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West Bancorp inc (NASDAQ:WTBA)
Q3 2020 Earnings Call
Oct 30, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the West Bancorporation Third Quarter 2020 Earnings Call. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Doug Gulling, Chief Financial Officer. Please go ahead.

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

Yes. Thank you, Andrew, and good morning, everyone. Thank you for joining us this morning. Also on the call today are Dave Nelson, our CEO; Harlee Olafson, our Chief Risk Officer; Jane Funk, our Chief Accounting Officer; and Brad Winterbottom, our Bank President. 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.

And to begin the call, Dave Nelson will start us off.

David D. Nelson -- President and Chief Executive Officer

Thank you, Doug, and good morning, everyone. Thank you for joining us. We appreciate your interest in our Company. I have just a few general opening comments, and then we'll turn it over to others for more detail.

As I think you all know, we just had a record quarter and hopefully on our way to yet another record year despite setting aside significant higher provision this year. Just a couple of general COVID comments. We continue to have people working from home and are observing and practicing all the appropriate COVID protocols that no doubt all of you on the phone are doing as well.

We're very -- in terms of our PPP participation, as I think you know, we really outpunched our weight class with that and we are now busy working through the forgiveness phase. Based on our performance, our Board of Directors declared a dividend of $0.21 per share, which remains unchanged, still at the highest level that we paid. The payment date is November 25 to shareholders of record as of November 11.

I'd also like to add that our Minnesota expansion is going incredibly well. As I think you all know, last year during 2019, our fully expensed expansion into Minnesota and the St. Cloud, Mankato and Owatonna and joined by our existing presence in Rochester, Minnesota is going very well, and we have purchased land and have completed the design process for our building in the St. Cloud area. Actually, it's in Sartell, Minnesota, which is adjacent to St. Cloud and construction is under way on that new facility.

So, would like to turn the call over to Brad Winterbottom, our Bank President.

Brad L. Winterbottom -- Executive Vice President and President of West Bank

Good morning, everyone. My comments will be brief. I'm going to talk a little bit about our sales activities. Absent PPP we're up about 4.5% through the first nine months of this year. The pipeline is, I won't say it's robust, but we still have a fair amount in our pipeline that we're working on. We have a couple of headwinds that will hit us in the fourth quarter, we have a couple of long-term customers that have sold their business, and I would anticipate some paydown there, some significant paydown maybe to the tune of $20 million.

On the other side of that coin, though, is we have construction projects that are going in all areas that we do business in. And I would say that we have, between now and probably a year from now, another $100 million of construction loans that will be advanced on projects.

Our bankers are not only working on the PPP forgiveness, but the business development people are doing just that, it's a little harder. People are cautious in terms of letting our folks to have face to face, but we are working on that. And again, we have -- we've added about 4.5% of new loans and that has really come from all markets, but especially up into our three new markets that we entered into last year.

Those would be my comments. I'm going to the pass this over to Mr. Harlee Olafson.

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

Yes, good morning. And again, thank you for your interest in our Company. I'm going to talk about our credit quality, watch list, COVID modifications and then some specifics in regard to individual communities and how -- what the environment is there.

On our watch list, our total watch list right now, which include watch credits, non-accrual credits and everything in that category totals $47 million. And although our level is up, that still is less than 2% of total loans, which is historically low when you look at the watch lists in general. Of those loans that are in our watch list, we really look at one of the credits as having the ability to possibly have some loss potential in it. We don't see it as of today. The collateral on it appears to be adequate to cover the principal balance on the loan. But if things don't work out correctly, we could have some small level of loss in that loan as it kind of liquidates. When we look at also the level of additions to our allowance through the course of the year, we've -- we put in $8 million and we fully believe that, that exceeds our loss potential in anything in the watch list.

So anyway, moving on from the watch list. COVID modifications, we have a fairly robust commercial real estate portfolio that includes apartments, warehouse, office, mixed use hotel, medical office, senior living centers, all of those different types of categories. As with most areas, the entertainment and hospitality areas of business have been affected the most by COVID-related issues.

