West Bancorporation

Hello everyone and welcome to the West Bank Corporation Inc. Learning School. My name is Sam and I'll be coordinating your call today. If you would like to ask a question during the presentation, you may do so by pressing star four, lift bar one on your telephone keypad. I will now hand you over to your host, Jane Funk, CFO of West Bank Corporation to begin. Jane, please go ahead.

Thank you. We just want to thank everybody for joining us this afternoon. Hopefully everybody made the conversion from our Friday morning calls to our Thursday afternoon calls. Today I've got with me Dave Nelson, our CEO, Harley Ollison, our Chief Risk Officer, Brad Winterbottom, our Bank President, and Brad Peters, our Minnesota Region President. I'll start out with reading our fair disclosure statement. Comments made during this conference call may contain forward-looking statements within the meeting of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Any forward-looking statements 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 statements to reflect current events or circumstances after this call or to reflect the occurrence of unanticipated events. And now I'll turn it over to Dave Nelson to start our conference.

Thank you, Jane, and good afternoon, everyone. Thank you for joining us. We are providing expanded reporting in our printed materials this quarter, and we hope that you've noticed that, and we would welcome and appreciate any thoughts you might have about the format and the content. I have a few general comments, and then I will turn the call over to the others for more details. We had a very solid third quarter with strong performance metrics, including return on equity of 21% and return on assets of 1.32%. And based upon that performance, we declared a quarterly dividend of 25 cents per share payable on November 23rd to stockholders of record on November 9th, 2022. Despite everything that is occurring within our country and our industry and the economy in general, we are still experiencing good loan growth of .8% year over year as a third quarter end. And it was not that long ago our industry was literally swimming in liquidity, and now it has been disappearing. And in terms of credit quality, we literally do not have a single loan pass due 30 days in the entire bank now for the fifth consecutive quarter end. The series of Fed rate hikes has put a squeeze on our margin, and Jane will speak more to that topic. Now, these circumstances and outcomes are not necessarily unique to West Bank. However, what is unique to West Bank is we believe we are in a much superior position than others to enter an economic slowdown or a recession. We believe this protection goes beyond our underwriting in our relationship building, and Harley will speak more about that topic. Another outcome caused by recent events that is perhaps also somewhat unique to West Bank is that our long history of being a reliable dividend paying strong community bank makes our current dividend yield of .81% as a third quarter end, all the more attractive. With that, I'd like to turn the call over to our chief risk officer, Mr. Harley Olufsen.

Well, thank you, Dave. My presentation will include comments on our credit portfolio and specific information on our Eastern Iowa market. As Dave talked earlier, we have not had a 30-day past due loan at quarter end for over one year. This includes loans on accrual and on non-accrual. Speaking of loans on non-accrual, we have one loan of $328,000. This loan is secured by first mortgages on residential real estate worth in excess of $600,000. We expect the owners to have improved their credit scores in the not too distant future and be able to refinance the property on the secondary market. We have less than $100,000 in substandard loans. All are properly secured and have appropriate repayment plans. Our watch list sits at $57 million. Most of this is a hangover from COVID-19 slowdown in the hospitality field. I'm happy to report the properties that are now performing on a monthly basis better than they did pre-COVID. Once we receive year-end financials, we expect that all financial covenants on these properties will be met. Our major real estate concentrations by TAIF are multifamily, $455 million, warehouses, $267 million, office properties, $176 million, mixed-use properties, $100 million, hotels, $265 million, and medical office properties, $225 million. Of all these sectors, office properties would seem to be the weakest. Currently, the average loan to value on our office property is 70%, and our debt service coverage averages 1.3%. Most of these office properties have strong base tenants. Hotels during the pandemic were able to manage through with PPP help and some modest principal deferrals. Due to very little new product, they have bounced back and have been operating with results that exceed 2019 performance. The current portfolio has an average loan to value of 65% and debt service coverage of 144. Our multifamily, warehouse, and medical office properties all perform extremely well. Our C&I portfolio is growing and very strong, with customers still holding significant liquidity. In summary, our portfolio is all about doing business with the right customers. Their collective success leads to the strength of our portfolio as a whole. And before I turn it over to Brad Winterbottom, our bank president, I will mention the great job our Eastern Iowa team is doing. They have continued to gain market share and increase both their core deposits and loan balances. With that, I'll turn it over to Brad.

