West Bancorporation, Inc.
Q1 2016 Earnings Call Transcript

Published: 30 Apr 2016

[Operator:]

Good morning and welcome to the West Bancorporation Quarterly 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.

[Doug Gulling:]

Thank you. Welcome everyone. Thank you for joining us this morning. On the call this morning are Marie Roberts, our Chief Accounting Officer; Brad Winterbottom, West Bank President; Harlee Olafson, Chief Risk Officer; and Dave Nelson, our Chief Executive Officer. 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. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans, strategies, projections, anticipated events and trends, economy and other future conditions. Because forward-looking statements related to the future, they are subject to inherent uncertainties, risk and changes and circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward looking statements can be found in the Company’s periodic filings with the Securities and Exchange Commission including the Company’s 10-K for the year ended December 31, 2015. 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 obligations to revise or update such statements to reflect current events or circumstances after this call or to reflect the occurrence of anticipated events. I will turn it over to Dave Nelson to begin the call.

[Dave Nelson:]

Thank you, Doug. Good morning, everyone. Thank you for joining us. We had a record first quarter, record first quarter in our 123-year history of our Company, which now makes seven consecutive record quarters. We’re also very pleased to announce an increase of our dividend to $0.17 a share, which represents the highest quarterly dividend ever paid. So, we now have record earnings and record dividends. The dividend, a $0.17 per share dividend will be payable May 27th to shareholders of record as of May 11th. We had very good growth during our first quarter in all three markets and we have a very strong pipeline. In Rochester, we celebrated our third anniversary this month, 1st of April. And recall, three years ago when we got started, we had some expectations that -- and after three years, we thought we probably could grow the bank from zero to about $60 million in loans and then start planning our bank building. And we just had our third anniversary, we were at $100 million in loans and our bank building is already under construction. So, things are going well for us in all three of our marketplaces. And I’d like to turn the call over to Brad Winterbottom, our Bank President for some more detail on that.

[Brad Winterbottom:]

Good morning, everyone. And my comments will be brief and probably boring and very consistent with prior. And then as the pipelines for new business is very strong, has been strong, we were able to grow loans by roughly $28 million for the first quarter from yearend and we have loan growth in all three markets. All three markets are in a very robust economic environment. And our sales folks are being very active in their calling activities. As I look towards the second quarter and beyond, we have committed some fairly significant refinance activity that will continue to add to the outstandings. And those activities are -- those refinance activities are -- should be taken place here in the second quarter and third quarters of this year, plus we have booked multiple large construction loans with strong guarantors behind them. So that too will add volume. Helping fund that is, as you can see on the deposit side, about an $80 million increase. I’m pleased to report that we have picked up multiple, very large depositors, C&I business, very liquid, moving there their primary accounts to the bank. And again, this is all coming from all three markets. So, activity is good, feeling good about the remainder of 2016. That would be my brief comments. Mr. Olafson?

[Harlee Olafson:]

Thanks Brad. I’m not going to try to plow different or the same ground again here. Credit quality is very good. As can be shown in our financials, we currently have no OREO and past-due levels are very low. Part of our process is to maintain our standards in regard to loan to values and debt service coverage, and we’re staying that course. We don’t know where we’re at in regard to the economic cycle. We do understand right now the economic cycle is very good but we want to keep our position so that if there is a downturn that we are in good shape with our credits. Just a quick comment on both Rochester and Iowa City, Iowa City has had a stable first quarter and I think a fairly strong pipeline. In Rochester, we had nice growth in the first quarter and pipeline needs a little work right there right now. Our building in Rochester is under construction, and we hope that that new building billboard for us will help us in the long-run in obtaining a full range of financial products with our customers. And that’s the extent of my comments. And I turn it over to Doug.

[Doug Gulling:]

