Q3 2020 West Bancorporation Inc Earnings Call

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Leasehold and operator will be with you shortly.

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David Brown.

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Company with.

Hi, A.I.E. on.

There are no.

Oh, it was being recorded that will.

Thank you.

In the fourth quarter, we have a couple of.

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Long term customers.

That have sold their business and I would anticipate some pay down there.

Some significant pay down maybe to the tune of of $20 million.

On the other side of that coin, though is we have a construction projects that are going in all areas that.

That we do business in and I would say that we have between now and probably a year from now another $100 million of construction loans that will be advanced on projects.

Our bankers are.

Are not only working on the PPP forgiveness, but the business development.

People are doing just that it's.

It's a little harder people are.

Cautious in terms of letting.

Our folks have face to face.

We are working on that and.

And again, we have.

We've added about 4.5%.

Of new loans and that has really come from all markets, but especially up into our three new markets that we entered into last year.

Those would be my comments I'm going to pass this over to Mr. Harlee olafson.

Yes, good morning, and again, thank you for your interest in our company.

Good to talk about.

Our credit quality watch list.

Cobot modifications.

And then some specifics in regard to.

Individual communities and how what the environment is there on our watch list. Our total watch list right now which would include watch.

Credits.

Non.

Non accrual credits and.

Everything in that category totals $47 million.

Although our level is up.

Still is.

Less than 2% of total loans, which is a historically low water. When you look at the watch lists in general.

Oh those are loans that are in our watch list.

We really look at one of the credits as having.

The ability to possibly have some loss potential in it we don't see it as of today.

Of the collateral and it appears to be adequate to cover the principal balance on the on the loan.

But.

If things don't work out correctly, we could have some.

Small.

Level of loss in that loan as it as a terrible liquidates.

When we look at also.

The level of.

Additions to our allowance through the course of the year, we've we've put an $8 million and we fully believe that that exceeds our loss potential in the in anything in the watch list. So.

Anyway, moving on from from the watch list Ur Cobot bought applications we've had.

A fairly robust.

Commercial real estate portfolio.

It includes a part months warehouse office mixed use hotel medical office senior living centers.

All of those different types of categories.

As with.

Most areas the entertainment and hospitality.

Areas of.

Businesses have been effective.

The most bye.

Covert related issues.

Just for example in our hotel portfolio.

In looking at.

Occupancy percentages over the last six months April and May were very close to zero.

In June the occupancy percentage in our hotel portfolio on average moved up to 36% in July it moved to 40% August It moved to 57% and then it fell off in September back down to 50% and.

And although that isn't great, but still it's that that pattern.

Catastrophic either.

In looking at the.

Cobot modifications on our hotel properties.

The average loan to value on the properties, we provided models or have modifications on currently.

62% loan to value and.

Pre modification cash flows on those properties exceeded 1.52. So these are good properties that under normal circumstances will will bounce back.

Total modifications at quarter end were fairly high still because they were still in process.

As we hit November our total modifications declining to something under 7%.

And then we have a modifications that began payments in December and January that would drop us down into under 4%.

In looking at.

Other types of things that are going on we have looked at our stress tests.

Our major.

Types of commercial real estate.

And what the debt service coverages are right now and besides the hotel a portfolio debt service coverage is on the average are well above 120.

And.

Seem to be moving along in a in a good manner, we are requesting and receiving.

More interim financial.

Results from our borrowers so we can stay on top of what's happening with them.

And believe that.

In most cases, our portfolio because of the strength of our customer base is still very strong.

One of the.

Things that's interesting in our portfolio is just the level of liquidity.

Our customers are holding this.

This year, our business DTA accounts are 50% higher than they were the previous year last year. We are about 400 million in non interest bearing deposits and this year, we're over 600 million.

A lot of that I think is due to the conservative nature of our customer base holding cash.

Out of concern of what's happening with the economy as a whole.

Moving on to.

Individual markets and what's happening in them.

Our Rochester market, we were concerned a little bit in the Rochester market, because mail, which male clinic, which is a big.

Employer and driver of the economy there.

Hi, Todd.

A decrease the level of.

Non critical activities there were doing.

They are back to a 100% of their pre covert activity in fact, theyve gone through a process of of.

Of.

Decreasing salaries by 10% they not only gave the money back to their employees. They are.

Also gave them some bonus on top of that.

So Rochester right now I think is doing very well it is driven a lot by mail in eastern Iowa, The University of Iowa enrollment is down about 4%.

There there is really no new major construction.

Going on.

The problem for their world over there is there is no events really happening that drive people to the town.

As a very active community with the University.

And.

With that.

Blake in most places there was no concerts, nor ballgames know things.

Things that really drive people to the city from a tourist perspective.

Housing is strong.

In the area they sell fast on anything under.

