West Bancorporation, Inc.
Q4 2016 Earnings Call Transcript

Published: 27 Jan 2017

[Operator:]

Good day, 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, Nicole, and welcome, everyone. Thank you for joining us today. We’re glad you could join us, and we’re anxious to discuss our fourth quarter and 2016 results. On the line today with me are, Brad Winterbottom, our Bank President; Dave Nelson, our CEO; Marie Roberts, our Chief Accounting Officer; Dave Milligan our Chairman; and Harlee Olafson, our Chief Risk 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, and strategies, projections, anticipated events and trends, the economy, and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes to 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, which will be filed around March 1st. Any forward-looking statement made by us during this call are based only solely 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 anticipated events. With that, I’ll turn it over to Dave Nelson to start.

[Dave Nelson:]

Thank you, Doug, and good morning, everyone. Thank you for joining us. We appreciate your interest in our Company. Fourth quarter 2016 was another record quarter, which makes that our 10th consecutive record quarter. Based on this performance, our Board of Directors declared a regular quarterly dividend $0.16 per common share, this is equal -- $0.17 per common share, which is equal to the highest quarterly dividend ever paid by our Company. The dividend is payable on February 22, 2017 to shareholders of record on February 08, 2017. 2016 was an all-time record year for earnings during our 123 year history of our Company, and was also the second consecutive record year. During the year 2016, our average loans increased 10.1%, average deposits increased 9.2%. This growth only caused expenses to increase 3.6%. And we have infrastructure in place for additional growth without adding significant expense. During the fourth quarter of 2016, we opened our new Rochester, Minnesota main office, and we're being very received by the Rochester community. During the year 2016, we experienced all-time highs in earnings, dividends, and our stock price, and also our credit quality remains exceptionally strong. Those are my prepared comments. So, I'd like to turn the call over to our President, Brad Winterbottom.

[Brad Winterbottom:]

Good morning, everyone. For the fourth quarter, gross loans increased roughly $17 million, and the bulk of that would have been through commercial real estate. We had a handful of nice I would say apartments and warehouse closings that we financed. We also had some reduction in our C&I business, and we do see this. Our C&I customers, one sold to an out-of-state firm and that was $6 million pay-down, and sorry to see that happen for them. But we are seeing those commercial customers selling to out-of-state, and those become harder-and-harder to find. For the year, Dave mentioned that the average loans were up 10%, roughly a $122 million, lot hard work. We have several construction loans that are in various stages of construction that will continue to add to our loan portfolio. However, I'll also tell you that we are aware over the next 90 days of approximately $50 million of loans that will exit the bank, because they're going to get refinanced elsewhere, or they're being sold. So we're going to have to pedal hard over these next 90 days to just kind of keep where we're at today. The growth is coming in all three markets. We feel good about all three markets. I'll also say that we're in the process of, and it's been a few years, that we're reviewing our retail and commercial accounts. And what those look like and we're revising service charges, we expect a modest increase when we're done modest increase in those lines. Those would be my comments. And Harlee do you want to visit about credit quality and anything else?

[Harlee Olafson:]

Yes, thanks Brad. From a credit quality perspective, I'd say that we remain a bit more anguished, I think is good. And to that, we have no other real estate. Our watch list doesn't hold as stable at a low level. We have adequate reserves that we've added to recover loan growth. So what we're doing? We are predominantly a commercial bank with a lot of dependence on commercial real estate. So, our strategy is to continue to limit the amount of dollars that we have in certain types of the commercial real estate that are less stable and are subject to economic downturn. We have very low past-dues and in fact at the end of the year, I think we have five loans that were past-due over 30 days, and that included all loans including our non-accruals. In fact, a couple of those loans paid right after the first the year, so could have been even lower than it was. But the credit quality currently is good, and we don’t foresee any significant surprises in the near future. As far as Iowa City and Rochester going, both had good years; both had increases in loans and deposits; working very diligently in both markets to increase our core deposits and increase the franchise-type customers in the markets. Both areas have nice new banking facilities, and are in good position to provide all the services to our customers deserve and expect. And with that, I would turn it back to Doug.

