West Bancorporation

Thank you for standing by. My name is Gail and I will be your conference operator today. At this time, I would like to welcome everyone to the West Bank Corporation Inc. Fourth Quarter 2024 Earnings Conference 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 would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. I would now like to turn the conference over to Jane Funk, Chief Financial Officer. You may begin.

Good afternoon. I'm Jane Funk, the CFO of West Bank Corporation, Inc., and I'd like to welcome the participants on the call today and thank you for joining us. With me today, I've got Dave Nelson, our CEO, Harley Olofsson, our Chief Risk Officer, and Brad Peters, our Minnesota Group President. Now I will 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 fourth quarter earnings release for more information about risks and uncertainties which may affect us. The information we will provide today is accurate as of December 31st, 2024, and we undertake no duty to update the information. And with that, I'll turn it over to Dave Nelson.

Thank you, Jane, and thank you everyone who has dialed in to join us. We appreciate your interest and support of our company. We had an excellent fourth quarter. From an earnings standpoint, it was our best quarter during the previous seven quarters. During 2022, we knew and forecasted that 2023 and 2024 were going to be challenging due to margin compression and they were. We also had forecasted that 2025 would be better and it will. We actually, we believe the 2025 improvement is already underway and reflected within our fourth quarter 2024 performance. We believe our forecasted 2025 improvement was accelerated by our tremendous deposit gathering success during 2024, which then allowed for the corresponding reduction in wholesale deposits. We will continue to benefit from further short-term rate reductions and significant asset repricing opportunities during 2025 and 2026. Our credit quality remains pristine and the economies of the communities in which we do business are strong and our loan and deposit pipelines remain solid. Based upon our fourth quarter performance, we have declared a 25-cent dividend to common shareholders of record as of February 5th and payable February 19th. Those are the extent of my prepared remarks, and I will now turn the call over to our Chief Risk Officer, Mr. Harley Olofsson.

Thank you, Dave. As Dave stated earlier, credit quality remains a strength at West Bank. Highlights include at quarter end, we had zero past dues over 30 days, and our watch list represents only 0.26% of total loans. Our $2.4 billion commercial real estate portfolio continues to perform very well. We have a small amount of multi-tenant office properties that are performing as expected with good long-term tenants. In our markets, office properties are dealing with significant vacancies. Our other types of commercial real estate, such as multifamily, warehouses, mixed use, and hotels are performing very well. Our $500 million CNI portfolio is also strong. We receive interim financials on most borrowers and are not aware of any significant deterioration in financial strength. Of course, we will begin receiving most year-end financials in the coming months. The uncommon strength of our loan portfolio is due to doing business with customers with proven track records. good balance sheets, and strong and diverse payment abilities. Our banks are located in thriving communities. From a lending perspective, half of our outstanding loans are originated in our Des Moines market, 27% in Minnesota locations, and 23% in Iowa City Coralville. Des Moines, St. Cloud, Mankato, and Owatonna have strong business climates and have diverse business. The Rochester economy is dependent on the health and growth of Mayo Clinic and all the services they require to support a significant portion of the city's total employment. Iowa City Coralville is dominated by the University of Iowa, and most of the business there goes to support a major university student and faculty population, along with a major medical facility. We have a seasoned team of bankers that continue to prospect for comprehensive banking relationships. This has been a focus of the group, and as you can see in our significant deposit growth, their efforts have been rewarded. They're succeeding in capturing new business relationships and expanding our market share with our existing customers. Interest rates will affect the level of new projects and expansions. I expect that we will continue to see moderate growth in 2025. I am available for any questions after our prepared remarks. I will now turn it over to Brad Peters, our Minnesota group president.

Thanks, Harley. Good afternoon, everyone. I'm going to provide a brief update on our progress in Minnesota. Our new credit opportunities have slowed somewhat and we are also very selective in where we are focusing our efforts. We continue to proactively call on CNI prospects, and many of those prospects have no credit needs, but our bankers are spending their time winning new relationships with core deposits. We are also working closely with our existing business banking client base to win the high-value retail deposits of business owners, key executives, and employees of the businesses we bank. We do not have specific production goals for our bankers, but instead measure our bankers on the right activities that will drive results. We have a seasoned group of bankers that have proven this strategy to be effective. Deposit growth has been strong in each of our Minnesota regional centers. Our superior service and high touch retail banking have driven the positive results. The final construction project in Owatonna is now complete. The new facility opened for business this week. This facility, like the others in Minnesota, was designed with well-appointed entertainment areas that allow our teams to host client and prospect events and quality small group meetings. These unique facilities align perfectly with our strategy of building our business based on strong relationships. Our team has embraced this and we have done an outstanding job of leveraging our buildings to grow our business. Those are the end of my comments. I will now turn the call back over to Jane.

