West Bancorporation, Inc. (WTBA) Q1 2020 Earnings Report, Transcript and Summary

Good day. And welcome to the West Bancorp Quarterly Earnings Conference Call. [Operator Instructions] Please note today's event is being recorded. I would now like to turn the conference over to Mr. Doug Gulling, Chief Financial Officer. Please go ahead, sir.

Yes. Thank you. Good morning, everyone. Thank you for joining us today. On the call with me, we have Dave Nelson, our Chief Executive Officer; Brad Winterbottom, our President; Harlee Olafson, our Chief Risk Officer; and Jane Funk, 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 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 with that, I'll turn it over Dave Nelson.

Thank you, Doug and good morning, everyone. Thank you for your interest and support of our company. 2019 was another record year for West Bank. First quarter 2020 was an all time record quarter despite tripling our provision expense from the prior quarter. And had already seen so long ago. So Covid-19 arrived, West Bank initiated our disaster prevention protocol to get people setup to work at home. We closed our bank lobbies. We kept our drive-thru service open. And we jumped all in with the PPP program. West Bank along with the good portion of our industry has undergone what I'd describe as wartime like repurposing of our bank into SBA factory with night shifts. We got about 600 PPP applications totaling about $206 million across the finish line before round one funding was depleted. We have about another 150 more PPP application ready to be submitted when the round two window opens, which we expect to be today. We are also expecting another wave of new PPP applications as well. It is very appropriate to ask and reflect upon questions such as, what happens if people don't pay or are unable to pay the rent or home mortgage payments. What happens if businesses don't pay the rent or mortgage payments? What impact would there be on office building occupancy across America if people continue working from home permanently or semi-permanently? How long will the shutdown last? Will Americans not have the confidence to re-engage with normal activity until herd immunity or is achieved or a vaccine is available? All of these questions and others are very appropriate to ask, but for which answers are unknown. As of right now, meaning today West Bank has a very low to non-existent levels of past-due loans or overdrawn accounts. Frankly, as in none which is very remarkable. We are a reflection of those with whom we do business. When our customers have difficulty we will have difficulty. Our industry is initially most concerned with exposure and certain obvious areas in sectors such as travel and entertainment, which includes hotels and restaurants. Energy, agriculture, transportation retail businesses, consumer credit card portfolios; consumer auto and consolidation loans, mortgage, servicing rates, valuations for home mortgage portfolios et cetera. West Bank has no direct exposure to energy, agriculture or credit cards with minimal exposure to consumer debt, restaurants and travel and entertainment. West Bank has a meaningful exposure to hotels and commercial real estate. Our hotel exposure is concentrated with a handful of successful operators with an overall portfolio loan to value of 69%. Perhaps this may sound arrogant, but I believe our relationship based, customer base is comprised of clients with well above average financial strength as West Bank is seen as a bank of first choice not a bank of last resort. However, when our customers have problems, we will have problems and the problems may be severe and the duration remains unknown. In accordance with our industry regulators, joint instructions, West Bank will extend helpful loan modification terms where warranted to these impacted businesses. I'd also like to add that our three market Minnesota expansion into St. Cloud, Mankato and Owatonna, which was launched during March of last year, achieved a positive profitable run rate after just nine months and exceeded breakeven to start calendar year 2020. For our quarterly dividend, we are keeping it the same at $0.21 unchanged versus an increase. The $0.21 has a payment date of May 20th to shareholders of record as of May 6th. I would now like to turn the call over to Harlee Olafson, our Chief Risk Officer.

