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West Bancorp inc (NASDAQ:WTBA)
Q2 2020 Earnings Call
Jul 24, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to West Bancorp Quarterly Earnings Call. [Operator Instructions]

I'd like to turn the conference over to Mr. Doug Gulling, Chief Financial Officer. Please go ahead.

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

Hey. Thank you, Nick. Good morning, everyone. Thank you for joining us. With me on the call today are Dave Nelson, our Chief Executive Officer; Harlee Olafson, our Chief Risk Officer; and Jane Funk, our Chief Accounting Officer.

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.

I'll turn it over to Dave Nelson to start us off.

David D. Nelson -- President & Chief Executive Officer

Thank you, Doug. Good morning. Thank you everyone for joining us. We appreciate your interest in our company. We had an excellent quarter, and we are significantly ahead of where we were at this point during last year's record year plus we've set aside more in reserves for potential future loan losses. Doug will provide more detail on the drivers behind the performance with a large one being the performance of our Minnesota expansion.

While we currently have an absence of past due loans or overdrawn accounts, we have extended many helpful payment modifications where needed. In terms of what the economic impact of COVID and the shutdown will ultimately have on our customers and our community remains to be seen. We will hope for the best but plan for some trouble and challenges. Harlee will have more comments on credit quality, but we believe that being a bank of first choice versus a bank of last resort will prove to be strongly in our favor.

And in terms of COVID-19 operational issues, we have implemented many protocols, no doubt, similar to what all of you have done. But despite limiting physical access and many employees working from home, I remain unaware of a single example of where a West Bank customer has been unable to receive requested service. Pertaining to the PPP, proud to say we really outpunched our weight class with the PPP program. We did over 900 PPP loans. I think we actually have 914 active PPP loans totaling approximately $24 million, and we are all anxious -- anxiously awaiting final instructions on the forgiveness process. Based on our quarterly performance, our Board of Directors has approved a $0.21 dividend with a payment date of August 19 to shareholders of record as of August 5.

That's my prepared comments, and with that, I'd like to turn the call over to Harlee Olafson, our Chief Risk Officer.

Harlee N. Olafson -- Executive Vice President, Chief Risk Officer

Well, thank you, Dave, and good morning everyone. I'll talk about our credit and where we're currently at and then more importantly some color in regard to our modifications and what's been going on there. Currently our watch list is very low and it has actually declined from $51 million at the end of last quarter to $33 million on June 30. We had one past due loan at the end of June over 30 days, and that was in the amount of $15,000. So we currently don't have any as Dave mentioned, any past due issues or overdrafts or things such as that. All of the concern of course is for the future, where will credit problems come from and when will that happen?

The major segments of our commercial real estate portfolio, for example are: we have $260 million in apartment loans, $110 million in senior living accommodations, office commercial real estate of $159 million, medical office buildings of $120 million, warehouse real estate of $180 million, hotels of about $150 million. Most modifications that we granted were in the commercial real estate portfolio. The length of the modifications range from two months to six months. About 75% of the modifications still require monthly interest payments. Deferral of P&I payments have been granted to businesses that were virtually closed in April and May, mainly the hospitality business.

On our hotel portfolio. We are tracking monthly occupancy and revenue on the hotel properties that have reopened. In April, most of the properties were either closed or marginally open. In May, most reopened, and the range of occupancy that we saw in our hotel properties went from a low of 10% occupied to a high of 59%. In June, and we don't have all of the reporting in June on the hotel properties, but the range of occupancy improved from 19% to a high of 64%. And then I would also qualify that our average loan-to-value in the motel portfolio was around 65%, and the majority of the flags are Hilton or Marriott with a couple of Holiday Inns.

So as Dave said, currently we're not showing the stress right now due to the fact that some of the properties are in modifications. We had a number of borrowers that ask for modifications I think from a -- just being careful perspective of saying, hey, we can just pay interest only for a few months here, we'll retain cash and put ourselves in a position of having liquidity in case there's this situation lasts longer and becomes more troublesome than they know what is at the current time. So we are trying to stay in close touch with our customer base and they're being very good at providing information to us and telling us where they're at. Currently we don't have the problem -- any problems that have surplus in payment problems or lack of cash or anything such as that. But as Dave said, we are prepared to deal with problems if they do occur.