Just for example, in our hotel portfolio, and looking at occupancy percentages over the last six months, April and May were very close to zero; in June, the occupancy percentage in our hotel portfolio on average moved up to 36%; in July, it moved to 40%; August, it moved to 57%; and then it fell off in September back down to 50%. And although that isn't great, it's still -- it's not catastrophic either.

And looking at the COVID modifications on our hotel properties, the average loan-to-value on the properties we provided or have modifications on currently is 62% loan-to-value, and pre-modification cash flows on those properties exceeded 1.5 to 1 [Phonetic]. So these are good properties that under normal circumstances will bounce back.

Total modifications at quarter-end were fairly high still, because they were still in process. As we hit November, our total modifications decline to something under 7% and then we have modifications that begin payments in December and January that would drop us down into under 4%.

And looking at other types of things that are going on. We have looked at our stress tests on our major types of commercial real estate and what the debt service coverages are right now. And besides the hotel portfolio, debt service coverages on average are well above 1.20 and seem to be moving along in a good manner. We are requesting and receiving more interim financial results from our borrowers so we can stay on top of what's happening with them and believe that, in most cases, our portfolio, because of the strength of our customer base, is still very strong.

One of the things that's interesting in our portfolio is just the level of liquidity our customers are holding. This year our business DDA accounts are 50% higher than they were the previous year. Last year we were about $400 million in non-interest-bearing deposits, and this year we're over $600 million. A lot of that, I think, is due to the conservative nature of our customer base holding cash out of concern of what's happening with the economy as a whole.

Moving on to individual markets and what's happening in them. Our Rochester market -- we were concerned a little bit of the Rochester market because Mayo, which -- Mayo Clinic, which is a big employer and driver of the economy there, had decreased the level of non-critical activities there we're doing. They are back to a 100% of their pre-COVID activity. In fact, they have gone through a process of decreasing salaries by 10%. They not only gave the money back to their employees, they also gave them some bonus on top of that. So Rochester, right now, I think, is doing very well, it is driven a lot by Mayo.

In the eastern Iowa, the University of Iowa enrollment is down about 4%. There is really no major construction going on. The problem for their world over there is there is no events really happening that draw people to the town. It is a very active community with the University. And with that, like in most places, there is no concerts, no ballgames, no things that really draw people to the city from a tourist perspective.

Housing is strong in the area. They sell fast on anything under $400,000. University Iowa hospitals are backed up at full speed right now and they are drawing people to the town. Apartments is a big deal over a new -- in Iowa City and Coralville. Average occupancies there have always been very strong, but they are down from about 97% to 93% currently.

In our new Minnesota markets, we continue to grow really good franchise customers. Loans and deposit balances in that -- in those markets, we've have about $230 million in loans in the new markets and a $107 million of deposits, which is the deposits what we've learned while opening new businesses in something that lags a little bit. Currently, we don't have bank buildings in any of those communities at this time, but that will change in the future. As is the case in all markets, new projects in regard to construction and those type of things is quite limited at the current time.

I'll leave it with that right now, and we'll entertain questions later if there are any. And I'll hand it back to Doug.

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

Okay. Actually, at this time, we would entertain any questions that may be out there.

Questions and Answers:

Operator

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

Brendan Nosal -- Piper Sandler -- Analyst

Hey. Good morning, everybody. Hope you're doing well.

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

Yeah. Good morning, Brendan.

Brendan Nosal -- Piper Sandler -- Analyst

Thank you for all the prepared commentary. Definitely, very helpful. Just starting off on the growth outlook. Definitely appreciate that there are some larger payoffs coming in the fourth quarter, but I just want to get a sense of looking past the payoff activity, growth is quite strong this quarter. So, what is your outlook for kind of net loan growth over the next couple of quarters?

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

I would say, we have a pipeline that will replace the payoffs before the end of the year, absent anything that we don't know that's going to payoff between now and then. So I don't see us dipping below the 4.5% by the end of year. In fact, I would anticipate that maybe up just a little bit.

Brendan Nosal -- Piper Sandler -- Analyst

Perfect. That's helpful. Then moving on to the margin. You guys have done a really, really nice job of lowering deposit costs pretty much as fast as you can in response to what the Fed has done. Given that cost has come down so much, I'm guessing there's probably not a ton more room to run on the liability side. So, I'm just trying to understand how you're thinking about the margin outlook for the year. You'd imagine, perhaps, a little bit of pressure, but just curious how you're thinking about it.

