West Bancorporation Inc (WTBA) 2014 Q1 法說會逐字稿

Good day, and welcome to the West Bancorporation's first quarter 2014 earnings call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Mr. Doug Gulling, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you, and welcome, everyone. Thank you for joining us today. On the call with me from our Company is Dave Nelson, our CEO; Harlee Olafson, our Chief Risk Officer; Brad Winterbottom, West Bank's President; and Marie Roberts, our Chief Accounting Officer. And let me begin with our fair disclosure statement. Comments made during this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking information is based upon certain underlying assumptions, risks and uncertainties.

Because of the possibility of change in the underlying assumptions, actual results could differ materially from these forward-looking statements. 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. Additional information concerning factors that could cause actual results to materially differ from those in the forward statements can be found in our periodic filings with the Securities and Exchange Commission. And I'm going to turn it over to Dave Nelson to start us off.

Thank you, Doug, and good afternoon, everyone. Thank you very much for joining us. We had a very good quarter. Our opening 2014 balance sheet was basically the same size as last year, but it was both stronger and more efficient. What I mean by that is, we had $100 million more in average loans outstanding at the beginning of the year, and our credit quality was great last year, but even better today. We have intentionally and more aggressively deployed both our liquidity and our capital.

This year, Rochester is expected to make a positive contribution to the bottom line. Our sales culture continues to improve, and our infrastructure is in place, and can support more growth without adding much expense. We're in a position of financial strength, and this year, 2014, has already started off better. First quarter this year is certainly better than first quarter of last year. In fact, our first quarter of earnings, they were not an all-time Company record, but they were close enough to cause us to get out the record book and check.

On Wednesday, our board announced an increase to our first quarter dividend to $0.12 a share. It's payable on May 27 to shareholders of record as of May 7. NASDAQ has recently invited us to New York for a ceremonial bell ringing ceremony during June, and we're making plans to do that. I would comment quickly on our new Rochester location. We're right at the one-year anniversary of starting a new location in Rochester. We opened for a business one year ago during April. We often enjoy asking bankers from around the country if they were to start a new bank in a new community with no customers or no revenue, just expense, how long they would expect it to take to start making money?

And the typical response we get is three to four years, but two years would be fantastic. And we thought we could do it in one year, and we did. Our first profitable month was January of this year, after nine months of operation. And we have purchased land in Rochester for our future Rochester bank building. We're currently constructing our new eastern Iowa headquarters building in Coralville. We expect that building to be completed this year, and then we would plan to construct our new Rochester Bank building next year. In Rochester, we are strictly a business and commercial bank. We did not want to try to be all things to all people in Rochester.

We just want to be best at what's most important to someone who is running their business. We've got a lot of significant advantages in Rochester. And we believe that all three of the communities that we are in, the greater Des Moines area, Iowa City, Coralville and Rochester, Minnesota, are all positioned for economic growth and expansion. With that, I would like to turn the call over to our Bank President, Brad Winterbottom, to talk more about that. Brad?

Thanks, Dave. Hello, everyone. We had a very, very nice first quarter in terms of loan activity. All areas of our -- of loan categories had growth in it. The -- we're getting that business through, again, a very robust marketing and sales calling program, and the growth is coming in all areas. It's coming from Rochester, as Dave mentioned. It's coming from Iowa City, Coralville area, and it's also coming from Central Iowa and the Des Moines area. So we're pleased with the progress and the additions to the portfolio, and I would also just add that the pipeline still is very full.

We have a lot of things that we're working on and chasing and -- in terms of new business. And I would expect things to continue to go the way that they are going. In addition to that, I -- if you look into our non-interest income, certainly the mortgage area is down from prior -- same-time prior period, but we're seeing a little bit of -- of some additional activity going on there, given the time of year that it is. And then the other thing that I would add is, a year ago, we hired a new person to run our trust department, and he had a very strong background in business development, and we're starting to see the fruits of his activities and his department's activities. Those are my comments. Harlee?

