West Bancorporation - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered clear operating leverage: net income rose to $7.8M ($0.46 diluted EPS) on a 30 bps sequential NIM expansion to 2.28% (FTE) and a 442 bps improvement in the efficiency ratio to 56.37%.
• Results beat S&P Global consensus: EPS $0.46 vs $0.38 and “revenue” (NII + noninterest income) $23.10M vs $21.61M; beats were driven by lower deposit costs and funding mix shifts post late-2024 Fed cuts; expense run-rate stabilized. Values retrieved from S&P Global.*
• Credit remains pristine (NPAs/Assets 0.00%); the only nonaccrual ($181K) was paid off after quarter-end, leaving no nonaccruals, OREO or adversely classified assets, per CRO commentary.
• Management tone constructive: deposit costs near-term “pretty static” absent further rate cuts; expense run-rate viewed as sustainable; tax rate higher in 2025 following expiration of a 2024 tax credit; $0.25 dividend maintained (5.02% annualized yield).

What Went Well and What Went Wrong

• What Went Well

  • Margin and efficiency inflected positively: NIM (FTE) rose to 2.28% from 1.98% in Q4; efficiency improved to 56.37% from 60.79%.
  • Funding cost relief: cost of deposits fell 38 bps vs Q4; deposit cost tracked to ~3.15% on presentation metrics; CRO/management emphasized strong core relationship banking.
  • Credit quality remained “best-in-class”: NPAs/Assets 0.00%; one $181K nonaccrual at quarter-end was paid off post quarter-end; ACL/Loans steady at 1.01%.
  • Management quote: “Our financial improvement is underway. Our margin is our main driver and we are experiencing improvement.” – CEO David Nelson.

• What Went Wrong

  • Period-end deposit balances declined 1.0% q/q (ex-brokered down 3.3%); brokered deposits rose $69.1M to $335.5M, reflecting normal customer cash flow but adds some headline sensitivity.
  • Loan growth modest (period end +$11.6M q/q; +$36.3M y/y), with pipeline tempered by payoffs/refinancings and a competitive environment.
  • Office CRE remains an area to monitor: market vacancy acknowledged; while portfolio performing, tenant renewals may weaken borrower leverage in negotiations, per CRO.

Transcript

Speaker 0

Thank you for standing by. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome everyone to the West Bancorporation first Q 2025 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed with the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Jane Funk, CFO. Please go ahead.

Thank you. Good afternoon, everybody. I'm Jane Funk, the CFO of West Bancorporation, and I'd like to welcome the participants on the call today, and thank you for joining us. With me today are Dave Nelson, our CEO; Brad Winterbottom, Bank President; Harlee Olafson, Chief Risk Officer; and Brad Peters, Minnesota Group President. I'll now read the fair disclosure statement. During today's conference call, we may make projections or other forward-looking statements within the meaning of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995 regarding future events or the future financial performance of the compan

The information we will provide today is accurate as of March 31, 2025, and we undertake no duty to update the information. With that, I'll turn it over to Dave Nelson.

Speaker 5

Thank you, Jane, and good afternoon, everyone. Thank you for joining us. We appreciate your interest in West Bank, and we have good news to share. Our financial improvement is underway. Our margin is our main driver, and we are experiencing improvement. The first quarter earnings were 35% higher than first quarter last year. Our credit quality remains excellent with no problem loans. We had big core deposit growth last year, and this year, first quarter 2025, rather flat so far, both loan and deposit growth. However, our pipeline for both is good. We declared a 25% per share dividend payable May 21 to shareholders of record as of May 7. Those are the end of my prepared comments other than thanking you again for joining us. With that, I'd like to turn the call over to Harlee Olafson.

Speaker 4

Thank you, Dave. Credit quality remains strong at West Bank. At quarter end, we had one past due over 30 days in the amount of $180,000. This loan was on non-accrual. Since quarter end, that loan has been paid in full. Now we have no non-accruals, no OREO, and no adversely classified assets. Our commercial real estate portfolio continues to perform well. Office property is deteriorating. There is significant office property that is vacant or nearly vacant. We do not have any property that is currently not performing, but with the amount of vacant property, our customers who have multiple tenants with pending lease expirations will not be dealing from a position of strength. Our CNI portfolio is seasoned and strong. We continue to receive year-end financial information on our customers, and we do see less profitability than in previous years.

Uncertainty in the direction of the economy does concern us and our customers. Prices for imported products and possible supply interruptions could cause production problems and earnings distress. The uncommon strength of our loan portfolio is due to doing business with customers with proven management, good balance sheets, and strong and diverse payment abilities. That has not changed. Though we do face potential changes in the economy, our commitment to our underwriting disciplines and our conservative philosophy, we expect our credit portfolio to remain very strong. Part of our strength also stems from the markets we serve. All communities have different strengths and are currently thriving. We have a seasoned team of bankers that continues to prospect for comprehensive banking relationships and provide exceptional service to their customers to obtain even more wallet share. I'm available for questions after our prepared remarks.

