West Bancorporation

Ladies and gentlemen, thank you for standing by. Welcome to the West Bank Corporation Incorporated Earning School. My name is Irene and I will be coordinating this event. I would like to turn the conference over to our host, Jane Funk, Chief Financial Officer. Jane, please go ahead.

Thank you and good morning everybody. Thanks for joining us on the call this morning. Today on the call we've got myself, Dave Nelson, our CEO and President of WTBA. We've got Harley Olufsen, our Chief Risk Officer, Brad Winterbottom, our West Bank President, and Brad Peters, our Minnesota Region President. I'll start out reading our fair disclosure statement. Any 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. And with that, I'll turn the call over to Dave Nelson to get us started.

Thank you, Jane, and thank you everyone for joining us. We very much appreciate your interest in our company. We had another good quarter with strong performance metrics. I just have a few general comments, and then we'll turn the call over to others for more details. We have declared a 25-cent dividend to common stockholders payable August 24th to shareholders of record as of August 10th, 2022. While the increasing rate environment is putting pressure on our margin, our credit quality has continued to improve to the point where we almost have an absence of problem loans or even past due loans. And most of our communities in which we do business are all sitting on record building permits. The extent of the impact of our inflationary marketplace coupled with the corresponding increasing interest rates will have on delaying or perhaps stalling some of this activity remains unknown. However, in any event, we have a strong pipeline and pristine credit quality. With that, I'd like to turn the call over to our Chief Risk Officer, Mr. Harley Olufsen.

Well, thank you, Dave. Again, this is Harley Olufsen. I'm gonna make a few comments on our credit quality. First being, our credit quality, in our opinion, is in the best shape that it has ever been. We have no past due loans over 30 days. Our philosophy that there is not enough margin in banking to take on risky credit has served us well in the past and hopefully in the future. We don't feel we have concentrations in business that may suffer unduly in a recession. Certainly there may be some challenges, but we believe our strong customer base will manage through an economic downturn. Previously, we had one significant credit on non-accrual within our portfolio that has now been resolved. We had a $2.5 million specific loss reserve assigned to that credit, and the loss after payoff was less than $500,000. This freed up a little over $2 million in reserve. Before I turn the call over to Brad Winterbottom, I will comment on our Eastern Iowa performance. Loan growth in Eastern Iowa has continued to be strong at approximately 9% -to-date. Prospects for future business there are good, but we also see that there has been a slowdown in new projects there and in our other markets. Again, I will now turn the call over to our bank president, Brad Winterbottom. Thanks, Harley.

For the quarter, total loan growth is approximately 3%, which was an excellent quarter. Going forward, we have headwinds in front of us. We have a couple, we have three loans that are commercial construction projects that have matured and two have paid off as of today, with a third one expected to pay off through the remainder of this year. And those three total $100 million. We have some replacement for those, but in terms of the growth pattern, I think that that will probably slow some things up. We're seeing our homebuilding business, which we have a nice portfolio of, dealing with very reputable long-term homebuilding customers in central Iowa. They're slowing up, given the interest rate environment. And we're seeing some deals getting passed on, or we're in the planning stages we're working on. And due to the supply chain issues, uncertain construction costs, and the rising rate environment, some of those folks have just put that on hold, and it makes sense to them, it makes sense to us. We have a very long list of other things that we're working on to replace some of this volume. I can't tell you where that will all end up, but obviously with the rising rate environment, it's a lot harder to go refinance something today than it was maybe six months ago. We're in a deposit gathering mode right now. We've lost some deposits. Existing customers using their money to do other things. One was a significant acquisition that they funded out of cash. So we're gathering deposits. We're still making calls daily on customers and prospects, and I anticipate that will not change. Mr. Peters, you are next.

Thanks, Brad, good morning, everyone. I'm going to provide a brief update on our market expansion into Minnesota. Our team continues to make good progress in growing business in each of our Minnesota regional centers. Each of our markets are seeing solid growth. Our bankers are focused on building relationships and our activities have created ongoing new business opportunities. We continue to grow our business by adding new relationships focused on C&I. This focus has driven strong core deposit growth and treasury management business. We opened our new building in St. Cloud during the month of March, and the Mankato Market has begun construction of a new facility with plans for completion in the middle of next year. Our Oetano Market is in the process of exploring potential new sites for a building. That is the end of my comments. I will now turn it back over to Jane.

