West Bancorporation Inc (WTBA) 2014 Q3 法說會逐字稿

Hello and welcome to the West Bancorporation third-quarter 2014 conference 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.

Yes, thank you. And welcome, everyone, to our call. We appreciate you taking time this afternoon. With me in the room here today is Dave Nelson, our President and CEO of the Company; Harlee Olafson, our Chief Risk Officer; Marie Roberts, our Chief Accounting Officer. And normally Brad Winterbottom, our Bank President, is with us but he was not able to make it today.

I'll 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.

I'm going to turn it over to Dave to get us started.

Thank you, Doug. And good afternoon, everyone. Thank you for joining us. We appreciate your interest in our Company. I have just a few general comments, including our dividend news.

We had a great quarter. It wasn't an all-time record but it was close. Actually number four for all quarters in the history of our Company. As for a third quarter it was number one. It was our best third quarter we've ever had in terms of earnings.

Quite simply, all the good parts of our Bank continue to grow, and all the bad parts of the Bank continue to shrink. Our performance metrics are strong and improving. All three of our marketplaces are doing well.

And also, during the third quarter West Bank was selected as one of America's top-performing small cap banks for the third consecutive year, as well as West Bank being named as one of Iowa's Top 100 workplaces.

In terms of our dividend, our Company's Board of Directors declared a regular quarterly dividend of $0.14 per common share, which is a 17% increase over previous quarterly dividend of $0.12. The dividend is payable November 19, 2014 to shareholders of record on November 5, 2014.

And with that I'd like to turn this over to Harlee Olafson.

Good afternoon. I'll talk a little bit about our sales activities in the last quarter and about our credit trends that have been occurring.

First, in regard to loan growth, loan growth this last quarter, although positive, was less than we expected due to some one-time events, which included the sale of a significant business and a couple of other things that really ended up having one-time pay-offs of a little over $40 million that weren't expected. We always have significant pay-offs during each quarter but these were above and beyond what we would normally have seen.

In regard to our outlook, in looking at our pipeline, one of the things that's encouraging for us is the size of the pipeline that we have in the category that we call approved and accepted by the customer. And that's at a level that's higher than we've seen in the last at least significant period of time. So, the outlook for closings does appear to be positive.

One of the things that's been very encouraging this year has been our trust business. Our trust business had been in an area where they were positive in regard to profitability, but the momentum of that positive income has improved this year and will have significant and fairly repeatable results, as it appears. So we're all happy with that.

The mortgage business currently has a real high level of applications, as everybody's probably aware. Mortgage rates have fallen in the last short period of time and the applications for new home mortgages is quite high. A lot of mortgage activity in the last quarter. 85%, 90% of it is purchase business rather than refi.

In looking at the local economies that we serve, all have had, I would say, are in stable position with low unemployment. There is some growth. We see, as I'm sure everybody sees that's on interstate highways and corners of activity, a fair amount of new warehousing projects. Apartments are hot in almost all markets, some retail expansion.

Moving on to what our credit trends have been, our total watch list has been declining. We have, I would say, in our OREO category a couple of very sticky properties. They are a gift that keeps on giving because we continue to get appraisals on these properties and, for whatever reason, they continue to decline in value. We're trying to market those very hard in this next quarter. We really don't have a lot of OREO any more but the couple that we have, we haven't been able to get rid of.

The last quarter's delinquency rates were so low that they were almost non-existent. I think our delinquency rate -- and I hope I'm not quoting this wrong -- was somewhere in the neighborhood of 0.1 of 1% of our loan portfolio was over 30 days past due, and that included our non-accrual category.

In looking at what's happening in the markets outside of Des Moines, our Rochester group has continued to pick up many new relationships. These are full business relationships, nice companies and they have real strong momentum.

Iowa City has had a very good year this year. Their economy remains strong. And our Des Moines group has done an incredibly good job because they have a lot more on the books right now, a lot more to defend and a lot more to keep margins on, and have done a really good job of maintaining interest rate margins as we've gone forward.

