West Bancorporation Inc Q2 FY2025 Earnings Call

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 Bancorp, Inc. Second Quarter 2035 Earnings Conference Call. I would now like to turn the conference over to Jane Funk, CFO. Please go ahead.

Thank you, and good afternoon, everyone. I'm Jane Funk, the CFO at West Bank Corporation, and 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; Harlee Olafson, Chief Risk Officer; Brad Peters, Minnesota's Group President; and Todd Mather, West Bancorporation's Chief Credit Officer. I'll read our fair closure 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 2nd 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. And 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 Bancorporation had another solid quarter, which was significantly better than the second quarter of last year. First half earnings this year are about $5 million 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 and 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 20 to shareholders of record as of August 6. 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. Harlee Olafson.

Thank you, Dave. Credit quality continues to be very strong at West Banc. At quarter end, we had a small 30-day past due loan that is now current. We have a number of enviable metrics. We have 0 other assets. We have 0 other real estate. We have 0 doubtful accounts. We have 0 nonaccruals and we have 0 substandard loans. Our watch list consists of 4 relationships; 3 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 have not been a lot of new developments in 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 and there are tenants, that 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 keeping their tenants. Our average loan-to-value on non-owner-occupied office property is 65% and the debt service coverage is 1.35x. 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 6 markets are all thriving, and our team of experienced bankers continues to prospect for strong comprehensive relationships. At the end of all our prepared remarks, I'm available for any questions. I will now turn it over to Todd Mather, our Chief Credit Officer and Business Banking Manager.

Thank you, Harlee. For the quarter end of June 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 the 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 selective 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 due to 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. Our disciplined calling approach has enabled our team to successfully attract new business. Our experienced group of bankers and our focus on business banking distinguish us from our competitors. We are also targeting high-value retail deposits. Our bankers have successfully captured the retail deposits of business owners and key executives. Additionally, we are attracting new deposits from higher-earning individuals in our communities. Each of our Minnesota regional centers has experienced significant growth in retail deposits. We do not set specific production goals for our bankers, but rather evaluate them based on the right activities that drive results. This approach requires our local leaders to be actively engaged with their teams, consistently reviewing calling efforts. This method has proven effective as we grow our market share in our communities. All of our building construction projects are now complete. We designed each facility with well-appointed entertainment areas, allowing our teams to host client and prospect events for quality small group meetings. These unique facilities align perfectly with our strategy of building business through strong relationships. Our team has embraced this and has done an outstanding job leveraging our buildings to grow our business. That concludes 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 '25 and $5.2 million in the second quarter of 2024. Net income and net interest income continued 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 noninterest income or noninterest expense in the second quarter. The yield on 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 4 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.

Your first question comes from Nathan Race with Piper Sandler.

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 appreciate payoffs are still somewhat of a headwind, but just any thoughts on how you see loan growth trending 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 Harlee Olafson. The pipeline is pretty robust right now. There are 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. Just curious how you're thinking about the margin trajectory in the back half of this year. Obviously, you had deposit costs tick up in the quarter. So just curious how you're thinking about the margin trajectory if the Fed remains on pause. And then maybe if we got 1 or 2 cuts as well in the back half of the year.

Yes, we see potential for margin improvement in the second half of the year. There are still significant opportunities for asset repricing in the loan portfolio, which we expect to continue regardless of whether the Fed cuts rates. We believe asset repricing will align with our projections. On the deposit side, we are experiencing some pressure in certain areas, so I anticipate that deposit costs will remain relatively stable but may increase slightly. I am unsure if we will be able to reduce costs significantly until the Fed makes a move.

Okay. Great. And there's been some notable M&A-related disruption here in northern markets and around the Twin Cities and South of there. So just curious kind of what the upside is to maybe hire some additional producers in those markets, open 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 taken place and also the ongoing, I guess, opportunities by larger banks that have kind of abandoned the regional centers where we are located.

Okay. Great. It's good to hear. And then just going back to the balance sheet growth trajectory, Jane. I appreciate your comments that you had that municipal deposit flow in the quarter that helped drive the deposits up in the quarter, but it still seems like you guys said pretty strong deposit growth, notwithstanding that inflows. 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?

Yes, our pipeline is equally focused on building deposit relationships as it is on credit relationships. We are continuously seeking strong customers in our locations to help strengthen our balance sheet. Our emphasis on growing deposits is as significant as our focus on the credit pipeline, and that is the daily work of our bankers.

Okay. Great. And then is this run rate that we saw in 2Q for expenses, a pretty good figure to use in the back half of this year, you guys have seen 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.

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 Bancorporation, 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.