Thanks, Brad. I'll make just a couple of comments on the financial statements. On the income statement, we did record a negative provision this quarter, total negative provision for the year's $2.5 million. That's primarily driven by the impaired loan that we had that was our significant impaired loan that was settled in June. We had a specific reserve on that particular relationship of $2.5 million. Our ultimate charge off was $451,000. So that was the primary reason for the negative provisions in the second quarter. Our income tax, effective income tax rate was higher this quarter. For the Iowa bank franchise tax rates, there was a change in those rates that were enacted in June, and that resulted in us remeasuring our deferred tax assets as a result of those changes in tax rates, and resulted in an additional tax expense of 671,000 in June. So that's a one-time event, a one-time remeasurement of the deferred tax assets. And the significance of the amount is really driven by the large deferred tax asset on the investment portfolio. From a margin standpoint, our margin for the quarter was 293 compared to 299 last year. In -to-date, we are at 289 compared to 308. The 2021 numbers have more of an impact from the PPP loans. So when we look at the decline in margin, part of that is driven by fewer PPP fees recognized in 2022, and then also just recognition of the rate environment that we're in, the pressure on the deposit side for pricing as the market rates increase, and then continued, really continued pressure also on the loan side in our markets. We're still seeing a fairly high level of competition and pricing competition on loans. We did complete our sub-debt issuance in June, around June 15th, where we issued $60 million sub-debt at the holding company level. The net proceeds of that was injected into West Bank as capital. Brad had mentioned our decline in deposits, primarily driven by existing customers using some of their liquidity to complete business transactions. So rather than borrowing for those transactions, they're using their cash. And then also some accounts that were a little bit more sensitive to market rates and moved some money into treasuries. That accounted for the vast majority of our shift in deposits in the second quarter. That's all the comments that I have on the financial statements, and I think we will open it up for questions at this time.

Thank you. Ladies and gentlemen, we will now begin our question and answer session. To ask a question, please press star, then one on your telephone keypad now. To withdraw your question, please press star, then two. If you are using a speakerphone, please pick up your handset before pressing the keys. Our first question comes from Brandon Nozel from Piper Sandler. Brandon, your line is over. It's open.

Hey, good morning, folks. How are you?

Good

morning, Brandon. Good morning. I guess first, congratulations on the credit cleanup in this quarter. We're certainly nice and safe. Maybe to start off on the growth side of things, based on your prepared comments, definitely some competing factors with strong pipelines, the higher anticipated payoffs as we move through the year of that 100 million. Can you help me just kind of tie that together of what you're expecting for loan growth through the balance of the year?

That's really kind of hard to say, but I'll give it a shot. We have picked up a couple of other nice construction projects and large ones. So that's going to replace the items that I talked about in terms of the payoff that happened in the month of July. And another one that is a condo project that will get paid off as those units are sold. And those are all scheduled to be closed. The vast majority of those by the end of this year. So I think we have some construction projects that are right behind the ones that are paying off. So we should catch that up, but that'll probably take maybe a year to do that. But in the meantime, we're working on, literally I got a list here of our weekly pipeline report, things that we're working on. And there's probably over 40 names that we're chasing that we're having significant conversations with. So I would not anticipate a double digit loan growth by the end of the year, but that's just my opinion. And I have nothing in front of me that says that, we'll have that or don't have that. I don't know if that helps or.

Yeah, it certainly does. Thank you. So you're saying you don't think that you'll be able to double digits and that's for the full year, correct?

That's for the full year based on what I know today.

Perfect, perfect, that's helpful. All right, good. Maybe moving on to the funding side here. Kind of I get the deposit dynamics you guys highlighted during the prepared remarks and hear you loud and clear that you're in deposit gathering mode. But just kind of help me understand the potential for additional deposit outflows as you look at things today. Will that pressure wane or do you think that that dynamic will continue as rates move higher?

