Q2 2020 West Bancorporation Inc Earnings Call

West Bank Corp quarterly earnings call.

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I would like to turn the conference over to Mr. Douglas Chief Financial Officer. Please go ahead.

Thank you and that's a good morning, everyone. Thank you for joining us so.

With me on the call today are Dave Nelson, Our Chief Executive Officer, Harlee, Olafson, our chief risk Officer, and James Foster Chief Accounting Officer.

And 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 statement made by US during this call is based only on information currently available to us and speaks only as a state.

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 start us off.

Thank you Doug Good morning. Thank you everyone for joining US we appreciate your interest in our company.

We had an excellent corridor.

And we are significantly ahead of where we were at this point during last year's record year, plus we've set aside more and reserves for potential future loan losses.

Doug will provide more detail on the drivers behind the performance was a large one being the performance of our Minnesota expansion.

Well, we currently have an absence of past due loans are overdrawn accounts, we have extended many helpful payment modifications were needed.

In terms of what the economic impact of colder than the shutdown will ultimately have on our customers on our community remains to be seen.

We will hold for the best the plan for some trouble and challenges.

Yep.

More comments on credit quality, but we.

I believe that being a bank of first choice versus a bank of last resort will prove to be strongly in our favor.

In terms of covert 19 operational issues.

We have implemented many protocols no doubt similar to what all of you have done a despite limiting physical access and many employees working from home.

Remain unaware of the single example of for West Bank customer has been unable to receive requested service.

Pertaining to the P. P P.

Proud to say, we really out punched our weight class with the PPP program. We did over 900 P. P. P loans I think we actually have 914 active PPP loans totaling approximately 224 million and we are all anxious anxiousless anxiously awaiting final.

Instructions on the forgiveness process.

Based on our quarterly performance our board of directors approved a 21 cent dividend.

Oh with a payment date of August 19th to shareholders of record as of August itself.

Oh, that's over my prepared comments on what that I'd like to turn the call over to the Harlee Olafson, our chief risk officer, well. Thank you, Dave and good morning, everyone. All talk about our credit and where we're currently out and more importantly.

Some.

Color in regard to our modifications on what's been going on there.

Currently our watch list is very low and it has actually declined from $51 million at the end of last quarter to $33 million on June Thirtyth.

Oh, we have one past due loans at the end of June.

Over 30 days and that was in the amount of $15000. So we currently don't have any as Dave mentioned any past two issues or.

Overdraft sort of things such as Oh.

All of the concern of courses for the future, where we'll credit problems come from and when will that happen.

The major segments of our commercial real estate portfolio. For example, our we have 260 million to apartment loans 110 billion and senior living.

Oh accommodations.

Plus a commercial real estate of 159 million medical office buildings of 120 million warehouse.

Warehouse real estate of 180 million.

Hotels of about 150 million.

Most modifications that we granted we're in the commercial real estate portfolio.

The length of the modifications ranged from two months six books.

About 75% of the modification still require monthly interest payments.

Deferral of P. It I payments have been grab to two businesses that were virtually closed in April and may mainly the hospitality business.

On our hotel portfolio were tracking monthly occupancy and revenue on the whole hotel properties that have reopened.

In April.

Most of the properties were either closed or marginally open in may most real buttoned, Adam the range of occupancy that we saw at our hotel properties.

Well from a low up 10% occupied to Ohio, 59%.

In June and we don't have all of the reporting in June the hotel properties, but the range of occupancy improved from 19% to Ohio, 64%.

And then I would also qualify that our average loan to bill loan to value when the motel portfolio was around 65%.

And the majority of the flags or Hilton or Marriott with a couple of holiday items.

So as Dave said, we're currently we're not selling stress right now due to the fact that.

Some of the properties are modifications.

We had a number of borrowers that asked for modifications I think from a a.

Just being careful perspective of saying Hey.

We can just pay interest only in for a walk for a few months here will retain cash and put ourselves in a position of having liquidity in the case there's.

Situation last longer.

Becomes more troublesome.

They know what is at the current time.

So we are trying to stay and close touch with her.

Our customer base.

They're being very.

Good at providing information to us and telling us where they're up.

Currently we don't have the problem or any problems that have served post.

In the payment problems or lack of cash railing, such as that but as Dave said, we are prepared to.

Deal with problems that they do occur.

