West Bancorporation Inc Q4 FY2021 Earnings Call

00:08 Good day and welcome to the West Bancorporation Quarterly Earnings Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. 00:36 I would now like to turn the conference over to Jane Funk, CFO. Please, go ahead.

00:41 Thank you. Welcome everybody. Good morning. Welcome to our Fourth Quarter Earnings Call for West Bancorporation, Inc. Thank you for joining us. I'm Jane Funk, the CFO. I've got joining me today Dave Nelson, our CEO; Harlee Olafson, our Chief Risk Officer; Brad Winterbottom, our Bank President; and Brad Peters, our Minnesota Group President. 01:06 And I will start off by reading the fair disclosure statement. The 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 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. 01:43 And with that, I'll turn it over to Dave Nelson.

01:46 Thank you, Jane. Welcome, everyone. Thank you for your interest in our company. I have some general comments and then we'll turn it over to others for more detail. Another great quarter and another record year for West Bank despite the pandemic and other challenges. West Bank achieved another record year by a significant margin as we increased earnings by 52%. 02:11 We did this by growing loans 16%. We grew our investment securities portfolio by 77% and deposits grew another 12%. We had return on equity of 20.3% and West Bank stock appreciated 61% during 2021. As of year-end 12/31/21 we did not have a single loan 30 days past due on our entire $2.4 billion loan portfolio. This performance allowed our Board of Directors to declare an increase to our quarterly dividend to $0.25 per share, which is payable February 23 to shareholders of record as of February 9. 02:56 We also have a number of initiatives underway including four new bank buildings that are all in different stages of development. When we started our most recent Minnesota expansion during 2019 with new loan production offices in St. Cloud, Mankato and Owatonna, Minnesota, all utilizing rented office space, it only took us nine months to achieve profitable operations and our plan has always been to construct bank-owned permanent facilities in each market. 03:33 Our Sartell location, which is a suburb of St. Cloud, Minnesota is nearing completion. We have purchased our Mankato site, the design is complete with construction to begin this spring. We are still on the hunt for the perfect site in Owatonna, and the design phase for our new West Des Moines headquarters building is almost complete. The site has been purchased with construction beginning this spring as well in West Des Moines. 04:03 So, with that, I'll turn the call over to Harlee Olafson, our Chief Risk Officer.

04:12 Thank you very much, Dave. I'm going to make comments on our watchlist, our specific reserve, various credit trends, and then just some quick information on our Eastern Iowa market and how they are doing. First, our watchlist has declined from $100 million on September 30 to $73 million as of December 31, 2021. That equates to less than 3% of total loans. $8.9 million of this total is substandard or non-accrual; all loans within all categories are receiving payments under current. 05:04 As Dave stated earlier, we had zero past dues over 30 days at year end. In fact, we had zero past dues on September 30 as well. We have a specific reserve on one credit in the amount of $2.5 million that we feel is adequate. We had anticipated that this credit would have declined to almost nothing by the end of this last year, but a sale to a third party did fall through on one piece of property. They are currently in negotiations with three other parties on pieces of the property for them. We still expect similar outcomes from what we anticipated before. 05:54 Our current stress test on our portfolio suggests our portfolio has never been stronger. Overall, loan-to-values have declined on a macro basis, cash flow is good, and companies have strong liquidity positions. We are in the same position as most financial institutions in the country right now that deposits are plentiful and a lot of those deposits are sitting in our customers' checking accounts. 06:31 Brad Peters and Brad Winterbottom will discuss what's happening in both Central Iowa and Minnesota. I will comment that our Eastern Iowa bank located in Iowa City/Coralville had a very strong 2021. They have a good pipeline going into 2022 and I think that they are in position to do very well in the coming year. 07:11 With that, I will turn it over to Brad Winterbottom for his comments.

07:19 Hello. For the fourth quarter, our loans grew approximately 5% for the quarter, maybe a little higher, under 6%. We were anticipating and did receive several paydowns, but our sales activity was very robust in the fourth quarter. Helping drive that was we hired a very experienced banker who came on board in the third quarter and the things that he was able to move — some relationships he had from another bank to our bank — really assisted our growth in the fourth quarter and he is not done yet. 08:11 We had a very busy December with a lot of payoffs and have a lot of advances and new relationships. I would also say that our construction financing still has roughly $100 million that will get advanced over probably the next six to nine months that will help with growth. We've had a couple of significant paydowns in January already, but we have some anticipated closings that should help us get a little growth for the first quarter. 08:54 Again, no past dues, which is something we're very proud of, and our customers are doing very well. All of this is a lot of growth in all markets.

09:09 Thanks, Brad. Good morning, everyone. I'm going to provide a brief update on our market expansion into Minnesota. Our team continues to make good progress in growing our business in each of our Minnesota regional centers. Each of our markets are seeing solid growth and our bankers are focused on building relationships and those activities have created ongoing new business opportunities. 09:41 Loan growth has been strong. The pipeline is strong. Our commercial-and-industrial focus has driven strong core deposit growth and treasury management business as well. As Dave mentioned, our new building in the St. Cloud market is nearing completion and we expect to move in later this quarter. The Mankato market has purchased a building site and we're working on plans to begin construction of that site in the spring and the Owatonna market is exploring potential new sites as well. 10:16 That is the end of my comments. I will now turn it back over to Jane.