Thanks, Brad. I'll just make a few comments on our financial performance. So net income was 7.1 million in the fourth quarter compared to 6 million in the third quarter of 2024 and 4.5 million in the fourth quarter of 2023. Net income was 24.1 million for both 2024 and 2023. We recorded a $1 million provision for credit losses in the fourth quarter of 2024. This provision was primarily due to an increase in certain qualitative factors in our methodology and was not the result of any specifically identified credit deterioration in the loan portfolio. In December, we sold approximately $12 million of investment securities and recorded a $1.2 million loss. Those funds will be reinvested in the loan portfolio and we expect the earn back period to be approximately two years. In the fourth quarter, we also recorded a $1.8 million income tax benefit from an energy related investment tax credit associated with the construction of our new headquarter building. Core deposit balances increased 15.8% in 2024 with an 8.3% increase in the fourth quarter. The core deposit growth is a mix of public funds, commercial, and retail activity reflecting our focused efforts on deposit relationships. Deposit growth facilitated a reduction in expensive wholesale funding of over $200 million in the fourth quarter of 2024, which has helped reduce our cost of funding. We have now had four consecutive quarters of increases in net interest income, and net interest margin increased seven basis points this quarter compared to third quarter. With the 100 basis point reduction in the Fed rates in September, we've been able to lower deposit rates in our highest costing sectors, resulting in noticeable improvements in our cost of funds and net interest margin. The impact of any future rate changes is dependent on multiple variables, including but not limited to the rate sensitivity of depositors, the mix of deposits, and the ongoing repricing opportunities from loan investments and deposit cash flows maturities. That completes the prepared comments, so now we will open it up for questions.

Thank you. The floor is now open for questions. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. If you are called upon to ask a 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 a question. Your first question comes from the line of Andrew Leash of Piper Sandler. Your line is open.

Hey, good afternoon, everyone. Just want to touch on the provision that you mentioned qualitative factors and commercial real estate. Would that be like the vacancy rate at other properties? I was curious what these qualitative factors might be.

It really was more of a recognition of as loans reprice higher and debt service coverage ratios maybe will decline a little bit. And the impact of that on kind of the economics of the property and the values of properties, it's really just kind of a broad base acknowledgement, but nothing necessarily specific to the portfolio.

Got it. Yeah, makes sense. And it sounds like loan pipelines are pretty solid here to start the year, I guess, by type. Is it construction, commercial real estate? Where are you seeing the most activity?

Most of the activity that we're seeing right now is CNI activity. We've had a business purchase by the group. We've had other opportunities that have been more in the relationship of CNI business. There isn't a huge pipeline of new commercial real estate projects that are on the docket right now. but it is a good pipeline.

That's great to hear about the CNI. On expenses, it looked like I think the third quarter might have been a little bit undersized, but as we look into 2025, is this a good jumping off point for cost, but recognizing there could be some seasonal upticks in the first quarter?

Yeah, I would say fourth quarter would have included probably some accrual adjustments as it relates to like incentive bonuses and some discretionary compensation pieces. And then also some true up of, I would say like depreciation costs with the new buildings that we've got coming online. So December was actually probably a little bit elevated.

Got it. Okay. That's helpful. And then on the non-interest income side, Trust services are up nicely. Was there any one-time benefit there? Or is this a new run rate going forward?

It's probably close to a new run rate. I mean, there's some one-time estate fees, but we seem to have reoccurring experiences with estate work. So it's an increase in value of assets and the fees related to that. So Nothing really large one-term that wouldn't reoccur.

Great. And then just lastly, cost of deposits down pretty nicely here. Full quarter effect of the November and December rate cuts. Do you think there's more improvement just to be had naturally on that front in the first quarter?

I think that's a fair assessment.

Got it. Maybe... that could help with the margin but not to the same pace as in the fourth quarter?

Well, part of that is going to be dependent again on, you know, we've still got a lot of assets repricing, so some of the timing of maturities and cash flows on the asset side will be, you know, as big of an impact as, you know, kind of the full repricing of the deposits for a full quarter.

Got it. Got it. That covers all my questions. Thanks so much for the time today.

Thanks, Andrew.

Again, if you have a question, please press star 1 on your telephone keypad. With no further questions, that concludes our Q&A session. I will now turn the conference back over to CFO Jane Funk for closing remarks.

Yeah. Again, we just want to thank everybody for your interest in our company, and thank you for joining us today. And we will talk to you again next quarter. Thank you.

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