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Edited Transcript of WTBA earnings conference call or presentation 26-Jul-19 3:00pm GMT

Q2 2019 West Bancorporation Inc Earnings Call

WEST DES MOINES Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of West Bancorporation Inc earnings conference call or presentation Friday, July 26, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* 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

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Presentation

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Operator [1]

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Good morning, and welcome to the West Bancorporation second quarter 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.

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

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Yes. Thank you. Welcome, everybody. Thank you for joining us this morning for our discussion of our second quarter results.

On the call with me this morning are Dave Nelson, our Chief Executive Officer; Harlee Olafson, our Chief Risk Officer; and Jane Funk, our Chief Accounting Officer. 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.

At this time, I'll turn it over to Dave Nelson.

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

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Well, thank you, Doug, and good morning, everyone. Appreciate you joining us. We had another very good quarter. We had growth in all of our markets, and our expansion into Minnesota is going very well.

Our credit quality remains very strong and, therefore, our Board approved a $0.21 dividend to shareholders of record as of August 7 and payable on August 21. We recently received another accolade in the Bank Director Magazine, came out with their 2018 year-end stack ranking for banks from $1 billion to $5 billion, and they had West Bank at #26 in America.

Our focus, as you can imagine, currently, is squarely on our Minnesota expansion. And as you know, about 4 months ago, we announced our expansion into St. Cloud, Mankato and Owatonna, Minnesota, all starting as brand-new LPOs, which we've since converted to full branch status. And several of you no doubt recall that about 6 years ago, we started in Rochester, Minnesota, also initially as an LPO with no loans, no deposits. But we also started with very significant advantages in that we were able to hire the top bankers in the marketplace who all had deep existing relationships and they're also supported with the local community advisory Board of Directors not only pledging all of their business that was important to us but also endorsing us and giving us instant credibility and validated our position in the marketplace.

And now 6 years later, we are what I believe is fair to say as the premier business bank of choice in the Rochester community.

So with these 3 new locations in Minnesota that we're expanding into, we're going about it in exact same fashion as we did in Rochester, where we were able to hire the top bankers in all 3 of those marketplaces who many have spent their entire career and perhaps, with others, it's even their hometown, have deep existing relationships and they are also supported with what some may refer to as the who's who of the business community in those 3 marketplaces.

So we are, of course, expecting and hoping for similar outcomes. And when we started in Rochester, it only took 9 months of operations before we reached a profitable run rate. And we're off to a great start in our 3 new markets, which I know Harlee will speak more to.

So with that, I would like to turn it over to Harlee Olafson, our Chief Risk Officer.

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

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Well, thank you, Dave. I'm going to talk about a couple of things today: the first one being our loan activity; second, our outlook for loan growth, just information on local economy, our watch list and credit trends, and then just a couple of comments at the end.

First of all, in regard to loan activity, it has been really good. And through the first portion of this year, we've had a 22% increase in our C&I balances and a 9% increase in commercial real estate balances. One of the things that we've continued to strive for is to continue to increase our commercial and industrial outstandings, and that really comes from new relationships because most of our C&I borrowers are doing very well and are using a low level of their lines of credit. And -- but it does, with that, bring in significant depository relationships and funding availability for lots of other things.

In regard to our loan balances, we are at a record-high level right now and the outlook for continued growth is good. Our pipeline at this time of the year is approximately double what it was last year at the same time. The pipeline currently exceeds $450 million. Of that portion, our new Minnesota initiative, the amounts they have in the pipeline right now exceed $150 million.

So the outlook is very good. And again, as Dave had talked about, we have been operating in those markets for quite a short period of time. And as you probably would assume, getting started is always a job, getting new locations, getting technology to the various spots. Just getting connected and being able to do business takes some time. So the strength of the relationships our Minnesota group has in their marketplace is very significant and has led us to a very strong pipeline for future events.

As for the economies in our -- in the markets that we are in, I would say they are all good. I would say they're not going at the level that they might have in the early parts of an expansion when everybody is out building. And as in any good economy, the probability and possibility for overexpansion in certain areas of building properties is going to occur. I would say none of the categories of commercial real estate are in any critical area where they've been developed too far. But I would also say that there is a slowing of big, new commercial real estate projects as compared to years in the past.

