Q4 2021 West Bancorporation Inc Earnings Call
Yes.
Good day, and welcome to the West Bancorporation quarterly earnings call.
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I would now like to turn the conference over to James Park CFO . Please go ahead.
Thank you welcome everybody. Good morning, welcome to our fourth quarter earnings call for West Bancorporation, Inc. Thank you for joining us on the CFO I've got joining me today, Dave Nelson, our CEO , Harley Olafson, our chief risk Officer.
Brad Winterbottom, our bank, President and Brad Peters, Our Minnesota Group, President and I will start off by reading the fair disclosure statement.
Has 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.
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.
With that I'll turn it over to Dave Nelson. Thank.
Thank you Jane welcome everyone. Thank you for your interest in our company I have some general comments, and then I'll turn it over to others for more detail.
Another great quarter, and another record year for West Bank, Despite the pandemic and other challenges West Bank achieved another record year by a significant margin as we increased earnings by 52%.
We did this by growing loans, 16%, we grew in our investment securities portfolio by 77% and deposits grew another 12%.
And return on equity of 22, 3% and West Bank stock appreciated 61% during 2021.
As of year end 12, 31 21.
Did not have a single loan 30 days past due and our entire $2.4 billion loan portfolio.
This performance allowed our bank our board of directors to declare an increase to our quarterly dividend of 25 cents per share, which is payable February 23rd to shareholders of record as of February 9th.
We also have a number of initiatives underway, including four new bank buildings that are all in different stages of development when.
When we started our most recent Minnesota expansion during 2019 with new loan production offices in St Cloud, Mankato, and Owatonna, Minnesota, all utilizing Ren.
Rented office space. It only took us nine months to achieve profitable operations.
Our plan has always been to construct bank on permanent facilities in each market.
So our sarto location, which is a suburb of St Cloud, Minnesota.
Is nearing completion are.
We have purchased our Mankato site. The design is complete with construction to begin this spring.
We're still on the hunt for the perfect site in Owatonna and the design phase for our new West des Moines headquarters building is almost complete the site has been purchased and.
What's construction beginning this spring as well in West des Moines, So with that I'll turn the call over to <unk>.
Harley Harley Olafson, our chief risk officer.
Thank you very much Dave I'm going to make comments on our watch list are supposed to specific reserve.
Various credit trends and then.
Just some quick information on our eastern Iowa market and how they are doing.
Our watch list has declined.
From 100 million on September 30th to 73 million as of December 31st 2021.
That equates to less than 3% of total loans.
$8 9 million of this total is substandard or nonaccrual.
All loans with in all categories.
We are receiving payments under current.
As Dave stated earlier, we had zero past dues over 30 days at year end and.
In fact, we had zero past dues on September 30th as well.
We have a specific reserve on one credit in the amount of two and a half million dollars that we feel is adequate.
We had oh.
We anticipated that this credit would have declined to almost nothing by the end of this last year.
But a sale to a third party did fall through on one piece of property that are currently in negotiations with three other parties to purchase pieces of property for them, we still expect similar outcomes for what we anticipated before.
Our current stress test our portfolio suggests our portfolio has never been stronger.
Overall loan to values have declined on a macro basis cash flow is good and companies have strong liquidity positions.
We're in the same position as most financial institutions in the country right now all of that deposits are.
Plus people.
A lot of those deposits are sitting at our customers' checking accounts.
Brad Peter's and Brad Winterbottom will discuss the the.
What's happening in both Central Iowa, Minnesota, I'll comment that our eastern Iowa Bank.
Located in Iowa City, Coralville had a very strong 2021.
They have.
A good pipeline going into 2022.
And I think that they're in position to do very well in the coming year.
With that I will turn it over to Brad Winterbottom for his comments.
Hello.
For the fourth quarter.
Our loans grew approximately 5% for the quarter, maybe a little a little higher under six.
We were anticipating and did receive <unk>.
Several paydowns, but we are our sales activity was very robust in the fourth quarter.