And with that I'm going to switch horses and talk about what are -- what's been happening in regard to our sales side and our outlook and those type of things. In the last two months, we have closed over $140 million in new business. That's in addition to all of the PPP loans that we did. And of that $140 million, about $30 million of it was medical office property, $25 million in manufacturing, $25 million in C&I and about $50 million in other commercial real estate. We still have a very active pipeline. Obviously, we have more markets and more bankers out selling product right now which helps us to be very efficient and athletic, I'd say in our markets.

The pipeline, I believe will slow down to a certain degree as we keep going, especially if the economies continue to be modestly closed there and people are going -- are delaying their ventures that they had started on or were preparing to do. So, we do see some pull back in areas such as that. But I do think there still is room for some modest growth in our portfolio overall. When we did our PPP loans, we also noticed that we had number of our customers that were paying down lines of credit or augmenting their DDA balances as the PPP loans came in. And if you'll note even in our financials, you'll see our non-interest bearing deposits and our accounts are about $200 million higher than they were a year ago.

So with that, I'll sign off on my portion and give it back to Doug.

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

Okay. Thanks Harlee. I've -- just make some general comments, regarding our results year-to-date and here's how we would summarize our performance so far. Net interest income is up nicely due to two things. One, our earning asset base is higher due to a number of factors, but the Minnesota expansion, the PPP loan program and then our margin has expanded primarily due to the fact that the Fed dramatically cut rates in the middle of March, and as a result we adjusted a lot of our -- well, we adjusted all of our deposit rates, and so our interest expense on deposits has declined quite a bit.

And then in addition, our expenses -- our non-interest expenses are actually a little bit lower this year than they were last year and that's attributable to the fact that we had some one-time Minnesota start-up costs last year. We do have fewer FTEs this year than we had last year, and we renegotiated our core processing contract and so that expense is lower than it was a year ago. And so all of those positive attributes allowed us or more than covered the fact that we have added a lot more to the provision or to the allowance this year through the provision for loan losses, putting in $3 million here in the third -- second quarter and $1 million in the first quarter. So, we have provided for $4 million of potential losses so far this year.

I suppose, people may wonder, OK, what are we going to do going forward? Well, of course, sitting here today, we don't really know for sure. We make the determination on the allowance at the end of each quarter. And what we end up putting in the allowance will depend upon how long in this pandemic is predicted to be with us? How soon is the vaccine coming so on and so forth? But, sitting here today, I think we would not be surprised if our provision in the third and fourth quarters are similar to what it had been in the second quarter.

But with that, we will pause and answer any questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] First question comes from Brendan Nosal of Piper Sandler. Please go ahead.

Brendan Nosal -- Piper Sandler -- Analyst

Hey, good morning everybody. How are you?

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

Good morning, Brendan. Good. Thank you.

Brendan Nosal -- Piper Sandler -- Analyst

Good. I just want to start off on the deferrals here. So it looks like they moved up quite a bit from kind of the initial number you disclosed last quarter. And now they're sitting at 28% of total loans outside of PPP. So can you just talk about some of the dynamics within the deferral bucket that drove the increase from last quarter?

Harlee N. Olafson -- Executive Vice President, Chief Risk Officer

Sure. This is Harlee. Depending upon the timing of when those occurred, probably was generated, depending on what time of the month they happen, when the discussion happened. And a lot of the deferrals that occurred, we asked for specific information from the borrower regarding what's your cash burn going to be? What's your balance sheet going to look like at this time? What are your sources for additional capital? Do you really need a deferral or are you asking for deferrals so you can retain cash because of the ongoing uncertainty within the market? So really, that's what the flavor is. And I think what you need to remember again, about 75% of the deferrals are still paying their monthly interest charges. So really, they're only deferring principal payments for a fairly short period of time.

Brendan Nosal -- Piper Sandler -- Analyst

Got it, OK. And then with kind of the range of the deferral from two to six months, I'm just curious, when is the bulk of the $553 million start to roll off? And then as they do, is your expectation that most will request an extension of some form? Will they return to normal payment activity? Or how much movement will there be to nonaccrual?

Harlee N. Olafson -- Executive Vice President, Chief Risk Officer

I would guess that most will not request an extension. And our -- again, I feel our portfolio and borrowers are in really strong -- are very strong across the board, and have significant ability to accomplish and pay their debts as they come due. So I do not have anything flagged at the current time, that will move to TDR or to nonaccrual.