Thanks Harlee. And I just want to make a couple of comments on other areas of the income statement. First of all, I want to just drill down a little bit on the BOLI transactions. It’s apparent from the face of the income statement that the gain from bank-owned life insurance was $443,000 and that is tax exempt. We had two deaths, [ph] one was a former employee, the other one was employed at the time of his death. And when someone covered by BOLI is still employed by the bank, there can be associated benefits that are incurred. And in this case, those benefits totaled $171,000 and those are tax deductible. And so, when you net the tax deductibility of those expenses against the tax exempt gain of $443,000, that’s where how we come up with the net impact of BOLI of $332,000. But I mainly wanted to point out that there is a $171,000 of non-recurring expenses in the first quarter. Our margin did decrease a little bit. We did tweak a few deposit rates at the end of the year and we do see a few bonds being called from time to time that are at yields that are not replaceable. And then our swap is costing us some money. I think we’ve talked about this in the past, but it became effective in mid-December. So, it’s effective throughout the first quarter. As of today, the penalty to terminate that swap would be approximately $1.3 million. A0nd if we did that of course that $1.3 million would be amortized over the remaining life of the swap or the underlying borrowing, and then our borrowing would go back to being variable rate. We don’t believe rates are going to increase significantly. And so, we’re inclined to terminate the swap but we’re going to wait until the penalty is lower. We terminated today, we just feel that it wouldn’t be right to incur that much penalty expense and then go back and have a variable rate swap -- variable rate borrowing. And then lastly, again as you can see, we had a provision of $200,000 in the first quarter, no charge-offs, recoveries of about $112,000, so we added a little over $300,000 to the allowance, and we would expect probably -- well, we don’t know what our recoveries are going to be but certainly as the loans portfolio grows and we expect it to grow for the next couple of quarters, you should expect to see similar or maybe even higher provision. It’ll just all depend on the circumstances at the time. So, with that, we would like to answer any questions that maybe out there.

[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:]

Question revolving or regarding the deposit increase at the end of year. I am just curious what was the impetus for that; was it just the Fed rate hike or are you seeing any competition in your markets?

[Dave Nelson:]

For the increase and interest rates?

[Andrew Liesch:]

Yes.

[Dave Nelson:]

It was in response to Fed increase and the fact that short-term rates, mainly LIBOR did go up a little up a little, but it was fairly limited. It was really only some of our higher tiered money market accounts.

[Andrew Liesch:]

So, really the increase in the funding was just from the swap for the most part?

[Dave Nelson:]

Yes.

[Andrew Liesch:]

The $171,000 of non-recurring expenses, I am just curious what line item that might have been in the income statement?

[Dave Nelson:]

You bet, it -- $127,000 would be on the comp compensation line and $44,000 would be on the other expense line.

[Andrew Liesch:]

And then lastly, TCE ratio was just under 9%, good to see there another dividend increase, but just kind of curious on what are your capital deployment plans; would you consider a repurchase program, a special dividend; just what are your thoughts around that?

[Dave Nelson:]

I would say, today our thoughts would be that kind of comfortable with were the ratios are, where the payout ratio is. If you would look at our regulatory capital ratios, which are buried in the 10-Q back in the later foot notes, our position is that our regulatory capital ratio should be comfortably in excess of the requirements to be well-capitalized and generally a 100 basis points over the requirements to be well-capitalized. And then that will cover the Basel III phase in and so on so forth. And so, I would say that right now we’re kind of comfortable with where we are.

[Andrew Liesch:]

Great, thank you for taking my questions.

[Operator:]

[Operator Instructions] The next question comes from Kevin McLaughlin of BDF Investments.

[Kevin McLaughlin:]

I just wanted to ask Brad, or Dave, I had a chance to look at the handout that you had yesterday at the Annual Meeting. I was very pleased to see the increase in the non-interest bearing assets or deposits. I wondered if there was any relationship between the growth in those non-interest bearing deposits and the large construction loans or re-financings that Brad cited in all three of the markets that you are serving?

[Brad Winterbottom:]

No, not really. We have targeted -- well, we’ve targeted many but we believe to be large depositors that have little if no credit, and we have been successful in tracking a few of those and we’re chasing more.

[Kevin McLaughlin:]

And just as a follow-up question, you’re chasing more, but this is something that is an ongoing effort and you see this as being a potential. It seems to be a focus in your Rochester market, if I’m not incorrect there. But it seems to be becoming more of a focus in the other two areas you serve.

[Dave Nelson:]

The focus being with what, Kevin, deposits?

[Kevin McLaughlin:]

Yes, the non-interest bearing business type deposit.

[Dave Nelson:]

Well, I would just say that you need to have deposits to fund your loan growth. And so, our sales staff is well aware of that and we talk about that weekly. So, not only are they out trying to find good borrowing customers but they are also out there trying to find good deposit customers as well.

[Kevin McLaughlin:]

Understood. I like to see the emphasis on business deposits and especially the non-interest bearing kind. Well, great quarter. Thank you for the input. And I wish you every success, obviously. Thanks for the dividend increase too.

[Operator:]

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

[Doug Gulling:]

Yes. Well, that’s really all we had to cover this morning. So, we appreciate your interest in our Company and we’ll visit at the end of July. Thank you.

[Operator:]

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