West Bancorporation

Thanks for standing by. My name is Mondip and I will be your conference operator today. At this time, I would like to welcome everyone to the West Band Corporation, Inc. Q1 2024 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, press star one again. Thank you. I would now like to turn the conference over to Jane Funk, CFO. You may begin.

Thank you. Welcome everybody and thank you for joining us today on our earnings call. Today I've got Dave Nelson, our CEO, Harley Olson, Chief Risk Officer, Brad Winterbottom, bank president, and Brad Peters, our Minnesota group president today for the call and we'll be making comments. I'll start off by 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 disclosures in our 2024 first quarter earnings release for more information about risks and uncertainties, which may affect us. The information we will provide today is accurate as of March 31st, 2024, and we undertake no duty to update the information. And at this point, I'll turn it over to Dave for opening comments.

Thank you, Jane. Welcome everyone. Good afternoon and thank you for joining us. Also thank you for your interest in our company. Our quarter wind is expected actually a bit better than forecasted. Jane will speak more to this, but hopefully we have found the bottom in terms of our margin. Now Harley will speak in more detail to our credit quality, but it continues to be pristine with essentially no problem loans and no past due loans over 30 days at quarter end. Exciting news at West Bank is that we have just moved into our new main office headquarter facility and this has generated a lot of excitement and community attention. We completed a redevelopment for our new headquarters, turning a rather high profile blighted site into something very special. We've declared a regular quarterly dividend, 25 cents, payment date of May 22nd to shareholders of record as of May 8th. Those are the extent of my prepared comments. I'd like to turn the call over to Chief Risk Officer, Mr. Harley Olufsen. Thanks, Dave.

As Dave's earlier stated, credit quality is very strong at West Bank. Our watch list on our almost $3 billion portfolio is only $431,000. We have no past due loans at quarter end over 30 days. Quarterly, we stress test our portfolio and have seen improving trends in total loan to value and debt service coverage. We have looked closely at our office portfolio. The office portfolio totals about $180 million. The average loan to value is 68% and the debt service coverage of the non-owner occupied office properties is 1.41 to one. About half of our office portfolio consists of owner occupied properties. The remainder of our commercial real estate portfolio is strong and seasoned. We have stress tested commercial real estate loans that will be repricing in the next year. It appears that most will still have enough net operating income to cover the increased payments. With rising interest rates, there have not been a lot of significant new projects added to the portfolio. Our continuing focus is to provide the best service to our customers that have a comprehensive relationship with us. We are not providing financing to applicants that just want us to do a deal. Our bankers have been doing a good job capturing more of our customers' business. The economy in our markets remains strong. We keep looking for cracks and areas of concern. With having to increase our deposit rates to maintain our customer base, we keep prospecting those relationships that add to both sides of the balance sheet. With that, I will turn it over to our bank president, Brad Winterbottom.

Thank you. My comments will be brief. For the quarter ended March 31, our loan portfolio grew to 2.98 billion in outstandings or a .8% increase from year end 2023. Our growth in the portfolio was primarily driven by vertical construction draws on previously committed transactions. We have roughly 150 million in unfunded commitments on vertical construction draws that will take place over the next 12 months. And these loans are primarily variable rate priced. Deposit gathering remains a priority with our sales staff. Competition is stiff, but we are winning our fair share of the battles. What we're seeing is slightly reduction in existing customer's balances from a year ago, but we have picked that up with new deposit gathering. We remain confident in our abilities to create and maintain positive relationships with our customers and prospects that we are pursuing. With that, Mr. Peters,

it's all yours. Thanks, Brad. Good afternoon, everyone. I'm gonna provide a brief update on our progress in Minnesota. We continue to navigate through a challenging environment due to the rapid rise in interest rates. In spite of those challenges, we are growing new business and enhancing existing relationships. Our focus has been on C&I growth and deposit growth, and our bankers have been intentional in their calling efforts to draw new deposits in treasury management business. We are also focusing on our business owners and key executives to grow high value retail deposits. Mankato Market has now opened their new facility. As with our other locations, the new bank is designed for relationship building. Our new facilities have served as a great tool to attract new business and enhance existing relationships. The new facility in our Latana Market is under construction, and we anticipate we will be occupying the new bank in the fourth quarter of this year. Those are the end of my comments. I will now turn it back over to Jane.

