WTBA (2021 - Q3)

Good morning and welcome to the West Bancorporation Quarterly Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. 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 Gul

Good morning, everyone. Thank you for joining us. On the call today we have Dave Nelson, our Chief Executive Officer; Jane Funk, Chief Accounting Officer; Brad Winterbottom, West Bank President; Harlee Olafson, Chief Risk Officer and Brad Peters, our Minnesota Group President. And we’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. And Dave Nelson will start us off.

Good morning and thank you, Doug. Thank you everyone for your interest in our company and joining us today. West Bank is and has been operating under non-pandemic protocols, and we had a great quarter year-to-date, our ROE almost 21%. We’ve had year-to-date loan growth of about 10% with deposit growth of almost 20%. We have deployed our excess liquidity. We also hired three new commercial bankers for our Des Moines market, and we have already exceeded last year’s record earnings in just nine months of operations actually, we did it in eight months. But perhaps even most impressive as of quarter end, September 30,’21 we didn’t have a single past due loan past 30 days. So based upon that performance, our Board of Directors declared a $0.24 dividend per share payable November 24 to shareholders of record on November 10. With that, I’ll turn the call over to Harlee Olafson, our Chief Risk Officer.

Thank you, Dave, I will make some brief comments on credit quality and our watchlist. First of all, we have a very small number of watchlist credits, all credits on the watchlist either have an exit plan or we believe they have improving financial performance that will allow them to exit the watchlist and return to an acceptable classification. All credits are properly structured, and none are past due or have any history of past due payments. As Dave said, in fact, our entire credit portfolio did not have one past due loan over 30 days at the end of September. We have one credit with a specific reserve of $2.5 million that is a non-accrual. They have executed a plan that sells fixed assets that should virtually eliminate our non-accrual by year-end. We have tracked carefully the credits that have been impacted by the pandemic, namely hotels and movie theaters. I’m very pleased with the progress they have made and they returned positive cash flows. Payment protection loans are now down to less than $40 million, and we continue to receive payments almost daily from the SBA. I expect that the total dollars outstanding will be minimal by year-end. As we reported last quarter, we have no credits that have COVID modifications still in place, all that were are back on standard amortizing terms. We had a recent regulatory exam and did not have any risk rating changes or discussions on credits within the bank. In summary, our watchlist is small. We have no past dues and our customers have more liquidity than at any time I can recall and do not expect any surprises to come in our credit portfolio. Other risks, including business continuation plans and IT enhancements to protect the integrity of our systems are continually being implemented. With that, I will turn it over to Brad Winterbottom to discuss our markets and yield.

Thank you. My comments will be brief. Dave mentioned our loan growth for the year is at 10%, and during the third quarter, it was approximately 4%, primarily real estate secured transactions, some C&I, but mostly real estate. In the fourth quarter, we do have projected pay-offs of roughly $75 million based upon asset sales or refinance elsewhere. So, our pipeline is good. We’ll have a little bit of headwind to replace that, but I think we can do that in the fourth quarter. Our loan growth and deposit growth is coming from all markets with a heavier emphasis in our Minnesota markets. Dave mentioned also we hired three commercial bankers, two of which have started employment here, the third one will land on the ground next week. So, these are very experienced bankers that had tremendous relationships at their previous employer, and that too will help our growth plans. With that I’ll hand it and turn it over to Brad Peters.

Thanks, Brad. Good morning, everyone. I’m going to provide a brief update on our progress in Minnesota. Our team continues to make good progress in building our presence in each of our Minnesota regional centers. Each of our markets continues to see solid growth and our bankers are focused on C&I, and the activities around C&I have created ongoing new business opportunities. Loan outstanding in our four Minnesota markets have grown to nearly $600 million, and our C&I focus has driven strong core deposit growth and treasury management business. Our new building in the St. Cloud market is scheduled to be completed late this year, and we plan to move into the new facility in mid-January. The Mankato market has purchased a building site with construction scheduled to begin late in the first quarter of 2022. And our Owatonna market is exploring potential sites for a new building. That is the end of my comments. I will now turn it over to Jane.

Yes, good morning, I’m just going to give a little bit more information on the PPP loans, like Harlee said, at quarter-end we had $47 million of PPP balances remaining, where actually those are still paying down nicely were down to around $35 million, $36 million today. At quarter-end, we had $1.6 million of fees, unamortized origination fees yet to be recognized. So, as those pay down and that acceleration occurs, that’s what we’ve got remaining to recognize there. Just to compare from an income statement standpoint, quarter-to-date, for third quarter, we’ve recognized about $1.6 million of income from the PPP loans compared to $1.4 million last year. And year-to-date for the nine months, we’ve recognized $5.8 million versus $2.4 million last year, so that gives you a little idea of the impact on loan interest income. And now I’ll turn it over to Doug.

I just have a couple of comments. One, I’ll comment on provision. Of course, everybody always wonders what our provision will be in the fourth quarter; and of course, we don’t make that decision until right at the end of the fourth quarter. But sitting here today, Harlee mentioned that there are plans in place for the non-accruals to decline. So, we’ll look at our watchlist and then look at loan growth, the net loan growth for the fourth quarter, but sitting here today, our best guess would be that the provision would be in a narrow range between a modest-negative provision and a modest-positive provision, so that would be our thought at the present time on that. And as far as the margin is concerned, going forward in the fourth quarter Brendan from Piper Sandler wrote in his first look that, he pointed out that our end of period versus average quarterly liquidity suggests more re-indexing benefit to the margin next quarter, and I would agree with that statement in that, we did add quite a bit to the investment portfolio right at the end of the third quarter. And so, we will have the benefit of that during the entire fourth quarter. And then offsetting that or working against that will be any loan paydowns and refinancings that take place generally are at a lower rate than the existing rates. So, but all in all, I would expect the margin to be fairly constant to maybe a slight improvement in the fourth quarter. So, with that, that concludes our prepared remarks, and we’d be happy to answer any questions.

