West Bancorporation

Good day and welcome to the West Bank Corporation quarterly earnings call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Doug Gulling, Chief Financial Officer. Please go ahead.

Doug Gulling Hey, thank you, Matt. Good morning, everyone. Thank you for joining us. On the call today from West Bank Corporation, we have Dave Nelson, our Chief Executive Officer, Harley Olofsson, Chief Risk Officer, Jane Funk, Chief Accounting Officer, Brad Winterbottom, West Bank President, and Brad Peters, our Minnesota Group President. And we'll begin with our fair disclosure statement. Comments made during this conference call may contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any forward-looking statement made by us during this call is based only on information currently available to us and speaks only as of today's date. The company undertakes no obligation to revise or update such statements to reflect current events or circumstances after this call or to reflect the occurrence of unanticipated events. With that, Dave Nelson will start us off.

Thank you, Doug, and good morning, everyone. Thank you for joining us and for your interest and support of our company. Well, everyone is back to work at West Bank. All COVID loan modifications have expired and our bank is operating under normal non-pandemic protocols. West Bank had another record quarter. Our loan growth net of PPP during the first six months or year to date was 6%, and we have a good pipeline. So based on this performance, we have declared a 24-cent second quarter dividend, which will be payable August 25th to shareholders of record as of August 11th of 2021. With that, I'll turn the call over to Harley Olofsson, our Chief Risk Officer. Thank you, Dave, and good morning to everyone.

I will address credit issues first. Overall, credit quality at West Bank is very good. At the end of the quarter, we had only one loan passed due over 30 days in the amount of $85,000. This loan is a home that will be paid off in August. Our Texas ratio dropped from 9.38% to 5.31%. Our one significant non-accrual loan has sold one of their properties, which is expected to close on September 1, 2021, and will decrease our non-accrual by over $5 million. Other properties are also in play. One has a preliminary MOU that would provide a sale of $10 million. We believe the specific provision of $3 million that we have on this one credit is more than adequate. We have one significant credit on our watch list that was severely impacted by the pandemic. I'm pleased to say that they are recovering nicely and are positively cash flowing. We will wait to see sustained performance before we upgrade. All COVID modifications have expired and all customers are back to full payments as of June. PPP loans continue to pay off. We're getting regular reductions on that it seems like on a daily basis now. Credit trends are good and businesses have significant liquidity. I know that Brad Winterbottom and Brad Peters will discuss markets in Minnesota and Central Iowa. But I would add that our eastern Iowa market is doing very well and has significant pipeline. With that, I will turn this over to Brad Winterbottom, our president.

Good morning, everyone. Dave mentioned a 6% loan growth year to date. We had 3% the first quarter, 3% growth in the second quarter, so we're up $125 million in loans. That growth is really spread across all of our markets. There has been good demand in all markets, and our pipeline remains very strong. And again, when I look at the pipeline, There's a lot of good names in all of our markets that we are chasing. Deposits are up also $125 million for the first six months. We're gathering deposits. Harley mentioned the lack of past dues. Our customers seem to be doing very well. There is demand out there. It's tough. There are very aggressive interest rates from our competitors. We're holding our own, and with that, I will pass it over to Brad Peters, and he can talk about Minnesota.

Thanks, Brad. Good morning, everyone. I'm going to provide a brief update on our progress in Minnesota. Our team continues to make good progress in building our presence in each of our Minnesota regional centers. Our calling activities continue to focus on CNI, and our pipelines remain robust. Loan outstandings in our four Minnesota markets have grown to nearly 560 million, and our CNI focus has driven strong core deposit growth and treasury management business. We continue to make progress on our new building in St. Cloud. We're anticipating to open that new facility late this year. The Mankato market is scheduled to close on a building site in mid-August, and we're expecting to begin construction later in the fall. That is the end of my comments. I will now turn it over to Jane Funk.

Yeah, thanks, Brad. I'm just going to give a little information on the PPP loan activity and the impact on net interest income. So for the second quarter, interest income on the PPP loan portfolio was $1,387,000 year to date. Our total PPP income was $4,229,000. The acceleration of fees in the second quarter was around $700,000 for that quarter. Year to date acceleration is about $2,700,000. Our balances on PPP loans at June 30th were $85 million. We had unamortized fees remaining on that $85 million of $3 million. Most of that, the vast majority of that is in the second round of PPP. And with that, I'll turn it over to Doug.

