Q3 2021 West Bancorporation Inc Earnings Call

After todays 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.

Hey, good morning, everyone. Thank you for joining us on the call today, we have Dave Nelson, Our Chief Executive Officer, Jane Funk, our Chief Accounting Officer, Brad Winterbottom West Bank, President Harley Olafson, Chief Risk Officer, and Brad Peters, Our Minnesota Group.

President and well 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 this morning, and thank you Doug. Thank you everyone for your interest in our company and joining us today.

First bank is and has been operating under non pandemic protocols, and we had a great quarter here.

Year to date, our R. O E. Almost 21% we've had year to date loan growth of about 10% with deposit growth at almost 20%.

We have deployed our excess liquidity.

We also hired three new commercial bankers for the marine 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 of 'twenty. One we didn't have a single past due loan past 30 days or.

So based upon that performance our board of directors declared a 24 cents.

Dividend per share payable November 24th to shareholders of record on November 10th.

With that I'll turn the call over to Harley Olafson, our chief risk officer. Okay. Thank you, Dave I will make some brief comments on credit quality at our watch list.

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 are improving for financial performance that will allow them to exit the watchlist and returned to an acceptable classification.

Credits are properly structured and not our past due or have any history of pass through 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 two and a half million dollars that is on nonaccrual.

Have executed a plan that sells fixed assets that should virtually eliminated our non accrual by year end.

We have tracked carefully the credits that have been impacted by the pandemic.

Namely hotels of the movie theaters I'm very pleased with the progress they have made and their return to positive cash flows.

Payment protection loans or.

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-19 modifications still in place.

All that were our back garden standard Amber to amortizing terms.

We had a recent regulatory exam and did that have any risk rating changes or discussions on credits within the bank.

In summary, our white cliffs was small we have no past dues of our customers have more liquidity.

At any time I can recall.

I do not expect any surprises surprises to come at our credit portfolio.

Other risks, including those.

Parents continuation plans and I T 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 growth.

Thank you.

My comments will be brief that Dave mentioned, our loan growth for the year is it 10% during the third quarter. It was approximately 4%.

Primarily real estate secured transactions are some C&I, but mostly.

Our real estate.

In the fourth quarter are we do have projected payoffs of roughly $75 million.

Based upon asset sales or or refinance elsewhere. So are our pipeline is good and we'll have a little bit of headwind to replace that but I think we can do that in the fourth quarter.

It's.

Our loan growth and deposit growth is coming from all markets with a heavy heavier emphasis in our Minnesota markets.

Dave mentioned also we hired three commercial bankers two of which have started employment here in the third one will will land on the ground next week so.

These are very experienced bankers.

Had a tremendous relationships at their previous employer.

And that too will well will help our.

Our growth plans.

That all and in turn it over to Brad Peter's.

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.

Our loan Outstandings 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 autonomy market is exploring potential sites.

For a new building.

That is the end of my comments I will now turn it over to Jane.

Yeah. Good morning, I'm, just going to give us a little bit more information on the P. P. P loans like Harley said.

At year end or excuse me at quarter end, we had $47 million of P. P. P balances remaining we're actually those are still paying down nicely, we're down to around 35 36 million today.

At quarter end, we had $1 6 million of Ah Ah fees unamortized origination fees yet to be recognized so as those paid down and that acceleration of curse. That's what we've got remaining to recognize there.

Just to compare from and from an income statement standpoint are.

Quarter to date.

For third quarter, we recognized about 1.6 million of income from the P. P. P loans compared to $1 4 million last year and year to date for the nine months, we've recognized a $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 Okay.

Okay I just have a couple of comments one I'll comment on our provision of course, everybody always wonders what our provision would 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.

Harley mentioned that there are plans in place to to.

For the non accruals to decline.

So we'll we'll look at our watch list and then look at loan growth.

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.

They gave provision at a modest positive provision so.

That that would be our thought at a at the present time on that and as far as the margins concerned you know.

Going forward in the fourth quarter.

Brendan from Piper Sandler wrote in as a first look that are you know he he pointed out that our end of period versus average quarterly liquidity suggests more re nexium benefit to the margin next quarter and and I would agree with that statement and 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 you know during the entire fourth quarter and then Oh.

Oh offset setting that are working against that will be you know any loan paydowns and refinancings that are you know take place generally.

Or at a lower rate than than the existing rate, so, but 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.

To ask a question you May Press Star then one on your Touchtone phone.

If you're using a speaker phone please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then two.

We will pause momentarily to assemble our roster.

Our first question comes from Brandon also from Piper Sandler. Please go ahead.

