West Bancorporation, Inc.
Q4 2014 Earnings Call Transcript

Published: 30 Jan 2015

[Operator:]

Good afternoon and welcome to the West Bancorporation’s Fourth Quarter 2014 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 that today’s conference is also being recorded. 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:]

Hey, thank you and welcome everyone to our conference call to discuss our fourth quarter 2014 earnings and I’m sure we’ll talk about the entire year also. Around the table with me today are Dave Nelson our CEO; Harlee Olafson our Chief Risk Officer; Marie Roberts, our Chief Accounting Officer; Dave Milligan, Chairman and Brad Winterbottom, West Bank’s President. To begin with I’d like to read our fair disclosure statement. Comments made during this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking information is based up on certain underlying assumptions, risks and uncertainties. Because of the possibility of change in the underlying assumptions, actual results could differ materially from these forward-looking statements. 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. Additional information concerning factors that could cause actual results to materially differ from those in the forward statements can be found in our period filings with the Securities and Exchange Commission. And at this time I’ll turn it over to Dave Nelson.

[Dave Nelson:]

Thank you, Doug. Good afternoon. Welcome everyone and thank you for joining us. 2014 was a great year for West Bank. Not the absolute best in our 121 year history, but close. Our $20 million bottom-line ranked number 2 all time, but the fourth quarter was a record quarter. We had some non-reoccurring items take place during the fourth quarter and Doug will add some detail on those items. But based upon this performance our Board of Directors declared a regular quarterly dividend of $0.14 per common share, the dividend is payable February 25th, to shareholders of record on February 11th. Just a few highlights on the year, our loans grew almost $200 million and our outstanding loan balances now are at an all-time record high. Our credit quality is incredibly solid, our OREO balance at the bank level is zero and our holding company has one property. Our margins held up during the year and our past dues are almost non-existent. We even have some non-accrual loans that are current. We recently completed construction and moved into our new Eastern Iowa headquarters building in Coralville and we’re now starting the design process for our new Rochester Bank building. With that I’d like to turn the call over to our President, Brad Winterbottom or Bob.

[Brad Winterbottom:]

Good afternoon. I want to talk a little about our loan growth 19% for the year and we had about $100 million growth in the fourth quarter. And I would say roughly a third of that would have been a refinance of some commercial real estate projects from very good customers that had those assets financed elsewhere, they were coming due and we moved those assets over to us. We also purchased some participations. We had a strategy throughout the year of buying up to $50 million and most of that happened during the fourth quarter of this year, but we purchased participations on publically traded companies and we buy into a big pool and all of these would be publically traded companies. The balance of that would be again just continued sales activity, our folks are doing a great job, combing the streets and that growth came from Rochester markets, the Iowa City markets and the Des Moines market, so all three are very vibrant at this time. Trust activity needs to be highlighted. We had great growth in our trust department and that’s primarily personal trust. Our mortgage activity is decent. We did change the way that we are providing mortgages to our customers really we’re now doing that through our retail staff versus specific residential real estate mortgage originators. We think that that provides a better cross-sell activity and through other products and we’re seeing some benefits of that as we start the New Year. With that, that ends my comments and I'll turn it over to Harlee Olafson to talk about credit trends.

[Harlee Olafson:]

Good afternoon. I think you've already heard that our credit is in pretty good position right now. One of the things that we are doing is beginning to do a more thorough evaluation on any concentrations of different types of credit that we have in specific categories. One of the things that's good to see is that in all categories of our watch list, the total number of credits and the total dollar amount in those categories has declined. So even the -- although we have very little in regard to other real-estate non-accrual or substandard credits in the next categories of our least defensive watch list credits has declined significantly, which bodes well I think for how credits can migrate through that process. As you can see in our report, our Texas ratio from the previous year has gone from 7.69 down to 2.71 and past dues as Dave had talked about are virtually non-existent. And I think the nice thing about all of that is that through the growth that we've had in through the year in the fourth quarter, we haven’t had to become overly exuberant in regard to how we price credits and the margins have held up pretty well there. I'll just make a couple of comments on Rochester and our Eastern Iowa office and I was sitting in Coralville both areas had very nice 2014s for example Rochester at the end of the year loans went over the $50 million in outstandings that was a $33 million increase for the year. And their deposits were up by $4 million this year. We do not have a traditional banking type of store there as of yet, that will be coming in 2015 it should be a little bit easier to make deposits and do things such as that once we have a more traditional office I should say. In Iowa City in Eastern Iowa loan growth went from 193 million at the end of 2013 to 249 million at the end of 2014 or an increase of $56 million. And deposits also were up by $10 million over the year and certainly after the end of the year, we opened our new headquarters office in Coralville in Eastern Iowa. With that, that's the end of my comments.

[Doug Gulling:]