400000 units University, Iowa hospitals are backed up at full speed right now and they are driving people to the town.

Apartments is a big deal were in use in Iowa City in Coralville.

Average occupancy is there have always been very strong, but they are down from about 97% to 93% currently.

In our new Minnesota markets.

We continue to grow really good franchise customers.

Loans and deposit balances in that in those markets Weve.

Have about $230 million in loans in the new markets and $107 million in deposits.

Which is the deposits.

What weve learned while opening new businesses is something that lags a little bit currently we don't have.

Truck.

Traditional bank buildings in any of those communities at this time, but that will change in the future.

As is the case in all markets.

New projects.

In regard to construction and those type of things is quite limited at at the current time.

I'll leave it with that right now and we'll entertain questions. Later, if there are any no hand, it back to Doug.

Okay actually this time, we would.

Entertain any questions that maybe out there.

Thank you we will now begin the question and answer session last the question you May Press Star then one on your telephone keypad.

If you are using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then Q.

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

The first question comes from Brandon knows all of hyper Sandler. Please go ahead.

Hey, good morning, everybody hope you're doing well.

Good morning, Brian.

Thank you for for all the prepared commentary definitely very helpful.

Just starting off on the growth outlook I definitely appreciate that there are some larger payoffs coming in the fourth quarter.

I just want to get a sense of looking past the tail activity growth was quite strong this quarter. So what is your outlook for kind of net loan growth over the next couple of quarters.

I would say we have a.

We have a pipeline.

That that will replace the pay offs before in the end of the year.

Absent anything that we don't know that pay off between now and then.

So.

I don't see us.

Dipping below the 4.5%.

By the end of by the end of the year in fact, I would anticipate that maybe up just a little bit.

Perfect that's helpful.

Then moving on to the margin you guys have done a really really nice job of lowering deposit costs at pretty much a sentence you Ken in response to what the fed is done.

But just given that that cost to come down so much I'm guessing, it's probably not a ton more room to run on liability side.

So just trying to understand how you're thinking about the margin outlook from here to imagine, perhaps a little bit of pressure. After just curious kind of thinking about it.

Well you are correct, we really don't have much more opportunity to lower deposit costs.

And and then.

What will impact the margin going forward in this environment will be.

Existing investments and loans that mature and we.

We have to reinvest those dollars so most.

I think we can say with near certainty that.

The reinvestment dollars will be at a lower yield than the existing dollars you know to the extent of that it's a little hard to tell.

I would just add that.

Some of the.

Loans that are getting repriced, because we book those maybe five years ago would probably be in the.

A low to mid 4% range and.

We're not getting.

Net net those kinds of rates on.

New.

Assets that are getting book, but all those usually come with some sort of a prepayment penalty as well.

Okay, great understood.

Moving onto the credit side of things.

You mentioned in your prepared remarks that there is one credit you might see some loss on potentially.

Just hoping for a little more detail on that relationship what sector is it in.

What is collateral look like things like that.

Yes, the sector. It is and it's a it's a large non profit.

That.

I wouldn't want to mention the name specifically, but the large nonprofit has multiple facilities that.

Hi, Ben.

Appraised.

Recently.

That would have appraised values.

Somehow letters of intent on properties, they're looking at doing some sale and lease back to certain areas. They have some.

The owners and friendly sponsors that are willing to do some of that they also have some cities and different areas that are interested in some of their properties.

That they would have.

Properties that have appraise value.

Of over $30 million.

And our portion of the credit to 16, but the total credits about 26. So there is.

Depending on how things go.

That credit could have a small loss here or there but that isn't.

Theres still an operating entity. So there are there are other options are also it's just it's the one that we look at the most critically.

Yes, that's perfect.

That's helpful color and wanted to just ask quickly about the 16 million dollar movies due to credit that you pointed out in 10-Q, I mean, it seems like hotels occupancy has been generally trending in the right direction.

The worst of the early days of Colgate Abbott kind, if you like movie theaters here I'd just been on.

Most store shot average since the beginning.

So just any color on whether they are either any operations ongoing any cash flow coming in or if its relatively shut down right now and just how you view overall on the relationship.

They do have some of their theaters open.

On what Theyre <unk> theyre running in there as kind of classics and those type of things just as some more color in regard to the strength of their handles.

They've injected somewhere in the neighborhood of $7 million into the business and also a very strong.

Very strong individual.

Or partial owner has also agreed to increase their personal guarantee to support the business.

Along with that individual owner has.

Exceptional levels of liquidity.

So that's what's happening there, there's certainly like everybody else they have they're they're dependent on the product coming out to be able to put up.

Viable.

Viable entertainment if.

If they are not putting out new movies, that's not going to work, but they have strong hands and that's the.

And they are and they have.

Strength and liquidity to support their support their business.

