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West Bancorp inc (NASDAQ:WTBA)
Q3 2019 Earnings Call
Oct 25, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the West Bancorporation, Quarterly Earnings Conference Call. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. I would now like to turn the conference over to Mr. Doug Gulling. Please go ahead.

Douglas R. Gulling -- Executive Vice President, Treasurer and Chief Financial Officer

Thank you. Good morning and welcome to our third quarter conference call. On the call this morning are Dave Nelson, our Chief Executive Officer; Harlee Olafson, Chief Risk Officer; Brad Winterbottom, West Bank President and; Jane Funk, our Chief Accounting 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. So at this time, Dave Nelson will begin.

David D. Nelson -- Chief Executive Officer

Thank you, Doug and good morning everyone, thank you for joining us. Very pleased and proud to report that we had an all-time record quarter. Despite the earnings drag of our investment in our Minnesota expansion, we still had the best quarter in the 126-year history of our Company.

Perhaps even better news is that we are fast approaching a breakeven point on our expansion and achieving a positive and profitable run rate, hopefully by year-end, which will translate into a big year-over-year swing for our Company.

Also locally here in Iowa, we were once again selected as one of the top Iowa workplace employer for the sixth consecutive year, and our Board of Directors approved a quarterly dividend of $0.21 with the record date of November 6th and payable to shareholders on November 20th. We also had some exciting news in the appointment of a new Director.

Our Board appointed Patrick J. Donovan to our Board of Directors. Mr. Donovan is a retired career banker with an extensive background in the banking industry spanning nearly four decades and it's all been in Minnesota. We are very pleased and proud to welcome Mr. Donovan to our Board. And with that, I'd like to turn the call over to our Bank President, Brad Winterbottom.

Brad L. Winterbottom -- Executive Vice President

Thanks, Dave. I'll be brief in my comments. Loan activity were up 6.7% from the beginning of the year and then in the third quarter, our loans were up roughly 2.5%. Despite that, we had -- we had over $50 million in unexpected payoffs in the third quarter. So our growth, which would be coming from really all markets including our Minnesota directive, we've had good volume in the third quarter. Pipeline for the fourth quarter is very robust.

We have a lot of construction loans that we anticipate continued growth on. We have some big closings that we anticipate happening here in the next 30, 45 days. So I think our fourth quarter will be very robust in terms of loan volume. Deposit growth has been good. It will be better when we get Minnesota more on board with our strategy with ITMs [Phonetic]. And I would anticipate our deposit growth to improve in the fourth quarter.

That ends my comments, and I'll turn it over to Harlee to talk about credit trends.

Harlee Olafson -- Executive Vice President and Chief Risk Officer

Thanks, Brad. Just a couple of things to talk about. Our watch list is currently less than 3% of our total loans and our non-accruals, and substandard credit is really at a record low. We had some developments within the quarter that we actually got paid off in full on two or three credits and they had been very sticky both in that were in our non-accrual area and actually received all principal and interest on those credits. In fact, the non-accrual area is down to such a low level right now, it doesn't compute to some type of percentage.

We have a significant commercial real estate presence in our portfolio, and I'm pleased to report that there are zero past dues on that commercial real estate, nothing over 30 days. In fact, I don't think there is a commercial real estate credit we have, that's 15-day -- has a 15-day past due on it.

Due to our loan growth, really starting in the last quarter of last year till now, it's been fairly significant sometimes that it doesn't always occur in one year, but occurs in different quarters we did take a $300,000 provision and with that, we believe we're [Phonetic] allowance is appropriate based upon the quality of our loan portfolio.

In our new markets, we have really good momentum. In opening up those markets, I think we got behind a little bit in regard to technologically getting all of the pieces in place to be able to provide the best depository services we can. We think that we will have the type of technology and machines and those types of things in place in November that will help us accelerate our depository growth in our new markets.

And looking at our pipeline which Brad talked about, the portion of our pipeline that we consider to be loans that have been committed to -- by us and accepted by the customer that are just waiting the close, I believe, is at the highest level that I've ever seen it. And it is at a significant level going into this last quarter of the year.

On the economies that are in, part of our -- the magic of West Bank is that we are in really good communities, we're in Des Moines in Iowa city, Rochester, St. Cloud, Mankato and Owatonna all of those communities have strong economies and we have good momentum in all of those markets better than being in really good communities is that we don't have any locations in any shrinking or communities that are losing population or really strength. So that does bode well for us in the future.

Our customer base is strong and stable and continues to give us an opportunity to build future business. Along with that, I believe we have incredibly good staff that is seasoned and has the ability to continue to provide the best in customer service that we can along with continued growth.