Okay. Thanks Harlee. This is Doug and I'd like to first of all just talk and explain the one-time items that impacted the fourth quarter. We had mentioned I think on the previous couple of calls that we were going to and then actually had sold our old main office building in Iowa City. And so the sale of that facility plus the disposition of some other miscellaneous-type assets resulted in a net after-tax benefit or gain of 1.3 million. Then we had a pool trust deferred security at the holding company level that have started at the bank, but we then moved it to the holding company just to protect the bank from what we thought would be further losses in that investment, but we sold that security at the end of the year and recognized a roughly $500,000 pre-tax loss. However, due to the values when it transferred from the bank to the holding company, when all things were said and done, we were able to use some capital loss carry forwards against the gain portion of the transaction a net $600,000 benefit in the fourth quarter. Then we had OREO write-downs and loss on sale that cost us roughly $1 million after-tax in the fourth quarter. And so those items we would consider to be non-core and I suppose there could be some debate on OREO transactions but those aren’t going to repeat themselves, we're down to where we have very little OREO and so we don’t consider that to be a core result. Those thing net to about a $1 million of after-tax income in the fourth quarter so we reported 5.8 million and if you then would take out the net impact of these one-time items you’d be at about 4.8 million. That includes a $500,000 provision for loan loss in the fourth quarter and what’s a core number on the provision that’s kind of hard to say but with that loan growth in the fourth quarter we thought 500,000 was the right number, but again going forward it probably won’t be that high because I don’t think we anticipate $100 million quarters very often. And so we would say that our core earnings kind of on a quarterly basis at this point in time would be between $4.8 million and $5 million or $0.30 to $0.31 a share something like that. Also a comment upon the margin, we were able to improve the margin 11 basis points year-over-year and it actually went up a couple of basis points in the fourth quarter and there are 2 or 3 reasons for that, but by far the way the most significant driver of the improved margin is the improved mix of interest earning assets with the higher loan balances that are outstanding. Since this is the end of the year and we won’t file our 10-K until around March 6th, I think there are a couple of averages that some of you like to know about. So, let me just share those. For average assets for the quarter were a 1.570 billion, average equity was 137.8 million, quarterly average loan balance was a 1.134 billion, if there are any other numbers anybody would like, let us know but I think with that we’ll conclude our prepared remarks and respond to any questions. Question-and-Answer Session

[Operator:]

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

[Andrew Liesch:]

Just curious if you can talk a little bit more about these participation or the participations like just the location, like what loan types they are and like what sort of yields you have on them versus the rest of the portfolio?

[Dave Nelson:]

It’s all C&I business. It would be nationwide type credits, we’d be -- we’re buying no more than 2 million of each transaction so we chose to buy up to 25 transactions, they are monitored by one of our bankers along with a team of folks who we’re buying them from. And the pricing is all variable, it’s LIBOR based with floors. So it’s providing to us a minimum of say 3.25 I’d say, I don’t have it all here in front of me but that’s off of memory. So, it would be slowing base LIBOR plus and then with floors in the 3.25 range.

[Doug Gulling:]

And Andrew, just a little kind of background on our conceptual thinking on these assets, it was actually about a year ago that one of our correspondent bankers with a national bank just said, hey and you know we’ve got a program through one of our subsidiaries that banks can buy these participations and national credits, their variable rate and if you have any interest let us know. And so we considered that for a few months and decided to go ahead and dip our toe into this because they are variable rate. They adjust quarterly, and we still think interest rates are going to go up some day, but even after today it might be a little further out but and in a way we moved dollars or took dollars that otherwise would have found their way into the investment portfolio in a fixed rate instrument that with a four year duration and a yield of two, found their way into these variable rate assets. So that's a little bit better background on those assets. And I think we have funded the first one in the second quarter and we've just gradually ramped that up and here at the end of the year we had 43 outstanding and today I think we -- if not today very soon we will have 50 million outstanding. And that's going to be our limit for a while. We're going to watch them just see how they perform. Supposedly, they are liquid and that if we wanted to sell one, we could sell it. Of course there would be some market risk in doing that, but anyway that's a little background on those.

[Andrew Liesch:]

And they are from like a large national bank?

[Doug Gulling:]

Yes.

[Andrew Liesch:]

And then sort of with the yields where they are and then just I guess just where the margin came in this quarter? It seems like there might be some pressure to the loan yield going forward and may be some pressure on the margin from here?

[Doug Gulling:]

Well I -- if market rates don't change much from where they are right now, I think our margin will stay in the range that it's in. I think it will stay in the 3.55 range.

[Operator:]

[Operator Instructions] Our next question comes from Daniel Cardenas from Raymond James. Please go ahead with your question.

[Daniel Cardenas:]

Just a quick follow-up on the participations, are there any penalties if you try to liquidate early?

[Doug Gulling:]

No, just like I said that it could be subject to market pricing risk, but no penalties.

[Daniel Cardenas:]

And then maybe a discussion as to what you guys saw this past quarter in terms of pay-downs and payoffs was that rate kind of what you expected slower, better?

[Doug Gulling:]

There were a few customers that sold assets that were unanticipated. That certainly found its way to our portfolio, but we had nice activity of finding new stuff and some things that we committed to maybe a few quarters ago that finally found their way to closing. And that added good volume more than made up for what the pay-offs were.

[Dave Nelson:]

Dan in very rough numbers Brad and his group did a little analysis and in very rough numbers we made $400 million in new loans this year. We're up a net 200 well that's 190 but say 200. We identified $100 million of pay-offs so that leaves $100 million and that's roughly what we've considered to be a normal amortization, so that's kind of how the loan flows looked this year.

[Daniel Cardenas:]

And then how are your pipelines looking for the quarter may be versus a quarter ago?

[Dave Nelson:]

Very good, very good. Our bankers have whip marks on their backs.

[Daniel Cardenas:]

And your credit guys are bored is that how it works?

[Dave Nelson:]

No, that's not true. They're busy too. It's a good pipeline, some good things are happening in all three of our markets.

[Daniel Cardenas:]

Now with the changes that you made in your residential loan production products I mean are there any other changes coming down the pipeline in 2015 with any other product lines?

[Dave Nelson:]

Not that we have planned at this moment.

[Operator:]

[Operator Instructions] Ladies and gentlemen, at this time I'm showing no additional questions. I'd like to turn the conference call back over for any closing remarks.

[Dave Nelson:]

Well, we just like to thank you for joining us today and we'll talk again at the end of the first quarter. So thank you.

[Operator:]

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