West Bancorporation, Inc.
Q3 2018 Earnings Call Transcript

Published: 26 Oct 2018

[Operator:]

Good morning, and welcome to the West Bancorporation 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 question. [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.

[Doug Gulling:]

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. Now 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.

[Dave Nelson:]

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 earnings which I'll provide more detail on but just a few quick summary statements. Year-to-date average balances were all positive and round numbers. Loans were up 6%, deposits up 16%, and this growth caused earnings or caused expenses to increase 6.5%, and overall turnings were up 12%. Our credit quality remains very strong. Once again year-to-date, we are in a net recovery position. Because of this, our Board of Directors approved a $0.20 per common share, 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 Olafson:]

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 alliance has remained historically low. But from a good side of that it has also helped drive better non-interest bearing deposits and also with the quiddity that the C&I customers have had. It is also driven some liquid deposits in the savings area. As I said the prospect list is strong. Prospects, loan pipeline is high now as I think it is ever been and it's across all three markets. All three markets have very strong pipelines at the current time. So, we expect that our opportunities 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 covers in the 3% range. Couple other things that we're working at that we're staying conscious, but still doing business is that multi-family 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 are typically been used to the last few years. So what we're looking at is making sure that our developments and any raw land type debt is conservatively underwritten and that in an overabundance. On our watchlist, our watchlist currently is about 3% of total loans with almost zero pass through, we have 1.8 million in non-accruals and all of those non-accruals are currently making payments and curved. 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, concentration 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 three markets, I think we're very well positioned with strong customers, with good prospects through the future. And with that I'll turn it back to Doug.

[Doug Gulling:]

Okay, thanks Harlee. I'll add a few more comments. During this quarter, we had three items that we would consider unusual are non-reoccurring and I'll comment on those. First of all, we did collect a guarantee fee on a participation loan $254,000. They don'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, $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 ten 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 that was prudent to take a $400,000 negative provisions. 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, 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 years' tax returns and adjusted our current year accrual and you know cut that up as it should have been. That included $40,000 in interest in we calculated $57,000 in penalties, which we will try to get waived, but we did accrue them this quarter. And so that definitely is something we would not expect to happen again. We don't have that many tax exempt loans, but - and so 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 - of prior year taxes was $448,000 and then $45,000 adjustment to 2018. And then lastly just comment on the margin. As the fed continues to increase and the yield curve remains relatively flat, it is putting pressure on our margin. We did have a swap become effective rate at the end of the quarter. That are 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 swap 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 swap 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.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Andrew Liesch of Sandler O'Neill. Please go ahead.

[Andrew Liesch:]

Good morning, everyone. How are you?

[Dave Nelson:]

Good morning, Andrew. Good. Thank you.

[Andrew Liesch:]

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

[Dave Nelson:]

Well, we don't have a specific…

[Doug Gulling:]

We could that but…

[Dave Nelson:]

We can get that, yeah, we don't…

[Andrew Liesch:]

My only sense is that the, just looking at the quarter-over-quarter as the average yield went up in the portfolio, so I am wondering if that from originating loans or higher yields or from repricing a very low rate product authority there, that's really what I'm telling here?

[Dave Nelson:]

I can address that to a certain degree. If you would look back and again if you look back a quarter or year, the typical five year term loan right now is yielding a percent more than it be a year ago. That would be if you figure a lot of our commercial real estate which is maybe about 160th month, so they added the new stuff come in as a significant impact to yield because you're adding it all incrementally to two year loan portfolio and you're probably repricing your commercial real estate portfolio in that neighborhood, maybe a little bit quicker than. So loans of five year, seven year, three year category are all starting with five now instead of maybe last year starting with four. 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 Liesch:]

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

[Dave Nelson:]

So, 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.

[Andrew Liesch:]

Okay. That covers my questions, I'll step back.

[Dave Nelson:]

Okay. Thanks, Andrew.

[Operator:]

[Operator Instructions] The next question is from Bryce Rowe of Baird. Please go ahead.

[Bryce Rowe:]

Thanks. Good morning.

[Dave Nelson:]

Hi, Bryce.

[Bryce Rowe:]

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

[Harlee Olafson:]

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. That was an owner operated property, that's been experiencing some negative cash flow. Well they also had another property that has significant cash flows. So all we ended up doing is combining those two properties together and the one property has more than adequate cash flow to pay for all of that 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 fairly significant C&I credit that has been expanding, have a good base operation but they are all outside the expansion areas of take an awful little slower than they expected. So we did add them to our watch category even though in both cases they're well collateralized and have good plans for the future. So I don't know. The total watchlist substandard and non-accrual almost to rated about 3% of loans. And we know that we can't run at zero, but we have been running at such a low level, it's probably unsustainable. But add to the watchlist is really where one fairly significant C&I credit that still has good equity, good prospects and strong in-force.

[Bryce Rowe:]

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

[Dave Nelson:]

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 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 the 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 balance sheet and we would expect to have I guess what I will describe as normal deposit growth next year.

[Bryce Rowe:]

Doug, is there any - the end of period balances kind of had been jumping around for the last three or four quarters, anything in particular that's driving that especially relative to the consistent growth in average down since?

[Doug Gulling:]

No, not really. I mean it's the case 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 the - divides 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 Rowe:]

Great, okay. And then maybe a question about the margin. Clearly the margin is headed lower like it has with many, many banks. They were seen here in the earning season, you talk in the 10-Q about maybe continued pressure on the margin with the rate outlook the way it is. Do you expect the same degree of margin pressure that we've seen over the last couple of quarters, I think in it 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 on compression range?

[Dave Nelson:]

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 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 in the last couple of quarters.

[Doug Gulling:]

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 where rates having been stagnant for so long, but a lot more variable rate products being booked. Hopefully that'll be beneficial to us also.

[Bryce Rowe:]

Great. That's all I've got. I appreciate the time.

[Dave Nelson:]

Yeah. Thanks Bryce.

[Operator:]

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

[Doug Gulling:]

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:]

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