Thanks, Harley. For the quarter ended September 30th and excluding PPP loans, our loan portfolio grew just under 2% for the quarter, with -to-date growth just under 7.5%, or 2.6 billion outstanding. We're pleased with our activity for the quarter and -to-date. Our C&I category had a nice increase in the quarter due to a long-time significant customer making an acquisition, which we assisted with. And this was partially offset by some anticipated and unanticipated real estate asset sales by our customers during the quarter. One of our significant loans under construction has been completed, and that was a condominium project. And we're getting repaid as anticipated from the end-user purchases. We also expect to see some reduction in our home construction outstandings based upon our conversations with builders that we have relationships with, as they shrink their holdings and spec inventory. We have seen this occurring towards the end of the third quarter and expect this to continue into early next year. We are pleased with our pipeline, given the economic and interest rate environment we're currently experiencing. We still see many C&I customers sitting on cash, thus lines of credit usage continues to be minimal for the most part. We've taken the stance for the most part on any new construction projects that we are offering, floating rate credit, and then providing fixed rate once the project is completed. Some of our competitors have not followed this pricing strategy, and thus we've lost a few deals this past quarter, but that's okay. We'd like to see less volatility in the rate environment before we consider fixed rate pricing during construction projects. As always, our bankers are busy trying to grow both sides of the balance sheet. With that, I'll turn it over to Mr. Peters, and he'll talk about Minnesota.

Thanks, Brad. I'm gonna provide a brief update on our market expansion into Minnesota. Our team continues to make good progress in growing our business in each of our Minnesota regional centers. Each of our markets are seeing solid growth, and 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. Our new building in the St. Cloud Market opened during the last week of March. The Mankato Market has begun construction of a new facility with plans for completion mid-2023, and the Oetano Market is exploring potential sites for a new building. That is the end of my comments. I will now turn it over to Jane Funk.

Thanks, Brad. As Dave mentioned, we've expanded our disclosures in our press release and created a financial highlights document, both of which were filed in our 8K this morning and are available on our website. We did this with the intention of providing more easily accessible financial information for our analysts and investors, and we hope that you all have found that those enhancements useful and helpful. If you haven't seen those documents, please go out and see our SEC filings. A couple of comments about our financial highlights. We recorded no provision for loan losses this quarter. As Harley noted, credit quality remains extremely strong. As it relates to net interest margin, the loan yield increased to .34% for the third quarter compared to .95% for the second quarter. This was outpaced by the increasing cost of funding. Our net interest margin was .78% for the third quarter compared to .93% for the second quarter. The decline in deposit balances and our loan growth has put us in a borrowing position, resulting in an increase in broker deposits and overnight funding, which are more costly sources of funding. The decline in deposit balances is not a result of losing relationships. It's been driven by our customers putting their excess liquidity into business acquisitions and transactions and seeking higher yielding investment options. The pace of the Fed increases and changes in liquidity have also created an environment of significant deposit rate competition in our market, driving a higher beta in our deposit costs. With the expectation of another 75 basis point rate hike next week, we expect to continue to see pressure on the net interest margin through the rest of the year. Our efficiency ratio remains very low at 43% for the quarter, and our ROE is very strong at 21%. This is the end of our prepared comments, so now we'll open it up for questions.

Thank you. If you'd like to ask a question, please press star followed by one on your telephone keypad now. Our first question comes from Brendan Nozel from Piper Sandler. Brendan, your line is now open. Please go ahead.

Hey, good morning, folks. How are you doing? Hi, Brendan. How

are you?

I'm great. I'm great. Just want to start off by thanking you for the added information in the Breast Relief which was certainly helpful. Maybe to start off here on kind of the low growth side of things. It looks like it tempered from the second quarter pretty much as expected. So just, can you give a little bit more insight into how origination's trended during the quarter versus payoff trends? It sounds like you had some that you had expected, but then there were some unexpected ones as well. And then how did those two dynamics play out over the next quarter or so?

