West Bancorporation

Good day and welcome to the West Bank Corporation first quarter 2021 earnings conference call. All participants will be in a listen-only mode. Should you need assistance during today's call, press star then zero to be connected with an operator. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, press star then two. Please note this event is being recorded. I would now like to turn the conference over to Doug Gulen, Chief Financial Officer. Please go ahead.

Good morning, everyone. Welcome to our conference call this morning. On the call, we have Dave Nelson, our Chief Executive Officer, Carly Olofsson, Chief Risk Officer, Jane Funk, Chief Accounting Officer, Brad Winterbottom, West Bank President, and Brad Peters, Executive Vice President in charge of our Minnesota location. And 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. Dave Nelson will start us off.

Thank you, Doug, and good morning, everyone. Thank you for joining us. I'd like to start off by first introducing Brad Peters, who has been started with West Bank January 1st, 2019, to lead our Minnesota expansion, and Brad was just recently named as a policymaking officer during our organizational meetings this week, and will lead all of our Minnesota markets, and we will hear from Brad a little later during the call. In fact, we'll have several presenters today, so I'll shorten my comments, but I would say we just had the best quarter ever during our 128th year history. It's been a long time since I've seen a quarterly return on equity of 20% with an efficiency ratio under 40. Based on that performance, our directors have declared a quarterly dividend and increased the dividend from 22 cents to 24 cents per share. The payment date on May 26th to shareholders of record as of May 12th. I'd like to share some good news. Recently, West Bank has received three national accolades. One of the ways we measure our directional progress towards our vision is how our financial performance compares to others. And the performance rankings of banks across America for 2020 are just now beginning to be released. During this past March and this month of April, West Bank has received three national accolades for top performance. The 2020 Raymond James Community Cup recognizes the top 25 community banks across America with assets as small as $500 million up to $10 billion. West Bank was ranked number 21 in America and the only bank in Iowa or Minnesota to be recognized and one of very few from the Midwest. West Bank also recently, well, West Bank has received this award, the Raymond James Community Cup, now seven out of the past eight years. S&P Global ranked West Bank number 10 in our nation on their list of the top 50 large community banks across America, both public and private, with assets from $3 to $10 billion. Again, West Bank was the only Iowa or Minnesota bank to make that list. and one of very few from the Midwest. Finally, Bank Director Magazine just published their list of the top 25 banks across America with assets greater than $1 billion with the lowest or most favorable efficiency ratio and listed West Bank as number 19 in America. With that, I'd like to turn the call over to Harley Oleson, our Chief Risk Officer.

Harley Oleson Thank you, Dave. I will begin today talking about various credit issues. Our Texas ratio for the quarter increased due to the death of one of our customers and the time it took to properly document the loan and the trust's name. That did take a little bit longer than we expected, and it did carry over the month end of March. All of the interest was and is paid correct and the loan has now been renewed and is now in a standard classification. Nothing really negative to report on that going forward, but it did hit into our Texas ratio for the end of the quarter. Second, our other significant non-accrual asset is in the process of collection and is at the latter part of that collection period. In fact, today, one of the pieces of property is being sold and about 10% of the loan balance should be repaid today from the sale of a small piece of property. They have also sold and are leasing back significant other property that is expected to close by about the third week of May. This sale would pay down to a very minimal balance the remainder of our non-accrual debt. Third, our watch list has had a significant increase this quarter. It is now at 5.1% of total loans. This is due to one hotel group and one separate hotel being placed on our watch list. In reviewing the hotel loans in total, we have seen average occupancy increase from 30% in January to 42% in March. The hotels we put on the watch list have started to recover as well, but at a slower pace. These loans that are on the watch list now were very good operating entities prior to the pandemic. Pre-pandemic loan to values were in the low 60% and debt service coverages were greater than one and a half to one. We expect these hotel groups to achieve positive cash flow later this summer, but they will remain on our watch list until we have assurances that they are cash flow positive. In looking at modifications that we currently have, our modifications are rolling off and they will, 4 million return to full principal and interest payments in April, 48 million return to principal and interest payments in May, and 17 million return to principal and interest payments in June. We do have a couple of loans in that group that may receive a couple month interest only modification But that hasn't been determined quite yet. Overall, the health of the portfolio is very good. Business entities that needed PPP funding received adequate funds to manage disruptions from the pandemic. A large number of customers received funding and ended up having very profitable financial results, even though they received additional government funding. Our one significant customer added to our watch list due to their corporate structure did not receive as much funding due to program limitations. As discussed previously, the sector, as you would expect, that has been affected the most is our hotel group. Again, they have also received significant PPP funding The portfolio as a whole has been showing signs of improvement, and as I discussed previously, January occupancy was 30%, February was 38%, and March was 42% on average. You may have some questions for me later, but shifting off the credit and looking at our eastern Iowa market, This market has continued to perform at a very high level. We are continuing to gain market share in eastern Iowa with new and expanding current customer relationships. And with that, I will turn it over to Brad Winterbaum.

