West Bancorporation - Earnings Call - Q3 2025

Executive Summary

• Q3 2025 delivered accelerating profitability: net income $9.3M and diluted EPS $0.55, up 16% QoQ and 55% YoY, driven by higher net interest income and a 9 bps sequential improvement in fully tax-equivalent net interest margin to 2.36%.
• Credit quality remained pristine with 0.00% nonperforming assets, no nonaccruals or >30-day past dues; allowance for credit losses/loans was 1.01% vs. 1.03% in Q2.
• Deposits declined $85.5M QoQ (2.5%) due to anticipated public fund cash flows; uninsured deposits were ~28.6% of total, while brokered deposits fell $3.5M QoQ to $204.8M.
• Management highlighted continued margin tailwinds from repricing of fixed-rate loans (weighted avg 4.86% on fixed-rate book) and potential Fed cuts; dividend maintained at $0.25/share.

What Went Well and What Went Wrong

What Went Well

• Net interest income rose to $22.5M (+$1.1M QoQ) as loan yields improved to 5.66% and NIM expanded to 2.36% (+9 bps QoQ) on a FTE basis; noninterest income rose modestly with trust services strength.
• Efficiency ratio improved to 54.06% from 56.45% in Q2, reflecting revenue lift and disciplined expense control; ROAA reached 0.92% and ROAE 15.25%.
• Credit quality “pristine” with no nonaccruals and no substandard/doubtful loans; watch list increased due to one well-collateralized customer relationship, but overall portfolio remained strong, diversified in CRE.

Management quotes:

• “We had a strong third quarter with continued improvements in net interest income and net interest margin while prudently managing our noninterest expenses.” — CEO David Nelson.
• “Credit quality… remains pristine… no past dues, no OREO, no non-accrual loans, no doubtful accounts, and no substandard loans.” — Chief Risk Officer Harlee Olafson.
• “In our fixed-rate loan portfolio, the weighted average rate… is currently 4.86%. There’s still plenty of room… repricing into 2026.” — CFO Jane Funk.

What Went Wrong

• Total deposits decreased $85.5M QoQ (ex-brokered down $82.0M), reflecting expected public fund outflows and competitive pricing pressures that limit deposit beta aggressiveness near term.
• Noninterest expense ticked up slightly QoQ to $13.6M, mainly higher compensation, partially offsetting efficiency gains; data processing and technology expenses remain elevated vs. prior year.
• Watch list loans rose to $38.7M from $10.8M, tied primarily to one transportation-related customer; management views collateral as sufficient but it warrants monitoring.

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by. My name is Colby, and I will be your conference operator today. At this time, I would like to welcome you to the West Bancorporation Inc. Q3 2025 earnings conference call. All lines have been placed on mute to prevent any background noise, and after the speaker remarks, there will be a question and answer session. If you would like to ask a question at that time, please press star, then the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would like to turn the conference over to Jane Funk, Chief Financial Officer. Please go ahead.

Jane Funk (CFO)

Thank you. Good afternoon. I'm Jane Funk, the CFO of West Bancorporation Inc., 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, Harlee Olafson, Chief Risk Officer, Brad Peters, our Minnesota Group President, and Todd Mather, our Chief Credit Officer. 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 disclosure and our 2025 third quarter earnings release for more information about risks and uncertainties which may affect us.

The information we will provide today is accurate as of September 30th, 2025, and we undertake no duty to update the information. With that, I'll turn it over to Dave Nelson.

Dave Nelson (CEO)

Thank you, Jane, and good afternoon, everyone. Thank you for joining us, and thank you for your interest in our company. I have a few general comments, and then we'll turn the call over to others for more details. West Bank had another solid quarter with a 16% earnings increase over the prior quarter and a 55% increase over the third quarter of last year. Our financial performance metrics continue to improve, primarily driven by an expanding margin. The future Fed rate cuts will also be favorable to our margin, as well as loan renewal repricing is also helping our margin, and this will continue into and during 2026. West Bank credit quality continues to be very strong with essentially no problem loans or any 30-day past due loans.

Yesterday, our board declared a $0.25 per share quarterly dividend to common stockholders payable Wednesday, November 19th, 2025, to shareholders of record as of Wednesday, November 5th, 2025. Those are my prepared remarks and would now turn the call over to Mr. Harlee Olafson, our Chief Risk Officer.

