West Bancorporation - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 delivered clean results and incremental operating improvement: net income $8.0M and diluted EPS $0.47, both up vs Q1 2025 and Q2 2024, with net interest margin at 2.27% and efficiency ratio at 56.45%.
• Versus S&P Global Wall Street consensus, WTBA posted a modest beat on EPS (+$0.02) and revenue (+$0.33M), continuing a pattern of estimate outperformance since Q4 2024; estimate counts remain thin (one estimate) which can amplify surprises [Q2 2025 EPS and revenue consensus/actuals]*.
• Credit quality remains pristine: zero nonaccruals, zero substandard, watchlist limited and well-secured; ACL/loans rose to 1.03% and net recoveries were $13K, supporting confidence in forward earnings durability.
• Deposits rose $67.5M QoQ, mix improved as brokered fell by $127.2M; a $243.0M municipal bond deposit inflow lifts liquidity, while uninsured deposits dropped to ~27.2%—a favorable funding/capital narrative for the stock.
• Forward catalysts: continued asset repricing tailwinds, deposit-gathering momentum, and stable expense outlook; management sees H2 margin “opportunity” with deposit costs flat-to-up a few bps absent Fed action.

What Went Well and What Went Wrong

What Went Well

• “Enviable zeros” in credit: zero nonaccruals, zero substandard, zero OREO; watchlist limited and secured, with office CRE LTV ~65% and DSC ~1.35x—clear asset quality strength underpinning risk-adjusted returns.
• Funding mix improved: deposits +$67.5M QoQ, brokered -$127.2M, uninsured deposits ~27.2%; a $243.0M municipal inflow supports liquidity and lower wholesale reliance.
• Margin resilience: NIM held at 2.27% (FTE), loan yields +7 bps QoQ to 5.59% as originations/renewals price higher; efficiency ratio stable at 56.45%.
  • CEO: “We are well positioned for continued improvement in earnings through asset repricing while controlling funding costs and maintaining our pristine credit quality”.

What Went Wrong

• Loan balances -$50.1M QoQ amid payoffs/refis and lower line utilization; average loans fell ~$26.5M, tempering balance-sheet growth momentum.
• Deposit costs +4 bps QoQ (3.19%), with pockets of upward pricing pressure; NIM ticked down 1 bp QoQ to 2.27%, reflecting competitive funding dynamics.
• Limited formal guidance and thin Street coverage (single estimate) keep investor visibility modest; outsized municipal deposit inflow will be withdrawn over ~24 months, normalizing liquidity over time.

Transcript

Speaker 4

I would like to turn the conference over to Jane Funk, Chief Financial Officer. Please go ahead.

Speaker 5

Thank you, and good afternoon, everyone. I'm Jane Funk, the CFO at West Bancorporation. I'd like to welcome the participants on our call today, and thank you for joining us. With me today are Dave Nelson, our CEO, Harlee Olafson, Chief Risk Officer, Brad Peters, Minnesota Group President, and Todd Mather, West Bancorporation's Chief Credit Officer. I'll read our third-order 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 company. We caution that such statements are predictions and that actual results may differ materially. Please see the forward-looking statement disclosures and our 2025 second-quarter earnings release for more information about risks and uncertainties which may affect us.

The information we will provide today is as accurate as of June 30, 2025, and we undertake no duty to update the information. With that, I'll turn the call over to Dave Nelson for his remarks.

Speaker 0

Thank you, Jane. Good afternoon, everyone. Thank you for joining us, and thank you for your interest in our company. West Bancorporation had another solid quarter, which was significantly better than the second quarter of last year. First half earnings this year are about 54% higher than last year's earnings. Our journey back to top-performing metrics is continuing as forecasted. Our focus has been on relationship building and deposit growth. We still have a fair amount of asset repricing to benefit from this year and also during 2026, which will continue to improve our margin in earnings. We are gaining new relationships in all our markets and continue to have very strong asset quality. We have declared a $0.25 per share dividend payable August 20th to shareholders of record as of August 5th. Our stock is currently providing a yield in excess of 5%.

Those are the end of my prepared remarks, so I will now turn the call over to our Chief Risk Officer, Mr. Harlee Olafson.