Thank you. My comments are going to be brief. Harley touched on the eastern Iowa market. market in terms of new business generation and for the quarter, absent PPP loans, we grew 2.5% roughly. Our pipeline report is good. We have a lot of customers and prospects that we're talking to about new business and we're starting to get back to face-to-face meetings, not 100%, but it's getting closer. Our loan growth has been decent in all six of our markets, and we're seeing C&I business as well as real estate transactions. I would tell you that with banks with a lot of liquidity, and I think that that's generally most banks, We're starting to see some very aggressive interest rates being offered, and that will probably have headwinds for us. However, we're still in front of these folks with our sales hats on. Outlook for loan growth, again, our pipeline is decent, good. We're aggressively looking for good new customers. We had roughly $25 million of loans pay off in the first quarter from asset sales, and I think that that's going to continue as well. So that, too, will provide some headwinds, but it's nothing new. Those are my comments. Brad Peters.

Thanks, Brad. Good morning, everyone. I'm going to provide you a brief update on our Minnesota expansion. Our team continues to make good progress building our presence in each of the Minnesota regional centers. We continue to focus on CNI, and our pipelines are strong. Our loan outstandings in the three new markets have grown to nearly $300 million. And collectively with Rochester, Minnesota is now over a half a billion dollars in loan outstandings. Our core deposit growth has also been strong. And our CNI focus has really driven some strong treasury management business. We continue to make progress on our new building in St. Cloud. It's well in Sartell, which is a suburb of St. Cloud. We're looking to open that new facility late this year, and the Mankato market is very close to acquiring land for a new building. We're expecting to begin construction on that facility this fall. That is the end of my comments. I'll now turn it over to Jane Funk.

Thanks, Brad. I'm just going to make a couple of comments on the impact of the PPP loans on our income statement. Our PPP loan income in the first quarter was $2,842,000. So that was an impact on our net interest income and our income before taxes. Bottom line impact after tax would be about $2.1 million. Of that $2.8 million in interest income, approximately $2 million of that was what we would consider accelerated fees at the time of loan forgiveness in the first quarter. So that's just a little color commentary on PPP loans, and I'll turn it over to Doug for the rest of the financial comments.

Okay, I'll make a comment on a couple of areas. First of all, on the provision, as you know, Our provision in the first quarter was $500,000. That compares to a million dollars in the first quarter of last year and down significantly from the $4 million that we provided in the fourth quarter of 2020. And really, the provision in the first quarter represented providing for, on the loan growth, the non-PPP loan growth in the first quarter. You know, I'm sure, you know, the question on your mind is, well, what's it look like going forward? And it's, you know, we always take a look at that at the end of each quarter. But I think our best guess at the moment is that it would be similar to the first quarter at most. And if, you know, if everything gets resolved as Harley wants, was talking about earlier, it could be very minimal. As far as the margin is concerned, what's the outlook on the margin? Well, we think it's probably going to trend down a little bit. Any loan payments, loan maturities, loan payoffs, any paydowns and maturities in the investment portfolio are getting reinvested at a lower rate right now. And there isn't much repricing opportunity on the liability side of the balance sheet. Now, offsetting that a little bit is we are going to work to get some of our short-term liquidity into the investment portfolio or reverse repo program at a higher rate than we earn at the Fed. And so that will be a positive. And lastly, just on earnings, first quarter was an all-time record, significantly higher than what we had been running. While we do not give guidance, I think it's fair to say that second quarter will not be as high as the first quarter, but we do expect a very strong and decent second quarter earnings. With that, that completes all of our prepared remarks, and we would be happy to answer any questions.