Thanks, Brad. I'll just talk about a couple of things. As we go through our processes each quarter, we look at our allowance, and have viewed it compared to any specific provisions that we have, and the allowance in general. And the allowance is adequate to how we have looked at it to cover the loan portfolio issues. Our OREO continued to decline. And in fact, we have another piece of OREO that is sold, and will be closing here in this quarter that will decrease that total further. Our substandard loans continue to decline. And in fact, a number of the credits have performed better than in the past, and they have improved.

So there will be some upgrades to the credits that are in the substandard section. In fact, we have improvement across the board on our watch list. Our past-dues are very low. And in fact, almost to the point of having very, very few past-dues, other than credits that are on nonaccrual. Will we have to take a provision in the future? I think that depends upon the growth in our loan portfolio, and it does appear that our portfolio will continue to grow, based upon the pipeline.

Both Iowa City and the Rochester bank are picking up market share. And the nice thing that we're seeing is that our Rochester group is picking up some full service customers, NI business, with the depositories, along with not just the loan balances. So all in all, the credit side and the risk side of the business has performed well, but we continue to be diligent in watching all of those various issues.

Okay. Thanks, Harlee. I want to -- this is Doug. I wanted to just comment on two things. One, the margin. Make a few comments about that. Our margin actually expanded by 12 basis points from the fourth quarter to the first quarter. And the reason for that is that we've continued to, I guess, improve the mix of our earning assets. Our average earning assets were actually slightly lower in the first quarter than they were the fourth quarter. However, loans continue to grow, so they made up a -- they were higher balances in the fourth quarter, and made up a higher percentage of our earning assets.

Our investments were able to yield a few more basis points, and the amount that we had in fed funds was a little bit lower in the first quarter. And in addition, we adjusted the price down on most of our deposit products at the beginning of the year. And so all of those things combined to allow the margin to expand, like I said, by 12 basis points. Where does it go from here? I guess it's hard to see -- to envision it going much higher. I think we do have an opportunity to continue to improve the mix of our earning assets, as loans grow, but I doubt that we have much left in the way of pricing power with deposits.

So the other thing I wanted to comment upon were just the -- our core earnings, or the quality of our earnings. First quarter, we reported $4.4 million, and we really think that that's a core level of net income for us at this point in time. And I say that because we did report $500,000 in security gains, and so a lot of times that gets immediately discounted. But we also had a write-down on an REO property of 300,000, which -- is that core or not? That can be debated, but it's certainly not -- that happens from time to time, but it's not a regular recurring type of expense, and I think there's a couple hundred thousand of other expenses that will not repeat themselves going forward.

So that's the reason that we think that our $4.4 million in earnings this quarter is a pretty solid number. But certainly subject to, as Harlee said, each quarter we'll look at the provision and depends on that, the level of the provision, whether or not we have another REO write-down. So there's certainly some things that we'll move around. But from a core standpoint, I think -- we think $4.4 million is fairly solid. So I think that's the extent of our prepared remarks. And so we would love to answer any questions that may be out there.

(Operator Instructions)

Our first question comes from Dan Cardenas of Raymond James. Please go ahead.

Good afternoon, guys.

Hi, Dan.

Good quarter.

Thank you.

Just a quick follow-up on the Rochester branches. You said your profitability now, maybe just some footings, if you could tell me what the loan balance is? And what deposits are at that branch as of the end of this quarter?

Loans outstanding at the end of the quarter were $23 million. Deposits, I don't have it right in front of me, Dan, but I think it's about a $1.5 million. I know that these sort of commitments are in excess of that number, and there's construction loans that haven't funded yet. So -- but in terms of outstandings at March 31, it was $23 million.

Excellent. And how many people do you have at that facility right now?

We have three people actually on the bank side of the business, and then one on the mortgage side of the business, so four total.

Great. And then just looking at the balance sheet, if I'm reading this correctly, the -- looks like there was a reduction in debt during the quarter.

Yes, from our reduction in our long-term debt?

Yes.

Yes. Most of that long-term debt is the money we borrowed last June to buy back our stock. And the repayment terms, that was a $16 million loan. And the repayment terms are $800,000 of principle a quarter, plus interest. So most of that reduction is due to that. Also, in that number is a contract payable on land that we bought for our Coralville office, the land where we are currently building our Coralville office, and that has a little bit of principle reduction, also.

