West Bancorporation, Inc.
Q4 2017 Earnings Call Transcript

Published: 26 Jan 2018

[Operator:]

Good morning and welcome to the West Bancorporation Fourth Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions [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.

[Douglas R. Gulling:]

Thank you, Phil. Good morning everyone. Thank you for joining us this morning. On the line with me today are Dave Nelson, our CEO; Brad Winterbottom, our Bank President; Marie Roberts, our Chief Accounting Officer; Dave Milligan, our Chairman, and Harlee Olafson, our Chief Risk Officer. I will 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 statements 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. With that, I'll ask Dave Nelson to start us off.

[Dave Nelson:]

Thank you Doug and good morning everyone. Thank you for joining us. We had a very strong quarter, fourth quarter. We had the deferred tax asset adjustments that Doug will add more on but the non-cash adjustment brought an end to our consecutive string of 13 consecutive record quarters. However, we still had a record year despite one-time non-cash write down. We had growth in all three of our markets and during the year 2017 we had overall loan growth of approximately 8% and deposit growth of 17%. And this growth only caused non-interest expenses to increase less than 4%. So we achieved both growth and efficiency improvements. We were recognized again as one of America's top performing banks. We had 100% key employee retention during the year and very strong credit quality with three years of net recovery. So, as we begin our 125th year in business we will achieve continued performance improvement during 2018 by providing greater clarity to activity expectations and skill improvement for our team. With a continued focus on relationship building, community leadership, enhancing our internal sales culture and all the activities that make West Bank special. And based upon this performance our Board of Directors declared an $0.18 per share quarterly dividend with a record date Feb 7th and payment date of February 21st. And with that I'd like to turn the call over to Brad Winterbottom, our bank President.

[Brad Lee Winterbottom:]

Thanks Dave. I am going to repeat a lot of things that Dave said. We had a good fourth quarter in terms of loan and deposit growth and we had a great year in loan and deposit growth. During the quarter we added some new relationships. We had some assets that moved out of our construction loans into permanent that are now beginning to amortize. So that would be some of the activity that's in our loan portfolio. All three markets remained very strong for us, all three markets had growth not only in the fourth quarter but year-over-year. Our deposit gathering sales activity was very good. We've added good deposits, good core customers to the bank. And our sales activities remained very brisk and we have a lot of things that are in the pipeline that we're working on and we anticipate continued growth into 2018. With that I will turn it over to Harlee Olafson who will talk a little about asset quality and a few other things.

[Harlee N. Olafson:]

Thank you Brad and thanks for your attention today. From a credit quality perspective the bank ended the year with a watch list of 2.2% of total loans. And at the end of the year we had four total loans that totaled less than $150,000 that were 30 days past due. Even with that that was a small increase in the Watchlist over the previous quarter. We had one credit that is having some cash flow problems as currently for sale that has numerous interest of buyers that is on our sub standard list right now. We expect that that situation would be resolved before June 30th with no credit lost. One of the things that we continue to do is to watch occupancies, vacancy issues especially in multi-family hotel properties and office properties. We continue to stress test our portfolio based on the cash flow from those type of entities and although operations in that area seem to still be strong there has been a lot of product built and it does bear continued looks at to make sure that we're in a good space there. Our underwriting is still based on the same criteria, based upon good standards with strong borrowers. As it relates to our markets outside of Central Iowa, Coralville, Iowa City in Rochester both markets had pretty nice growth in 2017 and have active and adequate pipelines going into this year. With that I will turn it over to Doug.

[Douglas R. Gulling:]

Okay, thanks Harlee, I will just add a few more details to the quarter. First of all Harlee talked about the credit quality and how it remains very good and we've had net recoveries actually for the last three years and so this in the fourth quarter we did not take another provision and did not take a provision for the entire year. We did a couple of things in the fourth quarter to take advantage of the higher tax rate before it dropped and for instance we did take some security losses and got rid of a few bonds that we weren't necessarily overly concerned with but just saw some trending credit weaknesses with those and so we sold them at a loss to get the 35% deduction and reinvested. We prepaid in Federal Home Loan Bank advance. It was only prepaid about a month early but we thought we'd go ahead and pay the penalty. It wasn't that much greater than what our interest costs were going to be over the remaining term of the advance. And again take that when we deduct 35% of that loss, that was only about $40,000. You know with the new tax rates I would say that we believe that our net interest margin will be somewhere in the neighborhood of 15 to 20 basis points lower than it had been. And we also believe that our effective tax rate in 2018 is going to be approximately 20%. Then since this is the end of the year and we have not filed our 10-K yet, I think there are maybe a few averages that some of you would like to know about. And so for the fourth quarter our average equity number was 178,735,000. Our average asset number was 2,081,398,000 and for the entire year then the average equity was 173,568,289 and average assets for the year were 1,954,241,980. So with that we will stop and entertain any questions.

