West Bancorporation, Inc.
Q1 2018 Earnings Call Transcript

Published: 27 Apr 2018

[Operator:]

Good morning, everyone, and welcome to the West Bankcorporation Quarterly Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, today’s event is being recorded. And at this time, I’d like to turn the conference call over to Mr. Doug Gulling, Chief Financial Officer. Sir, please go ahead.

[Doug Gulling:]

Okay, thank you. Good morning, everyone. Thank you for joining us. On the call this morning are Dave Nelson, our CEO; Harlee Olafson, our Chief Risk Officer; and Brad Winterbottom, our Bank President. 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 an – unanticipated events. And with that, I’d like to turn it over to Dave Nelson.

[Dave Nelson:]

Thank you, Doug, and good morning, everyone. Thank you for joining us. Thank you for your interest in our company. We had a great first quarter, it was a record quarter and a fine way to start our 125th year of business. Our Board of Directors approved an increase to our quarterly dividend from $0.18 to $0.20 so the $0.20 per common share is payable on May 23 to stockholders of record as of May 9, 2018. With that, I’d like to turn the call over to our Bank President, Brad Winterbottom.

[Brad Winterbottom:]

Thanks, Dave. I’m going to be brief in my comments. Our loan portfolio was roughly flat for the first quarter, however, we had a 20-plus year customer, that we had – close to our legal lending limit too, and they sold and that business – and the sale closed during the first quarter, which resulted in approximately a $30 million decrease in our commercial loan portfolio. That would be the C&I business. So a bit of a headwind to get back to a 0 growth. As I look at our pipeline for the upcoming quarter, we have some nice things that will come on to the books, in terms of refinancing of some real estate transactions and also some construction loans that are coming out of the ground. So I anticipate continued growth. We do have some payoffs that we are expecting in terms of some construction loans, that are going to be finalized, finished and are moving out of the bank, which has been anticipated. And a few other asset sales that we’re aware of that will have some payoffs. But I do believe our increase in volume will outweigh our payoffs. All of this activity is spread amongst all three of our markets. We really do not see a lot of slowdown in construction activity with the exception of I think, the apartment, certainly the apartment projects in Des Moines, I think, those are slowing up. But other than that, business has been very impressed for all of our customers. Our deposit gathering has been – continues to be strong with good sales activities. And we hope that, that continues. Those would be my brief comments. I will pass it over to Mr. Harlee Olafson, who will talk about credit quality.

[Harlee Olafson:]

Thank you, Brad. Credit quality at West Bank is still very good. Past dues are low, we do not have any other real estate. We have a couple of – we have $1.5 million C&I credit that we did place on non-accrual due to earnings issues, and even though it is non-accrual, we have a strong collateral base there. And we’re giving them some time to either work through it or sell some assets. The commercial real estate portfolio has been stress tested again in the quarter. And we think that we are in the right categories of commercial real estate. We do not have a lot of retail exposure for shopping centers, those type of things. We do have – and again, we have no commercial real estate loan past due issues. So next thing that I discuss is our Rochester and Iowa City. And Rochester and Iowa City, as Brad had mentioned, both have good pipelines for activity and growth for the next quarter. So although we had a little increase in our non-accrual number, credit quality is very good. And expectations for growth in our markets is still good. And I’ll turn back over to Doug.

[Dave Nelson:]

Let me just add before Doug jumps in on our non-accruals. All of those remain current, including the one that we just added to the list. So they are making monthly payments. And those payments are on a current basis. The reason that we put them on the non-accrual as Harley mentioned is that there are earnings issues. And that – obviously, we’ll have – could have a negative impact to future payment. So – thus, we want these non-accrual round. Doug?

[Doug Gulling:]

Okay, I’ll just have a – I’ll have a brief comment on the provision and allowances. Brad and Harlee discussed with – non-accruals to go up slightly. But we feel that, that loan is well collateralized. We did have net charge-offs of $115,000 in the quarter. And so loan – basically flat loan growth, little bit of net charge-offs in a slight addition to the non-accrual resulted in us booking a provision for loan loss in the quarter of $150,000. So with that, we would answer any questions that may be out there.

[Operator:]

Ladies and gentlemen, at this time we’ll begin the question-and-answer session. [Operator Instructions] Our first question today comes from Andrew Liesch from Sandler O’Neill. Please go ahead with your question.

[Andrew Liesch:]

Good morning.

[Doug Gulling:]

Hi, Andrew.