[Doug Gulling:]

Okay, thanks Harlee. I just have a couple of items to mention. If you’re on our call in October when we were discussing the third quarter results, we mentioned that we had accrued $250,000 to settle the class action lawsuit that has been out there for about six years. I think we also mentioned that we thought we would have get reimbursement from insurance company for some of those costs. And in fact, we did received $300,000 from the insurance company during the fourth quarter. And the court approved mediation, and while there is still some administrative task to be done related to that for all intensive purposes, we believe we feel that this is done and behind us. As far as the allowances concerned just a couple of details there. As you can see, it has a provision for the year of $1 million, which included $100,000 for the fourth quarter. In the fourth quarter, our charge-offs were $141,000 and our recoveries were $196,000, so that we had net recoveries of $55,000. And for the year then our charge-offs were $406,000 but net recoveries $551,000. So, we had net recoveries for the year of $145,000. So we added $1,145,000 to the allowance, and at the end of the year, the allowance percentage was $1.15% of the total gross loans. And with that, that would conclude our prepared remarks. But we would be happy to answer any questions that maybe out there.

[Operator:]

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

[Andrew Liesch:]

Doug, some questions around the margin here. Just kind of curious what you are seeing so far post the rate hike? What's happened to deposit costs? Looks like maybe they've gone up a little bit, but I'm wondering if it's just too soon to tell.

[Doug Gulling:]

No, they dig up a little bit. Andrew, we have about $230,000 to $250,000 in deposits that…

[Brad Winterbottom:]

Million, thanks. Yes, $230 million to $250 million in deposits money markets, interest rate checking that pretty much move with a change in the target of debt funds rate. And so that happened in mid-December. We of course have variable rate loans on the other side also and our outflow report, which show that certainly over a 12 month period that our net interest income would not be harmed by increases in interest rates. But unless you want to do 400 basis points shock on one-time, and then it doesn't look prettier for the next 12 months. So anyway, that's kind of what things look like. So, we did change the interest rate on some money markets, and interest bearing check-in to primarily some of our larger account balances and some of our public unit customers. And we did change a few CD rates, but on a practical basis, that doesn't have much impact.

[Dave Nelson:]

I would also add, Andrew, that with that small rate hike, some of our customers -- we've floor set, so we would not have experienced any kind of increase in interest income even though the rate may have gone up the quarter.

[Andrew Liesch:]

So, about how many more rate hikes do we need for those floors, for those rates to be above those floors?

[Doug Gulling:]

Well, at the next quarter point increase we’ll have another $18 million re-price. And the quarter after that it's $6 million, the quarter after that it's $13 million, quarter after that is $30 million, and then it start to diminish.

[Andrew Liesch:]

So, maybe getting another rate hike is a little bit more benefit on the yield side, but still some pressure on the funding cost side. What are you seeing on newly originated loans? Has pricing moved at all with the steeper yield curve?

[Dave Nelson:]

Maybe not in stair step, but we are getting a little better pricing in some of the stuff that we are quoting on, and hitting to the finish line.

[Operator:]

Our next question comes from Kevin McLaughlin of West Bancorp. Please go ahead.

[Kevin McLaughlin:]

I just wanted to ask about that $50 million in lines of credit that have moved, and anyone who can take this question. Has there been much impact in terms of your commercial or demand deposits at the same time? And do you see -- I think that there's a lot of competition in Central Iowa right now. I don't know about your other markets. But it seems to me that there may be a lot of banks out there who are trying to re-price things in order to attract lines of credit or new customers. And I was wondering if you could just speak to that for a moment, and its impact on your P&L side?

[Brad Winterbottom:]

I'll try and answer the $50 million question. It’s roughly a handful of assets that are going away. Roughly, $15 million of that is a public entity that’s going to issue bonds and refinance debt that we have. So, I view that as that’s probably -- that was probably going to happen anyway. And then there is roughly three others and they received a price for their asset that they wanted to do that create some liquidity. So, they’ve marketed it. And so those are the assets that are going away that we’re aware of. It’s not because competition is refinancing elsewhere.

[Dave Nelson:]

And Kevin, there would be very, very minimal amounts of deposits that would…

[Brad Winterbottom:]

…with those particular loans.

[Kevin McLaughlin:]

Because, I'm always interested in knowing what those corporate accounts would do in situations like that, so that's a big help. Thank you very much, and congratulations on a great quarter.

[Operator:]

[Operator Instructions] We have no other questions, at this time. So, I would like to turn the conference back over to Doug Gulling for any closing remarks.

[Doug Gulling:]

Well, I just like to thank you again for joining us today. We do truly appreciate your interest in our Company. So, thank you.

[Operator:]

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