10:22 Thanks, Brad. I'm just going to make a few comments from the financial perspective. First of all, our net interest margin for the year was 3.05% that's compared to 3.20% last year. Certainly, like everybody in the industry there was pressure on margin from the high levels of liquidity and trying to keep that money deployed either in the investment portfolio or the loan portfolio and certainly as monies were invested, it was at lower rates than what was existing in the portfolio. So, I think what we've seen as pressure on our net interest margin is consistent with the industry. 11:05 Our provision for loan losses for the fourth quarter was zero. Year-to-date, we recorded a negative provision of $1.5 million that compares to a $12 million provision last year. The primary factors affecting provision this year related to a reduction in our specific reserves of about $500,000. We had net recoveries of over $400,000 and we did reduce some of our qualitative factors throughout the year that had been increased during the height of COVID and we've dialed some of those back a little bit, but all of those things were really offset by our really strong loan growth. So, with loan growth of about 16% that resulted in a small negative provision for the year. 12:01 On the expense side, we did have some items in the fourth quarter that were one-time expenses. We made an additional $300,000 contribution to the West Bancorporation Foundation for future grants. We made a $350,000 contribution to a housing fund that was organized by a local municipality and we also had some elevated occupancy expenses related to the termination of a lease on one of our branches. That lease was to run through May of 2024, we have accelerated that and made arrangements with the property owner to be out of that space in May of 2022. The costs associated with terminating that lease amounted to about $440,000. So those were some of the additional expenses in the fourth quarter that normally we wouldn't see. 13:15 So with those comments, I think, I will open it up to questions.

13:22 We will now begin the question-and-answer session.

13:48 And while you're waiting to assemble the roster, I just want to make one correction. We did not have a $20 million provision last year. It was $12 million. I misspoke earlier, so just a clarification. Okay. Now for the questions.

14:05 The first question comes from Brendan Nosal with Piper Sandler. Please go ahead.

14:09 Hey. Good morning, everybody. How are you doing today?

14:12 Good morning, Brendan.

14:14 Maybe just to start off on a couple of ticky-tacky questions here. Could you provide the average balance for loans and average earning assets for the fourth quarter?

14:26 I can. Average assets for the fourth quarter were $3.421 billion and average loan balance for the quarter was $2.380 billion.

14:57 Got it. And then I'm guessing the average earning assets were around $3.3 billion?

15:04 Yes. $3.271 billion.

15:11 All right. Fantastic. That's helpful. Thanks. And then could you also provide some of the info behind PPP this quarter? I guess the quarterly average balances and then what the interest income was realized on PPP this quarter?

15:28 Yeah. So PPP income for the quarter was $912,000.

15:52 All right. Fantastic. Thank you. All right. Let's see, kind of moving on to probably some of the more interesting questions here. Just on the new branch locations in Minnesota, can you offer any color on kind of what additional expenses you might need to incur to the P&L over the course of the year related to those projects?

16:16 Well the St. Cloud Sartell branch will be opening in March. So, we'll start depreciation expense on that this year. All the other expenses on the building projects really shouldn't be any expense in 2022 as they'll either be under construction or just land purchases.

16:45 And the Sartell location would be offset by not paying the lease expense there anymore either. So, would it be $200,000 probably?

16:53 Yeah.

16:55 Got it. And I would imagine that given you already have had any commercial teams there in place for years now, there is really no breakeven, right? It's more just kind of getting into a full location and keep doing what they're doing, but just from a more permanent base.

17:18 Right. I would say that's correct. And really just from the expense side, the team is already in place. So, we don't expect additional expenses. We do expect a spike in business though when we open the doors.

17:35 Yeah. Absolutely. Okay. That's helpful.

17:37 Yeah. We're basically trading rent expense for depreciation.

17:42 Yeah. That makes complete sense. Okay. Wonderful. So, turning to loan growth. I mean this quarter was just exceptionally strong and it sounds like you had most if not all of the kind of $75 million in payoffs that you were anticipating and just kind of pushed through it. It does sound like there is going to be some payoffs coming in the first quarter, but just kind of curious, how do you think about the loan growth opportunity for the year ahead, just kind of given the strength of 2021 and the opportunities you see?

18:16 Well, I'll try to address that question. First off, the $75 million in anticipated payoffs did happen in the fourth quarter. We've had about three additional payoffs that have taken place in the first three weeks of this month that totaled roughly $40 million. That would be due to the sale of the asset or an entity using liquidity to pay off some debt. However, we have three projects that we're working on right now that could replace that dollar and that could all happen before the end of the first quarter and we are also talking to a lot of other folks in terms of our business development practices. So, I do think that we will have some growth to talk about at the end of the first quarter and people are busy.