Helping drive that was a we hired.
A very experienced banker.
And he came on board in the third quarter and the things that are.
He was able to move some relationships that he had from another bank to our bank that really assisted our growth in the fourth quarter and and and he's not done yet.
We had a very busy.
December with a lot of pay offs and there are a lot of his dancers and and and new relationships. I would also say that our construction financing we still have roughly a $100 million that will get advanced over probably the next six to nine months.
That will help with growth.
We've had a couple of significant pay downs.
In January already but but we have some anticipated closings that are that should help us.
Get a little growth for the first quarter.
Again, no past dues, which is which we're very proud of.
And our customers are doing very well all of this a lot of growth in all markets.
Mr Peters.
Thanks, Brad good morning, everyone.
I'm going to provide a brief update on our market expansion into Minnesota.
Our team continues to make good progress in growing our business in each of our Minnesota regional centers.
Each of our markets are seeing solid growth.
And our bankers are focused on building relationships and those activities have created ongoing new business opportunities.
Our loan growth has been strong the pipeline is strong.
Our C&I focus has driven strong core deposit growth and treasury management business as well.
As Dave mentioned, our new building in the St Cloud market is nearing completion.
And we expect to move in later this quarter.
The Mankato market has purchased a building site and we're working on plans to begin construction of that site. This spring.
And the Owatonna market is exploring potential new sites as well.
That is the end of my comments I will now turn it back over to Jane.
Thanks, Brad I'm I'm, just going to make a few comments from a financial perspective first of all our net interest margin for the year was a 3.05%.
That was compared to 3.2, there a percent last year certainly.
You know with like everybody in the industry. There was pressure on margin from the high levels of liquidity and keeping a trying to keep that money deployed them either in the investment portfolio or that loan portfolio and certainly as monies were invested it was at lower rates than what was existing in the portfolio. So I think what we've seen.
As pressure on our net interest margin as is consistent with the industry.
Our provision for loan losses for the fourth quarter was zero.
Year to date, we recorded a negative provision of 1.5 million that compares to a $20 million a provision last year you know the primary factors affecting provision this year related to yeah, we had a reduction.
Actions in our specific reserves.
<unk> of about 500000, we had net recoveries of.
Over 400000, and we did reduce some of our qualitative factors throughout the year that had been increased.
Increased during the heat of Covid and we've dialed some of those back a little bit but all of those things were really offset by our really strong loan growth. So if loan growth of about 16%.
You know that resulted in a small negative provision for the year.
On the expense side.
We did have some items in the fourth quarter that were one time expenses. We made an additional 300000 dollar contribution to the West Bancorporation Foundation for future grants out of out of that group, we made a $350000 a contract.
<unk> to a a housing fund that was organized by local municipality.
And we also had some.
Elevated occupancy expenses related to the termination of a lease on one of our branches.
We are that lease was to run through 2020 four I may of.
'twenty 'twenty four we've accelerated that and made arrangements with the property owner to be out of that space in may of 'twenty 'twenty. Two so those are the costs associated with terminating that lease amounted to.
About $440000, so those where I'm kind of the additional expenses in the fourth quarter.
That's normally we wouldn't wouldn't see so.
With those comments I think I will open it up to questions.
Yeah.
We will now begin our question and answer session.
I'll ask a question you May press Star then one on you touched on phone.
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 two.
At this time, we will pause momentarily to assemble our roster.
And while you're waiting to his first question or I will.
I just want to make one correction, we did not have a $20 million provision last year. It was 12 million I misspoke. So just clarification, okay no no no for the questions.
The first question comes from Brendan Nosal with Piper Sandler. Please go ahead.
Hey, good morning, everybody how are you doing today.
Brendan.
Maybe just to start off on a couple of ticky-tacky questions here could you provide the average balance for loans and average earning assets for the fourth quarter.
I can.
And grabbed that piece of paper.
Average assets for the fourth quarter.
3 million 421, excuse me $3.421 billion.
And average loan balances for the quarter.