Well, we've had some customers sell assets and have primarily maybe the apartment in the apartment categories. They're looking for a profit and it wasn't distressed at all. I know our home building construction has seen a slight downtick in terms of outstandings. We would expect that given the rising rate environment. The CNI piece that we added was, there was more than just one, but we had a couple of very nice projects that we've been able to do. We've been chasing and we're able to capture those. I think as we look into the fourth quarter, I'm aware of two very large real estate projects that will pay off and a CNI transaction that will pay off during the quarter. So we'll have a little bit of headwind in the fourth quarter growth.

Okay, perfect. That's helpful. Given your visibility at this point, seeing those three deals that are probably gonna pay off, do you think you can still post some amount of loan growth in the fourth quarter or are those enough of a temporary headwind where it's more challenging to finish out the year?

I'm optimistic that we can have a little increase.

Okay, perfect. Maybe moving over to the next question. The funding side of the equation, it looks like deposit outflows had eased quite a bit from the first quarter pace, which is nice to see. Can you just give me some thoughts on what you're seeing in terms of customer deposit flows at this point and then just any thoughts on kind of the balance of how you plan to fund loan growth going forward between core deposit and then either broker or wholesale on that?

Yeah, as I had mentioned, the deposit outflows really doesn't stem from lots of business. It's just that our customer base has pretty sizable excess liquidity of their own and they're just utilizing it, either for business purposes, business transactions. Instead of borrowing money, they're using their own cash for transactions. We've got some customers that are a little more sensitive to finding higher yields and we've got very competitive rates in our market from other financial institutions and other investment options. I would say that that outflow has slowed down. I think people were reacting to probably about the second 75 basis point rate hike in the Fed rate. And so that's the pace at which the Fed is moving rates is just creating challenges, I think, for everybody to understand where money's moving and for what purpose. So we continue to manage that. We certainly have opportunities to bring in more deposit relationships and we're focusing on that. And we'll continue to use broker deposits and some overnight funding and when the rate environment makes sense, we may do some long-term funding, but we're just kind of waiting, not waiting, but just managing through the rate changes and we'll see what the Fed does over the next few months.

Yep, yep, fantastic. That all sounds good. Maybe turning to the net interest margin. I noted the expectation you're prepared to mark for some continued compression. It certainly makes sense to me given the dynamics. As I think about it, it seems like Fed funds on a quarterly average basis will be up about a similar amount to the fourth quarter as it was up in the third quarter. So it is kind of a best guess for a similar amount of margin pressure in the fourth versus the third.

Yeah, I think there's too many variables probably to really kind of estimate that. Like I said, we're significantly pursuing deposit relationships and so, depending on our ability to bring in deposits, what the Fed does, how our customer base reacts to the Fed movements, there's just a lot of variables there.

Yeah, that's fair. It's certainly a volatile environment. Okay, good. Maybe one on fee income. I noticed that swap fees were quite robust this quarter and I know they can be volatile and sporadic, but any thoughts on kind of how we should think about that revenue opportunity going forward?

We had a couple of transactions that created most of that number, maybe all of it. We are having conversations with existing customers about swap activity, but I would say it's too early to tell. Like those are kind of a one-off hit and miss and maybe they do it, maybe they don't. I would tell you though that we're not, we have not been in this environment providing any kind of like 10-year fixed rate type of transaction without some hedge with a swap. So if the customers are still looking for that, that's the path that we will take.

Yes, understood. Okay, good. Maybe on credit quality, I mean, things are certainly pristine by any number that I can look at from the outside here. I'm just curious if anecdotally there's anything at all to suggest that there's a turn in the macro environment coming for credit quality?

Not that we can tell. We've been through our portfolio and our stress tests and the type of properties that we have in our C&I customers. And we get very intense financial reporting either monthly or quarterly, and we do not see a, there's always, you can always find something I suppose, but right now there's nothing on the horizon that tells us that there's going to be a big crack in the credit quality.

Yes, yep. Okay, perfect. Well, thank you very much for taking the questions.

As a reminder, if you'd like to ask a question today, please press star followed by one on your telephone keypad down. And there are no further questions, so I'll hand back to the management team for any closing remarks.

We just want to thank everybody for joining us this afternoon, and we look forward to talking to you again at the end of the year. Thank you.

This concludes today's call. Thank you for joining. You may now disconnect.