And then, just given capital levels, they continue to build, and I know you're using some of it to fund growth. Maybe a couple comments on M&A, if you're hearing any pickup in -- or if you're having any pickup in discussions. And then, maybe to a lesser extent, comments on your thoughts regarding buybacks?

Dan, this is Dave. And yes, we're often asked and approached about that topic. I think primarily, because everybody knows we have the ability to do that, and there's still a lot of banks for sale. That -- currently, it's not a strategic objective, but we continue to have discussions, and still hold that possibility for the future.

Dan, our Board did approve a buyback authorization of $2 million, which they put into effect last July. And that authorization was good through our board meeting on Wednesday, and then they did renew that. However, I guess realistically, we're trading at about 1.9 times book. I don't think that we're going to buy back our stock at that level. We do have good growth -- organic growth prospects, as Brad and Harlee have mentioned, and we're growing in all three markets. And so our tangible common equity ratio is 8.5% here at the end of March. It did allow us, and we felt comfortable raising the dividend by $0.01, but I think we'll give it another couple of quarters.

And it's something the Board talks about every quarter, but I think we'll just see how the organic growth develops over the next couple of quarters. And Dan, I would be interested in your opinion on what you like to -- where you're comfortable with that tangible common equity ratio. I know it's all over the board for public companies. But we 8.5%, I don't know -- it's maybe a little bit on the strong side. But anyway, that's our thoughts. And if -- I don't know if you want to share your thoughts or not, but --

Yes, to the extent that you're growing, I think you need to maintain some of that capital so you can take advantage of the opportunities that present themselves. And if M&A does rear its head, then you have a war chest to go back to and partially fund a transaction. So when the [grill] stops, or it's not as robust as it is right now, then maybe you can revisit and reconsider what an optimal amount would be. But just general thoughts.

Sure. Yes, thanks.

All right. And then just one last question, just in terms of the market and the loan growth that you're seeing, is that still a market share grab? Or are you beginning to see glimmers of economic improvement in your footprint?

I would say, certainly, it's a market grab in Rochester, and that economy is very strong. Iowa City, I would say that the economy in Iowa City is strong. Is it a market grab over there? I would -- probably to a lesser extent. And it would also be the same in Central Iowa, the Des Moines area. I would say that we're certainly picking up new customers here. I think more of our growth has come from just expanding from our existing customers here in Central Iowa area.

Great. I'll step back and let somebody else ask.

Our next question comes from Andrew Liesch of Sandler O'Neill & Partners. Please go ahead.

Hi, guys. Good afternoon.

Hi, Andrew.

Doug, I'm curious, could you talk a little bit about some things that may have gone on in the securities portfolio to push the yield that much higher?

Push the yield higher?

Yes.

I think there's -- well, we did sell some securities and reinvest. And for the most part, we kept our duration about the same and the yield about the same. I think, as much as anything, as rates have gone up, it slowed down the prepayments on the mortgage backs. And so a little bit of a pickup in yield there.

Got you, okay. And then, looking at the loan pipeline, your comments are all very strong. And it seems like the growth is going to continue. But is there -- do you guys see, like on the rise, like any large pay-downs that you might be experiencing that may have maybe had the pace of growth slow a little bit?

We're having those -- we have those on a regular basis, in the form of some construction loans that have funded and moved on to permanent, maybe non-recourse basis. But Harlee and I were talking about that, actually, over lunch. And most of our construction projects -- larger construction projects are closer to the front end, and probably won't see pay-down until towards the end of the year, or maybe the first quarter of next year. So -- and on occasion, somebody may not like our terms and pay us off, but that's not a common theme. I don't know if that answers your question.

Yes. Certainly. Thanks so much, guys.

Okay. Thanks, Andrew.

(Operator Instructions)

And showing that we have no more questions, this concludes our question-and-answer session. I would like to turn the conference back over to Doug Gulling for any closing remarks.

I would just like to thank you again for joining us. We really do appreciate your interest in our Company, and we'll plan on a call at the end of July. So thank you.

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