WTBA (2019 - Q1)

Hello and welcome to the West Bancorporation Quarterly Earnings Call. All participants will be in a listen-only mode. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Doug Gulling. Please go ahead sir. Douglas

Yes, thank you, good morning everyone. Welcome to our first quarter 2019 earnings conference call. With me on the line this morning are Dave Nelson, our Chief Executive Officer, Harlee Olafson, our Chief Risk Officer, Jane Funk, our Chief Accounting Officer and I mentioned that Brad Winterbottom our Bank President is normally on the call but he is traveling on business today and will not be able to participate. 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. 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. I'll turn it over to Dave Nelson to begin our call.

Thank you, Doug and good morning everyone. Thank you for joining us. We had a solid quarter and launched our Minnesota expansion which I'll elaborate more upon in a moment. Based upon our first quarter performance, our Board of Directors approved an increase to our dividend to $0.21 with a payment date of May 22nd and a record date of May 8. This is an increase from $0.20, a 5% increase and represents the highest quarterly dividend ever paid during our 125 year history. Also during the first quarter, we received national recognition from Raymond James and being selected in their Annual Community Bankers Cup recognizing the top 10% of community banks across America and they ranked us as number 19 in the nation. We were the only Iowa or Minnesota bank to make the list and one of very few from the Midwest. We also will, we have made their list now for the past six years in a row. I think our most exciting news during the quarter was our expansion in Minnesota as most of you know, we brought West Bank to Rochester Minnesota six years ago and started as a loan production office with zero customers, no loans, no deposits, no revenue. Now today six years later, we are the premier business bank in Rochester Minnesota. We want to repeat that success in St. Cloud, Mankato and Owatonna which are all Mankato and Owatonna are in Southern Minnesota, St. Cloud are in Northwest Minnesota. We're going to go about it the same way we did in Rochester utilizing our advantages that no one else has. And that's why this strategy is so seldom used and those advantages are existing relationships both with bankers and with community leaders. We have added 11 highly seasoned and skilled bankers spread out amongst St. Cloud, Mankato and Owatonna. These bankers are the top bankers in their communities with deep existing relationships. We're just two months into this, our announcement was Monday, March 4. During the past two months, we have successfully recruited 30 community leaders to serve on our advisory boards. These people are the who's who in their respective community not only have they pledged their business to us but they will endorse and advocate on our behalf becoming an extension of our sales team and they do this because of the existing deep relationships. Our leases are in place. As I mentioned, we started as loan production offices as LPOs, however the regulatory process is well underway to converting from LPOs to full branch status. Our connectivity from an IT perspective is progressing well. We had previously announced that our initial annual cost or investment is for this expansion is $3 million and I'm sure people are wondering how long we think it will take to achieve a similar type result in St. Cloud, Mankato and Owatonna as we have in Rochester. So I'd like to answer that question well but we enjoy asking other bankers from around the country if they started a new bank and a new community with no customers and no revenue, how long would you expect before you started these break even and started to make money and the typical response is three to four years but two years would be fantastic. In Rochester, we thought we could do it in one year and we did actually we did it after nine months, our first profitable month of operation was just after nine months. When we opened for business six years ago in Rochester, we did so in a rented business office condo. And at that time, our expectation or estimate was that in three years we'd hoped to be at about $60 million in commercial loans and start the planning process for our own permanent Rochester location. Upon our third anniversary, we're well in excess of that expectation and we actually had commercial loans in excess of $100 million and our bank building was already in the design process. And in Rochester, we started strictly as a business or commercial bank. We do not want or try to be all things to all people in these communities just best at what's most important to someone running their business. We have a lot of significant advantages in our Minnesota markets and someone running their business will always prefer to do business with a strong community bank. Unlike in Iowa, the State of Minnesota is not blessed with as many strong community commercial banks. I'd also add that since our new bank facility has been in place in Rochester for the past two years, we've been able to expand a full line of traditional banking services. We have introduced a specialized form of consumer banking in Rochester. This concept is not a mass marketing strategy but designed to provide personal banking services for our business owners, their families and other community professionals. During our first year of having our building open during 2017, we opened 100 personal checking accounts and the average balance in those accounts was approximately $80,000 and thought that as we continued to grow this that surely that that large average account balance would decline. But during 2018, last year we opened another 100 personal checking accounts in Rochester and the average balance increased and is now approximately $100,000. So again how long will it take to achieve profitable operations in our new markets and how good can it ultimately become, the commercial loan volume necessary to cover $3 million in expenses assuming a 2.5% spread is $120 million. Certainly not everything that enters a pipeline results in closed business in the lead time varies with each individual opportunity. However the items that we have in our pipeline are all supported with existing relationships. And again we think we will be off to a good start and hope to achieve similar outcomes in these three communities as we have in Rochester. With that, I'd like to turn the call over to Harlee Olafson, our Chief Risk Officer. Harlee?