[Andrew Liesch:]

Doug, just a question on the provisions, it sounds like it was kind of related to the charge-off, maybe the rise in nonperformers. But credit quality has been so good, and you haven’t had a provision in – well, at all, last year. Should we be looking for modest provision this year? Or do you think because their provisions are likely to return as more of a one-off thing this quarter?

[Doug Gulling:]

I think, it’s hard to project, Andrew. I mean, we look at it at the end of each quarter. We look at how the loan portfolio has changed. We look at the change in the watchlist, and we look at whether we have net recoveries or net charge-offs. And as you indicated last year, we did not take a provision. But last year, we had net recoveries all year. And so it’s really hard to say. I mean, I think, it just depends on how those factors behave each quarter.

[Andrew Liesch:]

Okay. And then, the margin came in much better than I was looking for. It looks like you had some benefits on the loan yield side, just kind of curious what your outlook here is for the margin, my take is that it should be pretty stable but just curious what your thinking is?

[Doug Gulling:]

No, I’d agree with you. I think, it’s certainly, I think, for the next few quarters, if the Fed continues to increase rates, I don’t see any expansion. But on the other hand, I really don’t see much deterioration either. So I think, it’s going to be relatively stable.

[Andrew Liesch:]

Okay, great. [Indiscernible] two remaining question. Thanks.

[Doug Gulling:]

Okay, thank you.

[Operator:]

[Operator Instructions] Our next question comes from Bryce Rowe from Baird. Please go ahead with your question.

[Bryce Rowe:]

Thanks. Good morning and thanks for taking the questions.

[Dave Nelson:]

Good morning, thank you.

[Bryce Rowe:]

I understand the commercial and industrial loan payoff here in the first quarter, was curious if there were some related deposits that ran out of the bank, associated with that particular relationship.

[Dave Nelson:]

We’ve maintained the deposit, but it – they are getting swept out. But I would also tell you that the bulk of those deposits were being used on a suite basis to reduce line of credit outstanding. So yes, we had – but it was minor. So the quick answer is very minor loss and deposit with that account.

[Bryce Rowe:]

Okay. That’s helpful. And then, wanted to ask about – maybe digging in a little bit on the net interest margin, pricing on the loan. And deposit side. Maybe, Doug, you could help shed some light on loan pricing. If you look through the Q, you see the average yield on real estate loans was down slightly. And you also see the – I guess, the balances within construction and development going down while commercial real estate going up. So just kind of curious, how to think about that yield on the real estate section of the loan portfolio. Do you think that there is potential for that to move higher with these Fed rate increases? Or do you see that portion of the portfolio being relatively stable from a pricing perspective?

[Doug Gulling:]

Yes, sure. Harlee is going to take a first stab at that.

[Harlee Olafson:]

Yes. The commercial real estate portfolio is the – overall, rate on that has been continue to rise, as we go through the year. Number one, from new loans coming on the books at higher rates and what they had been on the books. Number two, from mini perm loans that mature at lower rates that are being renewed at higher rates. So – and as loans come off, we do a number of construction loans that turn into mini perm loans. And as they come off of construction and turn into mini perms, they will also increase the overall rates that we would be getting in the commercial real estate portfolio. It doesn’t happen overnight, but it’s – we see it occurring now on a monthly basis, and expect that – those rates still continue to go up.

[Bryce Rowe:]

Okay. That’s helpful. And then maybe just one more on deposits. Obviously last year you guys had a knockout year in terms of deposit growth. Some of those balances must have, kind of, come off here in the first quarter. So was curious if the deposit run off here this quarter was more seasonal in nature, maybe tied to timing of taxes, and what the outlook might be for the balance of this year. Thanks.

[Doug Gulling:]

Yes. Well, the decline of deposits in the first quarter – I would characterize it as being seasonal. We had a decline in the first quarter last year also. It was not due to losing any significant deposit relationship. Outlook for the rest of the year – we would expect deposits to grow from where they are at March 31. However, we have no expectation that deposits are going to grow as much as they did last year.

[Bryce Rowe:]

Well, thank you guys. I appreciate you’ve taken the questions.

[Doug Gulling:]

Yes. Thanks, Bryce.

[Operator:]

[Operator Instructions] And at this time I’m showing no additional questions. I’d like to turn the conference call back over to management for any closing remarks.

[Doug Gulling:]

Well, we would just like to thank you for joining us this morning, and we appreciate your interest in West Bankcorporation. So, thank you.

[Operator:]

Ladies and gentlemen, that does conclude today’s conference call. We do thank you for attending. You may now disconnect your lines.