West Bancorporation

Hello and welcome to West Bank Corporation Inc's Q2 2024 earnings call. All participants are in a listen-only mode. After the speaker's remarks, we will have a question and answer session. You'll need to press star followed by the number one on your telephone keypad to ask a question. As a reminder, this conference is being recorded. I would now like to turn the call over to the company's Chief Financial Officer, Jane Funk. Please go ahead.

Thank you. And welcome, everybody. Thank you for joining us today on our second quarter earnings call. I've got with me today Dave Nelson, our CEO, Harley Olufsen, our chief risk officer, Brad Winterbottom, our bank president, and Brad Peters, our Minnesota group president. We'll start off the call today. I'll turn it over to Dave Nelson.

Thank you, Jane. And good afternoon, everyone.

Sorry. I got to go back. I got to read the fair value disclosure. Sorry about that. Got ahead of myself. I'll read the 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 2024 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 30th, 2024, and we undertake no duty to update the information. Now I'll turn it over to Dave Nelson.

Well, thank you, Jeanne. Good afternoon, everyone, and thank you for joining us. Also, thank you for your interest in our company. I have some general overview comments, and others will provide more detail. really went as we expected. Our loan growth was essentially flat during the quarter, and we had good deposit growth during the quarter, and also our yields are improving. Net interest income is increasing, and we believe our margin has stabilized. Our credit quality remains pristine, and we have no credit problems. We opened our new headquarters building in West Des Moines during April, and it feels like we're now really getting settled in. Yesterday, we declared a 25 cent per common share dividend payable August 21st to owners of record as of August 7th. Those are the extent of my prepared remarks, and I'd now like to turn the call over to our Chief Risk Officer, Mr. Harley Oleson.

Thanks, Dave. Commercial real estate is what everyone seems to want to talk about today when assessing the quality of the loan portfolio. We have no past dues in our commercial real estate portfolio. I attribute this to our strong seasoned customer base. We look to provide credit to borrowers that have significant net worth, liquidity, and multiple sources of income. We quarterly stress test our commercial real estate portfolio to see if we have trends that concern us. In our last stress test, we have looked at all of the different types of commercial real estate and have the lowest loan-to-value we have experienced and very strong and consistent debt service coverages. Our watch list on our total portfolio stands at 0.3 tenths of a percent. Here are some statistics on our commercial real estate portfolio by type. Multifamily, we have $621 million outstanding with an average loan to value of 69% and a debt service coverage of 1.35. Warehouse properties, we have $303 million outstanding with a loan to value of 67% and an average debt service coverage of 1.9. Our office properties total $188 million with an average loan-to-value of 67% and a debt service coverage of 1.38%. Mixed-use type properties stand at $103 million with a loan-to-value of 65% and a debt service coverage of 1.95%. Our hotel properties total $278 million with a loan to value of 64% and an average debt service coverage of 1.37. Our medical office properties total $178 million with an average loan to value of 58% and an average debt service coverage of 2.49. Our senior care facilities total 108 million with a 64% average loan to value and a debt service coverage average of 1.38. Office property has come under a great deal of scrutiny due to many cities having a downtown office and other retail crisis with the work from home leaving those downtown cores devastated. We have no significant downtown office multi-tenant properties in our portfolio. About 40% of our office properties are owner occupied. Another area that concerns me is senior care facilities due to the high cost of operations. Although we have seen this cost coming down since the end of the pandemic, we have passed on doing more of this type of lending, not due to the market need, but due to the high cost of operations. The economy in our regional markets has remained strong. Our bankers have been focusing on building both sides of our balance sheet and had numerous deposit successes. At the end of our prepared remarks, I will be available for questions. And with that, I will turn it over to our bank president, Brad Winterbottom. Thank you, Harley.

For the quarter ended June 30, 24, our loan portfolio was relatively flat when compared to the first quarter ended 3-31. Outstandings were just under $3 billion. For the first six months of 24, our loan portfolio grew $71 million, or 2.43%, driven primarily on vertical construction loan commitments. We have slightly over $123 million unfunded commitments on vertical construction draws that should occur over the next 12 months. Deposit gathering sales efforts continue to be an emphasis in a highly competitive environment in the markets we serve, and we're winning our fair share of battles. We have and continue to see good opportunities in markets we grow, we serve, excuse me, to grow our market share but remain selective in our loan opportunities. We remain confident in our abilities to create and maintain positive relationships with our customers and prospects that we're pursuing. With that, I'll turn it over to Mr. Peters.

Thanks, Brad. Good afternoon, everyone. I'm going to provide a brief update on our progress in Minnesota. We continue to build new business in each of our Minnesota regional centers. We're focused on C&I and high-value retail deposits. Our team is actively calling on and consistently winning new business. We continue to navigate through a challenging environment due to the rapid rise in interest rates. These challenges have created new opportunities for our team. The quality of our bankers and our relationship-based approach has set us apart from our competition. We have built facilities designed with relationship building in mind. We are leveraging these facilities to have high-quality one-on-one discussions that lead to opportunities to grow our business. The new facility in our Waitana market is under construction, and we anticipate we'll be occupying the new bank late in the fourth quarter of this year. Those are the end of my comments. I will now turn the call back over to Jane.

