Q3 2019 Earnings Call

Good morning.

Welcome to the West Bank Corporation quarterly earnings Conference call, All participants will be in listen only mode should you need assistance. Please see only conference specialist for pressing the star key followed by zero.

Today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then 100 Touchtone phone to withdraw your question. Please press Star then too.

Please note this event is being recorded.

I'd now like to turn the conference over to Mr., Doug cooling. Please go ahead.

French call.

On the call. This morning, our Dave Nelson, our Chief Executive Officer, Harlee Olafson, Chief risk Officer.

Brad Winterbottom West Bank, President and Jane Flock Arc, Chief Accounting 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 any forward looking statements 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 a.

Buys for updates such statements to reflect current events or circumstances. After this call or to reflect the occurrence of unanticipated events.

So at this time, Dave Nelson will together.

Thank you Doug Good morning, everyone. Thank you for joining us very pleased and proud to report that we had an all time record quarter.

Despite the earnings drag of our investment in our Minnesota expansion, we still had the best quarter in the <unk> hundred 26 year history of our company.

So even better news is that we are fast approaching a breakeven point our expansion.

Achieving a positive and profitable runrate hopefully by year end, which will translate into a big year over year swing for our company.

Oh also locally here and well we were once again selected as one of the top well workplace employer for the sixth consecutive year.

And our board of directors approved or quarterly dividend of 21 cents with a record date of November six them payable to shareholders. On November 20, I also had some exciting news on the appointment of a new director our board.

Appointed Patrick Jay Dod event to our board of directors.

Mr. Donovan as a retired career banker with an extensive background in the banking industry spanning nearly four decades, and that's all been and Minnesota, Oh, we're very pleased and proud.

Welcome Mr. Donovan to our board.

With that I'd like to turn call over to our bank President Brad Winterbottom.

Thanks, Dave I'll be a brief in my comments loan activity.

Were up 6.7%.

At the beginning of the year and then in the third quarter, our loans were up roughly 2.5%.

Despite that we had we had over $50 million in.

Unexpected payoffs in the in the third quarter so.

Our growth, which would be coming from really all markets, including our AR.

Minnesota.

Directive.

We had a we've had good volume in the third quarter pipeline for the fourth quarter.

Is very robust a we have a lot of construction loans that we anticipate continued draws on we have some big closings that we.

Anticipate happening here in the next 30 or 45 days. So I think our fourth quarter will be very robust in terms of loan volume deposit growth has been good it won't be better when we get a.

Minnesota more onboard with.

Our strategy with I T M.

And I would like I would anticipate our deposit growth to.

To improve in the fourth quarter.

That ends my comments and I'll turn it over to Harley to talk about a credit trends.

Thanks, Brad.

Just a couple things to talk about.

Our watch list is currently less than three for set up our total loans that are non accruals and substandard credit is is really had a record low.

We had some developments within a quarter that.

We actually got.

Paid off in fall.

We're three credits that then very sticky both in that went on non accrual area.

Yeah.

Actually received all principal and interest stuff rolls on those credits faculty.

Non accrual areas down to such a low level right Oh it doesn't.

Compute to some type of percentage.

Oh.

We have significant.

Commercial real estate presence in our portfolio.

I'm pleased to report that there's zero pastors <unk> commercial real estate.

Nothing over 30 days in fact, I don't think there's a commercial real estate credit. We have that's 15 has a 15 days past due on it.

Doing or loan growth.

I'm fairly significant sometimes it doesn't always occur at one year, but occurs after four quarters, we did take a EUR 300000 dollar provision.

With that we believe we're a long since appropriate based upon the quality of our of our loan portfolio.

And our new markets.

We have really good momentum.

And opening up those markets I think we.

Hi, and a little bit regard to.

Technologically getting all the pieces in place to be able to.

Provide the best Depository services, we can we think that we will have.

The type of technology or machines, and those type of things in place in November that will help us accelerate or depository growth in our new markets.

Looking at.

Our pipeline, which Brad talked about.

Portion of our pipeline that we consider to be.

Loans that have been committed to by us and accepted by the customer that are just waiting a close I believe is at the highest level that I've ever seen exits or it is a significant level going into.

So last quarter of the year.

Oh, no army economies that are part of our.

Patrick of West Bank is that we are.

Really good communities, where into more and I was city Rochester, St Cloud demand Kato on old town.

All of those communities.

Have strong economy as we have good momentum in all those markets.

Better than being in really good communities is that we don't have any locations in any shrinking.

Or communities that are.

Losing share.

Population or.

Really strength.

So what does bode well for us on the future our customer base is strong and stable.

Continues to give us an opportunity to build future business.

Along with that I.

I believe we have.

Incredibly.

Good staff that season and has the ability to continue to provide the best in customer service that we can along with continued growth.

With that I would turn it back over to dot.

Thanks, Harley I've got a just a few.

More comments on some details of the.

Financial statements we had.

We did have some nonrecurring interest income items in the third quarter, we on nonaccrual loans that Harley mentioned were paid in full.

We did collect $175000 a back interest and then on the on some of the prepayments that Brad mentioned, we collected $340000 between prepayment penalties and recognizing the out of more ties deferred fees. So.

We would a point that out.

In the expense categories.

The FDIC costs this quarter was zero because as some of you may know.

A lot of the banks have credit to build up at the FDIC and they were able to take those credits once the FDIC insurance fund reached 1.38% of all insured deposits and that happened at the end of the second quarter early third quarter and so.

We used a our credits and and a portion of our credits in the third quarters, so that the FDIC expenses zero.

We expect that our FDIC expense in the fourth quarter will be zero again.

That should leave about $90000 of credits.

Recognized in first quarter.

2020.

Just a little.

A bit of information on the net cost of our Minnesota initiative.

Our our.

Rough estimate is that on a year to date bases.

We've incurred expenses of about 1.9 million or we have.

Generated net interest income of about 500000, so that would give us a net cost of 1.4 million.

That's year to date for the third quarter, we estimate that they expenses were 700000. The net interest income was 400000 Saar and that costs.

There were approximately $300000 so.

With that.

That concludes our prepared remarks, and we would be happy to answer any questions.

We will now begin the question answer session to ask a question you May Press Star then one on your touched on Sun, if you're using a speakerphone. Please pick up your handset before passing the keys to withdraw your question. Please press Star then teal at this time, we'll pause momentarily to assemble our roster.

My first question comes from Andrew Liesch with Sandler O'neil. Please go ahead.

Everyone morning, Andrew Good morning.

Doug just a quick clarification, the 341 million of a thousand of prepayment penalties that went for the net interest margin as well and <unk> because that is that correct. That's correct. Okay gotcha.

And then I know you guys referenced maybe the deposit growth top of the Minnesota locations not being as strong as <unk> as possible and you're working to remediate that but still I mean deposit growth is pretty good in the quarter and I mean, it looks like it maybe drove excess liquidity a little bit high.

Which maybe kind of offset some of the benefits you saw in the funding side, what what drove that liquidity and how do you see that playing out and where do you see the margin trending from here notwithstanding the though those nonrecurring or that those onetime interest items that you mentioned sure yeah. No. That's a good question good observation we.

We do have a little.

More liquidity than we would normally carry but starting in late June maybe train over into July a little bit we did build that liquidity up we sold some this was actually in late June we sold some 100% risk weighted investments corporate notes that type of thing.

When when interest rates were headed down we're able to sell those are.

Or at least a breakeven I don't know there might have been spoke small gain but.

And and and put that money and liquidity for the loan portfolio.

And and so we did not.

Have a loan growth that net loan growth in the third quarter that we expected to have Brad mentioned, you almost $50 million of payoffs with most of those being unexpected.

Yeah I'll when we were visiting with you at the end of July .

And so.

At the end of September we did have a little more liquidity that way.

Would normally carry however.

We expect a good strong fourth quarter of loan growth and and so we're just holding onto that and tell it sopped up by the by the loan portfolio saw in terms of the margin.

Our best guess right at the moment would be that our margin has bottomed out.

There was a fed as you know a fed cut at the end up towards the end of September while the full benefit has added in the fourth quarter, which for US there is a slight benefit in the short run.

And then as more and more loans come on.

The books.

You know at higher rates than that and investments and certainly higher.

Error rates, then then overnight fed funds.

You know the margin should a bottom out and can improve a little bit.

Gotcha.

That's helpful.

It all footprint there was just a little pick up in the fee income areas in the Trust services then the other line was there anything unique driving that.

Yes in the trust fee income area, we were able to collect.

I think whats referred to as Extraordinaries fees on a state that we had been handling that's a situation where you know it if we have a lot more work than its expected. We can go to the court and request additional fees and a court granted that in the third quarter I believe that was.

70000, yes, it was said okay.

They have also have been.

Doing a good job selling as well so we're seeing the benefit of that as well.

Gotcha.

And then lastly from me or the comment in the release or them in the 10-Q.

About c., so how the delays applicable to the bank.

Are you guys planning to delay or what's the thought process there.

We are going to delay, yes, we've made the decision to delay where a small <unk> smaller reporting company and Ah that delay is available to us and so yes, we're going to delay okay.

Thanks that covers all my questions yeah. Thanks Sandra.

Again, if you have a question. Please press star then one to enter the keel.

Our next question comes from Kevin Mclaughlin with Mclaughlin investments. Please go ahead.

Hi, Good morning, I came into the call a little bit late but.

I just wanted to ask if you would characterize these three new markets with the up.

The assets that you are the people you've taken from bremmer, what kind of market share did they have been those in those markets and how does that compare with and I assume that the principal competitors would be wells Fargo and U.S. Bank Corp, how would they compare say with what you saw in Rochester and.

Okay.

How how large of a presence did they have and how valuable where the assets that they have compared to those of sale wells Fargo or U.S. Bancorp.

Kevin This is Dave and Ah interesting questions. I think there are a lot of similarities but yet the landscape is very different you know when we went into Rochester six years ago.

We were able to hire of what we believed to be and I guess.

That's proven out that we really have had the advantage of hiring the best team in town that had deep existing relationships with community leaders.

And.

It only took us about.

Nine months to achieve a profitable run rate in Rochester.

But when we.

Start really want to go about at the same way in St Cloud Mankato and over time in our advantage package has a similar and quite strong in the once again, we were able to hire.

The best bankers in the town, who all have deep existing relationships of supplemented by.

Familiarity from several of US here in des Moines, but we were able to round up advocates create a community boards were.

Instead of going into a town say were five employees were really a team of say.

12, or 20 people and the ramp up.

We're experiencing with this expansion with the three communities combined is very similar to the timeline that we experienced in Rochester.

What were some of the people seem to go ahead.

Oh things you're talking about is is probably potential.

Right if you look at potential.

Size wise I think you can look at them at Keno.

Uh huh.

Being a similar potential too.

Chester Girl.

All the time.

Potential.

Not as large as that.

Maybe 50%.

What that potential is.

And St cloud potential might be double what are Rochester potential was in regard to size and breadth of.

Sure.

Okay, well I remembered or Mark it was made at the annual meeting that might have been Brad Peters I think that made it.

And there may have been you Dave that that.

Virtually the entire staff moved out of sync clouds bremmer operation with Brad. They all felt the same way, but we're a lot of these bankers I know you came from Wells Fargo. Initially we're up some of these bankers that Brad is bringing over with him and autonomous Kato did they have a wells Fargo roots are those kinds of.

Connections as well.

Several did.

Certainly and Mankato, I know a tight but not not as much so in St cloud.

Okay.

Well.

That kind of gives me a feeling for for you know.

The pedigree and ER and the reach but I'll be anxious to see how it goes from here, especially on the deposit basis in this next quarter, but congratulations on a great quarter I'm, a very happy shareholders. Thank you Kevin we appreciate your support.

Yes, Sir.

This concludes our question and answer session I'd like to turn the conference back over to Doug cooling for any closing remarks, well just wanted to thank you again for joining us and we appreciate your support so thank you.

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