I think what we saw in the second quarter was a little bit, it was kind of a timing thing. That's when the Fed started moving rates. So we had some people that moved kind of quickly to alternative investments. I haven't seen that the last few months. That would have been early in the second quarter. And then certainly the significant customer that had the significant transaction and using cash for that, good for them for having the ability to do that. It's just, it's part of our deposit management process to manage those flows. I'm not seeing at this point in time any other large things like that happening. But we certainly know that the Fed just moved another 75 basis points. They're expected to maybe move another 100 basis points this year. And that's certainly, customers are certainly monitoring that as closely as we are. So it's hard to predict what the flows are gonna do, but what's happened in the last couple of months has been pretty stable.

Okay, fantastic. That's a couple of color. Let's see, maybe turning to deposit pricing. So interest bearing deposit costs throughout the 18 basis points, quarter over quarter. That kind of feels like it's a data of 25 to 30% so far, versus what Fed funds did this quarter. Can you update us on your deposit data assumptions through this cycle? And then what you're seeing on kind of deposit pricing from the past couple of weeks?

Well, I think on deposit pricing, what you just mentioned for betas is, our betas might be a little bit higher than the industry in general, but certainly that's an ongoing management process for us in this environment of regular volatility and communication with our customers and with our clients. And what they're seeing in alternatives for their funds. And so I think the betas that you just mentioned are probably, we'll continue to see those betas throughout the year, I think.

Okay, good. Turning to the margin this quarter, I guess once you strip out PPP, the result was quite nice actually. And it looks like kind of remixing of the earning asset base really drove a lot of expansion, more loans and less cash and security. So I'm curious if there's any more remixing of the asset base that you intend to do at this point?

Not, no, nothing specific.

Okay, all right, good. And then maybe kind of your thoughts on the margin outlook as we move through the balance of the year in light of what the Fed has and more likely continue with short-term rates?

Yeah, the margin's really gonna be a function of managing the deposit betas, the deposit volumes that we can bring in, a function of the local market competition and the local competition on the loan side also, not just the deposit side. So I think we're a little bit more liability-sensitive, so we're still expecting to see some pressure on margin. We issued sub debt in middle of June, and so that pricing really isn't reflective in our margin yet, so it'll just be a factor of how we manage through loan generation and managing deposit betas.

Yeah, understood, okay. Let's see, maybe on expenses, I guess core expenses are up about 5.5, 6% for the quarter to 11.3 million. Is that a run rate that you feel pretty good about for the remainder of the year, or is there the potential for some more upward pressure?

I would think the rest of the year would be pretty similar.

Okay, perfect. Maybe finally on capital ratios, so gap capital ratios like many other banks were impacted again by AOCI, but the red ratios are still quite healthy. And just any updated thoughts on kind of how you use the discrepancy with a thinner TCE ratio today, but still strong red ratios?

Yeah, our gap capital is right now, the biggest impact on that is the investment portfolio and the fair value adjustment on the investment portfolio. So that'll vary among institutions depending on whether they've got held to maturity securities, what their level available for sale is. So the comparability to other institutions gets a little bit clouded from stuff like that. But we continue to watch it, so we don't have any specific actions that we plan at this time to change our strategy.

Yeah, yeah, okay, perfect. One final one for me before I step back here, just on the tax rate, I know that there was the one-time expenses quarter related to the Iowa tax law change. Outside of the one-time expense, will there be any go-forward ramification on your effective tax rate?

Not that I'm aware of at this time.

Okay, all right, perfect. All right, well, thank you so much for taking my question.

Thanks, Brandon.

Thank you. Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. Ladies and gentlemen, it seems that we currently have no further questions. Therefore, I would like to hand back to Jane Funk for any closing remarks. Jane, over to you.

Yeah, thank you. Once again, we just wanna thank everybody for joining us and having an interest in our company this morning. And we'll talk to you all again next quarter. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for being with us today. Have a lovely day ahead. You may disconnect your lines now.