Ladies and gentlemen, thank you for being with us and welcome to the West Bancorporation Third Quarter 2024 Earnings Conference Call. All lines have been muted to eliminate background noise. Following the speaker's comments, we will have a question-and-answer session. I would now like to turn the call over to Jane Funk, CFO. Please proceed.

Thank you. Yes. This is Jane Funk, the CFO of West Bancorporation, and I'd like to welcome the participants on the call today and thank you for joining us. With me today are Dave Nelson, CEO; Harlee Olafson, Chief Risk Officer; Brad Winterbottom, Bank President; and Brad Peters, Minnesota Group President. I will begin the call with reading 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 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, 2024, and we undertake no duty to update the information. And with that, I will turn it over to Dave Nelson.

Thank you, Jane. Good afternoon, everyone. Thank you for joining us and for your interest in our company. I have some general comments, and you will hear more details from others. I'm pleased to say our quarter went as expected. Loan demand is not strong, but we have had some modest growth. Our deposit gathering activities are showing results in our balance sheet and we have a very strong deposit pipeline. Credit quality remains very strong with no problems. We believe our margin has stabilized. It is improving and we will benefit from further Fed rate cuts. Our Board of Directors has declared a $0.25 per share quarterly dividend to shareholders of record as of November 6th and payable on November 20th. With that, I'd like to now turn the call over to our Chief Risk Officer, Mr. Harlee Olafson.

Thank you, Dave. Our loan portfolio remains very strong. Starting with the commercial real estate portfolio, due to limited new projects we have seen overall loan to values decline. Debt service coverages remain strong but have shown a slight decline from the previous quarter. Our largest commercial real estate concentrations are multifamily and warehouse properties. We do not have any significant downtown multi-tenant office properties and there are zero past dues in the commercial real estate portfolio. Our C&I portfolio that represents about $500 million in funded balances continues to be strong. In reviewing this sector, our customers' operating profits in 2021 and 2022 were extremely strong and have moderated in 2023 and year-to-date 2024. The portfolio continues to exhibit strong balance sheets with adequate debt service. At quarter end, we had only one past due loan. This loan is a residential real estate property where the owner is deceased. We have allowed the areas of the property to be listed for sale and expect full payment as the loan is less than $100,000 and the property has been sold for over $200,000 and the closing is on October 30. The uncommon strength of our loan portfolio is in part due to the economic strengths of our communities. All of our locations have different economic engines that allow communities to grow and thrive. In our communities, we have customers with strong track records, good balance sheets and strong repayment abilities. In the future, we do have significant commercial real estate loans that will reprice and will cause our customers' cash flows to decline. We have stress tested the individual loans and do not see significant payment issues at the expected higher rates. At the end of our prepared remarks, I am available for questions. I now turn it over to our Bank President, Brad Winterbottom.

Thank you, Harlee. For the quarter ended September 30 of 2024, our loan portfolio was relatively flat when compared to the second quarter ended June 30. Outstandings were just over $3 billion. For the first nine months of 2024, our loan portfolio grew $94 million or 3.2%, driven primarily by vertical construction loan commitments. We have slightly over $87 million in unfunded commitments on large vertical construction projects with anticipated 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 have experienced core deposit growth of approximately 3.5%. We remain selective in obtaining new lending opportunities and quite frankly, those opportunities are less than previous years. We remain confident in our ability to create and maintain positive relationships with our customers and prospects that we are pursuing. With that, I'll turn that over to Mr. Brad Peters.

Thanks, Brad. Good afternoon, everyone. I'm going to provide a brief update on our progress in Minnesota. Our relationship-based strategy on growing our business continues to be successful in Minnesota. Each of our Minnesota regional centers have focused on C&I and high-value retail deposits and we are winning new relationships. We have built facilities designed to host events in high-quality one-on-one client and prospect meetings. Our unique approach gives us a competitive advantage to fully show the West Banc difference. The interest rate environment continues to be a challenge. This has created opportunities for our team as our relationship-based approach and experienced high-quality bankers set us apart from our competition. The new facility in our Owatonna market is under construction. We've had a slight delay, but I anticipate we will occupy the new building in the first quarter of 2025. Those are the end of my comments. I will now turn the call back over to Jane.

Thanks, Brad. Our net income for the quarter was $6 million compared to $5.2 million in the second quarter of 2024 and $6 million in the third quarter of $23 million. Net income for the first nine months of 2024 was $17 million compared to $19.6 million for the same period of 2023. We recorded a $1 million provision for credit losses in the third quarter of 2024. This provision was primarily due to an increase in forecasted unemployment rates and was not the result of specifically identified credit deterioration in the loan portfolio. We also recorded a $1 million negative provision for credit losses related to unfunded commitments. The reduction in the unfunded commitment liability is primarily due to the decrease in the unfunded commitment balances. We have now had three consecutive quarters of increases in net interest income, and net interest margin increased 5 basis points this quarter compared to the second quarter of 2024. With the 50 basis point reduction in the Fed rate in September, we were able to lower deposit rates in our highest costing sectors, which we believe will benefit our 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 for loans, investments and deposit cash flows maturities. Core deposit balances have increased 7% year-to-date. Approximately half of that is related to temporary funds that we expect to be withdrawn in 2025. The remaining 3.5% core deposit growth that Brad referenced earlier is a mix of public funds, commercial, and retail activity reflecting our focused efforts on deposit relationships. Those are the end of the prepared remarks and we'll open it for questions.

Your first question is from Andrew Liesch with Piper Sandler.

Hey, good afternoon. Thanks for taking the questions here. Just want to drill down on some of the loan growth commentary. It sounds like maybe the pipeline is lower than it's been in prior years, but maybe weighted more towards construction. I mean do you think that mid-single-digit loan growth is still reasonable? Or could it fall short from that? I guess also, are there any like lumpy payoffs coming down the line that you see?

We do have some anticipated payoffs primarily because of some construction advances that will materialize to final product and those assets will get sold. We have a large C&I customer that has sold their business and that's anticipated to close in the fourth quarter. But I think we have things that will fill that back up. So, I think we're about where we're going to be at year-end.

Got it. That's helpful. It's great to see a 5 basis point improvement in the margin. It seems you are reducing rates on accounts with significant opportunities. How are the discussions regarding rates progressing? We're looking at some CDs and possibly some money markets on the brokerage side. I'm curious if those rates are lower compared to a quarter ago. Once the full 50 basis points can impact the margin, how much expansion do you anticipate in the fourth quarter?

We have definitely noticed increased benefits on the CD side. Our volume has grown, and most of our CD portfolio along with our brokered CDs are relatively short-term, mostly within 12 months, with a significant portion maturing within six months. This means we will experience repricing benefits in core and brokered CDs, particularly due to at least a 50 basis point decline from their current rates. We'll benefit from this. Regarding transactional accounts and money market accounts, we were rather proactive with the 50 basis points reduction, but we haven't observed any adverse reactions to it. Future rate cuts are unlikely to occur at the same speed, but like every other bank, we are carefully assessing the situation.

Got it. That covers all the questions I had. You've addressed everything in the information provided today in the 8-K. Thank you very much. I'll step back.

Thanks, Andrew.

At this time, there are no additional questions. I will now turn the call back to the presenters for any closing comments.

Thank you, everybody, for joining us today. We look forward to discussing our year-end results next quarter. Thank you.

This concludes today's call. Thank you for joining. You may now disconnect your lines.