We will now begin the question and answer session. To ask a question, press star then 1 on a touchtone 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, press star, then two. At this time, we will pause momentarily to assemble our roster. And the first question comes from Brendan Noble with Piper Sandler. Please go ahead.

Hey, good morning, everybody. How are you? Good. Thanks, Brendan. Good. Maybe just to start off here on the PPP side of things, do you happen to know how much in remaining unrealized fees you have left at this point for each of the two rounds?

Yes. So for the first round, as of March 31st, we had about $770,000 of unearned, unamortized PPP fees. And on the second round lending, we had $2,880,000 of unearned fees.

Fantastic. Thank you. And then in reading through your 10Q, I did notice that there's about 50 million of the FHLBs that are being repaid either in this month or in May. Just wondering what the cost was on those advances, and do you see any further opportunities to pay down more of the FHLBs just with excess liquidity?

Well, good question, Brendan. The cost of those federal home loan bank advances was approximately 2.6%. So we are going to have some benefit from that because we're going to use money that's earning 10 basis points right now and pay off borrowings that had an effective cost at 2.6%. And the reason that cost was kind of high is that we have swaps wrapped around those that, that we terminated at the end of the first quarter. And then we're paying off those, uh, advances in, well, 25 million has been paid off, uh, now in April and another 25 million will be paid off in May. Um, we, we do not see any other opportunities for that, uh, right at the moment.

Got it. Okay. All right. That's, uh, that's helpful. Um, wonderful. Um, So you guys offered a lot of fantastic color on kind of the loan growth environment. I mean, it sounds like you're still getting in front of plenty of commercial customers. Pipelines are strong. But, you know, payoffs remain a bit of a headwind. And if anything, the competitive environment is getting more challenging. I mean, you guys have been doing, you know, very nice loan growth for the past couple of quarters. I was kind of looking for high single-digit to 10%, which you guys did this quarter. So is that kind of a reasonable expectation for growth for the rest of the year, XPDP?

Well, I don't have an official answer, but I would tell you this, that we've had a lot of discussions with developers and BUILDERS, OTHERS THAT REQUIRE INPUT COSTS THAT INCLUDE LUMBER, DRYWALL, STEEL, ET CETERA, THOSE PRICES ARE GOING UP AND A BIT TOO FAST FOR SOME OF OUR CUSTOMERS AND THEY'RE STARTING TO QUESTION WHETHER THEY NEED TO DO AN ADDITIONAL BUILDING OR ADDITIONAL ASSET. That's to be determined. But we do have over $150 million in construction advances that should fund through probably the rest of this year. And we're talking to a fair amount of other CNI-type customers that would obviously increase our footing. I don't know if I would say 10%, but last year I think we were at 8%. 8% without PPP. How's that for a nod? Okay.

It was a very good nod answer. Thank you for the color. Let's see, on credit, I think your prepared comments answered most of the questions that I would have had, so that was certainly helpful. I think I know the answer to this, but just to kind of confirm, just with the move up in the watch list and kind of what's remaining on deferral, it doesn't sound like you see any material loss content on kind of those pieces of the portfolio. Is that correct?

That is correct.