Thank you, Dave. And I'm going to give a little more information in regard to both our credit trends and loan activity and outlook on loan activity. I'm going to start with the less exciting portion of this first which would be our credit trends and our credit quality has continued to stay very strong. Our total watchlist when you look at it as a percentage of total loans is less than 2% of our total loan balance and our Texas ratio is less than 1%. In the last quarter, we had no charge offs and a small amount of charge off collections. In looking at our most difficult portion of our loan, the loans that are in our non-accrual category that only represents $1.8 million worth of loans and other than a two small loans that represent less than $100,000 in credit, all of those credits are current and paying. There is a significant amount of interest income that will be generated from those loans as the principal is collected and turns into just interest collections. So we have recently had our independent loan review which basically comes in and reviews 50% of our portfolio two times per year and in that review, there were no results that any credits were downgraded to the watchlist. They basically in the last category looked at $860 million in loans in the last review and then previous review that was six months before that looked at $900,000 in loans. So our independent review has confirmed our risk rating statuses and our credit quality remains strong. We also have been stress testing our commercial real estate portfolio and as it does with time and good structure, the credits within the portfolio continue to perform and in fact at the last stress test, we had no loans within the commercial real estate portfolio that were past due, no past dues over 30 days. So getting on with that, the credit has good trends. It looks strong, it's in as good shape as it's been in any time within the company's history I'm guessing. In looking at the outlook for activity and business, obviously last year we had a very strong year in regard to loan growth and deposit growth. Currently, we have a pipeline that exceeds $400 million. Typically at this time of the year that pipeline would be closer to $200 million. The advent of adding our new Minnesota Group has added significantly to that pipeline and one of the very positive aspects of their pipeline it varies very heavily weighted to C&I business and strong depository business which we need in most markets. One of the nicest things about being able to add bankers that have strong relationships and good communities is that we have the infrastructure in place at West Bank to support these people. So the additional overhead that we have put on in regard to production is all production people that can quickly pay for themselves and add to incrementally increasing the income of the bank. In regard to the economy in local markets, Des Moines had an exceptional amount of commercial real estate activity in the last years. And I do believe that especially Downtown added apartment type of dwelling is probably going to slow down because of an increase in vacancy in Downtown commercial real estate in the apartment side, warehouse properties are very strong, office is strong. In Iowa City, they've also had a lot of activity in those categories. And there are plenty of hotels over there in Iowa, I think and the involvement for us in the future on most type of things depends upon the strength of the borrower and the strength of their other type of things are doing for them to continue in those type of capacities. In our new markets both St. Cloud, Owatonna, and Mankato are in good for their actual situations in regard to growth, I'd say that the economies in all locations are robust and the level of C&I business that's in our pipeline there should be very strong and helpful to our ongoing financial performance. I'll quit with that and see if there's any questions as we go forward here. So with that, I'll turn it over to Doug.

Okay. Thanks Harlee. I'm going to make a couple of comments about expenses. As you know, we don't typically give earnings guidance but we thought we should give a little bit of guidance on expenses with the new growth initiatives that we have going on. And so we would project that in the second quarter, our total expenses will be around $9.6 million. Now that compares to the second quarter of 2018 had reported expenses about $9 million but there was $333,000 write-down on the carrying value of our Lower Muscatine office in the second quarter of 2018. And so if you factor that out, our expenses would have been closer to $8.6 million. So we're projecting that expenses second quarter this year will be about a $1 million higher than a year ago with $750,000 of that increase being attributable to our growth initiatives. And so I wanted to put that out there on the table. We have a little, a small wild card in expenses in the form of the FDIC insurance premium. At some point in time, when the FDIC insurance fund reaches 1.38% of deposits we're going to be able to recognize a credit that we have, the credits $498,000 and we don't know exactly when we're going to be able to recognize that. But our best guess would certainly be that sometime between now and the end of the year. And lastly, I would just comment upon our effective tax rate in the second quarter. We think that will be around 19%. And so with that, we would open it up for questions.

Okay, thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Andrew Liesch with Sandler O'Neill and Partners.

Hi, good morning guys. It's actually Aaron Deer on for Andrew this morning.

Yes, hi Aaron.

How are you all doing?

Good.

Good, I appreciate the color on the expense rate, I know that was something of a question for us. Just to confirm that that $9.6 million, that's the full in run rate, correct and then we kind of build-off of there over time?