Brendan Nosal -- Piper Sandler -- Analyst

Okay. All right. Great. And then moving on to the reserve. I appreciate your comments of kind of a provision potentially similar to this quarter for the rest of the year. I mean, as you think out across the next couple of quarters, is that enough in your minds to get the reserve to where you think it needs to be kind of just given how high the level of deferrals is? Or is there a potential for in a couple of months, you kind of look back and say, maybe we need a little bit more?

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

Well, I think Brendan, at this point in time, based on the information we have, we really don't have anything else to say other than what we have. I mean, as time moves on and we get better or different information, we will react accordingly. But I think it's -- if indeed our modifications track as Harlee indicated, I wouldn't anticipate that we would have to add more than what we've talked about. But it just really depends on what -- how things -- what happens over the next couple of months.

Brendan Nosal -- Piper Sandler -- Analyst

Yes. I totally understand. I guess in my mind, I was just trying to balance how clean your traditional credit metrics are today versus the number of loans that have asked for assistance. But I appreciate the color. I wanted to move on to the dividend and obviously you guys opted to hold it stable as opposed to increasing it this time in the year like you have in the past, but still stable nonetheless. Just spend a moment on how you feel about capital levels overall, and your thoughts on how committed you are to maintain the dividend where it is?

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

Well we'll look at capital levels first and projected capital levels when determining the dividend level. I mean, we certainly want to maintain it where it is, but if things really would deteriorate from what we believe will, the case is now we may have to look at a dividend cut. But right at this point in time, we don't anticipate that happening.

As far as capital levels, our pure equity to asset ratio has declined here at June 30 from where it had been in the past, but that's really for two reasons. One, our accumulated other comprehensive income is negative due to the valuation of the interest rate swaps we have with the decline in interest rates, the value of those swaps are more negative and, of course, over time, all things being equal, that will improve just as the age of the swaps get greater and get closer to maturity. But the other thing that has happened is the denominator in that calculation is probably artificially inflated due to all the PPP loans and so we would expect over the next six months or so, a lot of the PPP loans will pay back and our asset size will decline a little bit. And the pure equity to asset ratio will improve somewhat. All of our regulatory ratios are well in excess of the requirements to be well capitalized and we have an informal policy, if you will, of maintaining those ratios at least 100 basis points in excess of the requirements to be well capitalized and that's the case with all of the regulatory ratios.

Brendan Nosal -- Piper Sandler -- Analyst

Got it. Perfect. And then last one from me before I step back. Just looking at the NIM, obviously a really nice result this quarter as you guys benefited from the reduction in funding costs quarter-over-quarter. That's in reaction to what the Fed did. I'm just wondering how much more room is there to run on the deposit cost side, and then as it pertains to the margin outside of the volatility from PPP, is there any more room for expansion next quarter and through the end of the year?

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

I doubt it. Brendan. There might be a few basis points, but nothing significant, because really I don't believe that there is much more room on the deposit side. Now, we did have Federal Home Loan Bank advance mature on June 22 I believe it was, and we had a forward swap in place and have kind of rolled that borrowing into short-term borrowings, but with a long-term swap around it and we save a couple of hundred basis points there, and we've got another Federal Home Loan Bank advance coming due on September 20, give or take, for $30 million, and the same thing will take place there. We will save a couple of hundred million -- couple of hundred basis points on the cost of that borrowing. So we do have that coming, but beyond that, I don't see any -- anything that's going to impact the margin significantly.

Brendan Nosal -- Piper Sandler -- Analyst

Okay. Perfect. Thank you very much for taking all the questions. I appreciate it.

David D. Nelson -- President & Chief Executive Officer

Thank you.

Operator

[Operator Instructions] At this time, we have no additional questions. I'll return the call back to Mr. Doug Gulling. Please go ahead.

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

Okay. Well thank you, Nick again. And thank you everyone for joining us. That is all of our comments and we appreciate you joining us and having an interest in our company. Thank you.

Operator

[Operator Closing Remarks]

Duration: 24 minutes

Call participants:

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

David D. Nelson -- President & Chief Executive Officer

Harlee N. Olafson -- Executive Vice President, Chief Risk Officer

Brendan Nosal -- Piper Sandler -- Analyst

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