With that, I will turn it back over to Doug.

Douglas R. Gulling -- Executive Vice President, Treasurer and Chief Financial Officer

Okay. Thanks, Harlee. I've got just a few more comments on some details of the financial statements. We had -- we did have some non-recurring interest income items in the third quarter. We -- on the non-accrual loans that Harlee mentioned were paid in full. We did collect $175,000 of bank interest. And then on the -- on some of the prepayments that Brad mentioned, we collected $340,000 between prepayment penalties and recognizing the unamortized deferred fees. So we would point that out.

In the expense categories, the FDIC costs this quarter was zero, because as some of you may know, a lot of the banks have credits build out at the FDIC and they were able to take those credits once the FDIC insurance fund reached 1.38% of all insured deposits and that happened at the end of the second quarter or early third quarter and so we used our credits in -- a portion of our credits in the third quarter, so that the FDIC expense is zero.

We expect that our FDIC expense in the fourth quarter will be zero again, and that should leave about $90,000 of credits recognized in the first quarter of 2020. Just a little bit of information on the net cost of our Minnesota initiative. Our rough estimate is that on a year-to-date basis, we've incurred expenses of about $1.9 million, but we have generated net interest income of about $500,000.

So that would give us a net cost of $1.4 million. That's year-to-date. For the third quarter, we estimate that the expenses were $700,000, the net interest income was $400,000 so our net cost were approximately $300,000.

So with that, that concludes our prepared remarks. And we would be happy to answer any questions.

Questions and Answers:

Douglas R. Gulling -- Executive Vice President, Treasurer and Chief Financial Officer

We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Andrew Liesch with Sandler O'Neill. Please go ahead.

Andrew Liesch -- Sandler O'Neill -- Analyst

Hey, everyone.

David D. Nelson -- Chief Executive Officer

Good morning Andrew.

Andrew Liesch -- Sandler O'Neill -- Analyst

Good morning. Doug, just a quick clarification of $341 million of -- or $341,000 of prepayment penalties that went through the net interest margin as well or NII, is that correct?

David D. Nelson -- Chief Executive Officer

That's correct.

Andrew Liesch -- Sandler O'Neill -- Analyst

Okay, got you. And then I know you guys referenced maybe the deposit growth out of the Minnesota locations not being as strong as possible and you're working to remediate that. But still, I mean deposit growth is pretty good in the quarter, and I mean it looked like it maybe drove excess liquidity, a little bit high, which may be kind of offset some of the benefits you saw on the funding side.

I mean what drove that liquidity, and how do you see that playing out? And where do you see the margins trending from here? Notwithstanding those non-recurring or those one-time interest items that you mentioned.

David D. Nelson -- Chief Executive Officer

Sure. Yeah, no, that's a good question. Good observation. We do have a little more liquidity than we would normally carry, but starting in late June and may be carrying over into July, a little bit, we did build that liquidity up.

We sold some, this was actually in late June. We sold some 100% risk-weighted investments corporate notes that type of thing when interest rates were headed down, we were able to sell those at least at breakeven. I don't know, there might have been a small gain, but -- and to put that money and liquidity for the loan portfolio and so, we did not have the loan growth, the net loan growth in the third quarter that we expected to have.

Brad mentioned almost $50 million of payoffs with most of those being unexpected, when we were visiting with you at the end of July. And so at the end of September, we did have a little more liquidity than we would normally carry.

However, we expect a good strong fourth quarter of loan growth and so we're just holding on to that and until it's softened [Phonetic] by the -- by the loan portfolio. So in terms of the margin, our best guess right at the moment would be that our margin is bottomed out. There was a Fed, as you know, a Fed cut at the end of -- toward the end of September, while the full benefit of that in the fourth quarter, which for us, there is a slight benefit in the short run.

And then as more and more loans come on the books, at higher rates than investments and certainly higher rates than overnight fed funds, the margin should bottom out and improve a little bit.

Andrew Liesch -- Sandler O'Neill -- Analyst

Got you. That's helpful. It also looked like there was just a little pick up in the fee income areas in the trust services, and then the other line. Was there anything unique driving that?

David D. Nelson -- Chief Executive Officer

Yes, in the trust fee income area, we were able to collect I think what's referred to as extraordinary fees on an estate that we had been handling, that's a situation where if we have a lot more work than it's expected, we can go to the court and request additional fees and the court granted that in the third quarter and I believe that was $70,000.

Brad L. Winterbottom -- Executive Vice President

Yes it was.

Andrew Liesch -- Sandler O'Neill -- Analyst

Okay.