$3 billion $380 million.
Yeah.
2 billion will go to them.
$2 billion.
I'm working on my billions of millions 2.380 billion.
Okay.
Got it and then I'm guessing the average earning assets were around $3 3 billion.
Yeah Yeah.
Here.
Yes, 3 billion 271.
Alright fantastic that's helpful. Thanks.
And then could you also provide some of the info behind <unk> this quarter.
I guess, the quarterly average balances and then what the interest income.
Was realized on ETD this quarter.
Yeah.
So the P. P P M.
Income.
For the quarter.
Was.
912000.
Okay.
Yeah.
Alright fantastic. Thank you.
Alright, let's see.
Kind of moving on to <unk>.
Probably some of the more interesting questions here.
On the new branch locations in Minnesota can you offer any color on kind of what additional expenses you might need to incur through the P&L over the course of the year are related to those projects.
Yeah.
Well the.
Uh huh.
Saint Cloud, sorry tell branch will be opening up.
In March so we will have start depreciation expense on that this year all the other expenses on the building projects there really shouldn't be any expense in 2022 as they'll either be income under construction or just land purchases.
And the SAR till location would be offset by not paying the lease expense there are anymore Ivar so yeah.
What would it be got it $200000 probably yeah.
Got it and I would imagine that given you already have had the commercial teams there in place for four years now there's really no breakeven right. It's more just kind of getting into a full location.
Keep doing what they're doing but just from a more permanent basis.
I would say, that's correct and and really just from a.
On the expense side from payroll the team is already in place. So we don't expect additional expenses, we do expect a spike in business, though when we opened the doors.
Yes, absolutely. Okay. That's helpful. Yeah, we're basically trading rent expense for depreciation.
Yeah that makes complete sense, okay wonderful.
So turning to loan growth. This quarter was just exceptionally strong and it sounds like you had most if not all of that kind of $75 million in payoffs that you were anticipating and just kind of pushed through it.
It does sound like there is maybe some payoffs coming in the in the first quarter, but just kind of curious how do you think about the loan growth opportunity for the year ahead, just kind of given the strength of 2021 and the opportunities you see.
Well.
I'll try to address that question first off that the $75 million and anticipated pay offs.
That did happen in the fourth quarter, we've had we've had about three additional.
Pay offs that have taken place in the first.
Three weeks of this month.
That total.
Roughly $40 million and that would be due to the sale of the asset or.
An entity just using our liquidity to pay off some.
Some debt.
However, we have a we have three projects that we're working on right now that could replace that.
That dollar and that could all happen before the end of the first quarter.
And we are also.
I can do a lot of other folks in terms of our business development.
Practices so.
I do think that we'll have.
Some growth to talk about at the end of the first quarter.
And.
And people are busy.
I also think just to add on to what Brad is saying.
The total size of the pipeline.
Maybe bigger today than we've seen.
Anytime in the recent past.
As far as just total dollars.
The other part that's really encouraging as is the.
The pipeline dollars and breath of having multiple locations comes from multiple areas.
So there's a there's a good.
It's a good group out there finding the opportunities that we're less dependent on any one location today, but we have them.
And I would just add.
From the Minnesota perspective.
We had our initial surge when we did our lift out.
Now I think looking beyond that the pipeline is as strong as it's been and that's really from new new new prospects and our existing client base.
Got it that's super helpful color. Thank you.
And then turning to expense.
Expenses, Jean just wanted to make sure I heard you right that those three onetime items add up to about $1 1 million for the quarter right. So the kind of the core expense base is around $10 8 million.
Correct.
Got it okay wonderful that that was very very helpful.
Given the B initiatives you had in place it sounds like most of the hiring is done and they won't be too many incremental expenses from the new branch locations, but just curious how you think about the expense run rate as we progress through 2022, given things like wage pressure and record in.
<unk>.
Well I certainly.
We certainly expect them.
Salary and benefits compensation to to see the most pressure I think on the expense side for us.
