West Bancorporation - Q2 2023

Transcript

Moderator (participant)

Hello, everyone, and welcome to the West Bancorporation Incorporated Q2 earnings call. My name is Emily, and I'll be your moderator for today's call. After the prepared remarks, you will have the opportunity to ask any questions by pressing star followed by the 1 on your telephone keypad. I will now turn the call over to our host, Jane Funk. Please go ahead.

Jane Funk (EVP, Treasurer and CFO)

Thank you, and good afternoon, everybody. Welcome to the West Bancorporation Inc.'s Q2 earnings call. Today, I've got with me Dave Nelson, our CEO, Harlee Olafson, our Chief Risk Officer, Brad Winterbottom, Bank President, and Brad Peters, our Minnesota President. I'll start out reading our fair disclosure statement. During today's conference call, we may make projections or other forward-looking statements within the meaning of the Safe Harbour provisions of the Private Securities Litigation Reform Act of 1995 regarding future events or the future financial performance of the company. We caution that such statements are predictions and that actual results may differ materially. Please see the forward-looking statement disclosure in our 2023 Q2 earnings release for more information about risks and uncertainties which may affect us.

The information we will provide today is accurate as of June 13, 2023, and we undertake no duty to update that information. We'll start off the call, with Dave Nelson.

Dave Nelson (President & CEO)

Thank you, Jane. Welcome, everyone, and thank you for joining us. We appreciate your interest in our company. I just have a few brief summary statements, and then we'll turn the call over to others for more detail. American Banker magazine recently came out with their list of the 2022 top performing large community banks between $3 billion and $10 billion and ranked West Bank as number 18 in America. That was for last year. In the meantime, the Federal Reserve has been successful in curtailing growth in our markets, and their monetary policy has also resulted in dramatically increased depository rates, which are squeezing our margin. Our loan growth year to date is about 2%. Our credit quality remains pristine. We declared a Q2 dividend of $0.25 per share, payable August 23rd to shareholders of record as of August 9th.

I'd now like to turn the call over to our Chief Risk Officer, Harlee Olafson.

Harlee Olafson (Chief Risk Officer and EVP)

Thank you, Dave. My comments will also be brief since there isn't a lot of credit quality issues to talk about. As with that, credit quality does remain very strong at West Bank. Our watch list is at historically low levels. We had gone passed through this quarter for the first time in two years, and it's a fully guaranteed PPP loan that's in the process of being collected. Our commercial real estate portfolio is performing very well. We have very little metro multi-tenant office properties. The ones we have are doing fine. Other categories of commercial real estate are performing as we would expect. Our performance is really due to having strong customers in strong markets. Our bankers are staying close to their customers and are continuing to prospect new opportunities.

With that, I'm going to turn it over to Brad Winterbottom to provide some additional information.

Brad Winterbottom (Bank President and EVP)

Good afternoon. For the first 6 months of the year, Dave mentioned our loan portfolio did grow 2.3% to $2.8 billion in out-standings. The interest rate environment has really slowed business activities in all markets. Many customers have told us they've put new projects on hold until there is a more stable rate environment. As to the C&I businesses, we see a decline in cash balances versus borrowing, suggesting that they are using their own cash for their business needs. The financials of our customers remain strong, we do not see a general weakening of our customer base. Our bankers continue to do the things that they were hired to do, that's call on existing customers and prospects to build relationships. Deposit gathering remains important to us, we are working hard to do that.

Jane will speak about deposit trends in a little bit. Those are my comments, and now to Mr. Peters for some Minnesota.

Brad Peters (EVP)

Thanks, Brad. Good afternoon, everyone. I'm going to provide a brief update on our expansion into Minnesota. Our team continues to build new relationships in each of our Minnesota regional centers. Our relationship-based approach has enabled us to grow new business and enhance existing relationships. In spite of the challenging environment, we continue to grow new business household. Majority of our new business is C&I, which has grown our deposit and treasury management businesses. Mankato market is looking forward to the completion of construction of their new facility, and we anticipate occupying the new building early in the Q4. The Owatonna market has purchased land for a new building, and we anticipate that construction to begin this fall. Those are the end of my comments. I will now turn it back over to Jane.

