense categories, the FDIC cost this quarter was 0 because as some of you may know, a lot of the banks have credits built up at the FDIC and they were able to take those credits once the FDIC insurance fund reached 1.38% of all insured deposits, and that happened at the end of the second quarter or early third quarter. And so we used our credits in -- a portion of our credits in the third quarter, so that the FDIC expense is 0. We expect that our FDIC expense in the fourth quarter will be 0 again, and that should leave about $90,000 of credits recognized in the first quarter of 2020.

Just a little bit of information on the net cost of our Minnesota initiative. Our rough estimate is that on a year-to-date basis, we've incurred expenses of about $1.9 million, but we have generated net interest income of about $500,000. So that would give us a net cost of $1.4 million, that's year-to-date. For the third quarter, we estimate that the expenses were $700,000, the net interest income was $400,000 and so our net cost were approximately $300,000.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Andrew Liesch with Sandler O'Neill.

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

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Doug, just a quick clarification, the $341 million of -- or $341,000 of prepayment penalties, that went through the net interest margin as well, or NII, is that correct?

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Douglas Ray Gulling, West Bancorporation, Inc. - Executive VP, Treasurer & CFO [3]

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That's correct.

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Andrew Brian Liesch, Sandler O'Neill + Partners, L.P., Research Division - MD [4]

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Okay. Got you. And then I know you guys referenced maybe the deposit growth out of the Minnesota locations not being as strong as possible and you're working to remediate that. But still, I mean deposit growth was pretty good in the quarter. And I mean it looks like it maybe drove excess liquidity a little bit high, which maybe kind of offset some of the benefits you saw on the funding side. I mean what drove that liquidity? And how do you see that playing out? And where do you see the margin trending from here, notwithstanding those nonrecurring or those onetime interest items that you mentioned?

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

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Sure. Yes. No, that's a good question, good observation. We do have a little more liquidity than we would normally carry. But starting in late June, and maybe turning over into July a little bit, we did build that liquidity up. We sold some -- this was actually in late June. We sold some 100% risk-weighted investments, corporate notes, that type of thing.

When interest rates were headed down, we were able to sell those at least a breakeven. I don't know if there might have been small gain. But -- and put that money in liquidity for the loan portfolio. And so we did not have a loan growth, the net loan growth in the third quarter that we expected to have. Brad mentioned almost $50 million of payoffs, with most of those being unexpected when we were visiting with you at the end of July.

And so at the end of September, we did have a little bit more liquidity than we would normally carry. However, we expect a good, strong fourth quarter of loan growth, and so we're just holding on to that and -- until it's sopped up by the loan portfolio.

So in terms of the margin, our best guess right at the moment would be that our margin has bottomed out. There was a Fed -- as you know, a Fed cut at the end of -- towards the end of September, while the full benefit of that in the fourth quarter, which for us, there is a slight benefit in the short run. And then as more and more loans come on the books at higher rates than investments and certainly higher rates than overnight Fed funds, the margin should bottom out and improve a little bit.

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Andrew Brian Liesch, Sandler O'Neill + Partners, L.P., Research Division - MD [6]

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Got you. That's helpful. It also looked like there was just a little pickup in the fee income areas, in the trust services and then the other line. Was there anything unique driving that?

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Douglas Ray Gulling, West Bancorporation, Inc. - Executive VP, Treasurer & CFO [7]

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Yes. In the trust fee income area, we were able to collect, I think, what's referred to as extraordinary fees on an estate that we had been handling. That's a situation where, if we have a lot more work than it's expected, we can go to the court and request additional fees and the court granted that in the third quarter, and I believe that was $70,000?

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David D. Nelson, West Bancorporation, Inc. - CEO, President & Director [8]

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Yes, it was $70,000. They've also -- had been doing a good job selling as well. So we're seeing the benefit of that as well.

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

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Got you. And then lastly from me, just the comment in release or in the 10-Q about CECL, how the delay is applicable to the bank. Are you guys planning to delay? Or what's the thought process there?

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

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We are going to delay. Yes, we've made the decision to delay. We're a smaller reporting company and that delay is available to us, and so yes, we're going to delay.

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Operator [11]

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(Operator Instructions) Our next question comes from Kevin McLaughlin with McLaughlin Investment.

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Kevin McLaughlin;McLaughlin Investment;Financial Advisor, [12]

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I came into the call a little bit late. But I just wanted to ask if you would characterize these 3 new markets with the assets that -- or the people you've taken from Bremer, what kind of market share did they have in those markets? And how does it compare with -- and I assume that the principal competitors would be Wells Fargo and U.S. Bancorp. How would they compare, say, with what you saw in Rochester? And how large a presence did they have and how valuable were the assets that they have compared to those of, say, a Wells Fargo or a U.S. Bancorp?

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David D. Nelson, West Bancorporation, Inc. - CEO, President & Director [13]

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Kevin, this is Dave and interesting questions. I think there are a lot of similarities, but yet the landscape is very different. When we went into Rochester 6 years ago, we were able to hire what I believe to be, and I guess the -- it's proven out that we really have had the advantage of hiring the best team in town that had deep existing relationships with community leaders. And it only took us about 9 months to achieve a profitable run rate in Rochester when we start.

Really, we want to go about it the same way in St. Cloud, Mankato and Owatonna and our advantage package is similar and quite strong. And that once again, we were able to hire the best bankers in the town who all had deep existing relationships supplemented by familiarity from several of us here in Des Moines, but we were able to round up advocates, create the community boards where instead of going into a town, say, with 5 employees, we're really a team of, say, 12 or 20 people. And the ramp-up that we're experiencing with this expansion with the 3 communities combined is very similar to the time line that we experienced in Rochester.

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Kevin McLaughlin;McLaughlin Investment;Financial Advisor, [14]

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Were some of the people -- excuse me, go ahead.

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

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I think one of the things you're talking about is probably potential. And if you look at potential and size-wise, I think you can look at the Mankato group as being a similar potential to our Rochester group. The Owatonna potential may not be as large as that, it'd be maybe 50% of what that potential is. And the St. Cloud potential might be double what our Rochester potential was in regard to size and breadth of operation.

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Kevin McLaughlin;McLaughlin Investment;Financial Advisor, [16]

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Okay. Well, I remember the remark that was made at the annual meeting that might have been Brad Peter's, I think, that made it and it may have been you, Dave, that virtually the entire staff moved out of St. Cloud's Bremer operation with Brad. They all felt the same way. But were a lot of these bankers -- I know you came from Wells Fargo initially. Were some of these bankers that Brad is bringing over with him in Owatonna and Mankato, did they have Wells Fargo roots or those kinds of connections as well?

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David D. Nelson, West Bancorporation, Inc. - CEO, President & Director [17]

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Several did, certainly Mankato and Owatonna, but not as much so in St. Cloud.

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Kevin McLaughlin;McLaughlin Investment;Financial Advisor, [18]

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I see. Okay. Well, that kind of gives me a feeling for the pedigree and the reach. But I'll be anxious to see how it goes from here, especially on the deposit basis in this next quarter, but congratulations on a great quarter. I'm a very happy shareholder.

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David D. Nelson, West Bancorporation, Inc. - CEO, President & Director [19]

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Thank you, Kevin. We appreciate your support.

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Operator [20]

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

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Douglas Ray Gulling, West Bancorporation, Inc. - Executive VP, Treasurer & CFO [21]

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Well, just wanted to thank you, again, for joining us, and we appreciate your support. So thank you.

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Operator [22]

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