Hey, good morning, how are you doing good.

Morning Brendan.

Yeah. So thank you for the detailed prepared remarks do you hit a lot of the question that I didn't ask but I definitely have a few more for you maybe to start off.

Hear you that 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 of the additions.

Well.

There's nothing specifically planned.

To add we are we did have conversation and talked about the three that we added.

You know that that was probably a good quarter or two discussions before we pulled the trigger we don't have anything specifically now.

However.

If.

If an experienced one showed up and we liked them.

Any market, we would chan.

Chances are we would add add to them. So we don't have anything planned them yeah.

The only.

Add to that.

We didn't really touch on our eastern Iowa markets of Eastern Iowa market continues to do.

To grow and become a very strong.

We do believe that there is an opportunity to possibly have one over that would be the next likely place, where we have a possible candidate place to add to that marketplace.

And then maybe just a kind of a question.

The higher inflation numbers, we're seeing just kind of curious how concern your commercial borrowers are about down inflation, they're seeing in their own way spaces and input costs and then also to what extent youre seeing the effects of inflation in your own expense basis.

Well.

Certainly there as well.

We're having conversations and there is a.

There's some caution there construction cost.

It's certainly increased a we've had a we've had a couple of developers.

<unk> back off on some planned activity our homebuilding business right now, though is is I think we've got.

350, plus or minus is probably 25 homes under construction.

With a couple a handful of builders primarily in central Iowa.

And their costs are up however, the demand is there and typically if.

If they start a spec within six months, it's sold with a with a closing three months down. So there 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 Horizon, I do I think the.

We look at it even though we can't predict the future in regard to all of that kind of stuff, but it does it does.

Have some interesting things that are going on some of our C&I.

C&I customers.

Have trouble getting inventory and when they get it 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.

So yes, there there could be I think theres been a slowdown in some levels of construction, but I think overall the strength.

Yeah.

Our customer base is very good when they have been making.

Good get incomes and holding a lot a lot of liquidity.

Okay. That's helpful.

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 payoff activity, but.

Curious, how you're thinking about growth.

Outside of that temporary or transitory slowdown into next year.

Well, adding some additional bankers should help maybe Brad Peter's might want to comment a little bit more on things that are happening up in Minnesota.

You know I would say.

We hire people will do go find new business and and maintain existing relationships and they're doing a pretty good job of it.

But where we're growing and in Minnesota, and we should continue to grow in Minnesota.

Brad do you have any.

Yeah, Brad I would agree.

I would I would.

I 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 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 our I think the growth will continue.

Okay fantastic.

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Maybe turning to expenses.

As we look ahead.

Added a few bankers in this quarter.

Sounds like some of which kind of came on later in the quarter maybe.

And maybe a little bit of an inflation pressure as well just kind of curious how you think about near term.

Penn state's outlook.

We don't really see that Ryan.

Ryan away from US I mean, yes, we added three.

Anchors in the third quarter.

And they kind of came on well one was at the beginning and one was in the middle and.

And the other one although he's going.

Gonna hit hit the ground next week I mean, we've been paying for them since August but so.

You know I don't think we really expect our expenses to.

Significantly change.

Yeah.

Okay wonderful.

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And then maybe turning to credit I, just want to confirm that I heard correctly that the the the one remaining non accrual loan has a $2 5 million specific reserve is that correct.

That's correct.

Okay Alright.

Yeah Yeah.

We have we have two non accrual loans. One is very small one is what is the only one that's fairly significant.

The one that is significant.

I think eight eight.

$8 million reduction in the quarter of our total total commitment there.

Yeah.

They have a plan that they have another property that sold that supposed to close in early November that word.

Take the number down to.

Unless significant place than it is right now so we have plans in place.

Pure that are working there.

Going to as I said.

Expect that to eliminate.

Namely by the end of the year.

Okay wonderful.

Maybe one more for me.

Just kind of thinking about the the margin and the potential for higher interest rates.

I think your disclosure in the Q shows that you might be slightly asset sensitive, but thinking back to the last tenant rates grows.

I think deposit repricing ended up resulting in some overall margin pressures. So just can you update us on your thoughts of how you expect NIM to respond to rising short term rates, if and when that happens.

Yeah, well, there's no question that we do have some deposits tied to.

Short term interest rates, but.

Overall.

We believe you know based on our models that are there.

There'd be a slight slight increase in our net interest income.

Alright wonderful well. Thank you all for taking my questions.

Thanks Brendan.

Again, if you have a question. Please press Star then one.

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 a 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.

I will 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.

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