Jane Funk (EVP, Treasurer and CFO)

Thanks, Brad. I'll just make a few comments on the financials and then we will open it up for questions. The obvious driver in our change in our earnings and efficiency ratio is our net interest income. Net interest income declined for the quarter, compared to Q1 by $1.3 million. We continue to see very significant rate pressure on our deposit base, and with the inverted yield curve, the increase in the interest costs continue to outpace the repricing of our loan and securities portfolios. While our business model is still incredibly cost efficient, our non-interest expenses have increased from last year with inflationary pressures on compensation benefits, an increase in the FDIC's minimum assessment rate, and occupancy costs associated with the opening of our new building, last year in St. Cloud.

We recorded no provision for credit losses this quarter. As mentioned earlier, our watch and classified loan listing, it has declined to less than a million dollars of loans, and our credit quality remains pristine, with no glaring issues that we're seeing in the marketplace. Those are my comments, and now we will open it up for questions.

Moderator (participant)

Thank you. If you would like to ask a question today, please do so now by pressing star followed by 1 on your telephone keypad. If you change your mind, that is star followed by 2. When preparing to ask your question, please ensure that your device and your microphone are unmuted locally. Our first question comes from Brendan Nosal with Piper Sandler. Please go ahead.

Brendan Nosal (Director of Equity Research)

Hey, good afternoon. Hey, good afternoon, everybody. Hope you're doing well. Maybe just to start off here on, on credit quality, specifically fantastic for the quarter. Was just hoping you could offer a little more insight into what drove the improvement in the credit relationship that was upgraded during the quarter?

Brad Peters (EVP)

Sure. We were waiting for year-end audited financial information to be received. We had pretty much knew that the commercial real estate properties that were underneath this, that were on the watch list were performing. We waited until we received their audited financials and verified the cash flow and liquidity of the borrower prior to updating. That's when it was updated.

Brendan Nosal (Director of Equity Research)

Got it. Okay.

Brad Peters (EVP)

Great.

Brad Winterbottom (Bank President and EVP)

Hey, Matt, I would also just add, it went on the list during the COVID, during the pandemic, because their business really slowed, but it has since come back very strong.

Brendan Nosal (Director of Equity Research)

Fantastic. Thank you. Maybe turning over to the net interest margin, do you folks happen to have where the NIM was for the month of June, just to give us a sense of where the margin might start the Q3?

Jane Funk (EVP, Treasurer and CFO)

Yeah, our June, net interest margin was right around 2%.

Brendan Nosal (Director of Equity Research)

Okay. All right. That's, that's helpful. I mean, I guess then, if, you know, you ran 2.02 for the quarter and June was 2%, it certainly feels like the, the monthly pace of compression has eased pretty meaningfully, correct?

Jane Funk (EVP, Treasurer and CFO)

Well, for June, May and June, we did see some easing, but the Fed just raised rates yesterday, and we still have, you know, pressure on deposit rates. Those continue significantly, you know, retaining deposits, trying to gather deposits. We're not really making any predictions on what net interest margin will do, because there's still a lot of volatility in the market.

Brendan Nosal (Director of Equity Research)

Of course, of course. No, that's, that's helpful. Maybe turning to, to lending, and particularly the Minnesota markets, can you just update us where loan and deposit balances stood at quarter end within those markets?

Brad Peters (EVP)

Sure. Collectively, we're just under $700 million on the loan side, and deposits between the four markets are in the neighbourhood of $350 million.

Brendan Nosal (Director of Equity Research)

Okay, perfect. Let's see. Maybe on loan growth more specifically, definitely a stronger quarter in the second versus the first. Just curious what sort of opportunities you're seeing in the marketplace to add new loans and how you think about growth through the balance of the year?

Brad Peters (EVP)

I would say that certainly it, it slowed in all markets, all four Minnesota and two Iowa markets. We do have activities. We've had a fair amount of payoffs, too. Entities selling their assets, primarily in the real estate side of that. We have some construction projects that will add to our volume. There are a few opportunities out there that we are looking at. In terms of the C&I business, those are long lead times to really gather, but, you know, we're visiting with those folks on a daily basis as well. I do not anticipate a significant growth, like what you've seen in the last couple of years from us. You know, 2% for the first six months.

I would say we're going to be in that range for the year. Maybe another 2%.

Brendan Nosal (Director of Equity Research)

Okay.

Brad Peters (EVP)

I would say.

Brendan Nosal (Director of Equity Research)

Yeah. Okay. That's, that's certainly helpful. All right, good. Do you happen to have what low yield you're getting on, on new production in the Q2? Roughly.