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

Well, you're correct. We really don't have much more opportunity to lower deposit costs. And then what will impact the margin going forward in this environment will be existing investments and loans that mature and we have to reinvest those dollars. So most -- I think we could say with near certainty that the reinvestment dollars will be at a lower yield than the existing dollars. To the extent of that, it's a little hard to tell.

David D. Nelson -- President and Chief Executive Officer

Yeah. I would just add that some of the loans that are getting repriced because we book those maybe five years ago would probably be in the low-to-mid 4% range and we're not getting those kinds of rates on new assets. But all of those usually come with some sort of a prepayment penalty as well.

Brendan Nosal -- Piper Sandler -- Analyst

Okay, great. Understood. Moving on to the credit side of things, you mentioned in your prepared remarks that there is one credit you might see some loss on potentially. I was just hoping for a little more detail on that relationship, what sector is it in, what it's collateral look like, things like that.

David D. Nelson -- President and Chief Executive Officer

Yeah. The sector it's in, it's a large non-profit that I wouldn't want to mention the name specifically. But the large non-profit has multiple facilities that have been appraised recently, that would have appraised values and some have letters of intent on properties. They're looking at doing some sale and leaseback to certain areas. They have some donors and friendly sponsors that are willing to do some of that. They also have some cities and different areas that are interested in some of their properties that they would have properties that have appraised value of over $30 million, and our portion of the credit is $16 million, but the total credit is about $26 million.

So there is depending on how things go, that credit could have a small loss here or there, but that isn't -- there is still an operating entity. So there are -- there are other options that are also -- it's the one that we look at the most critically.

Brendan Nosal -- Piper Sandler -- Analyst

Yeah. That's perfect. That's helpful color. Wanted to just ask quickly about the $16 million movie theater credit that you pointed out in 10-Q. I mean it just seems like hotels occupancy has been generally trending in the right direction since -- that were still in the early days of COVID. But it kind of seems like the movie theaters have just been almost toward shut ever since the beginning. So, just any color on whether there is any operations ongoing, any cash flow coming in or if it's relatively shut down right now? And just how you feel overall about the relationship?

David D. Nelson -- President and Chief Executive Officer

They do have some of their theaters open, and what they're running in there is kind of classics and those types of things. Just to add some more color in regard to the strength of their hands. They've injected somewhere in the neighborhood of $7 million into the business and also a very strong, very strong individual owner, partial owner has also increased their personal guarantee to support the business. Along with -- and that individual order has exceptional levels of liquidity. So that's what's happening.

There is certainly like everybody else, they have -- they are dependent on the product coming out to be able to put a viable entertainment. If they are not putting out new movies, it's not going to work, but they have strong hands and that's the -- and they -- and they have strength in liquidity to support their -- support their business.

Brendan Nosal -- Piper Sandler -- Analyst

Yeah, OK, OK. And then moving onto deferrals, you guys pointed out, both in the release and in your prepared remarks that you have line of sight to deferrals, moving down to a much, much lower numbers. Is it fair to say that most of what would we make there, that chunk rolled off through the end of the year is hotel?

David D. Nelson -- President and Chief Executive Officer

Yeah. I was just, when I look at the tools on that, we're looking at about $80 million of basically, these are Marriott-Hilton products that are in deferral through March and April. Loan to values are in good shape, and again, pre-pandemic these were awfully strong operating entities and personal guarantee. They do have -- they are guaranteed personally by some of them have multiple owners that have other sources of liquidity and income. We do have a group of hotels that really their main business is just the hotel business and their source of other cash is not as ready, but their loan to values are very, very low in the 50s.

So while they don't have the income coming in, they have the ability to survive this and come back once we have something a little closer to normal.

Brendan Nosal -- Piper Sandler -- Analyst

Okay. And then turning to the increase in non-accrual, I appreciate that it was a very low base in the overall figure, it is still quite low but up regardless. So I was just hoping for a little more color on the two credits that drove the increase this quarter and then also curious that those are the same relationships that drove the uptick in substandard loans?