All right, good. And then? Maybe one last one for me, and then I'll step back. The M&A environment has certainly taken a turn for the better over the past couple of weeks or a month or two. I know traditionally you folks are very internally focused, and you've been able to kind of have a lot of runway with organic growth on your own. But just kind of curious for any updated thoughts on M&A. Is that something that interests you, or is the organic focus still top of mind for the time being?

Brendan, this is Dave, and I'd answer that. We're always open to the idea and the concept, but you're correct that we have been very successful with our internal growth. In fact, just recently had reason to look back at our growth. Rarely do we talk about growth as a standalone because we don't set goals about being a certain size by a certain time, nor do we give bankers goals about selling a certain amount of something during a certain time. But we've quietly over the last nine years gone about almost tripling our size, um, without making an acquisition from 2011 to 2020, we've gone from 1.2 billion to 3.2. So it's not quite, but close to tripling. Um, we just recently crossed the 3 billion mark in assets. So it caused me to look back and see how long it took West bank to grow its most recent billion to go from two to 3 billion. And it took 110 years to get our first one from zero to one, but to grow the most recent billion only took three years. So, um, acquisitions. Yes. I mean, always open to it. I think the intrinsic value of our franchise is the purity of our business model. So if we were to head down that road, we would certainly look to, uh, at other banks with a similar business model to maintain the value of, of the purity of what we have.

Okay. Fantastic. Um, I think that's all that I had for you folks, but thank you for taking the questions.

Thank you, Brendan. Tom, is there anyone else?

Yes. We have a question from Kevin McLaughlin with McLaughlin Investments. Please go ahead.

Thank you. Good morning, everyone. My question would be for Dave and Brad Peters, because I like what you're doing in Minnesota so much, and I visited your Rochester operation and saw with my own eyes just how successful it is. Are there any metrics that you apply when you're looking for new opportunities, or how do you determine? I mean, you've been turning profitable in six to nine months in the operations that you've started so far. but is there some kind of a formula that you apply where you have to see a certain ability to grow by a certain amount in a certain period of time before you're willing to make that commitment or take a step?

Well, hi, Kevin. This is Dave, and again, I want to thank you for coming to our annual meeting yesterday, and I very much appreciate your support, but let me start with that in saying that The reasons why we've been so successful going into these marketplaces with no customers and zero revenue, and ironically, in all cases, achieving a profitable run rate in just nine months. Doug and I, when we are at conferences and talk to other bankers around the country, we often like to ask that question of others. If they were to expand into a new marketplace, how long would they think it would take them to achieve a break-even or a profitable run rate? And they often say, well, if we didn't think we could do it in four or five years, we probably wouldn't, you know, uh, probably three years, two years would be fantastic. The reason that we've been so successful with this and have chosen the locations we have was due to our very unique and strong advantage package. And that advantage package being the ability to hire the top bankers in that town who have existing relationships. So, you know, you think about a formula or what one would look for in order to keep doing this in other places would start with the local leadership to be able to identify and be successfully attract at least one, a leader whom you could build a team around. And so, you know, if we had the ability to continue to replicate what we've done, we most certainly would like to do that.

Okay. Is there any opportunity that you've turned down? I mean, I love what you've done so far, but I think that your success may attract other people. I just wondered if there was anyone coming to you that is interested in aligning themselves with you.

Well, everything that we've done, we've initiated. So we're kind of the ones that would extend the invitation versus the other way around. Okay.

And I know that you've taken a lot of business away from Bremer, so as a follow-up, do you follow Bremer? How have they been recovering through this whole thing?

Well, I really don't. So, I mean, they have been in the news a lot for various reasons, but honestly, I have not heard anything current.

Okay. Well, I'm just going to close by thanking all of you for all the hard work you did last year, which was phenomenal, and finally just for making me look so good. I've got a lot of very happy clients, and I appreciate everything you've done. Congratulations.

Thank you, Kevin. Thank you very much.

As we have no further questions, this concludes our question and answer session. I would now like to turn the conference back over to Doug Gulen for any closing remarks.

Well, yes, that concludes our remarks, and we just appreciate your interest in our company, and thank you for joining us this morning.

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