Good afternoon, and welcome to West Bancorporation Inc.'s Fourth Quarter 2023 Earnings Call. Please note that this call is being recorded. All participants are now in listen-only mode. After the speakers’ remarks, there will be a question-and-answer session. Thank you. I will now turn the call over to Jane Funk, CFO. Please go ahead.

Thank you, and welcome, everybody. Thank you for joining us today. On the call today, we'll have myself; Dave Nelson, our CEO; Harlee Olafson, Chief Risk Officer; Brad Winterbottom, our Bank President; and Brad Peters, our Minnesota Group President. I'll start the call with our earnings call forward-looking statements. 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 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 2023 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 31, 2023, 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 for joining us this morning, and thank you for your continued interest and support of our company. Our quarter went as expected. During the quarter, we had a provision and an intentional loss trade that Jane will provide details on both of those. In terms of margin compression, no Fed rate hike during the fourth quarter was welcome and future rate cuts would be even more helpful. Our credit quality remains pristine. We ended the quarter and the year with no 30-day past due loans and essentially no credit problems. Our Board of Directors approved a $0.25 per share regular quarterly dividend, payable Wednesday, February 21 to shareholders of record as of Wednesday, February 7. Those are the extent of my prepared remarks. I would now like to turn the call over to our Chief Risk Officer, Mr. Harlee Olafson.

Thank you, Dave. And as he stated, our credit quality remains extremely strong. Our watch list is only $440,000. And as said before, we have no past due loans at quarter end over 30 days. We do stress test our portfolio each quarter and have seen improving trends in total loan to value and in debt service coverage, just for some percentages of the portfolio makeup in the commercial real estate area. 32% of our portfolio is multifamily, 18% is warehouse, 10% is office, which is approximately 50% owner-occupied, 7% in mixed-use properties, 15% in hotels, 11% in medical office properties, and 7% in senior housing assisted living type properties. Office properties in downtown locations have the most pressure on values due to vacancies. We have minimal exposure to the type of property. Assisted living and long-term care facilities are also under pressure due to the high cost of staffing those facilities, and we have a limited amount of that also. Our focus is to provide great service to our customers that have comprehensive relationships with us. We're not looking for applicants that just want to do a deal. Our bankers have been doing a good job capturing more of our customers' total business. The economy in our markets remains strong, and 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. And with that, I will turn it over to our Bank President, Brad Winterbottom.

Good afternoon. For the year ended 2023, our loan portfolio grew just over 6.7% and $2.93 billion in outstandings. And for the quarter ended 12/31/23, our loan portfolio grew $78 million or 2.7%. Our growth in the portfolio was in part due to some asset acquisition funding and vertical construction draws on previously committed transactions. We have slightly over $190 million in unfunded commitments on vertical construction draws that should take place over the next 12 months to 18 months. Deposit gathering sales efforts are an emphasis in a very highly competitive environment in the markets we serve. We're winning our fair share battles in these. Our pipeline is good. Given the interest rate environment we're living in, we have and continue to see good opportunities in all markets we serve to grow our market share, and we remain confident in our abilities to create and maintain positive relationships with our customers and the prospects that we are pursuing. With that, I'll turn it over to Brad Peters, our Minnesota President.

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. In spite of 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 a new deposit and treasury management business. We are also growing our high-value retail deposits by focusing on our business owners and their key employees. The Mankato market has now opened their new facility. This has been a great tool to attract new business and high-value personal deposit relationships. Our Owatonna market has finalized plans for the new building, and construction will begin later this spring. Those are the end of my comments. I will now turn it back over to Jane.

Thanks, Brad. Just a few comments on our financials, and then we'll open it up for questions. So our earnings were $4.5 million in the fourth quarter compared to $5.9 million in the third quarter. The fourth quarter income included a $431,000 loss on the sale of investment securities. The securities transaction provided approximately $11 million of proceeds that were reinvested in the loan portfolio, and the earn-back period on that loss transaction is estimated to be about one year. We also recorded a $500,000 provision for credit losses in the fourth quarter as a result of loan growth and growth in unfunded commitments. Net interest income was relatively flat, with a small decline of $273,000 in the fourth quarter compared to the third quarter, and our net interest margin declined just 4 basis points quarter-over-quarter. The net interest margin decline has slowed significantly since earlier in the year, and for each of the three months in the fourth quarter, it was relatively stable. However, due to market rate volatility, our customers' cash flow activities, and competition for deposits, any forecasting net interest margin in the near term remains uncertain. Our 2023 earnings were $24.1 million, with the decline from the prior year primarily the result of the decline in net interest income. Our net interest margin declined from 2.76% in 2022 and to 2.01% in 2023. Year-over-year increases in non-interest expenses were primarily due to market and inflationary related increases in compensation costs, occupancy costs of our new building in St. Cloud, Minnesota, and increases in the FDIC insurance assessment rate. Those are the end of the prepared comments, and we'll open it up for questions.