David D. Nelson -- President and Chief Executive Officer

Correct. The one we already talked about was the non-profit. That takes up $16 million of the $18 million I think. The other one that's of any substance is a shared national credit. It's really the only one we have, that's a $1.4 million, that's a tradable asset we could trade that right now for at par of a little over $100,000 to par. But in everything that we can see it's going to come back to par, and then we're going to trade out of the -- out of that credit at that point.

Brendan Nosal -- Piper Sandler -- Analyst

Okay. That's certainly helpful. And then last one for me, and I'll let you guys go. You spent a good part of this year taking strong pre-provision earnings and building the reserve. So I'm just curious where reserve coverage today, is that a level that you think you -- is that at a place to absorb any potential issues down the road or would you prefer to be more cautious over the next couple of quarters and continue to add just given the environment.

David D. Nelson -- President and Chief Executive Officer

Well, you know, sitting here today, I mean certainly at the end of September, we thought the allowance was adequate. As we move forward, it's just going to depend upon the environment, the information that's available. Brendan, if we had to guess right at the moment, the fourth quarter provision may be similar to the second and third quarter, but that's probably as close as we can get to a guess right now.

Brendan Nosal -- Piper Sandler -- Analyst

Yeah, I totally understood. No one has the crystal ball on that, but just curious how you're thinking about things. All right. Thanks. That is it from me. And thank you so much for taking the questions.

David D. Nelson -- President and Chief Executive Officer

Yeah. Thank you.

Operator

[Operator Instructions] The next question comes from Kevin McLaughlin of McLaughlin Investments. Please go ahead.

Kevin McLaughlin -- McLaughlin Investments -- Analyst

Good morning, everyone. First of all congratulations on another great quarter under very difficult circumstances. My question for Doug, I don't understand what the implications would be in the forgiveness process relating to these PPP loans. Is that going to accelerate the recognition of the fees for the bank or how does that work?

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

Yes, Kevin, you're correct. The fees that were collected upfront are deferred and amortized over the life of these loans, which is two years. And then as the loans pay-off, any unammortized fee that still exists at the time that the loan pays off will be recognized into income at that time. And so we're starting to see a few payoffs. I mean as of yesterday -- at the end of the September, we had not had any payoffs or forgiveness payments. As of yesterday, we have received $750,000 in payments. So it's just beginning, just starting to trickle in but --

Kevin McLaughlin -- McLaughlin Investments -- Analyst

You know on a base of how much, Doug? 700 --

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

$224 million. So I mean it's just. But, so, Kevin, it's a little hard to project or predict the dollar amounts of when they're going to come in. At this point in time, I think we would say that most of these loans will not be forgiven until 2021.

Kevin McLaughlin -- McLaughlin Investments -- Analyst

Okay. And then my other, and I don't know this isn't so much a question. Thank you, Doug. But I wanted to ask Dave, if you wanted to get kind of adjust over the announcement by Wells Fargo and their business banking operations in Rochester, when I was up there, visiting their -- your branch office.

David D. Nelson -- President and Chief Executive Officer

Well, they have essentially got rid of all their bankers quite simply. So that is rather I guess over the past the history of the past 30 years, that's an outcome that I don't think many would have been able to predict.

Kevin McLaughlin -- McLaughlin Investments -- Analyst

And that's the point that I wanted everyone on the call to understand. When you enter a market and normally it takes three years to five years to breakeven, and you breakeven in just nine months, but within a handful of years later, one of your biggest competitors drops their business banking services because so many clients have moved I think that that's something that everyone on the call should recognize and appreciate because that's an extraordinary performance. I'll leave it to you to close, but I just want to say congratulations and I'm hopeful that I think that there are implications in these other new markets. And I'm excited about what you are accomplishing there as well.

David D. Nelson -- President and Chief Executive Officer

Thank you, Kevin.

Kevin McLaughlin -- McLaughlin Investments -- Analyst

You're welcome.

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

We'd just like to again thank everyone for joining us and we appreciate your interest in our company.

Duration: 32 minutes

Call participants:

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

David D. Nelson -- President and Chief Executive Officer

Brad L. Winterbottom -- Executive Vice President and President of West Bank

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

Brendan Nosal -- Piper Sandler -- Analyst

Kevin McLaughlin -- McLaughlin Investments -- Analyst

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