Thanks, Brad. Our net income this quarter was $5.2 million compared to 5.8 million in the first quarter of 2024 and 5.8 million in the second quarter of 23. There was no provision for credit losses recorded in the second quarter. As previously mentioned, our credit quality remains pristine. Our net interest margin has stabilized the last few quarters. Net interest income was up 480,000 in the second quarter compared to the first quarter of 2024. which is the second straight quarter of an increase in net interest income. Non-interest expenses have increased as expected with the occupancy of our new corporate headquarters. And as mentioned earlier, our loan growth was about 2.4%, primarily due to funding of construction loans. And our deposit balances at June 30th include a large deposit from a municipal customer that we expect to draw down over the next 12 to 18 months for a construction project. Excluding those funds in any broker deposit activity, the core deposits have increased 1.9% year to date. Those are the highlights I was going to cover. That's the end of our prepared comments, so now we'll open it for questions.

As a reminder, to ask a question, please press star followed by the number one on your telephone keypad. Our first question comes from Andrew Leisch from Piper Sandler. Please go ahead, your line is open.

Hey, good afternoon, everyone. Hi, Andrew. I just want to stick with the long growth here. It's on a pretty good pipeline of construction. How's that looking here for the third quarter? And are there any large payoffs that you see coming down the pipe?

We have a few. PAYOFFS SCHEDULED, PROBABLY IN MAYBE THE 20, 25 MILLION RANGE. THAT WILL GET REPLACED WITH FUNDED COMMITMENTS. YOU CAN GET SURPRISED WITH, HEY, WE SOLD THIS PROPERTY AND IT'S GOING TO CLOSE IN 60 DAYS. BUT THE ONES THAT WE ARE AWARE OF ARE ROUGHLY AROUND 25 MILLION. GOT IT. HAVE BEEN VERY SELECTIVE IN ADDING NEW PROJECTS based upon where we stand with CRE and our liquidity position.

Got it. That's very helpful. Then on the funding side, great to get that win from the municipality. It sounds like there are some other potential commercial customers. Where do those stand and any timing of some potential deposit trends, larger deposits?

Well, we have roughly 30 commercial bankers and about 15 principal bankers, and that's their job daily to go out and find those deposits. So we're chasing any and all. It's very competitive. We're seeing CDs that might be six months that are north of 5%, but we're competing. We're chasing the lower priced type deposits as well as non-interest bearing deposits. I'm not answering your question very well, but we're out hunting every day.

No, that's very helpful. Very good information. Thank you. Jane, on the expense front going forward, higher on the occupancy, like you mentioned, and as was expected, Is this the $13.2 million number a good run rate until maybe the next branch in office in Minnesota hits expenses?

It's probably pretty close. I think we would have had a full quarter of occupancy in the new headquarters in this quarter. We had some one-time costs in there with the move and stuff, but It's probably a reasonable assumption.

Got it. And then a little bit of an uptick once the new Minnesota office comes in there?

Yeah, that'll be probably January, December, January. And that's the smallest building that we've constructed. So that'll be a smaller scale.

Okay. Very helpful. And then, Harley, the increase in the watch list, any... Commentary behind that like what what drove that increase this quarter?

We just have a couple of commercial customers that had a weaker operating performance that They're well well capitalized well secured We expect we expect them to Meet their projections for this next year and and come through it and continue to be good commercial customers. And again, like I said, I almost get embarrassed talking about our watch list because it's so low at three-tenths of 1% of our total portfolio. We have a couple of non-accruals that have been with us for a while. that we expect will pay off in the next, well, I think they'll all be gone before the end of the year, but there's some closings that are scheduled from sale or refinance of those.

Got it. That's really helpful and some good trends to hear. And then I guess towards the end of my question, the deposit that came on looked like that was used to fund some pay-offs of some brokered funding. If you have handy, what was the rate that the deposits came on versus the brokers that were paid off to set spread?

They were very similar.

Okay.

Yeah.

There wasn't much of a difference. Okay. So it really just seemed like the margin stabilized here. Do you think that you need rate cuts for it to start moving higher?

We probably don't. I mean, we're seeing... Good improvement on the loan yields and, you know, our cost of deposits is really kind of stabilizing. Probably one of the challenges that we'll see in the net interest margin is we do have a couple of fixed rate interest rate swaps that will be maturing in the second half of the year. And, you know, a couple of those have rates below 2%. So we'll be, you know, refinancing, resetting rates on those. But I think we are seeing yield improvement on loans that's a little bit in excess of what we had expected.

Great. A little bit of margin expansion then. Get some rate cuts and help a little bit after that then. That sound reasonable? Good. We hope so. That covers all my questions. Thanks so much. I'll step back.

Thanks, Andrew. Once again, to ask a question, please press star followed by one on your telephone keypad. We have no further questions. I would like to turn the call back over to Jane Funk for any closing remarks.

All right. Thank you. We just want to thank everybody for joining us today, and we look forward to talking to you again next quarter. Thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect.