Q1 2020 Earnings Call

There's an expense from the prior quarter.

And it already seems so long ago. So covid-19 arrives West Bank initiated our disaster prevention protocols. We got people set up a work-at-home. We closed our bank lobbies. We kept her drive-through Service open and we jumped all in with the PPP program West Bank along with a good portion of our industry has undergone. What I would describe as a wartime like repurposing of our bank into an SBA Factory with night shifts. We got about 600 PPP applications, totaling about five or six million across the Finish Line before round one funding was depleted we have about another hundred fifty more PPP applications ready to be submitted back when the round to window opens, which we expect to be today. We are also expecting another wave of new PPP applications as well.

It was very appropriate to ask and reflect upon questions such as what happens if people don't pay or unable to pay their rent or home mortgage payments what happens if businesses don't pay their rent or mortgage payments. What impact would there be on office building occupancy Across America if people continue working from home permanently or semi-permanently, how long will the shutdown last will Americans not have the confidence to re-engage with normal activity until herd immunity org is achieved or a vaccine is available all of these questions and others are very appropriate to ask but for which answers are unknown?

As of right now in today West Bank has a very low to non-existent levels a past due loans or overdrawn accounts.

Frankly as in none, which is very remarkable. We are a reflection of those with whom we do business when our customers have difficulty we will have difficulty with our industry is initially most concerned with exposures in certain obvious areas in sectors such as travel and entertainment which includes hotels and restaurants energy agriculture Transportation retail businesses consumer credit card portfolios Consumer Auto and consolidation loans monthly mortgage servicing rates valuations for Home Mortgage portfolios cetera.

West Bank has no direct exposure to energy agriculture or credit cards with minimal exposure to Consumer Debt restaurants and travel and entertainment West Bank has a meaning of exposure to hotels in commercial real estate. Our hotel exposure is concentrated with a handful of successful operators with an overall portfolio loan-to-value age of sixty nine percent perhaps this may sound arrogant, but I believe our relationship based customer base is comprised of clients with well above average Financial strength as West Bank is seen as a bank of First Choice not a bank of Last Resort. However, when our customers have problems we will have problems and the problems may be severe and the duration remains unknown

in accordance with

Our industry Regulators joint instructions West Bank will extend helpful loan modification terms. Where warranted to these impacted businesses.

I'd also like to add that are three Market Minnesota expansion into Saint Cloud Mankato and Owatonna, which was launched during March of last year achieved positive profitable run rate after just nine months and exceeded break-even to start calendar year 2020.

For our for our quarterly dividend. We are keeping it the same at twenty one cents unchanged versus an increase. The twenty one cents has a payment date from May 20th to shareholders of record as of May 6th. I would now like to turn the call over to Harley Olufsen our chief risk officer. Well, thank you Dave. I'm going to comment about a couple of different things here. There's so much that could be said today, but we'll reiterate a couple things that they've talked about. We currently do not have any past dues in our loan portfolio and every day we monitor overdrafts off and we do not have any drafts over $5,000 in our overdraft situation. So, yep.

Looking at where we could have issues and where things could could happen for us as Dave talked about one of the thoughts and Creations that we have. Our is in commercial real estate just from a trying to give you some flavor into how that all adds up multifamily properties. We have a $279 million dollars in multifamily properties. The average loan-to-value on those properties is 70% Warehouse properties. We have $179 million dollars in Warehouse properties average loan-to-value of 67% office properties, 159 million and 70% medical office building wage.

115 million sixty 1% Senior Living centers 112 million and 68% in looking at the hotel properties. We have $151 in hotel properties what's actually extended right now and just I'm not trying to change change Dave's discussion in regards to our loan the value on that but our loan to value on that is currently 66% We have provided modification to a lot of our hotel operators. Number one. They're basically in a shut-down mode right now where they're definitely not making money off their open their barely open. Our typical modification right now has been performed months. We do expect that that could change.

And we might modify.

As far as long as 6 months when we look at that from a totality perspective, we look at the interest rates on those hotels at home somewhere in the neighborhood of the between 4 and 4 and half percent are the rates on those loans. So even at a six month deferral of interest that real life only adds to the loan the value on a combined basis at 2 to 2 and half percent not not terribly significant the same issue with the Roses, but we be up and running in six months and it's really six months from now because through March all of the payments have been made on the deferrals are really start in April and go forward from there and looking at where these properties are at. We have eight properties and Des Moines wage.

Five properties in Cedar Rapids Iowa City Coralville, we have three properties in Rochester. And then we have three other Hotel loans that on a spread out between different areas. These are all customers of ours that have long histories and the business and significant staying power can cash flow.

