West Bancorporation Inc (WTBA) 2017 Q4 法說會逐字稿

Good morning, and welcome to the West Bankcorporation Fourth Quarter 2017 Earnings Conference Call. (Operator Instructions) 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.

Thank you, Phil. Good morning, everyone. Thank you for joining us this morning. On the line with me today are Dave Nelson, our CEO; Brad Winterbottom, our Bank President; Marie Roberts, our Chief Accounting Officer; Dave Milligan, our Chairman; and Harlee Olafson, our Chief Risk Officer.

I'll 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.

With that, I'll ask Dave Nelson to start us off.

Thank you, Doug, and good morning, everyone. Thank you, for joining us. We had a very strong quarter, fourth quarter. We had the deferred tax asset adjustment that Doug will add more on. But the noncash adjustment brought our end -- brought an end to our consecutive string of 13 consecutive record quarters. However, we still had a record year, despite the one-time noncash write-down. We had growth in all 3 of our markets. And during the year 2017, we had overall loan growth of approximately 8% and deposit growth of 17%, and this growth only caused noninterest expenses to increase less than 4%.

We achieved both growth and efficiency improvements. We were recognized again as one of America's top performing banks. We had 100% key employee retention during the year. Our very strong credit quality with 3 years of net recovery.

So as we begin our 125th year in business, we will achieve continued performance improvement during 2018 by providing greater clarity to activity expectations and skill improvement for our team; and with a continued focus on relationship building, community leadership, enhancing our internal sales culture and all the activities that make West Bank special.

Based upon this performance, our Board of Directors declared an $0.18 per share quarterly dividend with a record date of February 7, and payment date of February 21.

With that, I'd like to turn the call over to Brad Winterbottom, our Bank President.

Thanks, Dave. I'm going to repeat a lot of things that Dave said. We had a good fourth quarter in terms of loan and deposit growth, and we had a great year in loan and deposit growth.

During the quarter, we added some new relationships. We had some assets that moved out of our construction loans into permanent that are now beginning to amortize. So that would be some of the activity that's in our loan portfolio. All 3 markets remain very strong for us. All 3 markets had growth not only in the fourth quarter but year-over-year. Our deposit gathering, sales activity was very good. We've added good deposits, good core customers to the bank, and our sales activities remain very brisk. And we have a lot of things that are in the pipeline that we're working on, and we anticipate continued growth into '18.

With that, I will turn it over to Harlee Olafson, who will talk a little about asset quality and a few other things.

Thank you, Brad, and thanks for your attention today. From a credit quality perspective, the bank ended the year with a watch list of 2.2% of total loans. And at the end of the year, we had 4 total loans that totaled less than $150,000 that were 30 days past due. Even with that, we've -- that was a small increase in the watch list over the previous quarter. We had one credit that is having some cash flow problems that is currently for sale that has numerous interested buyers. That is on our substandard list right now. We expect that, that situation would be resolved before June 30, with no credit loss.

One of the things that we continue to do is to watch occupancies, vacancy issues, especially in multi-family, hotel properties, and office properties. We continue to stress test our portfolio, based upon the cash flow from those type of entities.

And although operations in that area seems to still be strong, there has been a lot of product built, and it does bear continued looks at to make sure that we're in a good space there. Our underwriting is still based on the same criteria, based upon good standards with strong borrowers. As it relates to our markets outside of Central Iowa, Coralville, Iowa City and Rochester, both markets had pretty nice growth in 2017 and have active and adequate pipelines going into this year.

With that, I'd turn it over to Doug.

Okay, thanks Harlee. I'll just add a few more details to the quarter. First of all, Harlee talked about the credit quality and how it remains very good, and we've had net recoveries actually for the last 3 years. And so, this -- in the fourth quarter we did not take another -- or a provision, and did not take a provision for the entire year. We did a couple of things in the fourth quarter to take advantage of the higher tax rate before it dropped. For instance, we did take some security losses and got rid of a few bonds that we weren't necessarily overly concerned with, but just saw some trending credit weaknesses with those, and so we sold them at a loss to get the 35% deduction and reinvested.