Speaker 2

Thank you, Dave. Credit quality continues to be very strong at West Bank. At quarter end, we had one small 30-day pass-through loan that is now current. We have a number of enviable zeros. We have zero other assets. We have zero other real estate. We have zero doubtful accounts. We have zero non-accruals, and we have zero substandard loans. Our watchlist consists of four relationships. Three are trucking-related. All are well-secured and current on their payments. The other watchlist credit is a small nonprofit that struggles with funding. There has not been a lot of new development in our markets, so our commercial real estate portfolio continues to improve from both a loan-to-value and a debt service coverage perspective. Office property in our Des Moines market, like in many larger communities, is in a distressed situation. We are aware of numerous properties that have significant vacancy problems.

Since there is more space available than there are tenants, it depresses the entire office market. A large percentage of our office property is owner-occupied. We have a handful of multi-tenant properties that we watch carefully. Currently, they are all performing well, but some have leases that will expire, and their future health will depend on their keeping their tenants. Our average loan-to-value on non-owner-occupied office property is 65%, and the debt service coverage is 1.35 times. Having strong customer liquidity, strong global cash flows, and varied income sources has served us well. With our commitment to our underwriting disciplines, we expect our credit portfolio to remain very strong. Our six markets are all thriving, and our team of experienced bankers continue to prospect the strong, comprehensive relationships. At the end of all our prepared remarks, I'm available for any questions.

I will now turn it over to Todd Mather, our Chief Credit Officer and Business Banking Manager.

Speaker 3

Thank you, Harlee. For the quarter ended 6/30/2025, our loan outstandings were down slightly at just under $3 billion. We experienced a few larger payoffs from asset sales and refinancing activities. The majority of those assets were priced below the current rate environment. We replaced those assets with quality new assets at better interest rates. Deposit gathering continues to be an emphasis, and we have been successful in attracting new depositors. During the quarter, deposit balances increased just over $67 million. We remain collected in obtaining new loan opportunities, and those opportunities are less than in prior years. We are confident in our abilities to create and maintain positive relationships with our customers and prospects that we are pursuing in a highly competitive market. I will now turn it over to Brad Peters, our Minnesota Group President.

Speaker 2

Thanks, Todd. Good afternoon, everyone. I'm going to provide a brief update on our Minnesota banks. Our clients remain cautious with the economic uncertainty in the marketplace. Our bankers have been diligent in staying close to our clients, and we have increased our frequency of calls to our customer base. We continue to target deposit-rich business banking opportunities. We have a disciplined calling approach that has enabled our team to be successful in attracting new business. Our seasoned group of bankers and our business banking focus set us apart from our competition. 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. Each of our Minnesota regional centers has seen significant retail deposit growth.

We do not have specific production goals for our bankers, but instead measure our bankers on the right activities that will drive results. Measuring activities requires our local leaders to be actively engaged with their teams with consistent inspection of calling efforts. This method has proven to be successful as we expand our market share in our communities. All of our building construction projects are now complete. We design each of our facilities with well-appointed entertainment areas that allow our teams to host client and prospect events and quality small group meetings. 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 5

Thanks, Brad. I'll just make a few financial-related comments. As Todd mentioned, our loan balances decreased approximately $50 million in the second quarter as customers sold real estate assets or refinanced in the secondary market in ordinary course of their businesses. We also saw a slight reduction in the utilization of commercial lines of credit. Core deposit balances increased approximately $195 million in the second quarter. An existing municipal customer raised funds through a bond offering for a construction project, and those funds are expected to be withdrawn over the next couple of years as the construction project progresses. That was the primary reason for the large increase in core deposits. Those deposits resulted in a reduction of brokerage funding of approximately $127 million this quarter, along with an increase in our cash and short-term liquidity position.

Net income was $8 million in the second quarter, compared to $7.8 million in the first quarter of 2025, and $5.2 million in the second quarter of 2024. Net income and net interest income continue to improve. As described earlier, credit quality remains very strong, so no provision for credit losses was recorded this quarter, and there were no significant one-time items in non-interest income or non-interest expense in the second quarter. The yield in the loan portfolio continues to improve as fixed-rate assets repriced at higher yield. The second quarter loan yield was 5.59% compared to the first quarter's 5.52%. The improvement in loan yield in the second quarter was partially offset by a four-basis point increase in the cost of deposits. We were fairly aggressive in lowering deposit rates last year when the Fed was lowering the federal funds rates.