Brad L. Winterbottom -- Executive Vice President

Dave also have been doing a good job selling as well. So we're seeing the benefit of that as well.

Andrew Liesch -- Sandler O'Neill -- Analyst

Got you. And then lastly from me, just the comment in the release or then the 10-Q about CECL, how that delay is applicable to the bank. Are you guys planning to delay or what's the thought process there?

David D. Nelson -- Chief Executive Officer

We are going to delay. Yes, we made the decision to delay. We're a smaller reporting company and that delay is available to us. And so, yes, we're going to delay.

Andrew Liesch -- Sandler O'Neill -- Analyst

Okay, thanks. That covers all my questions.

David D. Nelson -- Chief Executive Officer

Yeah. Thanks, Andrew.

Operator

[Operator Instructions]. Our next question comes from Kevin McLaughlin with McLaughlin Investment. Please go ahead.

Kevin McLaughlin -- McLaughlin Investment -- Analyst

Good morning. I came into the call a little bit late, but I just wanted to ask if you would characterize these three new markets with the assets that you -- or the people you've taken from Bremer, what kind of a market share did they have in those markets?

And how does it compare with, and I assume that the principal competitors would be Wells Fargo and US Bancorp. How would they compare say with what you saw in Rochester? And how large of a presence did they have? And how valuable were the assets that they have compared to those of say, a Wells Fargo or a US Bancorp?

David D. Nelson -- Chief Executive Officer

Kevin, this is Dave. Interesting questions. I think there are a lot of similarities, but yet the landscape is very different. You know, when we went into Rochester six years ago, we were able to hire, I believe to be, and I guess that's proven out that we really had the advantage of hiring the best team in town that had deep existing relationships with community leaders.

And it only took us about nine months to achieve a profitable run rate in Rochester. Only start really want to go about it the same way in St. Cloud, Mankato and Owatonna and our advantage package was similar and quite strong in that, once again, we were able to hire the best bankers in the town, who all had deep existing relationships of supplemented by familiarity from several of us here in Des Moines, but we were able to round up advocates, create the community boards where instead of going into a town, say we're five employees, we're really a team of say, 12 or 20 people and the ramp-up that we're experiencing with this expansion with the three communities combined is very similar to the timeline that we experienced in Rochester.

Kevin McLaughlin -- McLaughlin Investment -- Analyst

Well, some of the people -- [Speech Overlap] excuse me. Go ahead

Brad L. Winterbottom -- Executive Vice President

One of the things you're talking about is probably potential and, and if you look at potential and size wise, you can look at the Mankato Group as being a similar potential to our Rochester Group, the Owatonna potential may not be as large as that, the maybe 50% of what that potential is, and the St. Cloud potential might be double to what our Rochester potential was in regard to size and breadth of our operation.

Kevin McLaughlin -- McLaughlin Investment -- Analyst

Okay. Well, I remember a remark that was made at the Annual Meeting that might have been Brad Peters, I think that made it, and then may have been you Dave that virtually the entire staff moved out of St. Clouds, Bremer operation with Brad. They all felt the same way. But where a lot of these bankers, I know you came from Wells Fargo initially, where some of these bankers that Brad is bringing over with him in Owatonna and Mankato, did they have Wells Fargo roots or those kinds of connections as well?

David D. Nelson -- Chief Executive Officer

Several did. Certainly in Mankato and Owatonna but not as much so in St. Cloud.

Kevin McLaughlin -- McLaughlin Investment -- Analyst

Okay. Well, that kind of gives me a feeling for -- the pedigree and the reach, but I'll be anxious to see how it goes from here, especially on the deposit basis in this next quarter, but congratulations on a great quarter. I'm a very happy shareholder

David D. Nelson -- Chief Executive Officer

Thank you, Kevin. We appreciate your support.

Kevin McLaughlin -- McLaughlin Investment -- Analyst

Yes, sir.

Operator

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

Douglas R. Gulling -- Executive Vice President, Treasurer and Chief Financial Officer

Well, I just wanted to thank you again for joining us and we appreciate your support. So thank you.

Operator

[Operator Closing Remarks].

Duration: 21 minutes

Call participants:

Douglas R. Gulling -- Executive Vice President, Treasurer and Chief Financial Officer

David D. Nelson -- Chief Executive Officer

Brad L. Winterbottom -- Executive Vice President

Harlee Olafson -- Executive Vice President and Chief Risk Officer

Andrew Liesch -- Sandler O'Neill -- Analyst

Kevin McLaughlin -- McLaughlin Investment -- Analyst

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