Okay, thanks, Jane. I just have a couple of comments related to provision and margin. On the provision, as you know, we took a negative $2 million provision in the second quarter, and I would say that that was primarily due to the adjustment of some qualitative factors. We dropped our qualitative factor related to the overall economy by five basis points due to what we perceive to be improvement. that factor is still well above the pre-pandemic factor that we had been using. And we also made a small adjustment in a qualitative factor just related to our CRE portfolio due to the improvement there. And as far as the margin is concerned, you know, as we look ahead, we would say that we expect the margin to be under somewhat pressure due to the fact that we have little if any repricing power on the deposit and liability side. Any loan payment, loan payoff, any investment maturity or pay down on mortgage backs generally gets renewed at a lower rate. Now, offsetting that and what will be a positive will be as we continue to decrease the amount of Fed funds and put that money into the investment portfolio, that will be an offsetting positive. But overall, it will probably be a little bit of pressure on the margin. And with that, we would like to entertain any questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on a touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. And our first question will come from Brendan Nossel with Piper Sandler. Please go ahead.

Hey, good morning, everybody. How are you? Good.

Good morning, Brendan.

Maybe to start off here on the growth side of things, I mean, obviously another quarter of very strong results and you folks have managed to kind of push through the general lending slowdown that has plagued a lot of other small banks over the past year. I mean, it sounds like pipelines remain quite strong and you're still getting in front of good opportunities. So I guess my question is, You know, if you've been doing kind of, you know, 6% growth year-to-date, does that sound like a reasonable pace going forward, kind of that 10% to 12% annualized?

Yeah, I would say that that's a good assumption based upon what we're looking at today.

Yep. All right. Fantastic. Good. Then maybe turning to the expense side of things, I'm just kind of curious if you can offer a little bit of color on the expense outlook and where you might see opportunities over the next year or so just to kind of keep an eye on the overall cost base.

Well, we wouldn't expect any wild fluctuations in our expenses. You know, this year the FDIC insurance premiums up some because our deposits are up quite a bit. and our asset size. In the compensation area, the price of our stock at the time that RSU grants are made influences that. But beyond that, we would expect our expenses to remain pretty well under control and continue to have a very favorable efficiency ratio.

All right, that's helpful, Collar.

Now, we are, and I would add, Brendan, we've added a couple of bankers in our markets, but, you know, the expectation is that they will more than pay for themselves.

Yeah, of course, of course. Okay, excellent. Okay. You folks mentioned one of the positive offsets on potential margin pressure is your ability to invest Fed funds into higher-yielding securities. I'm just kind of wondering, you know, how much in terms of balances do you think you'll be able to put to work and kind of what do those rates look like today for you?

Well, you know, we have roughly $250 million in Fed funds. We don't have a real specific target, but I would expect that we could put another $100 million to $150 million to work over the next few months. I mean, we're doing a somewhat gradual transfer of that money. I think we did $60 million in May and another $60 million in June. We did a little bit in July. probably ramp that up somewhat in August and September, but as far as the reinvestment rates, they aren't pretty. We're staying relatively short on those purchases, and if we can get above 1%, we feel pretty good.

Okay, excellent. Let's see. Just kind of trying to think about... the kind of adequate reserve levels as the overall economy improves. I mean, this quarter's negative provision released more reserves than I was perhaps anticipating, but you still have a much higher level in the overall allowance than you did entering pre-COVID. As you noted, just kind of wondering your thoughts on the glide path for the reserve ratio, where that might settle, and then whether getting there comes in the form of loan growth or outright reserve releases.

Yeah, you know, we don't have a target ratio. I mean, the ratio is the result of our analysis every quarter. And, you know, the factors that go into that are what you would expect. Loan growth, the change in the watch list and the direction of that change, and then an overall evaluation of our various qualitative factors. So, you know, we don't have a target ratio. We let the ratio fall where it may after we evaluate all those other pieces.

Okay. All right. That's totally fair. Maybe last one for me before I step back. there was some nice improvement in total criticized assets this quarter, but they're still trending above kind of where they were at this point last year. So I'm just kind of curious for how you view the timing and then the drivers of further improvement to kind of work through that remaining bit of credit noise.

This is Harley. I'll... Obviously we had a increase in watch list and that was really due to one specific customer and that customer is showing improvement but we would look to see sustained improvement in cash flow over a period of time before we would upgrade. Our risk of loss is really minimal there so it's not It isn't that sort of situation. It's really a situation of recovering from pandemic type of issues in regard to not being open and then wrapping the business back up. Even though it's higher than what it has been, I would also comment that the overall watch list and all categories within it are less than 5% of total loans, which is, in historical perspective, still very low.

Yeah, of course, of course. All right, excellent. Thank you for taking my questions, everybody.

Yeah, thanks, Brendan.

Again, if you have a question, please press star then 1. As there are no more questions, this concludes our question and answer session. I would like to turn the conference back over to Doug Gulling for any closing remarks.

Well, we'd just like to thank you for joining us this morning, and again, we appreciate your interest in our company. So, thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.