19:34 I also think just to add on to what Brad is saying, the total size of the pipeline may be bigger today than we've seen any time in the recent past, as far as just total dollars. The other part that's really encouraging is that the pipeline dollars and breadth of it, having multiple locations, comes from multiple areas. And so there is a good group out there finding opportunities that are less dependent on any one location today than we have been.

20:23 And I would just add from the Minnesota perspective, we had our initial surge when we did our lift out. Now, I think looking beyond that, the pipeline is as strong as it's been and that's really from new prospects and our existing client base.

20:44 Got it. That's super helpful color. Thank you. And then turning to expenses. Jane, I just want to make sure I heard you right that those three one-time items add up to about $1.1 million for the quarter, right so the core expense base is around $10.8 million?

21:00 Correct.

21:04 Got it. Okay. Wonderful. That was very, very helpful. Given the initiatives you had in place, it sounds like most of the hiring is done and there won't be too many incremental expenses from the new branch locations, but just curious, how do you think about the expense run rate as we progress through 2022 given things like wage pressure and record inflation?

21:30 Well, I certainly expect salary and benefits compensation to see the most pressure on the expense side for us. We don't have a lot of turnover but certainly when you hire people — and we hired a few bankers in the second half of 2021 — we are always looking for good and qualified bankers and as we hire people we're seeing pressures in the market on compensation, even at the staff levels when we have to replace somebody. So, we're expecting pressure there, not just from new hires but in also rewarding our current staff base. So, I think that's where we'll see the most pressure for us on expenses.

22:27 I think the other part of that too is that the beauty of our financial model is that the people we're hiring are productive and with productivity the ability to cover their salaries and benefits is more easily generated in our financial model than a retail model. So that bodes well. But there is certainly pressure from inflation and expectations of salary increases.

22:27 Yeah. And with the increase in expenses this year and when we're looking at next year, our efficiency ratio is still extremely, extremely low. So, we're able to manage those expenses through generating revenue.

23:26 I would add, we're not done building out some of these other markets. So, there will be a little bit of additional hiring going on but St. Cloud is fully staffed. We will have to beef up Mankato as we get closer to a new building opening.

23:45 Fantastic. All right. Good. Let's see, maybe turning to the net interest margin. Jane, based on your color on PPP, it looks like the core underlying margin was pretty stable quarter-over-quarter, maybe even up just a touch. Just curious for your thoughts on the NIM this year given the prospect for a couple of Fed rate hikes, how deposit betas play into that, and whether you expect stability or perhaps a little bit of pressure if the Fed raises rates?

24:24 I think there will be a little bit of pressure. I don't think it will be really significant. Our cost base of borrowed funds is pretty well fixed because a lot of that's tied to interest rate swaps. Deposits — depending how quickly and significantly the Fed raises rates — will have some increased deposit costs but the betas on that I think will be relatively slow. And then hopefully, we get the benefits with our loan growth on the loan side as we add new loans at reasonable rates relative to what we're seeing currently.

25:10 Yeah. Okay. Wonderful. And then maybe last one from me, just thinking about reserve coverage and provisioning needs throughout the year. I mean, your reserve is still quite a bit healthier than it was coming into COVID but it sounds like the outlook for loan growth is quite strong. I would imagine there may be a need to provision for loan growth. But maybe to draw down that reserve coverage ratio as the year progresses, just curious on your thoughts there?

25:42 The provision is always a balance between growth and the qualitative factors. Our credit quality is quite strong. We've already reserved for the one credit that we know will have some challenges. I think loan growth, and the pace of loan growth, will be the most significant factor for provisioning this year.

26:10 Right. Wonderful. That is it for me. Thank you so much for taking the questions.

26:15 Thank you.

26:17 The next question comes from Roger Current (phonetic) who is a Private Investor. Please go ahead.

26:32 Yeah. So my question is, how much of PPP income was taken in the fourth quarter? How much did that affect the earnings?

26:44 Yeah. So our PPP income in the fourth quarter was $912,000.

26:53 Is that pretty well the end of it then?

26:56 Yeah, I think at the end of the year we had about $22 million of PPP loans left on the books that had unrecognized deferred fees of about $500,000. So, we would expect that $500,000 to kind of bleed in through the year and should not have a significant impact overall on financial performance.

27:19 Okay. You said on the loan loss provision, you didn't make any for the fourth quarter?

27:24 Correct.

27:26 Did you take it? Did you put any, I mean, did you claw any back from what you had before?

27:31 Not in the fourth quarter. We did earlier in the year. So year-to-date, we had a negative provision of $1.5 million.

27:39 Okay. That's my only questions.

27:43 Thank you.

27:49 This concludes our question-and-answer session. I would like to turn the conference back over to Jane Funk, CFO for any closing remarks.

27:57 Well, we just want to thank everybody for joining us today and we look forward to having more great news in 2022.

28:10 The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.