Brad Peters (EVP)

It's in the mid sevens, mid to low sevens right now on new stuff. If it's, if it's fixed in a 5 year.

Brendan Nosal (Director of Equity Research)

Okay, excellent. Maybe turning to the funding side of things, looks like deposits were up nicely for the quarter, including some good growth in core money market and savings accounts. Maybe walk through deposit flows and mix shift as it occurred over the course of the quarter.

Jane Funk (EVP, Treasurer and CFO)

Yeah, the, probably a good portion of that growth from the Q1 was from public fund deposits. We would generally see an uptick in the Q2. As far as other core deposits, there's still a fair amount of volatility, kind of from day to day as money's moving around. I think on average it's relatively stable, but we do continue to see dollars go out for interest rates and treasuries or, you know, the 5% competing institutional specials that are out there. We are also successful in bringing in new relationships and new customers and new dollars. It's a little bit of feels like recycling right now.

Brendan Nosal (Director of Equity Research)

Yeah. Yeah. Okay. All right, good. Then let's see. On the securities portfolio, can you update us on how much cash flow you expect to get from the portfolio over the next 12 months?

Jane Funk (EVP, Treasurer and CFO)

It should be around $50 million over the next 12 months. At just right around 2%, I believe, is the roll-off rate.

Brendan Nosal (Director of Equity Research)

Okay, great. Last one for me before I step back. Looks like your tax rate is a little bit lower over the past couple of quarters than it kind of had been in the past. Wondering if there's anything particularly driving that and then expectations for your tax rate going forward?

Jane Funk (EVP, Treasurer and CFO)

Nothing in particular. You know, we do have a fair amount of tax credits that, you know, won't fluctuate with our income level. When you apply the, some of those tax credits and stuff, it reduces our effective rate in this type of environment.

Brendan Nosal (Director of Equity Research)

Understood. All right. Fantastic. Thank you for taking all my questions.

Jane Funk (EVP, Treasurer and CFO)

Thanks, Brendan.

Moderator (participant)

Our next question comes from David Welch with River Oaks Capital. Please go ahead, David, your line is open.

David Welch (Principal and Portfolio Manager)

Thank you. I apologise, maybe I was just missing the disclosure in the past on this, but I had no idea that you had a $53 million credit relationship, and I guess the good news, it's been upgraded. That's almost a quarter of Q2 capital or equity, excuse me. Can you just tell us a little bit about what that relationship is? You know, I'm sensing CRE, but geography, how many buildings, you know, core business. To me, that feels like a very large relationship. I guess I'm looking for elaboration. Is this your largest relationship in the bank as well?

Brad Peters (EVP)

All right. How many buildings? I would say that this would include hotels and restaurant chains that would multiple, I want to say, in the 7-10 building range in various markets throughout the Midwest. They're sprinkled all over. No real significant exposure in any one market. Maybe the biggest market would have been Kansas City, but they're in Des Moines. They're headquartered in Des Moines.

David Welch (Principal and Portfolio Manager)

Okay.

Brad Peters (EVP)

Is it our largest? No, it's not our largest.

David Welch (Principal and Portfolio Manager)

Okay. My follow-up question is, you know, what is the largest and, how many I'm just picking a number. You can give me a different number, but how many, relationships are, say, you know, more than $40 million or some other number you might prefer?

Brad Peters (EVP)

Maybe in the $40 million range. I would say that we've got, four, five relationships in that range.

David Welch (Principal and Portfolio Manager)

Okay.

Brad Peters (EVP)

David, I mean, just to clarify on some of those, these are typically entities that have might have a common manager, but might have different ownership shares. They become a combinable type entity, not from a legal lending perspective, but more from a how we look at them perspective. Typically have guarantees, personal guarantees, corporate guarantees, borrowing entities. The parent would have significant liquidity. We know these folks. These people are all in Des Moines.

David Welch (Principal and Portfolio Manager)

Okay. All right. Thank you for the elaboration.

Brad Peters (EVP)

Extends beyond 30 years.

David Welch (Principal and Portfolio Manager)

Okay.

Moderator (participant)

At this time, we have no further questions registered. As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad now. With that, we have no further questions, so I'll turn the call back to the management team for any further comments.

Jane Funk (EVP, Treasurer and CFO)

No further comments. We just want to thank everybody for your interest in our company, and thank you for joining us on the call today. Thank you.

Moderator (participant)

Thank you everyone for joining us today. This concludes our call. You may now disconnect your lines.