Yes, okay. Okay.

And then moving onto deferrals you guys pointed out both in the release and then in your prepared remarks that you have line.

Line of sight to deferrals moving down.

And to a much much lower number and is it fair to say that most of what would remain geared that.

Rolled off to the ended the year in hotel.

Yes.

As I was just.

When I look at the tools on that.

We're looking at.

About $80 million.

Of.

Basically.

User Marriott Hilton products that.

Our in deferral through March and April.

A loan to values are in good shape.

And again pre.

Pre pandemic these are awfully strong operating entities and.

Personal guarantee they do up they are guaranteed personally by.

Some of them have multiple.

Owners that have other sources of liquidity and income.

We do have a group of.

Hotels that really there their main businesses just the hotel business.

And their source of other cash is not as ready, but their loan to values are very very low in the fifties. So all they don't have the income coming in they have the ability to.

To survive this and come back once we have something a little closer to normal.

Okay. Okay.

And then turning to the increase in non accrual I appreciate that.

Very low base in the overall figure.

He is still quite low but up regard that so I was just hoping for a little more color on the two credits that drove the increase this quarter and then also curious if those are the same relationships that.

Drove the uptick in substandard loans.

Correct. The the one we already talked about was the nonprofit that.

That takes up a.

16 of the 18 million I think.

The other one thats of any substance as a shared national credit.

Really the only one we have.

Thats a million for.

We in head that's a trainable asset we could trade that rate now for at par.

A little over $100000 to par but.

But in everything that we can see it's going to come back to par and then we're going to we're going to trade out of out of that credit at that point.

Okay. Good that's certainly helpful. And then last one reported that you guys go.

He spent.

Good part of this year, taking strong pre provision earnings and building the reserve.

So I'm, just curious where read your coverage today.

Is that a level that you think you is at a place to to absorb any potential issues down the road or would you prefer to be.

More cautious over the next couple of quarters and continue to add just given the environment.

Well you know sitting here today I mean, certainly it at the end of September we thought the allowance was adequate.

You know as we move forward, it's just going to depend upon.

You know the environment the the information.

That's available.

You know Brendan if if we had to guess right at the moment to help the fourth quarter provision, maybe similar to the second and third quarter.

But that's probably as close as we can get to a gas right now.

Yes totally understood no one has the crystal ball on that but just curious how you're thinking about thanks.

All right Thats embedded it for me. Thank you so much for taking the questions yeah. Thank you.

Again, if you have a question. Please press Star then one let me touch tone phone. The next question comes from Kevin Mclaughlin of Mclaughlin Investor. Please go ahead.

Good morning, everyone.

First of all congratulations on another great quarter under very difficult circumstances.

My question for Doug.

I don't understand what the implications would be in the forgiveness process relating to these PPP loans is that going to accelerate the recognition of the fees for the bank or how does that work.

Yes, Kevin.

You are correct.

The fees that were collected upfront are deferred and amortized over the life of these loans, which is two years.

And then as.

The loans pay off.

Any on a more ties to feed that still exist at the time that the loan pays off will be.

Recognized into income at that time.

And so.

We're starting to see if you pay offs I mean.

As of yesterday.

Feedstock into the September.

September we had not had any pay offs or for forgiveness payments.

As of yesterday, we have received $750000 in payments.

So its just beginning just starting to trickle in.

But then on a base of of how much Doug.

200, 2100 to 224 million. So I mean, it's just okay.

But its look you know so Kevin it's a little hard to.

Project or predict.

The dollar amounts and when they're going to come in at this point in time, I think we would say that.

You know most of these loans will not be forgiven until two.

2021.

Okay.

And then my other and I don't know this isn't so much a question. Thank you Doug.

I wanted to ask Dave if you wanted to get kind of chesty over the announcement by Wells Fargo and their business banking operations in Rochester, when I was up there visiting there I'm.

Your branch office.

Well they.

Weve essentially.

Got rid of all other bankers quite simply.

So that is.

That is rather a I guess over the past the history of the past 30 years, that's an outcome that I don't think many would have.

I've been able to predict.

And that's the point that I want to everyone on the call to understand.

When you enter a market and normally it takes three to five years to breakeven or new breakeven in just nine months, but within a handful of years later one of your biggest competitors dropped their business banking services because so many clients have moved I think that that's something that everyone on the call should recognize and appreciate.

Because that's an extraordinary performance I'll leave it to you to close but I just wanted to say congratulations and I'm hopeful that I think that there are implications on these other new markets and I'm excited about what you're accomplishing there as well.

Thank you Kevin.

Yes.

This concludes our question and answer session I would like to turn the conference back over to Doug ruling for any closing remarks.

I would just like to again, thank everyone for joining us and we appreciate your interest in our company. Thanks.

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