As the Fed has been holding rates since December, we do see some pockets of upward pricing pressure on deposits, resulting in that slight increase in the second quarter. Those are the completion of our remarks, and now we'll open it up for questions.

Speaker 4

Ladies and gentlemen, you will now begin the question and answer session. If you have dialed in and would like to ask a question, as a reminder, that is to press star one on your telephone keypad. If you would like to withdraw your question, simply press star one again. We will pause for a moment to compile the Q&A roster. Thank you. Your first question comes from the line of Nathan Race with Piper Sandler. Please go ahead.

Speaker 1

Hi, everyone. Good afternoon. Thanks for taking the questions.

Speaker 5

Hi, Nate.

Speaker 1

Question just maybe first on how you guys are seeing client sentiment these days and just how the pipeline is looking ahead into the back half of the year from a loan growth perspective. I appreciate payoffs are still somewhat of a headwind, but just any thoughts on how you see loan growth trending in the back half of the year and kind of what you're hearing and seeing from commercial clients these days?

Speaker 2

This is Harlee Olafson. The pipeline is pretty robust right now. There's a number of projects within the pipeline. We're holding a little bit strong in our pricing thought process, not taking on underpriced assets at this time, but I do believe that we will have many good opportunities this year to maintain and grow our loan portfolio.

Speaker 1

Okay. Great. Maybe a question for Jane. Just curious how you're thinking about the margin trajectory in the back half of this year. Obviously, deposit costs pick up in the quarter. Just curious how you're thinking about the margin trajectory, you know, if the credit remains on pause, and then maybe if we got more interest cuts as well in the back half of the year.

Speaker 5

Yeah. We do see an opportunity for some improvement in the margin in the second half of the year. We still have, you know, a lot of opportunity for asset repricing in the loan portfolio, so that will continue. We would expect that whether it's a cut rate or not. The asset repricing, we believe, will be there as we're projecting. On the deposit side, like I said, we're seeing pressure on deposits in certain pockets. I would expect, you know, maybe deposit costs to be relatively kind of flat, maybe pick up a couple basis points. I don't know that we'll be able to lower much until the Fed does some sort of move.

Speaker 1

Great. There's been some notable M&A-related disruption in your northern markets in and around the Twin Cities and south of there. Just curious what the upside is to maybe hire some additional producers in those markets, open other offices, or what the opportunities look like with the existing teams in those geographies.

Speaker 2

Yes. Nate, this is Brad Peters from Minnesota. There are opportunities in the marketplace. I think we have capacity in the markets that we serve to be able to take advantage of that. We already have to a certain degree, but I see continued opportunities in the future, with, as you said, the M&A that's taking place and also the ongoing opportunities by larger banks that have kind of abandoned the regional centers where we are located.

Speaker 1

Okay. Great, good to hear. Just going back to the balance sheet growth trajectory, Jane, I appreciate your comments that you had, you know, that municipal deposit flow in the quarter that helped drive the deposits up in the quarter, but it still seemed like you guys did pretty strong deposit growth, notwithstanding that inflow. Just curious how you're thinking about deposit growth opportunities in the back half of the year as well based on kind of the pipelines to add clients.

Speaker 5

Yeah. I mean, I think that our pipeline is just as focused on deposit relationships as it is credit relationships. We continue to look for those strong customers in our regions and our locations that can provide us to help build our strong balance sheet. Certainly, the focus is on growing deposits just as much as it is on the credit pipeline, and that's what our bankers are working every day on.

Speaker 1

Okay. Great. Is this run rate that we saw in Q2 for expenses a pretty good figure to use in the back half this year, or are you guys seeing some just general inflationary pressure that may drive it up slightly?

Speaker 5

I would say the second quarter is probably a good indicator. I don't see any significant items happening in the second half of the year.

Speaker 1

Okay. Great. I appreciate all the color. Thank you, everyone.

Speaker 5

Thanks, Nate.

Speaker 4

Again, as a reminder, if you have any questions, please press star one on your telephone keypad. It seems that we have no further questions for today. I would like to turn the conference back over to Jane Funk for any closing remarks.

Speaker 5

All right. Thank you. We just want to thank everyone for joining us today. We appreciate your interest in West Bancorporation and have a good day. Thank you.

Speaker 4

Ladies and gentlemen, this concludes today's conference call. We thank you for your participation. You may now disconnect. Have a pleasant day, everyone.