With that, that will conclude my comments and I'll give it back to Doug.

Thanks, Harlee. I'd like to just comment on a few other items. First of all, our increased performance, both for the quarter and year to date, is largely due to the increase in net interest income. We've been able to maintain and actually expand our margins by a few basis points over both of those time frames, and actually increased it by 1 basis point over the second quarter. But the reasons for that would be that we've had strong loan growth so our earning asset mix changes favorably.

The yield on our investments have increased a little bit. And our deposit costs this year are lower than what they were last year. You'll note that we did have $210,000 of security gains in the quarter which, of course, aren't really a part of core earnings, but from time to time we do have those. We were just tweaking the portfolio a little bit. We sold a couple of mortgage-backs and reinvested in others that had tighter structures. And we were able to do that, actually enhance the yield by a few basis points and still kept our duration within policy parameters.

We had a modest provision for loan losses of $100,000 this quarter. We actually had net recoveries for the quarter. But we did have a little bit of loan growth, as Harlee talked about, and, as a result, the allowance percentage is 1.23%, which is actually constant with where it was in the second quarter.

Also I just wanted to point out that we established a held-to-maturity portfolio in the third quarter. We had not had one prior to this quarter. We identified about $50 million of state and political bonds that we're going to hold to maturity anyway, and so we thought that we might as well classify them as held to maturity and take the market value fluctuation out of retained earnings, or the potential for a devalue, or a decline in value, to impact book value going forward.

And, then, lastly, as we look forward to the fourth quarter, we expect a good fourth quarter. As Harlee said, we should have some nice loan growth. Would expect it to be a real solid core earnings quarter.

But we will have at least one one-off transaction. As we've noted in the 10-Q the last two quarters, we will be selling our Dubuque Street office in Iowa City. We anticipate that that will generate a $1.6 million after-tax gain. Obviously a one-time item.

And also, as Harlee alluded to, we'll update valuations on the two larger REO properties that we have. At this point in time, of course, we don't know exactly how that will come out.

But with that, that ends our prepared remarks but we would love to answer any questions that may be out there.

(Operator Instructions)

Our first question comes from Andrew Liesch at Sandler O'Neill.

Hello. Doug, could you talk a little bit more about your margin outlook? It sounds like, putting everything together, there may be a little bit of compression, but holding in nicely. I was curious what your thoughts are.

I would say that I think for the next couple of quarters it will maintain about where it is. It may fluctuate 2 or 3 basis points but -- and I doubt if it goes up. I think it should be pretty constant.

Okay. And then the other thing I noticed, it looked like you took on some overnight FHLB borrowings. I'm curious what the rationale for that was, the loan to deposit ratio, where it is. Just curious where you added that funding.

Sure. We were in an overnight borrow position on September 30. The reason for that, we added a little bit into the investment portfolio. And, actually, we were going to add a little bit more.

As we moved into the third quarter, we were anticipating I think about four large loans that we thought were going to pay off. And to counteract what would have been a net decline in loans for the quarter we thought we would add a little bit into the investment portfolio. As we started doing that, then, a couple of those loans changed their mind and did not pay off.

And as a result, then, we ended up in a borrowed position -- overnight borrow position on September 30. That was at $40 million. Today I think we're at about $25 million. We have enough run-off from the investment portfolio that, all things being equal, that would go away in a couple of months. So, that's how that developed.

Okay. But those loans that did pay off, were those the ones that you were talking about earlier that weighed on the growth?

Correct.

And then the two that stayed on, or so, is there a possibility that they do pay off?

There's that possibility. It's not in the immediate future, but down the road there's a possibility that that may happen.

Okay, thank you for taking my questions.

(Operator Instructions)

Our next question comes from Dan Cardenas with Raymond James.