Thank you. Your first question comes from Andrew Liesch with Piper Sandler. Please go ahead.

Hey. Good afternoon, everyone. Thanks for taking the questions. Just sticking with the margin here. Obviously, the pace has slowed quite a bit. So do you think we're nearing a bottom as you look out to the best that you can forecast it?

Yeah. So the monthly margin has been pretty stable during the fourth quarter. I think what will dictate that here in the next three months to six months will be really kind of deposit activity flows of our current depositors and just how quickly the loan portfolio reprices, which at this point is a little bit slower than what we would like it to be. But the cost side, the cost of funding side is really what's going to drive the margin. So changes in mix and things like that will influence that significantly.

Got it. The loan growth here was pretty strong. Do you have the average of what the new loans were added at during the quarter?

Great.

Brad?

Most of our construction loans, virtually all of our construction loans that we added would be on a floating rate basis off of prime. Some of the asset funding that we did would be in the mid to high 7s.

That’s helpful. The margins have been under pressure with rising rates. If we see a series of Fed rate cuts starting in the middle of the year, how do you anticipate the margin will respond?

I believe it would be beneficial. The uncertain factor is really regarding deposits and the delay involved. It’s unclear how quickly we can reduce deposit rates in this environment. Therefore, any relief from lower Federal Reserve rates might come with some delay when it begins.

Got it. Makes sense. Then on operating costs or the occupancy cost there, was the increase just related to the new offices coming online?

Yes.

Got it. And then I noticed that salaries and benefits were down, was that a bonus accrual adjustment or I guess I'm trying to figure out what the run rate for that line item is going to be going forward in 2024?

Compensation costs in the fourth quarter included adjustments for bonuses and additional benefits. We expect a slight increase in compensation for the next year. We had some retirements at the end of the year, and there will be another retirement early in 2024, all of which are from bankers who will not be replaced. The annual increases will depend on the marketplace, so we do not anticipate a significant change in overall compensation costs.

Got it. Okay. That's helpful. And then shifting gears to loan growth. It sounds like the construction pipeline is strong, but you also had some single-family residential go up this quarter. I was curious what drove that? And as we look into 2024, is the growth really going to be driven by the construction, or are there also some asset purchases like in the CRE book again that you could see?

I believe we have over $190 million in various construction projects that will progress. Additionally, there were some significant transactions that concluded late in the fourth quarter, and we've noticed some impact from that early this month. These transactions were largely unexpected. The recent increase in home construction likely stems from some projects getting underway to allow construction work during the winter instead of waiting to start when the ground is frozen. However, these would be relatively minor developments.

Got it. Very helpful. And then just one quick question on the charge-offs that you had in the quarter. Any details surrounding those that you can provide, just I was not expecting them.

The situation I have in mind involves a receivable of about $50,000 that we've had on our books and classified accordingly. We were receiving monthly payments, but I believe there were some health issues that led to a lack of communication from him. Therefore, we decided to charge it off, even though we have collateral and expect to recover all of that money in due time. It’s a minor issue.

Okay. Got it. That’s all. Very helpful. Thank you for taking the questions here. I’ll step back.

Thank you, Andrew.

Your next question comes from Paul. Please go ahead.

In terms of the $11.3 million bond sale, how did you calculate the estimated earn-back period?

Well, looking at the foregone interest on the securities that we're selling. And then the proceeds, the $11 million in proceeds really went into the loan portfolio. So looking at the kind of prevailing rate that we're booking loans at for the income that we're going to earn off of those. That's how we measure the payback period.

Okay. Thank you.

Seeing no further questions at this time. I will now turn the call back to Jane Funk.

All right. Thank you, everyone for joining us today. We look forward to the next earnings call with everybody and continue discussions through 2024. Thank you very much.

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