Well, thank you, Dave. I'm going to comment about a couple of different things here. There's so much that could be said today, but I will reiterate a couple of things that Dave talked about. We currently do not have any past dues in our loan portfolio and every day we monitor overdrafts and we do not have any overdrafts over $5,000 in our overdraft situations. So and looking at where we could have issues and where things could happen for us, as Dave talked about, one of the concentrations that we have is in commercial real estate. Just from, trying to give you some flavor into how that all adds up. Multifamily properties, we have a $279 million and multifamily properties, the average loan to value on those properties is 70%. Warehouse properties, we have a $179 million in warehouse properties. Average loan to value of 67%. Office properties, a $159 million and 70%; medical office buildings, $115 million, 61%; Senior Living Centers, a $112 million and 68%. And looking at the hotel properties, we have a $151 million in hotel property which is actually extended right now. And just I'm not trying to change Dave's discussion in regard to our loan to value on that, but our loan to value on that is currently 66%. We have provided modifications to a lot of our hotel operators. Number one, they're basically in a shutdown mode right now where they're definitely not making money. And if they're open they're barely open. Our typical modification right now has been for four months. We do expect that that could change and we might modify those for as long as six months. When we look at that from a totality perspective, we look at the interest rates on those hotels at being somewhere in the neighborhood of between 4% and 4.5% are the rates on those loans. So even at a six-month deferral of interest that really only adds to the loan-to-value on a combined basis at 2% to 2.5%. It's not terribly significant. The issue with those is they will we be up and running in six months and that's really six months from now because through March all of the payments have been made and the deferrals have really started in April and go forward from there. And looking at where these properties are at. We have eight properties in Des Moines. We have five properties in Cedar Rapids, Iowa City, Coralville. We have three properties in Rochester and then we have three other hotel loans that are spread out between different areas. These are all customers of ours that have wild histories in the business and significant staying power and cash flow. As with any industry like this though there is a significant burn of cash on a monthly basis because things continue to happen. Such as real estate taxes continue. There is a still significant payroll in some of the areas and the burn has been calculated and many of these properties to see how long our operators have the sufficient liquidity to support these. And in the ones that we've looked at, they all have sufficient liquidity to support at least six months worth of problems. So that's probably a little more information on just on our higher risk loans section, which I do believe is the -- excuse me, the hotels at this time. We have done modifications to not just hotel customers but to some other customers that we have. We've done approximately a 120 modifications for 70 different customers. In some cases, the modifications are put in place because these individuals have a lot of different investments and a modification to interest only might allow them to maintain or build liquidity in these difficult times. And in some cases, they're put in place because they are in a cash burn position. And they're in a working to maintain their liquidity to get through this problem when they can be back open for business again. In addition to this information, the only other information that I would say a significant right now is our Iowa City. Our Iowa City location again is very dependent upon the University of Iowa. The University of Iowa being again opens for business this fall. And our Rochester location which has a dominating force there of Mayo Clinic of which Mayo Clinic is in a position where they are less than full speed right now due to not taking on cases that aren't of imminent need. We do believe that our basic markets are strong that they're resilient, but ours like anybody else's are having some difficulties today that will have to be worked through. And with that I'd turn it over to Brad for maybe for some happier discussion.

Hi. Here comes the happy talk. Just looking back on the quarter, we started the year; our loan portfolio was roughly a $1.950 billion that number grew under normal operations about 2.7% and when you look at our four markets in Minnesota and our two markets in Iowa, there was growth in every one of those markets then added to that 2.5% growth. Deposit growth was not as strong, but we also anticipate that should improve this year as we attract those especially up in Minnesota, where we're attracting new customers. And the loan activity is happening prior to the deposit activity moving. But we are working to gather those deposits. I look at our pipeline report a lot, but looking at it today; we've had a lot of customers that have delayed projects that we had been talking about or expansion. And we still have a pipeline. It's not nearly as robust as maybe what we've talked about in prior quarters. But as an example, I'm aware of about six transactions that are going to pay off in the next maybe 30-45 days, a total maybe $30 million. And those would be assets that have been sold, waiting to close or they were construction loans that have been built and now they're moving to non-recourse lenders. We're going to trade those payoffs with some C&I business that we have been chasing for a while. And some other construction loans. And of course, our construction loans will take a while to build but that is happening. And so I would say that we're going to replace those things that are paying off. We have spent seriously the last 30 days working on PPP loans. It seems like we've become an extension of the US government and just in terms of submitting these applications, verifying the information and sending it in and then conversely then creating the notes and the documentation necessary to get it funded. And as Dave mentioned earlier, we have on our books today roughly a $190 million outstanding. I think by the end of the day, we might be at $205 million. And we've got maybe another $15 million to $20 million and they come in every day. These applications that is ready for phase two once the SBA is ready for us. Then in about eight weeks, we're going to have to do waiting for guidance from the SBA. We hope to get that someday, but there will be debt forgiveness and we'll have to be involved in that. So again, that is taking a lot of time away from just normal business calling efforts. And we're fine with that, but it does have its toll on us. We don't know what's going to happen in the next few months. And we're prepared as Dave said; we are talking to our customers regularly. There's -- there hasn't been panic yet but we know that the times will be a lot different than where they were three months ago, six months ago. So we're bracing for that. With that Doug, I'm going to turn it over to you. I'm tired of talking.

Yes. All right. I just want to make a comment about noninterest expenses for the first quarter. They were only up 1.25% over the first quarter of 2019. And the primary reason for that is that our compensation expense is actually lower in the first quarter of 2020 than it was in the first quarter of 2019. Few reasons for that, in the first quarter of 2019, we were paying what you would call sign-on bonuses to our new folks in three markets. Three expansion markets up in Minnesota. And of course, we didn't have that in the first quarter of this year. Also we're actually down about six FTEs now compared to a year ago. And so that has influenced favorably on expenses. So with that, those conclude our prepared remarks. And we would be happy to answer any questions.

[Operator Instructions] Our first question today will come from Andrew Liesch of Piper Sandler. Please go ahead with your question.