As with any industry like this though. There is a significant burn of cash on a monthly basis because things continue to happen such as uh, real estate taxes continue. There is still significant payroll in some of the areas and the burn has been a related on many of these properties to see how long our our operators have the sufficient liquidity to support these and off in the ones that we've looked at. They all have sufficient liquidity to sport at least six months worth of of problems.

So that's probably a little more information on just on higher-risk loans section, which I do believe is the is the wage. Excuse me the hotels at this time, we have done modifications to not just Hotel customers but to some other customers that we know we've done approximately 120 modifications for 70 different customers in some cases. The modifications are put in place because these individuals have a lot of different Investments and a modification to interest-only might allow them to maintain or build liquidity in these difficult times and in some cases they're put in place because they are in a cash burn off.

In a working to maintain their liquidity to get through this problem when they can be back open for business again.

in addition to

this information. The only other information that I would say is significant right now is our Iowa City are Iowa city office location. Again is very dependent upon the University of Iowa. The University of Iowa being again open for business has fallen and our Rochester location, which is has a dominating Force there a male clinic which Mayo Clinic is in a position where they are often less than full speed right now due to not taking on cases that aren't of imminent need. We do believe that our basic markets are strong that they're resilient but

Hours, like anybody else's are having some difficulties today that will have to be worked through and what that I'd turn it over to Brad for maybe some happier discussion. Yeah. All right. Here comes the happy talk. Just looking back on the quarter. We started the year. Our loan portfolio wage is roughly a million 950 that number grew under normal operations about 2.7% And when you look at our for markets and Minnesota and are two markets in Iowa there was growth in in fact everyone of those markets, but added to that 2.7%

Growth deposit growth was not as strong but we also anticipate that should improve this year as we track those especially Up In Minnesota where we're attracting new customers and the loan activity is happening prior to the deposit activity moving off, but we are working together those deposits. I look at our pipeline. I looked at our pipeline report a lot but looking at it today, we've had a lot of customers that have delayed projects that we had been talking about or expansion and we still have a pipeline. It's not nearly as robust is maybe what we've talked about in in Prior quarters, but as an example, I I'm aware of about six transactions Thursday.

Going to pay off.

In the next maybe 30 45 days a total maybe Thirty million dollars and those would be assets that have been sold waiting to close or they wage construction loans that have been built and now they're moving to non-recourse lenders. We're going to trade those payoffs with some cni business that we've been chasing for a while and some other construction loans. And of course our construction loans will take a while to to build but that that is happening. And so I would say that Thursday we're going to replace those things that are paying off we have spent.

Seriously the last 30 days working on PPP loans. It seems like we've become an extension of the US government and just in terms of submitting these applications verifying the information and and sending it in and then conversely then creating the notes and the documentation necessary to get it funded and as Dave mentioned earlier we have on our books today roughly a hundred ninety million outstanding I think by the end of the day we might be at our own a hundred and five million dollars and we've got maybe another 15 to 20 mine and they come in every day these applications that are ready for phase two once once the SBA is ready for us.

Then in about eight weeks we're going to have to do very we're waiting for guidance from the SBA. We hope to get that someday, but there will be debt forgiveness and we'll have to be involved in that. So again that is taking a lot of time away from just normal business calling efforts, and I'm fine with that but it does have its toll on us. We don't know what's going to happen in the next few months and months. We're prepared as Dave said we are talking to our customers regularly. There's there hasn't been panic yet, but that's so we know that the times will be a lot different than they were they were three months ago six months ago. So we're we're bracing for that with that Doug. I'm going down.

Turn it over to you. I'm tired of talking. Yeah. All right. I just wanted to make a comment about nine interest expenses for the first quarter. They were only out the 1.25% over the first quarter of 2019. And and the primary reason for that is that our compensation expense is actually lower in the first quarter of 2028. It was in in the first quarter of 2019 few reasons for that in the first quarter of 2019. We were paying what you would call uh life on bonuses to our new folks in in the three markets 3 expansion markets up in Minnesota. And of course we didn't have that in a third quarter of this year. Also. We're actually down about 6ft. He's now compared to a year ago and and so Thursday

has

Influenced favorably on on expenses, but with that those conclude our prepared remarks and we would be happy to answer any questions.

Thank you. We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone. Please pick up your handset before pressing the keys to withdraw your question, please press * then two at this time. We will pause momentarily to assemble a roster.

Our first question today will come from Andrew lease Piper Sandler, please go ahead with your question.

Morning everyone. How are you? Good Andrew quick question on the additional pipeline for the ppv. You said 150 that hundred fifty million or a hundred fifty more applications applications.

Gotcha. Okay so dollar and still be a little bit less but still seems like you guys are having right now Andrew 220 million will probably be be funded between already on the books to what we know the applications that we have that are ready to get approved as soon as the SBA suck it up.

