West Bancorporation, Inc. (NASDAQ:WTBA) Q2 2023 Earnings Call July 27, 2023 3:00 PM ET

Company Participants

Jane M. Funk - Chief Financial Officer
David D. Nelson - Chief Executive Officer
Harlee N. Olafson - Chief Risk Officer
Brad L. Winterbottom - President
Brad P. Peters - Minnesota Group President

Conference Call Participants

Brendan Nosal - Piper Sandler
David Welch - River Oaks Capital

Hello, everyone, and welcome to the West Bancorporation, Inc. Second Quarter Earnings Call. My name is Emily, and I'll be your moderator for today's call. [Operator Instructions].

I will now turn the call over to our host, Jane Funk. Please go ahead.

Jane M. Funk

Thank you, and good afternoon, everybody. Welcome to the West Bancorporation, Inc. second quarter 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 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 in our 2023 second quarter earnings release for more information about risks and uncertainties which may affect us. The information we will provide today is accurate as of June 30, 2023, and we undertake no duty to update that information.

And we'll start off the call with, Dave Nelson.

David D. Nelson

Thank you, Jane. Welcome everyone and thank you for joining us. We appreciate your interest in Company. I just have a few brief summary statements, and then will 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 second quarter dividend of $0.25 per share payable, August 23, to shareholders of record as of August 9.

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

Harlee N. Olafson

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 one past-due 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 a strong customers and 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 L. Winterbottom

Good afternoon. For the first six months of the year, Dave mentioned, our loan portfolio did grow 2.3% to $2.8 billion in outstandings. 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 remained strong, and we do not see a general weakening of our customer base. Our bankers continue to do the things that they were hired to do and that's call on existing customers and prospects to build relationships.

Deposit gathering remains important to us and 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 Minnesota.

Brad P. Peters

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 region centers. Our relationship-based approach has enabled us to grow new business, and enhanced 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.

The Mankato market is looking forward to the completion of construction of their new facility, and we anticipate occupying the new building early in the fourth quarter. 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 M. Funk

Thanks Brad. I'll just make a few comments on the financials, and then we will open it up for questions.

So, the obvious driver in our change in our earnings and efficiency ratio is our net interest income. Net interest come declined for the quarter compared to first quarter by $1.3 million. We can continue to see very significant rate pressure on our deposit base, and with the inverted yield curve the increase in the interest cost continue to outpace the re-pricing 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 and increase in the FDIC's minimum assessment rate and occupancy costs associated with the opening of our new building with 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 $1 million of loans and our credit quality remains pristine with no glaring issues that we're seeing in the marketplace.

So, those are my comments, and now we’ll open it up for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Brendan Nosal with Piper Sandler. Please go ahead.

Brendan Nosal

Hi, good afternoon. Hi, good afternoon, everybody. Hope you're doing well. Maybe just to start-off here on credit quality. It’s simply fantastic for the quarter. I was just hoping you could offer a little more insight into what drove the improvement in the crew relationship that was upgraded during the quarter?

Harlee N. Olafson

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. We're performing, but we waited until we received their audited financials and verified the cash flow and liquidity of the borrower prior to updating, but that's when it was updated.

Brendan Nosal

Got it. Okay.

Harlee N. Olafson

Excuse me --

Brendan Nosal

Yes.

David D. Nelson

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

Brendan Nosal

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 a sense of where the margin might start the third quarter?

Jane M. Funk

Yes. Our June net interest margin was right around 2%.

Brendan Nosal

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

Jane M. Funk

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

Brendan Nosal

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

Brad P. Peters

Sure. Well, collectively, we're just under $700 million on the loan side. And deposits between the four markets are in the neighborhood of $350 million.

Brendan Nosal

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?

David D. Nelson

I would say that certainly it's slowed in all markets, all four of Minnesota and two Iowa markets. We do have activities. We've had a fair amount of payoffs too, entities selling their assets primarily on 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 we are visiting with those folks on a daily basis as well.

I do not anticipate significant growth like what you've seen in the last couple of years from us. 2% for the first six months, I would we're going to be in that range for the year, maybe another 2% --

Brendan Nosal

Okay. Yes. Okay. That's certainly helpful. And then do you happen to have what loan yields you're getting on new production in the second quarter? Roughly.

David D. Nelson

It's in the mid-7s, mid to low-7s right now, on new stuff. If fixed in a five year.

Brendan Nosal

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

Jane M. Funk

Yes, probably a good portion of that growth from the first quarter was from public funds deposits. So, they would have received tax payment monies in like April. So, we would generally see an uptick in the second quarter. As far as other core deposits, there's still a fair amount of volatility kind of from day-to-day as money is moving around.

So, I think on average it's relatively stable, but we do continue to see sellers go out for interest rates and treasuries or the 5% competing institutional specials that are out there, but we are also successful in bringing in new relationships and new customers and new dollars. So it's a little bit of feels like recycling right now.

Brendan Nosal

Yes, yes. Okay. All right. Good. And 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 M. Funk

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

Brendan Nosal

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

Jane M. Funk

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

Brendan Nosal

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

Jane M. Funk

Thanks, Brendan.

Operator

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

David Welch

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

David D. Nelson

All right. How many buildings? I would say that this would include hotels and restaurant chains that would multiple, I'm going to say in the -- probably in the seven to ten building range in various markets throughout the Midwest. So, they're sprinkled all over. So, 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

Okay.

David D. Nelson

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

David Welch

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

David D. Nelson

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

David Welch

Okay. I mean just to clarify on some of those, these are typically entities that have -- might have a common manager, that might have different ownership shares. So, they become a combinable entity, not from a legal lending perspective, but more from a how we look at them perspective.

David D. Nelson

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

Okay. All right. Thank you for the elaboration.

David D. Nelson

That extend beyond 30 years.

David Welch

Okay.

Operator

At this time, we have no further questions registered. [Operator Instructions] And with that, we have no further questions. So, I'll turn the call back to the management team for any further comments.

Jane M. Funk

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.

Operator

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