And with that I'm going to switch switch worsens and talk about what our.

What's been happening in regard to our sales side.

Our outlook and those type of things in the last two months, we have closed over $140 million and new business.

So in addition to all the BBP loans that we did.

In up that hundred 40 million, but 30 million of those medical office property 25 million in manufacturing 25 million and see it I at about 50 million and other commercial real estate.

We still have a very active pipeline.

Obviously, we have more markets and more bankers out selling product right now, which.

Helps us be very efficient.

The and athletic I'd say at our markets.

The pipeline I believe wall.

Slowed down to a certain degree as we keep going especially.

The economy continued to be modestly closed.

People are going are delaying their.

Ventures that they had.

Pat had started on or we're preparing to do so we do see some a pullback in areas such as that but I do think there still is room for some modest growth in our portfolio overall, when we did our PPD loans. We also.

Yeah.

Notice that we had.

A number of our customers that were paying down lines of credit or.

Augmenting their DTA balances as a BBB loans came in and if you will note even in our financials, you'll see our non interest bearing deposit center accounts are about $200 million higher than they were a year ago.

So with that all.

All of signed off on my portion and give it back to Doug.

Hey, thanks hardly I've.

Just make some general comments regarding our results year to date and here's how we would.

Summarize our performance so far.

Net interest income is up nicely due to two things one.

Earning asset base is higher.

Due to ER.

A number of factors, but the Minnesota expansion the PPP loan program.

And and then our margin has expanded.

Primarily due to the fact that the fed dramatically.

Rates in the middle of March.

March and as a result, we adjusted a lot of our it well, we adjusted all of our deposit rates.

And and so our interest expense on deposits has a has declined quite a bit.

And then in addition.

Our expenses, our non interest expenses are actually a little bit lower this year than they were last year and that's attributable to the fact that we had some onetime Minnesota startup costs last year.

We do have fewer ft east this year than we had last year and we renegotiated our core processing or.

Contract and so that expenses lower than it was a year ago and so.

All of those ER positive attributes.

Allowed us or or more than covered the fact that we have added a lot more to the provision or to the allowance this year through the provision for loan losses, putting at 3 million.

Here in the third second quarter and a million in the first quarter. So we have.

Provided for $4 million of potential losses, so far this year.

You know I suppose.

People May wonder Okay. What are what are we going to do going forward well.

So sitting here today, we don't really know for sure we make the determination on me allowance at the end of each quarter.

And what we end up.

Putting in the allowance will depend upon how long this pandemic is predicted to be with us.

You know how soon as a vaccine coming so on and so forth but.

You know sitting here today, I think we would not.

Be surprised if.

Our provision in the third and fourth quarters or similar to what it had been in the in the second quarter.

But with that.

We will pause and answer any questions.

Well I'll begin the question answer session.

Yes. Good question you make price Star then one on your Touchtone phone.

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The draw your question. Please press Star then too.

At this time, we'll pause momentarily to assemble our roster.

First question come from Brendan also Piper Sandler. Please go ahead.

Hey, good morning, everybody. How are you wondering brendon good. Thank you.

Yes, I'm just wanted to start off on the deferrals here.

So it looks like they moved up quite a bit from kind of the initial number you disclose last quarter and now they sitting at 28%.

Total on that side the TPP.

Can you just talking about some of the dynamics within the deferral bucket that drove the increase in last quarter.

Sure This was Harley.

So depending upon the timing of when those occurred.

Probably was generated the depending on what type of a month they happen when the discussion happened and a lot of the deferrals.

Occurred we ask for specific information from a borrower regarding.

What's your cash burn gonna be what's your.

Balance sheet. Good will look like at this time what are your sources for additional capital do you really need or deferral or are you asking for deferral. So you can retain cash because of the ongoing uncertainty within the market. So really that's what the flavor.

There is on that I think.

What you need to recur remember again about 75% of the deferrals are still paying their monthly interest charges, so really they're only deferring.

Principal payments for a fairly short period.

Got it okay.

And then with kind of the range did it for up from two to six months.

Curious when did the bulk of the 553 million Starcher roll off.

Then as they do.

Your expectation that that most will request an extension of some form a weather returned to normal payment activity or how much movement, where they'll be to to nonaccrual.

I would guess that most will not recur request an extension.

And our.

