West Bancorporation

Good afternoon and thank you for standing by. My name is John and I will be your conference operator today. At this time, I would like to welcome everyone to the West Bank Corp Inc. Second Quarter 2025 Earnings Conference Call. All lines have been placed and muted 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. To withdraw your question, simply press star one again. I would now like to turn the conference over to Jane Funk. Please, go ahead.

Thank you and good afternoon, everyone. I'm Jane Funk, the CFO at West Bank Corporation. I'd like to welcome the participants on our call today and thank you for joining us. With me today are Dave Nelson, our CEO, Harley Oleson, Chief Risk Officer, Brad Peters, Minnesota Group President, and Todd Mather, West Bank's Chief Credit Officer. I'll read our first order 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 2025 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 30, 2025, and we undertake no duty to update the information. With that, I'll turn the call over to Dave Nelson for his remarks.

Thank you, Jane. Good afternoon, everyone. Thank you for joining us, and thank you for your interest in our company. West Bank had another solid quarter, which was significantly better than the second quarter of last year. First half earnings this year are about 54% higher than last year's earnings. Our journey back to top performing metrics is continuing as forecasted. Our focus has been on relationship building and deposit growth. We still have a fair amount of asset repricing to benefit from this year and also during 2026, which will continue to improve our margin in earnings. We are gaining new relationships in all our markets and continue to have very strong asset quality. We have declared a $0.25 per share dividend payable August 20th to shareholders of record as of August 6th. Our stock is currently providing a yield in excess of 5%. Those are the end of my prepared remarks, but I will now turn the call over to our Chief Risk Officer, Mr. Harley Oleson.

Thank you, Dave. Credit quality continues to be very strong at West Bank. At quarter end, we had one small 30-day past due loan that is now current. We have a number of enviable zeros. We have zero other assets. We have zero other real estate. We have zero doubtful accounts. We have zero non-accruals, and we have zero substandard loans. Our watch list consists of four relationships. Three are trucking related, all are well secured and current on their payments. The other watch list credit is a small nonprofit that struggles with funding. There has not been a lot of new developments at our markets, so our commercial real estate portfolio continues to improve from both a loan to value and a debt service coverage perspective. Office property in our Des Moines market, like in many larger communities, is in a distressed situation. We are aware of numerous properties that have significant vacancy problems. Since there is more space available than there are tenants, it depresses the entire office market. A large percentage of our office property is owner-occupied. We have a handful of multi-tenant properties that we watch carefully. Currently, they are all performing well, but some have leases that will expire and their future health will depend on their keeping their tenants. Our average loan to value on non-owner occupied office property is 65% and the debt service coverage is 1.35 times. Having strong customers with liquidity, strong global cash flows and varied income sources has served us well. With our commitment to our underwriting disciplines, we expect our credit portfolio to remain very strong. Our six markets are all thriving, and our team of experienced bankers continue to prospect for strong, comprehensive relationships. At the end of all our prepared remarks, I am available for any questions. I will now turn it over to Todd Mather, our Chief Credit Officer and Business Banking Manager.

Thank you, Harley. For the quarter ended 6-30-25, our loan outstandings were down slightly at just under $3 billion. We experienced a few larger payoffs from asset sales and refinance activity. The majority of those assets were priced below current rate environment. We replaced those assets with quality new assets at better interest rates. Deposit gathering continues to be an emphasis, and we have been successful in attracting new depositors. During the quarter, deposit balances increased just over $67 million. We remain selected in obtaining new loan opportunities and those opportunities are less than in prior years. We are confident in our abilities to create and maintain positive relationships with our customers and prospects that we are pursuing in a highly competitive market. I will now turn it over to Brad Peters, our Minnesota Group President.

Thanks, Todd. Good afternoon, everyone. I'm going to provide a brief update on our Minnesota banks. Our clients remain cautious with the economic uncertainty in the marketplace. Our bankers have been diligent in staying close to our clients, and we have increased our frequency of calls to our customer base. We continue to target deposit-rich business banking opportunities. We have a disciplined calling approach that has enabled our team to be successful in attracting new business. Our seasoned group of bankers and our business banking focus set us apart from our competition. We are also targeting high-value retail deposits. Our bankers have been successful in winning the retail deposits of our business owners and key executives. We are also attracting new deposits from high-earning individuals in our communities. Each of our Minnesota regional centers have seen significant retail deposit growth. We do not have specific production goals for our bankers, but instead measure our bankers on the right activities that will drive results. Measuring activities requires our local leaders to be actively engaged with their teams with consistent inspection of calling efforts. This method has proven to be successful as we expand our market share in our communities. All of our building construction projects are now complete. We design each of our facilities 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 business based on strong relationships. Our team has embraced this and has 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 financial-related comments. As Todd mentioned, our loan balances decreased approximately $50 million in the second quarter as customers sold real estate assets or refinanced in the secondary market in the ordinary course of their businesses. We also saw a slight reduction in the utilization of commercial lines of credit. Core deposit balances increased approximately 195 million in the second quarter. An existing municipal customer raised funds through a bond offering for a construction project, and those funds are expected to be withdrawn over the next couple of years as the construction project progresses. That was the primary reason for the large increase in core deposits. Those deposits resulted in a reduction of brokered funding of approximately 127 million this quarter, along with an increase in our cash and short-term liquidity position. Net income was $8 million in the second quarter, compared to $7.8 million in the first quarter of 2025 and $5.2 million in the second quarter of 2024. Net income and net interest income continue to improve. As described earlier, credit quality remains very strong, so no provision for credit losses was recorded this quarter. and there were no significant one-time items in non-interest income or non-interest expense in the second quarter. The yield in the loan portfolio continues to improve as fixed-rate assets reprice at higher yields. The second quarter loan yield was 5.59% compared to the first quarter's 5.52%. The improvement in loan yield in the second quarter was partially offset by a four-basis point increase in the cost of deposits, We were fairly aggressive in lowering deposit rates last year when the Fed was lowering the federal funds rate. As the Fed has been holding rates since December, we do see some pockets of upward pricing pressure on deposits, resulting in that slight increase in the second quarter. Those are the completion of our remarks, and now we'll open it up for questions.

