Hello. My name is Chris and I'll be your conference operator today. At this time, I'd like to welcome everyone to the West Bancorporation, Inc. Q3 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. Thank you. Jane Funk, Chief Financial Officer, you may begin.

All right, thank you. We just want to welcome everybody today to our earnings call and thank you for your interest in our company. I'm Jane Funk, the CFO. I have with me Dave Nelson, our CEO; Harlee Olafson, Chief Risk Officer; Brad Winterbottom, our Bank President; and Brad Peters, our Minnesota Group President. 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 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 2023 third quarter earnings release for more information about risks and uncertainties which may affect us. The information we will provide today is accurate as of September 30, 2023, and we undertake no duty to update the information. And now I'll turn it over to Dave Nelson, our CEO.

Thank you, Jane, and welcome everyone. Thank you for joining us today. We appreciate your interest in our Company. Our third quarter went as we expected, and you'll hear more from us about our credit quality, our growth, and our margin. Our credit quality remained incredibly strong with essentially no problem loans nor even any past due loans. In terms of growth, the Fed action appears to be working in terms of reducing demand for loan growth, but the communities we serve are doing fine. Year-to-date loan growth is about 4%, and we have a good loan and deposit pipeline. Our situation on margin is similar to others. We have been paying up on deposits and perhaps we are now at or near the peak. During 2020 and 2021, when our industry was flooded with liquidity from federal deficit spending, we used that liquidity to make loans and investments mostly based upon a five-year duration. Therefore, these assets will reprice to prevailing market rates during 2025 and 2026. We expect our temporary margin compression to continue into 2024 and improve with increasing velocity during 2025 and 2026. We have declared a dividend of $0.25 per share with the payment date of November 22, to shareholders of record as of November 8. I will now turn the call over to our Chief Risk Officer, Mr. Harlee Olafson, for his comments.

Thanks, Dave. As Dave mentioned earlier, credit quality is very strong at West Bank. Our watch list totals $526,000; it seems almost like we don't have one anymore. 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 total office portfolio is $185 million. The average loan to value is 69%, and the debt service coverage of the non-owner occupied office properties is 1.43. About half of our office portfolio consists of owner-occupied properties. The remainder of our commercial real estate portfolio is strong in season. With rising rates, there have not been many 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' total business. The economy and our markets remain surprisingly resilient. 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.

Thanks, Harlee. This has been stated, but I'll repeat it. For the first nine months of the year, our loan portfolio grew approximately 4% to $2.85 billion in outstandings. Then for the quarter, our loan portfolio grew $43 million or 1.7%. Our growth in the portfolio was partly due to a customer acquisition that we financed and vertical construction draws on previously committed transactions. We have slightly over $175 million in unfunded commitments on vertical construction draws that should take place over the next 12 to 18 months. The interest rate environment has slowed business activities in all markets. However, our pipeline is solid given the environment we are working and living in. The financials of our customers remain strong and we do not see any general weakening of our customer base. Deposit gathering and maintaining remain important to us, and we are working hard to do that. We remain confident in our abilities to create and maintain positive relationships with our customers and the prospects we are pursuing. With that, I will turn it over to Brad Peters.

Thanks, Brad. Good afternoon everyone. I'm going to 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. Despite those challenges, we are growing new business and enhancing existing relationships. Our focus has been on C&I growth, and we have been intentional in our calling efforts to draw new deposits and treasury management business. We are also growing high-value retail deposits by focusing on our business owners and their key employees. The Mankato Market will be opening their new building next month. We expect this new facility to be a great tool to continue to attract new relationships. The Owatonna Market has finalized plans for their new building, and construction will begin later this fall. Those are the end of my comments. I will now turn the call back over to Jane.

Thanks, Brad. I'll make just a few comments about the financials, and then we'll open it up for questions. Our net income was flat this quarter compared to the previous quarter. The third quarter income included a one-time swap fee of $431,000 recorded on a back-to-back swap transaction, and we also recorded a $200,000 provision for credit loss as a result of loan growth. Net interest income declined $700,000 in the third quarter compared to the second quarter, and our net interest margin declined from 2.02% in the second quarter to 1.91% in the third quarter. Along with the rest of the industry, we continue to see rate pressure on our deposit base, resulting in an increase in the cost of deposits. The increase in interest costs continues to outpace the repricing of our loan and securities portfolios. Our deposit balances were lower at September 30 compared to June 30, 2023, partially due to the seasonality of public fund deposits. In October, our deposits have increased $120 million. Our core deposit base remains stable. Those were the end of our prepared remarks, and we'll now open it up to questions.

Hey, good afternoon everyone. I just want to touch base on margin here. Certainly, it's trending lower, but the pace of compression slowed. Do you think that that slowing will continue here and recognizing that the assets won't really reprice until 2025, I guess where do you think the margin might look like a year from now?

Well, that's the million-dollar question I think for everybody. Margin, we will, we are expecting to continue to see some compression because we know across the industry, there will continue to be pressure on the cost of deposits. So even if the Fed doesn't change rates, costs will continue to increase, but at what pace has slowed down? So that's a good sign. At what point it stops and starts to reverse is yet to be seen. So we expect to see margin pressure for the rest of this year and early next year.

I would also add, Andrew, that I mentioned the $175 million in unfunded commitments on construction draws. The vast majority of those are floating rates, and so that actually will help the margin a little bit as those get advanced.

Got it. I guess turning towards loan growth, I mean, what's the timing on those draws? And if we look out maybe a year from now, is mid-single-digit growth appropriate? There are some good construction gains this quarter, but how do you think loan growth overall is going to trend for the next year?

We're not seeing as many deals now as we did in 2022 or 2021, but it's difficult to make predictions. We're aware of five deals totaling $22 million that will likely pay off by the end of the year, but the construction draws will primarily take 12 to 15 months, possibly 18, and are expected to be evenly distributed.

Got you. All right, that's helpful. Then I mean, Harlee, as you mentioned, your credit metrics have been excellent. You've been looking for where there might be cracks. Are you seeing anything out there, and the metrics are very strong?

We are closely monitoring areas like senior housing, particularly assisted living, due to the significant rise in costs. However, our exposure in this category is minimal. We have one deal that we were not particularly enthusiastic about, but it is expected to pay off next month. This remains a concern primarily because of the labor costs associated with it. In terms of our office portfolio, we do not own any metro downtown multi-tenant offices without strong long-term tenants. We continue to explore options and evaluate the portfolio, and since there aren't many new projects emerging, the existing ones continue to pay down, maintaining strong debt service coverage. Our commercial and industrial portfolio has performed well, with new business activity and acquisitions contributing positively, which is beneficial for both sides of the balance sheet. I wish I had a more definitive answer for you, but we are actively searching for insights, Andrew.

That's good and encouraging. I have a question about the run rate expenses. The operating costs have fluctuated over the last couple of quarters. What would be a reasonable level to forecast going forward?

I would say probably this quarter was a pretty stable quarter.

Got it. That covers all my questions. Thanks so much. I'll step back.

Thanks, Andrew.

The next question is from Paul Deshaw. Your line is open.

I have a question for Ms. Funk. What is the duration on the securities portfolio?

About six years.

Six, thank you.

It appears that we have no further questions. I'll turn it back over to Jane Funk for any closing remarks.

All right. We just want to thank everyone for joining us again today on this quarterly earnings call, and we look forward to next quarter and talking to you in January. Thank you.

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