[Operator:]

[Operator Instructions]. The first question comes from Andrew Liesch with Sandler O'Neill and Partners. Please go ahead.

[Aaron Deer:]

Hi, good morning everyone. This is actually Aaron Deer on for Andrew.

[Douglas R. Gulling:]

Oh, hi Aaron.

[Aaron Deer:]

Hope you're all doing well today. I guess following your accounting numbers but maybe if you wouldn't mind if you have them handy, could you also provide the average loans for the quarter and the year?

[Douglas R. Gulling:]

You bet. Average loans for the quarter were 1,470,380,000. And for the year 1,443,885,326.

[Aaron Deer:]

Okay, that's great. Thank you and then you had some really terrific growth both loans and deposits had some nice growth in the fourth quarter but some interesting trends with respect to how that seemed to kind of play out in the margin, I was hoping to just get a little bit of color particularly in the deposits if the inflows there were in higher cost in accounts, maybe that weighed on the margin somewhat or if it was more just related to the strong inflows and having some excess liquidity that might have weighed on the margin a bit. Can you talk about the trends there please?

[Douglas R. Gulling:]

Sure, you bet. Yeah, a lot of the deposit growth was centered in two or three customers. And were the type of deposits that are priced at the top of the overnight pricing. So, that would weigh on the margin for sure.

[Aaron Deer:]

Okay, and then what are your kind of thoughts for liquidity going forward then, is that -- are those funds going to be redeployed in a way that you're going to be able to get the margin up but obviously to take into account the compression that you mentioned just from the tax effect but on an adjusted for that do you expect that we could see some margin expansion at this point from where we are today?

[Douglas R. Gulling:]

No, because most of those funds were deployed during the quarter. At the end of the year we only had 12 million or 14 million in overnight funds. So they were pretty much deployed during the fourth quarter. So, I wouldn’t -- so the specific answer to your question is no, I would not expect further margin expansion.

[Aaron Deer:]

Okay, and then just a question on credit I guess for Harlee, notwithstanding it sounds like just a small issue with this one credit there; the credit trends in general have been pretty spectacular. When you kind of look out at the economic environment that we are operating in today, is it your expectation we could get through another year without taking any provisions?

[Harlee N. Olafson:]

You know it's a good question. I think that will depend upon total growth. And looking at as we do our quarterly allowance, the adequacy of the allowance based upon factors that we look at and we try to say that position that we have more allowance than our factors dictate to a small percentage. And as we looked at each quarter we look at that independently and see where that is at. As I talked about earlier we do stress test our portfolio on a quarterly basis looking at loan to values, cash flows those sort of things. And we continue to underrate in what we think is a prudent Bear. So from a loss perspective we haven't been having losses and we have had recoveries. The growth in the portfolio might be more that might dictate or lead to add to the provision.

[Aaron Deer:]

Sure, okay, very good, thank you for taking my questions.

[Douglas R. Gulling:]

Thanks Aaron.

[Operator:]

[Operator Instructions]. This concludes our - okay we have another one a follow-up from Andrew Liesch from Sandler O'Neill Partners. Please go ahead.

[Aaron Deer:]

Hey guys as long as there is nobody else I just was hoping maybe to get a little bit more color on the loan growth and kind of what the types were that drove that in the quarter and then any additional color that you might have on the pipeline in particular for construction?

[Douglas R. Gulling:]

We had a couple of very large construction loans that would have had some additional advances and then moved out of construction to permanent financing. There is a couple of very large ones there and then in addition to that we had a very good customer approach us and during the quarter we refinanced some buildings, some office buildings that would have added good growth. So those would be some transactions that caused the 50 some million dollars of increase in the fourth quarter.

[Aaron Deer:]

Okay, good stuff. Thanks again guys, I appreciate you taking the time.

[Douglas R. Gulling:]

Thank you.

[Operator:]

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

[Douglas R. Gulling:]

Well, thank you again for joining us this morning. We appreciate your interest in West Bancorporation. So thank you.

[Operator:]

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