Ladies and gentlemen, we will now begin the question-and-answer session. If you have dialed in and would like to ask a question, as a reminder, that is to press star 1 on your telephone keypad. And if you would like to withdraw your question, simply press star 1 again. We will pause for a moment to compile the Q&A roster. Thank you. Your first question comes from the line of Nathan Grace with Piper Sandler. Please go ahead.

Hi, everyone. Good afternoon. Thanks for taking the questions. Hi, Nate. Question just maybe first on how you guys are seeing client sentiment these days and just how the pipeline is looking ahead into the back half of the year from a loan growth perspective. And I appreciate, you know, payoffs are still somewhat of a headwind, but just any thoughts on how you see loan growth turning in the back half of the year and kind of what you're hearing and seeing from commercial clients these days?

Well, I'll take that. This is Harley . The pipeline is pretty robust right now. There's a number of projects within the pipeline. We're holding a little bit strong on our pricing thought process, not taking on underpriced assets at this time, but I do believe that we will have many good opportunities this year to maintain and grow our loan portfolio.

Okay, great. Then maybe a question for Jane. You know, just curious how you're thinking about the margin trajectory in the back half of this year. Obviously, you know, deposit costs took up in the quarter. So just curious how you're thinking about the margin trajectory, you know, if the Fed remains on pause, and then maybe if we got one or two cuts as well in the back half of the year.

Yeah, we do see opportunity for some improvement in the margin in the second half of the year. We still have a lot of opportunity for asset repricing in the loan portfolio, so that will continue. And we would expect that, whether the Fed cuts rates or not. So the asset repricing, we believe, will be there as we're projecting. And then the deposit side – Like I said, we're seeing pressure on deposits and in certain pockets, so I would expect maybe deposit costs to be relatively kind of flat, maybe tick up a couple basis points. I don't know that we'll be able to lower much until the Fed does some sort of move.

Okay, great. And there's been some notable M&A relay disruption here, northern markets and around the Twin Cities and south of there. So I'm just curious kind of what the upside is to maybe hire some additional producers in those markets open to other offices or just kind of maybe what the opportunity set looks like with the existing teams in those geographies.

Yes, Nate, this is Brad Peters from Minnesota. There are opportunities in the marketplace. I think we have capacity in the markets that we serve to be able to take advantage of that. We already have to a certain degree, but I see continued opportunities in the future with, as you said, the M&A that's taking place and also the ongoing development I guess, opportunities by larger banks that have kind of abandoned the regional centers where we are located.

Okay, great. Good to hear. And then just going back to the balance sheet growth trajectory, Jane, I appreciate your comments that you had, you know, that municipal deposit flow in the quarter that helped drive the deposits up in the quarter. But it still seemed like you guys had pretty strong deposit growth notwithstanding that inflow. So just curious how you're thinking about deposit growth opportunities in the back half of the year as well based on kind of the pipeline to clients.

Yeah, I mean, I think that that's, you know, our pipeline is just as focused on deposit relationships as it is, you know, credit relationships. So, we continue to look for those strong customers in our regions, in our locations that, you know, can provide us to help build our strong balance sheets. So, certainly the focus is on growing deposits just as much as it is on the credit pipeline, and that's what our bankers are working every day on.

Okay, great. And then is this run rate that we saw on 2Q for expenses a pretty good figure to use in the back half of this year, or do you guys think some just general inflationary pressures that may drive it up slightly?

I would say the second quarter is probably a good indicator. I don't see any – significant items happening in the second half of the year.

Okay, great. I appreciate all the color. Thank you, everyone.

Thanks, Nate.

Again, as a reminder, if you have any questions, please press R1 on your telephone keypad. And it seems that we have no further questions for today. I would like to turn the conference back over to Jane Funk for any closing remarks.

All right, thank you. We just want to thank everyone for joining us today. We appreciate your interest in West Bank, and have a good day. Thank you.

Ladies and gentlemen, this concludes today's conference call. We thank you for your participation. You may now disconnect. Have a pleasant day, everyone.