Harlee Olafson (Chief Risk Officer)

Thank you, Dave. My remarks are going to be pretty short because credit quality hasn't changed much here. Credit quality of West Bank for the third quarter of 2025 remains very strong. We have no past dues, no OREO, no non-accrual loans, no doubtful accounts, and no substandard loans. We have a small watch list that is mainly in the transportation industry. These credits are well secured, but the entities are having cash flow issues. Our commercial real estate portfolio is well diversified and is performing as expected. Having strong customers with liquidity and strong cash flows has served us well. We remain committed to our past underwriting disciplines and expect credit quality to remain pristine. After our prepared remarks, I'm available for questions. I now turn it over to Todd Mather, our Banking Manager and Chief Credit Officer.

Todd Mather (Banking Manager and Chief Credit Officer)

Thank you, Harlee. For the quarter ended 9/30/2025, our loan outstandings were up slightly at just over $3 billion. We experienced a few larger payoffs from asset sales and refinance activity. The majority of those assets were priced below the current environment. We replaced those assets with quality new assets at better interest rates. Our deposit gathering efforts continue to be an emphasis, and we have been successful in attracting new customers and depositors. We remain selective 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.

Brad Peters (Minnesota Group President)

Thanks, Todd. Good afternoon, everyone. I'm going to provide a brief update on our Minnesota banks. We continue to see a slowdown with the majority of our manufacturing clients. The economic uncertainty has created a cautious environment in each of our Minnesota regional centers. Our bankers have been diligent in staying close with our clients and have increased calling activities to better manage relationships. We are seeing new business opportunities with the recent M&A activity from competitors in our markets. Our bankers have targeted calling plans, and each market has had success bringing new business to West Bank. Our calling is focused on 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 the 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. We do not have specific production goals for our bankers, but rather measure our bankers on doing the right activities that will drive results. This method of performance management is more difficult to manage, but our local leaders are fully engaged with our activity-based expectations, and we have established specific activity expectations which we coach our bankers on consistently. This method has proven to be successful as we expand our market share in our communities. Our facilities are designed to host client and prospect entertaining. 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 it back over to Jane.

Jane Funk (CFO)

Thanks, Brad. I'll make just a few comments on the financial performance for the quarter, and then we'll open it up for questions. Our loan balances increased approximately $43 million in the third quarter, but we're relatively flat year to date. Core deposit balances decreased approximately $82 million in the third quarter. This decline was primarily due to normal and anticipated cash flow fluctuations in core public fund deposits. Net income was $9.3 million in the third quarter compared to $8 million in the second quarter of 2025 and $6 million in the third quarter of last year. Net income and net interest income continue to improve through improvement in net interest margin, and our margin improved nine basis points compared to last quarter. The yield on the loan portfolio continues to improve as fixed-rate assets repriced into higher yields.

In the third quarter, loan yield was 5.66% compared to 5.59% in the second quarter and 5.52% in the first quarter of this year. The cost of deposits declined two basis points in the third quarter compared to the second quarter. As described earlier, credit quality remains pristine, and no provision for credit losses was recorded this quarter. There were no significant one-time items in non-interest income or non-interest expense in the third quarter, and our effective tax rate this quarter was a bit lower than prior quarters this year due to a change in estimate on an energy-related investment tax credit. The effective tax rate was around 19% this quarter compared to 22%, 23% in the first two quarters of the year. Those are my final comments on the financials, so now we'll open it up for questions.

Operator (participant)

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star, then the number one on your telephone keypad to raise your hand and enter the queue. If you would like to withdraw your question, simply press star one again. Thank you. Your first question comes from the line of Nathan Race from Piper Sandler. Your line is open.

Nathan Race (Managing Director and Senior Research Analyst)

Hi, everyone. Good afternoon. Thank you for taking the questions.

Jane Funk (CFO)

Hi, Nate.

Nathan Race (Managing Director and Senior Research Analyst)

Maybe just to start, in terms of where the pipeline stands from a loan growth perspective, nice growth in the quarter, nearly 6% annualized. I'd just be curious to get an update there. I know Brad indicated there are some opportunities to pull some market share in Minnesota, just given some of the M&A-related disruption there. I'd love to just get an update in terms of where pipelines stand and how you think about growth over the balance of this year and then into 2026 as well, please.

Brad Peters (Minnesota Group President)

Thanks, Nate. Yeah, I would say in Minnesota, our pipeline is good, but it's not as robust as it has been in the past. That's probably because we're really being more selective around what we're trying to attract from a credit perspective. I think we can expect to continue to maintain the pace that we're at today.

Nathan Race (Managing Director and Senior Research Analyst)

Okay, it sounds like mid-single digits is doable going forward.

Brad Peters (Minnesota Group President)

I think so.