I now turn it over to Brad Winterbottom, our Bank President.

Speaker 0

Thank you. Before the quarter ended March 31, 2025, our loan portfolio was relatively flat when compared to year-end. Outstandings were just over $3 billion. Several events took place during the first quarter that impacted our portfolio size. We experienced approximately $100 million in payoffs from asset sale and refinance activity. The majority of those assets were priced below the current rate environment. I'm pleased to report that the refinance activity was planned. We replaced those assets with quality new assets at better rates. These assets represent approximately 50% CNI business and 50% commercial real estate transactions. Deposit gathering sales efforts continue to be an emphasis in the markets we serve. During the first quarter, deposits decreased slightly, primarily the result of ordinary cash flow fluctuations from our customers, not a loss of any relationships.

We remain selective in obtaining new loan opportunities, and those opportunities are less than in previous years. We remain confident in our abilities to create and maintain positive relationships with our customers and prospects that we're pursuing in a highly competitive market that we serve in all markets. That's the end of my comments. I'd like to now turn it over to Mr. Brad Peters.

Speaker 2

Thanks, Brad. Good afternoon, everyone. I'm going to provide you a brief update on our Minnesota Bank. Our customers have been cautious with the economic uncertainty in the marketplace. We continue to work closely with our clients and have increased our calling efforts to our CNI base of customers. We do not have specific production goals for our bankers, but instead measure our bankers on the right activities that will drive results. Our focus is on CNI prospects with significant deposit balances. We have been successful in winning these opportunities. We have a seasoned group of bankers that have proven this strategy to be effective. We are also targeting high-value retail deposits. Our bankers have been successful in winning the retail deposits of our business owners and key executives. We are also attracting new deposits from high-earning individuals in our communities.

Our principal bankers provide superior service that sets us apart from the competition. Each of our Minnesota regional centers has seen significant retail deposit growth. All of our building construction projects are now complete. We designed each of our facilities with well-appointed entertainment areas that allow our teams to host client and prospect events and quality small group gatherings. These unique facilities align perfectly with our strategy of building business based on strong relationships. Our team has embraced this and has done an outstanding job of leveraging our buildings to grow our business. Those are the end of my comments. I will now turn the call back over to Jane.

Speaker 0

Thanks, Brad. Just a few items on the financials, and then we'll open it up for questions. Our net income was $7.8 million for the first quarter compared to $7.1 million in the fourth quarter of 2024 and $5.8 million in the first quarter of 2024. Harlee and Brad just provided some good commentary on our loan portfolio. As they mentioned, overall growth in the portfolio was modest this quarter, as expected, and our credit quality remained very strong. As a result, there was no credit loss expense reported in the first quarter. We've now had five consecutive quarters of increases in net interest income, and net interest margin increased 30 basis points this quarter compared to the fourth quarter of 2024.

With the 100 basis point reduction in the Fed rates in September of last year, we have been able to lower deposit rates on our highest costing sectors, resulting in noticeable improvements to our cost of funds and our net interest margin. The cost of deposits decreased 38 basis points this quarter compared with the fourth quarter of 2024. As Brad mentioned, we've been able to improve the yield on our fixed-rate loan portfolio as cash flows roll over. The improvement in the yield of the fixed-rate portfolio has helped offset the impact of last year's reductions in the prime rate on the variable-rate portfolio. The loan yield in Q1 2025 was 5.52% compared to 5.53% in Q4 of 2024 and 5.49% in Q1 of 2024. There were no significant one-time items in non-interest income or non-interest expense this quarter.

Occupancy expense in the first quarter reflects all new building costs as our last construction project was completed in January, and there are no other construction projects on the horizon. Those are the end of our prepared remarks, and now we would open it up for questions.

Speaker 3

At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from Delania VanderLeach with Piper Sandler. Please go ahead.

Speaker 1

Thank you. Hey, everyone. Good afternoon.

Speaker 0

Jane.

Speaker 1

Jane, just sticking with the margin here, obviously good improvement in the deposit cost side, but absent rate cuts, I mean, is there more room? It'll be more challenging to bring deposit costs down at this point.

Speaker 0

I would say in this environment, the deposit costs, we probably move them as much as we think we can in light of the current environment. They are probably pretty static until something else happens in the marketplace.

Speaker 1

Got it. On the new loans that were added in the quarter, could you have the weight on what those were added at versus what has been rolling off just to try to get a sense of that differential?