Thanks, Brad. Net income for the quarter was 5.8 million, compared to 4.5 million in the fourth quarter of 2023 and 7.8 million in the first quarter of 2023. There was no provision for loan losses recorded in the first quarter, as compared to a small provision of 500,000 in the fourth quarter of 2023. As previously mentioned, our credit quality remains pristine. Net interest income was up 389,000 in the first quarter, compared to the fourth quarter of 2023, and our net interest margin increased one basis point quarter over quarter. Net interest margin has ranged from .87% to .91% for the last three quarters. Loan and investment cash flows and maturities continue to reprice at higher prevailing market rates. However, competition for deposits and extended inverted yield curve and higher for longer rates expectations continue to put upward pressure on deposit rates. Market rate volatility, our customers cashflow activities and competition for deposits continues to create uncertainty in any forecasting of net interest margin. With that, those are the end of our prepared remarks and we'll take any questions.

Thank you. We will now begin the question and answer session. If you've dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you'd like to withdraw your question, simply press star one again. If you're called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, press star one to join the queue. Your first question comes from the line of Andrew Leish with Piper Sandler. Please go ahead.

Hey, good afternoon, everyone. Jane, just on the margin, some great resiliency here and I know it's pretty tough to forecast, I've just given that you could see some upward pressure for longer environment. But with that said, I mean, how, it just seems like you've now found a place where it can finally level out, just given that there wasn't as much upward pressure on deposit cost as court seemed like it's exciting. You are getting better yields on new loans. So I guess, is this a good level to build off of or maybe it'd be steady forward?

I would say that the yield on the loan portfolio is improving at a little bit faster pace than what we had originally projected for this year. So that's a good thing. But at the same time, the deposit costs have also gone up, but they have slowed to a much more manageable pace. So, we really hate to give any forecast of margin. We do have some interest rate swaps that are gonna be repricing in second and third quarter that were at some pretty low rates. And so they'll reprice on the cost side to more market rates. So while we're seeing good movement in the right direction at this point in time, we know that there's gonna be other things repricing throughout the year that could continue to give us challenges. But like Dave said, we hope we've kind of reached the bottom.

Got it. That's really helpful commentary. Thanks so much. And I have in my notes here that you have about $800 million that's indexed to deposits. Is that correct, from that number?

Yeah, it's been running pretty steady at that level.

Okay, got it. And then, on the loan growth side, some good construction, sometimes like the pipeline there is solid. CRE may be a little more challenging, but you also have some good C&I growth. How's the pipeline there? And I guess where is that growth coming from?

I would say our... Our emphasis is more on deposit gathering. Yeah, we've picked up a few customers, but quite frankly, we're trying to get the right side of the balance sheet to grow a little bit more than the left side, if

that makes sense. Yeah, certainly. And I guess along those lines, how is that deposit pipeline here looking at, as you go throughout the first quarter, it can be pretty tough to grow commercial deposits? Same with April, but I'm not sure how high that's going to be on the funding side.

I think we have a handful of fairly significant relationships that we're chasing right now. And we think that we're going to be successful on a majority of those. So, you know, our fingers are crossed, but it's good.

Great. And then... Yeah. So, they're very helpful. And then, Jay, last question for you. I'm just on the expense base. Some good cost control here came in much lower than I was expecting. Is this a good run rate to build off of, or is there anything that might affect operating costs heading into this quarter that could push us higher?

Well, I think, you know, essentially, we know occupancy is going to go up with our addition of the new building. That's yet to be determined, but the cost of that, you know, we'll have some one-time expenses in the second quarter just for the logistics of the physical move and things like that. But other than that, we're not expecting any significant shifts on the expense side.

Great. Thank you for taking all the questions. That covers everything. I'll step back. Thank

you. Again, if you'd like to ask a question, press star then the number one on your telephone keypad. That does conclude our Q&A session. I will now turn the conference back over to Jane Funk for closing remarks.

Again, we just want to thank everybody for joining us on our call today. And we look forward to talking to you again next quarter. Thank you.

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