West Bancorporation, Inc.
Q2 2018 Earnings Call Transcript

Published: 28 Jul 2018

[Operator:]

Good day 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, Chief Financial Officer. Please go ahead.

[Doug Gulling:]

Thank you, Alice and good morning everyone. Thank you for joining us this morning. On the call with me this morning are Dave Nelson, our Chief Executive Officer and Harlee Olafson, our Chief Risk Officer. And to begin, let me cover 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. I will turn it over to Dave Nelson.

[Dave Nelson:]

Thank you, Doug and thank you everyone for joining us. We had a very strong quarter. It was not an all-time record quarter, but it was the best second quarter during our 125-year history. Our Board of Directors declared a quarterly dividend of $0.20 per share with a record date of August 8 payable August 22. Just a couple of specific events that happened during the quarter that I will introduce and Doug will give more detail on this, but we announced the pending or the future closure of one of our retail bank locations in Iowa City, which we refer to as our Lower Muscatine office. It’s historically been a low volume, low traffic location than we thought it best to consolidate our operations in Coralville and the Iowa City with the November 1 closing of that particular location. We also had quite a birthday present to help us celebrate our 125th anniversary, where earlier this week actually Bank Director Magazine came out with their 2018 bank scorecard that lists all of the top performing banks throughout our country, ranked by asset class size and in our $1 billion to $5 billion they had us ranked as the number 12 top performing bank in America. And then for the first time ever, they combined all of their asset classes all the way, including the very large banks, $50 billion and over. So in their combined list, they had our bank, West Bank, as the number 21 top performing bank in America of all publicly traded financial institutions. So I am very pleased and proud with that. But I would like to turn the call over to Harlee Olafson, who among other things, will talk about our strong credit trends and pipelines. Harlee?

[Harlee Olafson:]

Thanks, Dave. I will start off talking about where we are at regard to growth. And through the second quarter, our loan activity has been strong, but I would say growth has been limited due to significant payoffs from business sales and construction loans converting to outside long-term financing. Going forward, our expectations are for better growth this next quarter with less anticipated payoffs. Current scheduled closings are going to boost our totals by quarter end and we also have significant projects in place that will draw significant dollars during the quarter. As far as the economy in our markets, the economy is good. Although there does appear to be a slowing down of new projects, there is a lot of commercial real estate product, mainly multifamily that’s come online and that we will need to absorb and that does take some time. So, I do see some slowdown there, particularly in our Des Moines and Eastern Iowa areas. Rochester appears to be very stable with additional opportunities. On specific types of property, warehouse is still very strong, office is strong, multifamily is still fine, but it does need to absorb some of the new product. I think there is pretty of hotels now. Housing, both lots and homes, there is a little bit of a slowdown, especially in the sales of product, mainly over the $500,000 range. From a credit quality and credit trend perspective, just update on where we are at. Our total watch list is 2.3% of total loans. We have no other real estate. Our non-accrual amount is 0.1% of our total loans and our next worse category of substandard is 0.6% of total loans. At quarter end, we had three loans that were past due, totaling $170,000, that’s loans over 30 days past due. We have had a couple of credits that have shown a bit of deterioration that we are working on. Our largest non-accrual loan for example is $1.5 million secured by property that has appraised value on real state of a couple of million and liquidation value of equipment of over $1 million plus the receivables and inventory. So we are not in a situation of not getting our money back, but it’s just things you have to work through. Our commercial real estate portfolio as a whole at quarter end had no past dues and had adequate debt service coverages. One of the things that we have been working through is the increasing short-term depository costs. And as we are going through renewals and new bookings at this time, it appears that our new product is coming on and our renewal product is coming on at between 1% and 1.5% higher than it was about a year ago. So, we are working through some margin compression, but we do see that getting better as we go forward. So, we continue to underwrite and manage portfolio in a conservative manner and the portfolio overall is performing well with strong results. With that, I’d turn it back over to Doug.

[Doug Gulling:]

Okay, thanks, Harlee. Couple of comments stated on some of expenses regarding our Lower Muscatine office. We wrote it down by $333,000 here in the second quarter and that was to get it to what we believe would be a net realizable value when we go to sell it. We have not marketed it yet and that the value we wrote it down to is assuming we sell that property not as a bank building. If by chance we would sell it to another financial institution, we might come out a little bit better. The annual operating costs of that office are approximately $300,000. So, it’s going to be operating until November 1, but next year, we would expect operating costs to be lower by about $300,000. Now that does include salary costs, we are not laying anyone off, there is one retirement and the others will be retained, but through attrition, we would expect our employee levels to go down a little bit over time. You heard Harlee talk about the credit quality and as a result of the continued very good credit quality and the fact that we had net recoveries in the second quarter we did not locate provision for loan loss in the second quarter. Then lastly, Harlee mentioned the margin a little bit of compression there. We do think that certainly by the end of the year, we will maybe be on the uptick there, because at the end of September, we have a swap that will become effective on our trust preferred securities. Currently, the cost of the trust preferred security is about 5.3%. When the swap becomes effective, the cost will drop down to 4.81% and then we have $60 million swap that will become effective at the end of the year that will convert – essentially convert $60 million of variable rate deposits into fixed rate at a cost of 2.31%. And if the Fed increases one more time, targeted Fed Fund rate will be 2.25%, so we will be essentially at that level and fix it at that level. With that, we will open it up for questions.

[Operator:]

Thank you. [Operator Instructions] And our first question today will come from Andrew Liesch of Sandler O’Neill. Please go ahead.

[Andrew Liesch:]

Hey, guys. How are you?

[Dave Nelson:]

Good morning, Andrew. Good.

[Andrew Liesch:]

Just a question on operating expenses in the quarter, they increased more than what I was expecting it looks like in the salaries and benefits line, was there any hiring that went on, just kind of curious what drove that?

[Doug Gulling:]

Yes, two things that drove that. All of our officers, except for the 4 NEOs have salary reviews that are effective April 1 on an annual basis. So, all of the officers’ salary increases were effective April 1. And then also we typically – well, we have a compensation committee awards, RSUs right towards the end of March and so the new expense associated with new RSUs kick in April 1 and of course, they are generally amortized over our 5-year period. However, for people who are approaching their full retirement age, we have to amortize those over a shorter period. And so as some of these people who get RSUs age, their amortization period shortens a little bit and increases the expense a little bit, but having said all that, roughly our officers’ salary increases accounted for roughly $30,000 a month increase and the new RSU expense is about $70,000 a month higher than what it had been.

[Andrew Liesch:]

Okay, that’s really helpful. And then just on the margin, appreciate that maybe find a floor and start to increase later this year, but is the trend still a fret to until late third quarter, into the fourth quarter, trends would still be lower until then?

[Dave Nelson:]

Well, not significantly, I don’t believe. We added some variable rate investments at the end of the month and then we added some – well we added about $60 million to the investment portfolio at the end of the month, about a third of that was variable rate. We have got 1 or 2 variable rate loans we are going to book here in the next couple of weeks, so I don’t know there could be maybe a few basis points, I don’t think it would be significant.

[Andrew Liesch:]

Okay, that’s really helpful. Thank you for taking my questions.

[Dave Nelson:]

Yes, thanks, Andrew.

[Operator:]

[Operator Instructions] And at this time, I am not showing any additional questions. So I would like to conclude our Q&A session and turn the conference back over to Mr. Gulling for closing remarks.

[Doug Gulling:]

Well, thank you for joining us this morning. We appreciate your interest in our company and we look forward to the call at the end of October. Thank you.

[Operator:]

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