Again, I feel our portfolio and borrowers are and really strong are very strong across the board and have significant ability to.

[music] accomplish and pay their pay their debts as they come do.

So.

I do not have anything flag. The current time that will move to TV, our or two non accrual.

Okay.

And then moving onto the reserve I appreciate your comments.

The provision potentially similar to this quarter compared to the rest of the year I mean, as you think out across the next couple of quarters is that nothing your minds to get the reserve where are you thinking needs to be.

And then just given how high the level of deferrals is or is there potential for any couple of months you kind of look back and say, maybe we need a little bit more.

Well I think Brendan at this point in time.

Based on the information we have a we really.

Don't have anything else to say other than than what we have I mean as time moves on.

And.

You know we get.

The better or different information.

Well, we'll react accordingly, but I.

I think it's it's.

[music].

If if indeed, our modifications to track as Harley indicated.

I wouldn't.

Wouldn't anticipate that that we would.

Half to add more than than what we've talked about but it just really depends on.

What.

How things.

Path.

What happens over the next couple of months.

Yeah, I totally understand I guess in my mind as he's trying to balance how clean your traditional credit metrics are today versus the number of loans that have asked for assistance.

I appreciate the color.

Once they move on to the Dividending, obviously, you guys Dod Rita to hold it stable as opposed to increasing it. This time of near that you have in the past.

But still stable on unless I'm just spend a moment on how you feel about capital levels overall and your thoughts on how committed you are to maintaining the dividend where it is.

Well.

Well look at capital levels, first and projected capital levels when determining or the.

Dividend level I mean, we certainly.

Want to maintain it where it is.

But if but if things really.

I would deteriorate from from what we believe will you know the cases now.

We may have to look at a dividend cut but.

Right right at this point in time, we don't anticipate that happening.

As far as a capital levels.

Our pure equity to asset ratio has declined here at June thirtyth from from where it had been in the past, but that's really for two reasons one our accumulated other comprehensive income.

Hey is negative due to the valuation of the interest rate swaps, we have that with the decline in interest rates.

That.

The value of those swaps are more negative.

And of course over time, all things being equal.

That will improve just as as the.

Age of the.

Swaps get greater and get closer to maturity, but the other thing that has happened. This isn't the denominator in that calculation is probably artificially inflated due to all that PPP loans and and so we would expect.

Over the sit next six months or so to a lot of the P. P. P launch will will pay back and.

Our asset size will decline a little bit and.

And the pure equity to asset ratio will improve somewhat.

All of our regulatory ratios are well in excess of their requirements to be a well capitalized and we haven't.

Informal policy if you will.

Maintaining those ratios at least 100 basis points in excess of the requirements to be well capitalized and that's the case with all of the regulatory ratios.

Got it perfect.

And then last one for me before I step back.

Just looking at the NIM, obviously, a really nice result, this quarter as you guys benefited from the reduction in funding costs quarter over quarter as you see in reaction to what the fed did I'm just wondering how much more room is there to Ron on the on the deposit cost side.

And then as it pertains to the margin outside of the volatility from PPP.

He is there any more room for expansion next quarter and entered into the year.

You know I doubt it Brendan I is there might be a few basis points, but nothing significant because.

Really don't believe that there's much more room on the deposit side.

Now we did have federal home loan bank advance.

The tour.

And on June 22nd I believe it was and.

We at a forward swap in place and and you know have.

Kind of rolled that borrowing into.

Sure short term borrowings, but with a long term swap around it.

And we say couple hundred basis points, there and we've got another federal home loan bank advance coming due on September.

Twentyth give or take.

For $30 million and the same thing will take place there will save a couple hundred million dollar.

A couple hundred basis points on.

On the cost of that borrowing so we do have that coming but beyond that.

I don't see any.

Anything that's going to.

Impact the margin significantly.

Okay perfect.

Thank you very much taking all the questions appreciate it thank you.

Again to be able to question.

Please press Star then one.

This time, we have no additional questions, we'll return to call back to Mr. Douglas. Please go ahead.

Okay, well. Thank you Nick again, and thank you everyone for joining us that is all of our comments and we appreciate you joining us and having an interest in our company. Thank you.

Conference has now concluded.

Thank you for attending today's presentation you may now disconnect.

Is there Nick.

One moment.

Okay.

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Okay. Thank connect thank you everyone have a good day. Thank you.