Yeah, we don't have excuse me, we don't have a lot of turnover, but I'm certainly when you hire people and we are you know kind of we've hired a few bankers in the second half of 2020 one.
We are always looking for good qualified bankers and you know as we hire people, we're seeing the pressures in the market on compensation and even at the staff level somebody have to replace somebody so we're expecting pressure there.
Not just from new hires, but and then also rewarding our.
Current staff base, So I think that's where we'll see.
The most pressure for a hunter expenses.
The other part of the two is the beauty of our financial model is the people that we're hiring are productive.
With productivity.
The ability to cover.
Cover there.
Financial needs and salaries and benefits those type of things.
Is more easily generated in our financial model than a retail model. So that's a that bodes well, but theres certainly.
Pressure on.
Just inflation.
The expectations of salary increases.
Yeah.
With the increase in AR.
Expenses this year and when we're looking at next year, our efficiency ratio is still extremely extremely low so we're able to manage those expenses through for generating the revenue.
Yes.
And we're not we're not.
We still need to build out some of these other markets. So there'll be a little bit of additional hiring going on but.
But Saint cloud is is fully staff, we will we will have to beef up mankato as we get closer to a new building opening.
Okay.
Okay.
Fantastic.
Alright good.
Maybe turning to the net interest margin I mean.
Jim based on your your color on kind of TPP I mean, it looks like the core underlying margin was pretty darn stable quarter over quarter, and maybe even up just a touch.
Just kind of curious for your thoughts on the NIM this year.
Given the prospect for a couple of fed rate hikes, how things like deposit betas might play into that.
And if there is stability or perhaps a little bit of pressure if the fed raises rates.
There'll be it.
A little bit of pressure I don't think it'll be really significant you know are.
The cost base of our like our borrowed funds is pretty well fixed because a lot of that's tied to to interest rate swaps.
Our deposits, depending how quickly and significantly the fed raises rates will have some some increased deposit costs, but the betas on that I think will be relatively.
Slow and then hopefully we get the benefits on with our loan growth on the loan side as we.
Add new loans that there is more reasonable rates than than what we're seeing.
Currently.
Okay wonderful.
And then maybe last one from me just thinking about reserve coverage in provisioning needs throughout the year I mean, I guess your reserve is still quite a bit healthier than it was coming into COVID-19 , but it kind of sounds like the outlook for loan growth is quite strong so I would imagine.
Probably the the need to provision for loan growth, but maybe to drawdown that reserve coverage ratio as the year progresses, just kind of curious on your thoughts there.
Yeah.
The provision you know it's always.
It's always a balance between growth and really the qualitative factors or quality as credit quality is quite strong.
You know we've already reserved for the one credit that we know will have some challenges and so really I think loan growth and the pace of loan growth will be the most significant factor for provisioning this year.
All right wonderful.
That is it for me. Thank you so much for taking the questions.
Thank you.
As a reminder, if you have a question. Please press Star then one b joined into the queue.
Next question comes from Roger current with Who's a private investor. Please go ahead.
Yes. My question is how much of a.
P. P. P income was taken in in the fourth quarter how much.
How much did that affect the earnings.
Yeah, So our P. P P income in the fourth quarter.
<unk> was 912000.
Is that is that pretty well the end of it then yeah I think at the end of the year, we had about $22 million of PPP loans left on the books that had unrecognized fees deferred fees of about 500000. So we would expect that 500000.
Bleed in through the year and would not shouldn't have a significant impact overall on our financial performance.
Okay, and you said on the loan loss provision you didn't make any floor in the fourth quarter correct.
Did you take it did you put it I mean did you Connie back from what you had before not in the fourth quarter we.
We did earlier in the year, so year to date, we had a negative provision of $1.5 million.
Okay.
That's my only questions.
Okay. Thank you.
This concludes our question and answer session I would like to turn the conference back over to Jane Funk CFO for any closing remarks.
Well, we just want to thank everybody for joining us today, and we look forward to.
Having more great news in 2022.
Okay.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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