Looking at our watch list and credit trends. Our watch list is behaving very well. And in fact, resolution is coming on a few credits that have lingered on the list longer than we would like. We have very little in the nonaccrual category. In fact, our nonaccrual category is only $1.6 million, and we have a resolution that we think is going to occur on almost $1.3 million of that by September. Our total watch list is less than 3% of total loans. Our past dues are very low, and the trends in credit are positive.

With regard to just a couple of other comments. We feel that we're in a really good position now. We have made the investment in the -- into people with a lot of talent, in good communities, with customers and prospects that have strong businesses, that have great relationships with the bankers that we've invested in. And we look forward to enjoying the expected growth from these relationships on it -- in our financial results over the next months.

And with that, I would turn it back to Doug.

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

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Okay. Thanks, Harlee. My only specific comment here is just to relay to you the actual expenditures on our Minnesota expansion so far this year. And on a year-to-date basis, we've spent a little over $1 million on a pretax basis, and that would be $825,000 or so after tax. And for the second quarter, our Minnesota expansion cost totaled approximately $580,000, and that would be somewhere around $465,000 after tax.

So with that, we would entertain any questions.

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Questions and Answers

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Operator [1]

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

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

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Few questions from me here. Noticed the rise in -- it looks like that's retail CDs in the quarter. Can you just explain what was behind that?

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

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We -- I don't know if it'd show up in retail, but...

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

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Maybe just other CDs.

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

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Okay. Other CDs. That would be -- at June 30, we had $75 million of brokered CDs on our books. And what we have done for funding some of this expansion is we've entered into long-term swaps, and the underlying borrowing is either a 30-day or 90-day brokered CD or Federal Home Loan Bank advance. At the end of June, it happened to be $75 million worth of brokered CDs. But every 30 or 90 days, we evaluate the cost of brokered CD versus a Federal Home Loan Bank advance and may go in and out of those depending upon those costs.

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

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Okay. Yes. That's helpful. And then just some of the other deposit trends. It looked like saving accounts were down, interest checking were up, noninterest checking were down. Was there anything -- I mean was there any shifting between products there? Were there any seasonal inflows and outflows? Just kind of curious what was behind the deposit movement here.

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

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Yes. There was -- I would just say it's just customer activity. I mean we had no product changes. And so it's just the customer behavior.

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Andrew Brian Liesch, Sandler O'Neill + Partners, L.P., Research Division - MD [8]

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Got you. And then just moving over to the loan growth here. I'm not sure if you guys want to say it publicly here, if you can say it publicly, but just kind of curious how much of the growth this quarter came from Minnesota and what other geographic breakdown you can provide.

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Douglas Ray Gulling, West Bancorporation, Inc. - Executive VP, Treasurer & CFO [9]

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At the end of June, we had about $26 million in loans from the 3 new Minnesota markets.

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Andrew Brian Liesch, Sandler O'Neill + Partners, L.P., Research Division - MD [10]

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Got you. That's a great start. And then my next question, just kind of goes up to the margin, if you're funding with the -- some of this expansion with 30- or 90-day money. Just kind of how do you view the margin came down about 5 basis points this quarter? And then how would you expect it to react if we have a Fed rate cut next week?

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Douglas Ray Gulling, West Bancorporation, Inc. - Executive VP, Treasurer & CFO [11]

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Right. Okay. So the underlying funding that we're talking about is 30- or 90-day money. However, we've got long-term swaps wrapped around those borrowings. And so we entered into a couple of swaps in June that were in the -- one was for 10 years at 2.01%, and another one was 8 years, I believe, at about a 1.95%. And we believe those are really attractive long-term fixed rates. Now as far as what happens to the margin going forward, if we get a rate cut next Wednesday, which apparently we're going to, of 25 basis points, that will add about $40,000 of net interest income per month and probably would increase our margin by a couple of basis points.

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Andrew Brian Liesch, Sandler O'Neill + Partners, L.P., Research Division - MD [12]

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Got you. And that's kind of driven by what -- how the margin went down when the Fed was raising rates of the several institutional high-beta clients whose funds are just indexed to the Fed funds rate. Is that correct?

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Douglas Ray Gulling, West Bancorporation, Inc. - Executive VP, Treasurer & CFO [13]

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That's correct. Along with the flat yield curve that we've been experiencing for the, I don't know, past year or so.

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Operator [14]

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(Operator Instructions) I'm seeing that there are no further questions. I would like to turn the conference back over to Mr. Gulling for closing remarks.

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

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Okay. Thank you, Danielle, and thank you, everyone, for joining us today. We truly appreciate your interest in our company. Thank you.

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Operator [16]

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