We will now begin the question-and-answer session. [Operator Instructions] We will pause momentarily to assembler our roster. Our first question comes from Brendan Nosal from Piper Sandler. Please go ahead.

Good morning, folks. How are you doing?

Good. Good morning, Brendan.

Thank you for the detailed prepared remarks. You hit a lot of the questions that I was going to ask, but I definitely have a few more for you. Maybe to start off, you added three commercial bankers this quarter. Just kind of curious your appetite to add further bankers and perhaps kind of where in your market you would like to most see additions?

Well, there’s nothing specifically planned to add. We did have conversation and talked about the three that we added. That was probably a good quarter for discussion before we pull the trigger. We don’t have anything specifically now. However, if an experienced one showed up and we liked them in any market, chances are we would add to them. So, we don’t have anything planned there.

The only add to that, we didn’t really touch on our Eastern Iowa market, but the Eastern Iowa market continues to grow and become very strong, and we do believe that there is an opportunity to possibly have one that would be the next likely place where we have a possible candidate place to add to that marketplace.

And then maybe just kind of a question on the higher inflation numbers we are seeing. Just kind of curious how concerned your commercial borrowers are about inflation they’re seeing in their own wage basis and input costs. And then also to what extent you’re seeing the effect of inflation in your expense base?

Well certainly, we’re having conversations, and there is some caution there. Construction costs have certainly increased. We’ve had a couple of developers back-off on some planned activity. Our home building business right now though is, I think we’ve got 350 plus or minus probably 25 homes under construction with a couple of handful builders primarily in Central Iowa, and their costs are up. However, the demand is there. And typically, if they start a spec within six months, it’s sold with a closing three months down. So, there are certainly some issues as it relates to or caution as it relates to inflation but nothing out of the ordinary really though. Do you agree with that Harlee?

I do. I think, we look at it, even though we can’t predict the future in regard to all that kind of stuff, but it does have some interesting things that are going on, some of our C&I customers have trouble getting inventory. And when they get it, it’s sold immediately. But the strength that I see on the commercial side of the business right now is the levels of liquidity that the commercial borrowers are holding. And I think there’s been a slowdown in some levels of construction. But I think overall, the strength of the customer base is very good when they have been making good net incomes and holding a lot of liquidity.

And maybe turning to loan growth, obviously an incredibly strong couple of quarters here from you folks. It certainly sounds like next quarter will be a good bit softer, just given elevated pay-off activity, but I’m just kind of curious how you think about growth outside of that temporary or transitory slowdown into next year?

Well, adding some additional bankers should help. Maybe Brad Peters might want to comment a little bit more on things that are happening up in Minnesota, but I would say we hire people to go find new business and maintain existing relationships, and they’re doing a pretty good job of it. But we’re growing in Minnesota and we should continue to grow in there. So Brad, do you have any?

Brad, I would agree. I would expect that we’re going to continue to see solid growth in each of our markets, and I don’t really see anything that’s going to curtail that. So, as we go into next year just looking at what’s in the pipeline and the opportunities that exist, I think the growth will continue.

Maybe turning to expenses, as we look ahead at a few bankers, this quarter sounds like some of which kind of came on later in the quarter, maybe a little bit of inflation pressure as well. Just kind of curious how you think about near-term, expense-based outlook?

We don’t really see that running away from us. I mean, yes, we added three bankers in the third quarter. They kind of came on well, one was at the beginning, one was in the middle, and the other one although is kind of going to hit the ground next week. I mean, we’ve been paying for him since August. So, I don’t think we really expect expenses to significantly change.

Then maybe turning to credit, I just want to confirm that I heard correctly that the one remaining non-accrual loan has a $2.5 million specific reserve, is that correct?

That’s correct.

We have two non-accrual loans. One is very small, one is the only one that’s fairly significant, and the one that is significant had I think $8 million reduction in the quarter of our total commitment there. And they have a plan may they have another property that’s sold -- that’s supposed to close in early November that would take the number down to a less significant place than it is right now. So, they have plans in place that appear that are working -- that are going to, as I said, expect that to eliminate mainly by the end of the year.

Maybe one more for me. Just kind of thinking about the margin in the potential for higher interest rates. I think your disclosure in the queue shows that you might be slightly asset sensitive. But thinking back to the last time that rates rose, as I think deposit re-pricing ended up resulting in some overall margin pressure, can you update us in your thoughts of how you expect NIM to respond to rising short-term rates if and when that happens?

Well, there’s no question that we do have some deposits tied to short-term interest rates. But overall, we believe based on our models, that there’d be a slight increase in net interest income.

All right, wonderful. Well, thank you all for taking my questions.

Thanks, Brendan.

[Operator Instruction] There are no more questions in the queue. This concludes our question and answer session. I’d like to turn the conference back over to Doug Gulling for any closing remarks.

Well, that’s all we have for today. We thank you for joining us and thank you for your interest in our company. And we’ll talk about the fourth quarter in late January. So thank you.

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