Nathan Race (Managing Director and Senior Research Analyst)

Okay, great. Jane, I think the $50 million municipal deposit that you flagged last quarter, it looked like that came out based on the end-of-period balances. Just curious, is the expectation that you guys can fund that mid-single digit growth outlook with deposit gathering from here and maybe a little bit as well from cash flow off the securities portfolio?

Jane Funk (CFO)

Yeah, that would be the objective. As we look at the cash flows off the investment portfolio and our opportunities for deposit gathering, that would be our objective. There may be a little bit of wholesale funding or broker deposits that we need to backfill for a short period of time, but we expect to be able to manage that cash flow.

Nathan Race (Managing Director and Senior Research Analyst)

Okay, great. Jane, it seems like you guys have still a decent amount of margin tailwinds at your back in terms of, I believe you have around $550 million of fixed-rate loans repricing over the next 12 months or so. If you could just update us on your deposit beta assumptions as we get additional, excuse me, Fed rate cuts going forward.

Jane Funk (CFO)

Yeah, on the loan side, we do still see a lot of repricing opportunities. In our fixed-rate loan portfolio, the weighted average rate of that portfolio is currently 4.86%. There's still plenty of room there. What we look at for maturities and repricing into 2026, we feel there's good opportunity there to continue to improve the yield on the loan portfolio. As far as deposit betas looking forward, I know that a year ago when the Fed did their rate changes, their rate declines, we were able to be pretty aggressive with our betas at that time on deposits. Should the Fed reduce rates another 25 basis points, 50 basis points this year and into next year, it's probably still questionable as to whether our betas can be as aggressive as they were a year ago. From a competitive standpoint, there's still a lot of pricing pressure on deposits.

I would expect it to maybe be a little bit lower than what we were able to do a year ago.

Nathan Race (Managing Director and Senior Research Analyst)

Okay. Jane, maybe one last one for you. I appreciate the commentary on the tax rate impacts in the third quarter. Any thoughts on the go forward tax rate?

Jane Funk (CFO)

I would say the go forward tax rate is probably similar to what we had the first half of the year. In the third quarter, it's just the anomaly.

Nathan Race (Managing Director and Senior Research Analyst)

Okay, gotcha. Is there any update in terms of capital management or deployment priorities? You built capital at a pretty nice clip this quarter, and I imagine that should continue to unfold. I am just curious if there's any kind of strategic priorities, whether it's additional location build-outs or adding team members to maybe accelerate the pace of organic growth. We'd just love to hear any updated thoughts on how you're thinking about excess capital management.

Jane Funk (CFO)

We don't have any specific plans necessarily, but I think being able to take advantage of good loan opportunities and organic growth is really what we're looking for.

Nathan Race (Managing Director and Senior Research Analyst)

Okay, great. I appreciate all the color and you guys taking the questions. Congrats on a great quarter.

Jane Funk (CFO)

Thank you.

Operator (participant)

Again, if you would like to ask a question, please press star, then the number one on your telephone keypad. Your next question comes from the line of David Welch, Private Investor. Your line is open.

David Welch (Private Investor and Principal)

Thank you. This is coming from a guy who grew up in Iowa and then has lived in Minnesota for 20 years. I know you're not a direct ag lender, but soybean prices, corn prices, I'm seeing an incredible amount of press about the distress in the farming community. Is that going to have a knock-on effect to West Bank, in your opinion?

Harlee Olafson (Chief Risk Officer)

Obviously, the dollars generated off of farm ground are going to be less. Our direct impact will have some impact on some of our customers, but most of our customers are not specific ag manufacturers. We have some customers that specifically provide pieces and parts to places like John Deere. Overall, we're a little bit insulated from that in our customer base.

David Welch (Private Investor and Principal)

Okay, that's kind of what I figured, but I thought I should ask. It's been quite a few years now, and it might be a little unfair for me to ask it this way, but what's the medium-term assessment of how the Minnesota growth venture has gone thus far?

Brad Peters (Minnesota Group President)

I think it's, I mean, we never put together a specific projection, but I think I can say with confidence we've exceeded expectations to this point. Each of the markets have contributed to the bottom line, and we continue to grow at a reasonable pace. I think at this point, company-wide, it accounts for about a third of our company. We're pleased.

David Welch (Private Investor and Principal)

Okay, thank you.

Operator (participant)

There are no further questions at this time. I'd like to turn the call back over to Jane Funk for any closing remarks.

Jane Funk (CFO)

All right. We just want to thank everybody for joining us today, and we appreciate your interest in our company. Have a good day. Thank you.

Operator (participant)

This concludes today's conference call. You may now disconnect.