That's the full run rate including the growth initiative.

Right, okay. And then with the folks that you've brought on board at this point, what's any sense of the timing in terms of how quickly they're able to bring over business and what that means for your growth in loans and deposits over the coming year?

Well again it's always, we hate to tell people that something's going to happen quicker than it actually is. But our pipeline from the new group exceeds what we would need to break even currently. The nice part about the pipeline is that it includes a significant level of C&I credit compared to commercial real estate and it also includes significant deposit relationships that will also help fund that growth. So we actually believe the activity which has already started and some is already funded and a bunch that's approved and accepted will grow fairly rapidly.

That's correct. Okay, and then it sounds like in terms of the kind of existing infrastructure for the systems and personnel to support these ground teams is in place and that there is no adds needed there, how much can you grow in terms of asset size before you would feel compelled to kind of stair step up the core infrastructure of the franchise?

Well, one of the things that we are adding to is additional people in our credit team. It's not a not a significant increase in cost. We're already in place looking at having an expansion or some of our core processing systems that provide better bandwidth and ability to get our core to our people in our new markets. And that was in place before we actually did this, it's just a coincidence of that but we do have the increased level of need for maybe an additional person or a person maybe one experienced person or two, more junior people in our credit department but that won't add significantly to our overhead. And one thing that I like about what we've done in our initiative is we're adding, adding to our production capability with the highest level of producers by almost 50% and not having to add to our overhead by anything that's significant.

Sure. And that all sounds pretty incidental.

And Aaron, we've tried to include the cost that Harlee talked about in our $3 million annualized run rate there but besides the one or two people that we may need to add to credit department, we really don't foresee having to add any other infrastructure type. Well, yes we're adding networking and things like that for the new offices but back on a centralized location or in our centralized locations and our support departments, we do not believe we need to add anything there.

That's great. And do the pipeline too sounds pretty robust. It is there is the granularity within that roughly the same as what you have had out of the existing franchise in Rochester? Or are there bigger credits or how does that compare?

I'm just looking at it right now and our size of credit, we only track credits over $500,000 in our pipeline, there's significant credit that's also underneath that amount that comes on top. But it just gets a little, gets too overwhelming to look at all of the smaller stuff too. But we're looking at deals in the pipeline from our new markets that is in the neighborhood of 30 new deals that would average about $4 million a piece.

Okay.

There's nothing in that pipeline that exceeds, I think the biggest one is about $10 million and the average is right in that category. So that's real similar to our real similar to our current base of business, I would say except with a higher level of C&I waiver.

Okay. Terrific, thank you for taking my questions and good luck with the new market.

Yes, thanks Aaron.

Thank you. And the next question comes from Kevin McLaughlin with McLaughlin Investment.

Good morning. I just wanted to ask two questions. I have no idea what the Fed will do with interest rates but what kind of an uptick or what kind of an effect would there be with an uptick or downtick at the Fed in your margin at 2.5% on your loans and it's your ability to cover your costs for starting up in Minnesota?

Well, Kevin if when the Fed increases in the short run it's detrimental to us because we have more larger deposits that reprice immediately and it takes time for the loan repricing to catch up. So conversely if the Fed were to cut that would be incrementally beneficial to us, when we use that 2.5% spread to estimate what type of loan volume that will take to cover those costs. That's I guess, I wouldn't see that fluctuating based upon Fed action. I mean because the rate should change on both sides of the balance sheet kind of proportionately.

Okay. And my second question Doug, I haven't heard you talking about Rochester in terms of trust activity. You mentioned the checking account balances which sound really encouraging but are you seeking trust business up there or not. And what's the experience been like if you have?

Kevin this is Harlee. There is activity on the trust side of the business there. We as you know, do - are not proprietary when it comes to the investment side, and have contracted with approved investment advisors to use. So the trust activity that we we've picked up in Rochester a lot of times has come from the ability to manage the trust documents and trust business for the client while allowing them to use an adviser in regard to their investments. So that that continues to happen, I'd say we had some real strong efforts in that area immediately and we're still working along those lines to continue that business.

Okay. I was just wondering because the kinds of people you're attracting sound like the kinds of people who would in many cases have an interest in trust services but I didn't know I hadn't heard you speaking about it but congratulations the Minnesota initiative is exciting to me. I'm very thankful for the position we have and we're looking forward to adding to it. So best wishes for 2019 and thanks for everything.

Thanks Kevin.

Thank you.

Thank you. [Operator Instructions] All right. As there is nothing more to present, at the time I would like to return the floor to Doug Gulling for any closing remarks.

Yes again thank you for joining us this morning and we appreciate your interest in our company.

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