Gotcha. Okay on the margin got some nice list there. I think they'll be some volatility that with the with the PPP loans and everything but excluding that I mean you guys have some room on the funding side to to reduce those reduced-cost further. I mean, how how do you think their margins going to trend from this month on the street ten level?

Well, certainly we should get a little more benefit in the second quarter from all the rate from the rate cuts that took place in March because often during March. We actually lowered every every single deposit rate that we have which we necessarily don't always do the FED is changing rates, but when they dropped them to the extent that they did, you know, like I said, we we changed every deposit rate that we have and so long

We'll get more of a benefit in that in the in in the second quarter and then it's hard to tell you know, the yield on these PPP loans will depend upon how long they're on our books because the real driver of the yield is the fee that we're getting and we're setting the fee up to amortize off the note. Which all of our notes are 2-year notes. And so they'll amortize start amortizing over that 2 year period and then of course as they're forgiven and pull it off early, then we'll recognize the an amortized fees at that time. So, you know, we we would expect I mean argh at this point in time is that most of those loans will will be forgiven in six months. So we should see the bulk of that fee recognition and third quarter maybe a little wage.

into the fourth quarter

Got you. That's out beyond that I don't know if this 2.7% won't go through right? But how how is the sensory Bowery but growth going forward? What's what's their sense of of Wonderland right now? I would say

In our new markets, that's where the bulk of our growth is going to come from because our our 20 Bankers that we have down there. They are chasing their relationships that they've created over the years and and that is still a very possible for us the central Iowa Market has growth but not nearly what's taken place up north of Des Moines and we've had decent growth over in our Iowa City Coralville area as well, but I don't anticipate growth heavy growth in either of the Iowa markets it it's more of our three new markets that we have up up north in, Minnesota.

Just just add to that. I think part of the part of the benefit of having good bankers and being responsive is is that there's some real franchise type customers up in those markets that went to talk to their existing Banks when I bought some issues have come up and we've had the opportunity to capitalize on some customers that might have taken a much longer time to bring into our fold and so with every problem there's also opportunity.

Right. Now it certainly helps not not fighting pay down there at all. Taking taking markets here. I guess along those lines out on the funding side. You kind of alluded to it. I just needed to in the past. You said you needed to upgrade some technology to better serve these customers from the depository standpoint. How how how is that process going is it pulls you up and running? We're uh-huh. Yeah, just any update there would be nice. I think part of what you're talking about their address when we when we went up to our Minnesota markets we welcome in with a limited amount of depository capability in the in the branches and we've added the backup capability for that. So our ability to add to our depository base up there is much better now than it was three months ago because of the backup capability of being able to take the deposit off.

and have a backup function so

Our Technologies and better situation there than it was before.

Gotcha. That's great. Thanks for taking my questions. I'll set back. Hey. Thanks, Andrew.

As a reminder to ask a question. It is star then what our next question will come from a Kevin McLaughlin of McLoughlin Investments, please go ahead with your question wage. Thank you. Good morning everyone. I just wanted to ask you've talked in the past about how the market in Minnesota does not have strong Community Banks and I was I understand that you have Bankers you were attracting to your new location there and that they have an advantage in bringing business immediately, but I was wondering if you would describe a little more in detail what the difference is between Iowa and Minnesota. How come they never developed a a strong Community banking system. And is there a significant competition that develops at some point from any of the banks and the communities you're serving or is this just something that is a foregone conclusion?

Thank you Kevin. This is Dave in great question and thank you for joining us state-iowa is extra ordinarily blessed with a high number of strong Community Banks per capita more so than other states which is a great economic benefit for our state. I'm in Minnesota. This is my opinion, but the two major banks that were initially headquartered in Minnesota the old Norwich the old first bank now both have different names, but we're incredibly successful. They were operated as a string of Independent Community Banks and dominating the state banking landscape and which didn't really provide a lot of room for others to flourish and so yep.

I say that the state of Minnesota is not as blessed as the state of Iowa and having a plethora of strong Community commercial Banks. I believe that is why wage, huh? Okay. Well, I was just wondering because we are long-term patient investors. We're looking for the long-term growth curve, which we believe could outperform the market over that ten or fifteen year time frame, and I just wondered how far this could extend. I know that the Twin Cities holds an exciting opportunity, and I'm anxious to see if the discernible advantages that we see will extend in that that Marketplace as well. Thanks for the background and congratulations on a on a great quarter. I couldn't be more excited about what you're doing and what we own. Thank you. Thank you, Kevin.

This concludes our question-and-answer session. I would now like to turn the conference over to Doug cooling for any closing remarks. I just like to thank you all for joining us and I will look forward to talking again next quarter. Thank you.

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

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