We prepaid a Federal Home Loan Bank advance that was only prepaid about a month early. But we thought we'd go ahead and pay the penalty. It wasn't that much greater than what our interest costs were going to be over the remaining term of the advance. And again, take that when we deduct 35% of that loss, that was only about $40,000.

With the new tax rates, I would say that we believe that our net interest margin will be somewhere in the neighborhood of 15 to 20 basis points lower than it had been. And we also believe that our effective tax rate in 2018 is going to be approximately 20%.

Then since this is the end of the year and we have not filed our 10-K yet, I think there are maybe a few averages that some of you would like to know about. And so, for the fourth quarter, our average equity number was $178,735,000. Our average asset number was $2,081,398 -- sorry, $2 billion, excuse me -- $2,081,398,000. And for the entire year then, the average equity was $173,568,289, and average assets for the year were $1,954,241,980.

So with that, we'll stop and entertain any questions.

(Operator Instructions) The first question comes from Andrew Liesch with Sandler O'Neill and Partners.

This is actually Aaron Deer on for Andrew. Hope you're all doing well today. I guess following your accounting numbers, maybe if you wouldn't mind do you -- if you have them handy, could you also provide the average loans for the quarter and the year?

You bet. Average loans for the quarter were $1,470,380,000; and for the year, $1,443,885,326.

Okay. That's great. And then, the -- you had some really terrific growth. I guess both loans and deposits had some nice growth in the fourth quarter. But some interesting trends with respect to how that seemed to kind of play out in the margin. I was hoping to just get a little bit of color particularly in the deposits. If the inflows there were in higher costing accounts, maybe that weighed on the margin some; or if it was more just related to the strong inflows and having some excess liquidity that might have weighed on the margin a bit. Can you talk about the trends there, please?

Sure. You bet. Yes, a lot of the deposit growth was centered in 2 or 3 customers, and were the type of deposits that are priced at the top of the overnight pricing. So that would weigh on the margin for sure.

Okay. And then what are kind of your thoughts for liquidity going forward, then? Is that -- are those funds going to be redeployed in a way that you're going to be able to get the margin up? But obviously I am taking into account the compression that you mentioned just from the tax effect. But on a -- adjusted for that, do you expect that we can see some margin expansion at this point from where we are today?

No. Because most of those funds were deployed during the quarter, at the end of the year we only had $12 million or $14 million in overnight funds. So they were pretty much deployed during the fourth quarter. So I wouldn't -- so that -- the specific answer to your question is, no, I would not expect further margin expansion.

Okay. And then just a question on credit, I guess for Harlee. The -- notwithstanding, what sounds like, just a small issue with this one credit, but the credit trends in general have been pretty spectacular. When you kind of look out at the economic environment that we're operating in today, do -- is it your expectation that we can get through another year without taking any provisions?

It's a good question. I think that will depend upon total growth. And looking at, as we do our quarterly allowance, the adequacy of the allowance based upon our factors that we look at. And we try to stay in a position that we have more loans that our factors dictate to a small percentage. And as we look at each quarter, we look at that independently to see where that is at.

As I talked about earlier, we do stress test our portfolio on a quarterly basis, looking at loan-to-values, cash flows, those sort of things. And we continue to underwrite in what we think is a prudent matter. So from a loss perspective, we haven't been having losses, and we have had recoveries. The growth in the portfolio might be more that might dictate our need to add to the provision.

(Operator Instructions) This concludes -- okay, we have another one, a follow-up from Andrew Liesch (sic) [Aaron Deer], from Sandler O'Neill Partners.

As long as there's nobody else. I just -- I was hoping to maybe get a little bit more color on the loan growth and kind of what the types were that drove that in the quarter? And just -- and then any additional color that you might have on the pipeline in particular for construction?

Sure. We had a couple of very large construction loans that would have had some additional advances, and then moved out of construction to permanent financing. There's a couple very large ones there. And then in addition to that, we had a very good customer approach us; and during the quarter, we refinanced some buildings, some office buildings that would have added good growth. So those would be some transactions that caused the $50-some million of increase quarter -- in the fourth quarter.

(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Doug Gulling for any closing remarks.

Well, thank you, again for joining us this morning. We appreciate your interest in West Bankcorporation. So thank you.

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