Earnings Call Transcript - WTBA Q3 2025

Operator, Operator

Ladies and gentlemen, thank you for being here. My name is Colby, and I will be your conference operator today. I would like to welcome you to the West Bancorporation, Inc. Q3 2025 Earnings Conference Call. I will now hand it over to Jane Funk, Chief Financial Officer. Please proceed.

Jane Funk, Chief Financial Officer

Thank you. Good afternoon. I'm Jane Funk, the CFO of West Bancorporation, Inc. and I'd like to welcome the participants on the call today, and thank you for joining us. With me today are Dave Nelson, our CEO; Harlee Olafson, Chief Risk Officer; Brad Peters, our Minnesota Group President; and Todd Mather, our Chief Credit Officer. 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 2025 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, 2025, and we undertake no duty to update the information. With that, I'll turn it over to Dave Nelson.

David Nelson, Chief Executive Officer

Thank you, Jane, and good afternoon, everyone. Thank you for joining us, and thank you for your interest in our company. I have a few general comments, and then we'll turn the call over to others for more details. West Banc had another solid quarter with a 16% earnings increase over the prior quarter and a 55% increase over the third quarter of last year. Our financial performance metrics continue to improve, primarily driven by an expanding margin. The future Fed rate cuts will also be favorable to our margin, as well as loan renewal repricing, which is also helping our margin, and this will continue into 2026. West Banc's credit quality continues to be very strong with essentially no problem loans or any 30-day past due loans. Yesterday, our Board declared a $0.25 per share quarterly dividend to common stockholders payable Wednesday, November 19, 2025, to shareholders of record as of Wednesday, November 5, 2025. Those are my prepared remarks, and I would now turn the call over to Mr. Harlee Olafson, our Chief Risk Officer.

Harlee Olafson, Chief Risk Officer

Thank you, Dave. My remarks are going to be pretty short because credit quality hasn't changed much here. So, credit quality at West Banc for the third quarter of 2025 remains very strong. We have no past dues, no OREO, no nonaccruals, no doubtful accounts, and no substandard loans. We have a small watch list that is mainly in the transportation industry. These credits are well secured, but the entities are experiencing cash flow issues. Our commercial real estate portfolio is well diversified and is performing as expected. Having strong customers with liquidity and strong cash flows has served us well. We remain committed to our past underwriting disciplines and expect credit quality to remain pristine. After our prepared remarks, I'm available for questions. I now turn it over to Todd Mather, our Banking Manager and Chief Credit Officer.

Todd Mather, Chief Credit Officer

Thank you, Harlee. For the quarter ended 9/30/25, our loan outstandings were up slightly at just over $3 billion. We experienced a few larger payoffs from asset sales and refinance activity. The majority of those assets were priced below the current environment. We replaced those assets with quality new assets at better interest rates. Our efforts in deposit gathering continue to be an emphasis, and we have been successful in attracting new customers and depositors. 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.

Bradley Peters, Minnesota Group President

Thanks, Todd. Good afternoon, everyone. I'm going to provide a brief update on our Minnesota banks. We continue to see a slowdown with the majority of our manufacturing clients. The economic uncertainty has created a cautious environment in each of our Minnesota regional centers. Our bankers have been diligent in staying close with our clients and have increased calling activities to better manage relationships. We are seeing new business opportunities with the recent M&A activity from competitors in our markets. Our bankers have targeted calling plans, and each market has had success bringing new business to West Banc. Our calling is focused on 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 the 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. We do not have specific production goals for our bankers, but rather measure our bankers on doing the right activities that will drive results. This method of performance management is more difficult to manage, but our local leaders are fully engaged with our activity-based expectations, and we have established specific activity expectations, which we coach our bankers on consistently. This method has proven to be successful as we expand our market share in our communities. Our facilities are designed to host client and prospect events. 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 it back over to Jane.

Jane Funk, Chief Financial Officer

Thanks, Brad. I'll make just a few comments on the financial performance for the quarter, and then we'll open it up for questions. Our loan balances increased approximately $43 million in the third quarter but were relatively flat year-to-date. Core deposit balances decreased approximately $82 million in the third quarter. This decline was primarily due to normal and anticipated cash flow fluctuations in core public fund deposits. Net income was $9.3 million in the third quarter compared to $8 million in the second quarter of 2025 and $6 million in the third quarter of last year. Net income and net interest income continued to improve through improvement in net interest margin, and our margin improved 9 basis points compared to last quarter. The yield on the loan portfolio continues to improve as fixed-rate assets reprice into higher yields. In the third quarter, loan yield was 5.66% compared to 5.59% in the second quarter and 5.52% in the first quarter of this year. The cost of deposits declined 2 basis points in the third quarter compared to the second quarter. As described earlier, credit quality remains pristine, and no provision for credit losses was recorded this quarter. There were no significant one-time items in noninterest income or noninterest expense in the third quarter. Our effective tax rate this quarter was a bit lower than prior quarters this year due to a change in estimate on an energy-related investment tax credit. The effective tax rate was around 19% this quarter compared to 22% to 23% in the first two quarters of the year. Those are my final comments on the financials. So now we'll open it up for questions.