Hi, good afternoon. Nice quarter. Could you give us a little bit of color as to what the loan footings in Minnesota stand as of the end of the third quarter?

Yes. The rate at the end of the third quarter, they were just under $40 million outstanding.

Is that in line or better than expectations?

I would say right on what our expectations are. Some of the issues is that we do have some commitments out there that have not yet been funded. The growth that we expect, sometimes it's a little bit of a timing issue, but the growth that we anticipate, a lot of it's already spoken for. We're in line with where we think we should be and also in line for a good fourth quarter in Rochester.

Okay. So, when you look overall at the consolidated entity, do you think loan growth in Q4 can mimic what we saw in Q3, excluding pay downs and pay-offs?

Dan, I think sitting here today -- and, of course, we have two more months of the quarter left -- but I think we would say that the fourth-quarter growth will exceed third quarter. It will not be as good as the second quarter. We had tremendous growth in the second quarter.

When I think about loan growth, as Harlee mentioned, we're optimistic about loan growth. But on a quarter-to-quarter basis it can jump around a little bit because so many factors in the process of closing a loan, and the timing is not always predictable. Quarter to quarter, it's not going to be a nice smooth line going up, but certainly over time it's going to be nice loan growth.

When I looked at the statement of cash flows here for the first nine months of this year, it shows that our loans have grown on a net basis a little over $90 million. And last year, for the first nine months of the year, we only had $30 million of growth. That $90 million has not come in a straight line this year.

Actually, I think third quarter's probably the slowest quarter of loan growth we've had this year. But fourth quarter will be, barring something that we just don't even know about today, fourth-quarter growth will be better than the third-quarter growth.

Okay. And then as you start thinking about 2015, do you think these trends, these loan growth trends are sustainable in the coming year?

I would say yes. Again, sitting here today with what we know today, we think 2015 should enjoy good loan growth.

Okay. And then a question about the dividend. Nice increase. But looking at your payout ratio at around 42%, 43% is that where you max out?

Not necessarily. I think the last two or three years we had been targeting 35% to 40% pay out. As our performance has improved, we think we can bump that up, which is obviously what we did this quarter. I think we could approach 50% at some point in time, and that still leaves us a good amount of capital with which to grow.

Okay, great. I'll step back for right now. Thanks.

(Operator Instructions)

We have a question from Kevin McLaughlin at BDF Investments.

Hi. Great quarter and thank you for what you're doing. My only question is, with your early successes in Rochester, have you seen any organized or focused response from Wells Fargo? Are they the ones that are being most affected by your new marketing efforts, and the fact that you've taken some banking talent away from them?

That's a good question. Of the relationships that we've brought in, there's definitely been a certain amount of those that have come from Wells Fargo. Some of it has come from this new business that's been happening. Their response, you'd have to ask them about that.

The one thing that we tried to rely upon here is our ability to understand what the customer is looking for and try to provide a good solution to them in a timely manner. And we see that as a competitive advantage of ours and don't know that it's a competitive advantage of everyone's.

Okay. I won't ask the question in a different way because that would be -- you never know who's listening in. But I do appreciate what you're doing. I think you had a great quarter and for me and my clients we're very happy. Thank you and have a good weekend.

We have a follow-up question from Dan Cardenas of Raymond James.

Hello. Just following up on that, just given the success you've seen in Minnesota does that wet your appetite for additional expansion efforts in that state? And then as a follow-up question, are there other areas, other markets in Iowa that you want to expand organically into?

This is Harlee again. I think that once you have some success in an area, that you try a model that's working. If you can find a way to duplicate that, there's certainly nothing wrong with that, and certainly would be a good thing to do. Finding the right talent in each market is really what's important. I would guess that we'll continue to look for that as we go forward.

Okay, great. Thanks.

At this time I show no other questions. Would you like to make any closing remarks?

We would just like to thank everyone again for joining us today and we do appreciate your interest in our Company. Thank you.

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