Speaker 0

Of the $100 million or so that paid off in the first quarter, I would say 75% of those were probably started with a 3 or a 4. Those all would have been replaced with started with a 6 in front of it, maybe even some with a few 7s. I would say that the current environment is probably in the high 6 range.

Speaker 1

Gotcha. That's helpful. The loan pipeline, it sounds like it's pretty good, and obviously $100 million is solid. Does growth accelerate here in the second quarter, or are you expecting other larger payments on the horizon?

Speaker 0

There's a handful of nice transactions that we're looking at. I would say we do have some planned payoffs, but I think the opportunity to succeed is the payoffs, to be honest with you. We'll see what happens.

Speaker 1

Great.

Speaker 0

There's other people involved in that.

Speaker 1

Oh, Jane, just on the expenses, there were some elevated accruals in the fourth quarter. In the first quarter, was there anything keeping expenses a little bit lower? Just trying to get a sense of the run rate into Q.

Speaker 0

No, I would expect that the first quarter performance will be pretty indicative of the go forward. There is not any significant items that we foresee at this point in time.

Speaker 1

Gotcha. I noticed the tax rate was a little higher than I was expecting. Probably, obviously, improved a better rate to be modeling?

Speaker 0

Yeah. We had a tax credit, like a seven-year new markets tax credit that expired at the end of 2024. The accounting for that goes away. Our tax rate will be a little bit higher this year than what it was last year.

Speaker 1

Got it. Last on credit here, is there anything you can point to with concerns of tariffs or immigration policy that you're watching specifically or that your borrowers are talking about? Your credit metrics are up, but just curious if there's anything that you're seeing that you want to highlight that's concerning.

Speaker 4

I do not have anything on immigration policy, but tariffs, we have some manufacturers that in their product, what they provide in their total product, they have mixes of components that are coming from offshore. The concern, there is some concern there that that cost will increase and/or the supply of it may be hindered, that it will not flow as easily as it has in the past. Again, I like to always say that the customers that we have been doing business with are seasoned and have developed good balance sheets, so typically can weather through those types of things, but they are concerning.

Speaker 1

Got it. That covers the questions. I'll step back. Thank you.

Speaker 0

Thanks, Andrew.

Speaker 3

Your next question comes from Delania Falk with Shelby itself. Please go ahead.

I have a question for Mr. Nelson relative to the letters to stockholders. In the first paragraph, he referenced the significant strides to return to excellence by concentrating on what we can control. Is that a reference to the duration risk that we take? In the second paragraph, you refer to being bankers and not lenders. Would you have any color on that?

Speaker 4

Sure. Thank you for the question. The differentiation between bankers and lenders is kind of a way of highlighting that we do not really like to be called lenders because that is just part of what we do. We work both sides of the balance sheet for both loans, deposits, and a multitude of other services. We talk about comprehensive recommendations, meaning that it is not just about making a loan, but it is about building a relationship and providing more services than just lending. In terms of focusing on what we control and control, really in my mind, what I was talking about there is what we do on purpose every day, despite economic conditions or the weather or competitors.

It's what's under our control about getting out and talking to people and being of assistance and learning all we can about our customers' business and looking for ways to be of further assistance.

Speaker 3

Before going to the next question, again, if you would like to ask a question, press star one on your telephone keypad. Your next question comes from Delania Free Roberts with Stackholder. Please go ahead.

Hi guys. I have a question related to the heading at the top of one of your charts in your attachment to the press release. It says successful lift-out strategy. Normally, a lift-out strategy would be outsourcing of a business function or part of your business. What do you mean by that language?

Speaker 4

This is Brad Peters from the Minnesota markets. The lift-out strategy is referencing our success in lifting out key people from other financial institutions to become West Bankers. We were successful in our Minnesota locations at doing that.

Okay. Thank you. I have one other question. How do you actually manage to hold on to your core deposit certificate of deposit numbers when your rates are so low compared to other places in the market? I just do not understand anybody leaving their money to earn 1% or something less than that. It just seems like a silly personal strategy.

Speaker 0

We have the ability to, you know, out of our core deposit base is commercial-based. And so we will do rates based on relationships. So we're not doing advertised retail specials like you see other institutions, but we certainly have pricing strategies similar to those other institutions.

You're saying I could negotiate with you?

You could call your banker and talk about rates.

Okay. Okay. Thank you.

Speaker 3

I will now turn the call back to Jane Funk for closing remarks.

Speaker 0

All right. Again, we want to thank everybody for joining us today, and we look forward to talking again next quarter. Thank you.

Ladies and gentlemen, that concludes today's call. You can disconnect. Thank you and have a great day.