Nathan Race, Analyst

Maybe just to start in terms of where the pipeline stands from a loan growth perspective, nice growth in the quarter, nearly 6% annualized. So just be curious to get an update there. I know Brad indicated there are some opportunities to pull some market share in Minnesota, just given some of the M&A-related disruption there. So I would love to just get an update in terms of where pipelines stand and how you're thinking about growth over the balance of this year and then into 2026 as well, please?

Bradley Peters, Minnesota Group President

Thanks, Nate. Yes, I would say in Minnesota, our pipeline is good, but it's not as robust as it has been in the past, and that's probably because we're really being more selective around what we're trying to attract from a credit perspective. But I think we can expect to continue to maintain the pace that we're at today.

Nathan Race, Analyst

Okay. So it sounds like mid-single digits is doable going forward?

Bradley Peters, Minnesota Group President

I think so.

Nathan Race, Analyst

Okay. Great. And then, Jane, I think the $50 million municipal deposit that you flagged last quarter, it looked like that came out based on the end-of-period balances. So just curious, is the expectation that you guys can fund that mid-single-digit growth outlook with deposit gathering from here and maybe a little bit of cash flow off the securities portfolio?

Jane Funk, Chief Financial Officer

Yes, that would be the objective. As we look at the cash flows off the investment portfolio and our opportunities for deposit gathering, that would be our objective. There may be a little bit of wholesale funding or broker deposits that we need to backfill for a short period of time, but we expect to be able to manage that cash flow.

Nathan Race, Analyst

Okay, great. Jane, it seems like you still have a decent amount of margin support with about $550 million of fixed-rate loans set to reprice in the next 12 months. Could you also provide an update on your deposit beta assumptions as we anticipate further Fed rate cuts?

Jane Funk, Chief Financial Officer

Yes, we still see many opportunities for repricing on the loan side. In our fixed-rate loan portfolio, the average weighted rate is currently at 4.86%, which leaves us with ample room for improvement. Looking ahead to maturities and repricing into 2026, we believe there are good chances to enhance the yield on the loan portfolio. Regarding deposit betas in the future, about a year ago, when the Fed made rate cuts, we were quite aggressive with our betas on deposits. If the Fed reduces rates by another 25 to 50 basis points this year and into next year, it’s uncertain whether our betas can be as aggressive as they were last year due to competitive pressures. Therefore, I anticipate that our betas may be somewhat lower than what we managed a year ago.

Nathan Race, Analyst

Okay. And Jane, maybe one last one for you. I appreciate the commentary on the tax rate impacts in the third quarter. Any thoughts on the go-forward tax rate?

Jane Funk, Chief Financial Officer

I would say the go-forward tax rate is probably similar to what we had in the first half of the year. In the third quarter, it's just the anomaly.

Nathan Race, Analyst

Okay. Got you. And then just curious if there's any update in terms of capital management or deployment priorities. You built capital at a pretty nice clip this quarter, and I imagine that should continue to unfold. But just curious if there's any kind of strategic priorities, whether it's additional location build-outs, adding team members to maybe accelerate the pace of organic growth. But I would just love to hear any updated thoughts on just how you're thinking about excess capital management.

Jane Funk, Chief Financial Officer

We don't have any specific plans necessarily, but I think being able to take advantage of good loan opportunities, organic growth is really what we're looking for.

Nathan Race, Analyst

Okay. Great. Congrats on a great quarter.

Jane Funk, Chief Financial Officer

Thank you.

Operator, Operator

Your next question comes from the line of David Welch, private investor.

David Welch, Private Investor

This is coming from a guy who grew up in Iowa and then has lived in Minnesota for 20 years. I know you're not a direct ag lender, but soybean prices, corn prices, I'm seeing an incredible amount of press about the distress in the farming community. Is that going to have a knock-off or knock-on effect to West Banc in your opinion?

Harlee Olafson, Chief Risk Officer

Obviously, the dollars generated off of farmland will be less. Our direct impact will have some effect on some of our customers, but most of our customers are not specific ag manufacturers. We have some customers that specifically provide pieces and parts to places like John Deere. But overall, we're a little bit insulated from that in our customer base.

David Welch, Private Investor

Okay. That's kind of what I figured, but I thought I should ask. And it's been quite a few years now, and it might be a little unfair for me to ask it this way, but what's the medium-term assessment of how the Minnesota growth venture has gone thus far?

Bradley Peters, Minnesota Group President

I believe we haven't set a specific projection, but I can confidently say that we've exceeded expectations so far. Each market has positively impacted our bottom line, and we are continuing to grow at a steady rate. Currently, this represents about one-third of our company, which is encouraging.

Operator, Operator

There are no further questions at this time. I'd like to turn the call back over to Jane Funk for any closing remarks.

Jane Funk, Chief Financial Officer

All right. We just want to thank everybody for joining us today, and we appreciate your interest in our company, and have a good day. Thank you.

Operator, Operator

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