Good morning, everyone. How do you do? Quick question on the additional pipeline for the PPP loans. You said 150, is that $150 million or 150 more applications?

Applications.

Got you. Okay. So dollar loan still will be a little bit less, but still seems like you having --

I'd say right now, Andrew, $220 million will probably be funded between already on the books to what we know the applications that we have that are ready to get approved as soon as the SBA opens it up.

Got you. Okay. On the margin, you got some nice lift there. I think there'll be some dynamics and some volatility on that with the PPP loans and everything. But excluding that I mean you guys have some room on the funding side to reduce -- still to reduce cost further. I mean how do you think the margin is going to trend from this 2:10 level?

Well, certainly we should get a little more benefit in the second quarter from all the rate --from the rate cuts that took place in March. Because during March, we actually lowered every single deposit rate that we have which we necessarily don't always do whenever the Fed is changing rates. But when they drop them to the extent that they did, like I said we changed every deposit rate that we have. And so we'll get more of a benefit in that in the second quarter. And then it's hard to tell the yield on these PPP loans will depend upon how long they're on our books. Because the real driver of the yield is the fee that we're getting and we're setting the fee up to amortize over the no period, which all of our notes are two-year notes. And so they'll amortized, start amortizing over that two-year period. And then of course, as they're forgiven and paid off early then we'll recognize the unamortized fees at that time. So we would expect I mean, our guess at this point in time is that most of those loans will be forgiven in six months. So we should see the bulk of the fee recognition and third quarter maybe a little spill over into the fourth quarter.

Got you. That's helpful. Beyond that, I don't know this 2.7% loan growth repeatable right now but how is the sense from your borrower growth going forward? What's their sense of loan demand right now?

I would say in our new markets that's where the bulk of our growth is going to come from because our 20 bankers that we have up there, they are chasing their relationships that they've created over the years and that is still a very positive for us. The Central Iowa market has growth but not nearly what's taken place up north of Des Moines. And we've had decent growth over in our Iowa City, Coralville area as well. But I don't anticipate growth, heavy growth in either of the Iowa markets. It's more of our three new markets that we have up north in Minnesota.

Just add to that, I think, part of the benefit of having good bankers and being responsive is that there's some real franchise type customers up in those markets that went to talk to their existing banks when some issues have come up. And we've had the opportunity to capitalize on some customers that might have taken a much longer time to bring into our fold. And so with every problem there's also opportunity.

Right. If somebody helps not fighting pay down there at all taking market share. I guess along those lines on the funding side, you kind of alluded to it. You guys said you get needed to and in the past you said you needed to upgrade some technology to better serve these customers from a depository standpoint. How's that process going? Is the technology all up and running where, yes, just any update there would be nice.

I think part of what you're talking about there, Andrew, when we went up to our Minnesota markets; we went in with a limited amount of depository capability in the branches. And we've added a backup capability for that so our ability to add to our depository base up there is much better now than it was three months ago. Because of the backup capability of being able to take the deposits and have a backup function. So our technology is in better situation there than it was before.

Our next question will come from a Kevin McLaughlin of McLaughlin Investments. Please go ahead with your question.

Thank you. Good morning, everyone. I just wanted to ask, you've talked in the past about how the market in Minnesota does not have strong community banks. And I was, I understand you have bankers whom you are attracting to your new locations there. And that they have an advantage in bringing business immediately. But I was wondering if you would describe a little more in detail what the difference is between Iowa and Minnesota. How come they never just developed a strong community banking system? And is there significant competition that develops at some point from any of the banks and the communities you're serving or is this just something that is a foregone conclusion? Thank you.

Hi, Kevin. This is Dave. And great question and thank you for joining us. The State of Iowa is extraordinarily blessed with a high number of strong community banks, per capita more so than other states, which is a great economic benefit for our state. In Minnesota, this is my opinion, but the two major banks that were initially headquartered in Minnesota; the old Norwest and the old First Bank now both have different names, but were incredibly successful. They were operated as a string of independent community banks and dominated the state banking landscape, which didn't really provide a lot of room for others to flourish. And so when I say that the state of Minnesota is not as blessed as the state of Iowa. And having a plethora of strong community commercial banks, I believe that is why.

Okay. Well, I was just wondering because we are long-term patient investors. We're looking for the long-term growth curve which we believe could outperform the market over that 10 or 15 year timeframe. And I just wondered how far this could extend. I know that the twin cities hold an exciting opportunity and I'm anxious to see if the discernible advantages that we see will extend in that market place as well. Thanks for the background and congratulations on a great quarter. I couldn't be more excited about what you're doing and what we own. Thank you. End of Q&A

This concludes our question-and-answer session. I would now like to turn the conference over to Doug Gulling for any closing remarks.

Well, I just like to thank you all for joining us. And we'll look forward to talking again next quarter. Thank you.

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