Earnings Call Transcript - WTBA Q2 2024

Operator, Operator

Hello, and welcome to West Bancorporation, Inc. Q2 2024 Earnings Call. As a reminder, this conference is being recorded. I would now like to turn the call over to the company's Chief Financial Officer, Jane Funk. Please go ahead.

Jane Funk, CFO

Thank you, and welcome, everybody. Thank you for joining us today on our second quarter earnings call. I've got with me today Dave Nelson, our CEO; Harlee Olafson, our Chief Risk Officer; Brad Winterbottom, our Bank President; and Brad Peters, our Minnesota Group President. We'll start off the call today. I'll turn it over to Dave Nelson.

Dave Nelson, CEO

Thank you, Jane, and good afternoon, everyone. Thank you for your interest in our company. I have some general overview comments, and others will provide more detail. Our first quarter really went as we expected. Our loan growth was essentially flat during the quarter, and we had good deposit growth during the quarter and also our yields are improving. Net interest income is increasing, and we believe our margin has stabilized. Our credit quality remains pristine, and we have no credit problems. We opened our new headquarters building in West Des Moines during April, and it feels like we're now really getting settled in. Yesterday, we declared a $0.25 per common share dividend payable August 21 to owners of record as of August 7. Those are the extent of my prepared remarks, and I'd now like to turn the call over to our Chief Risk Officer, Mr. Harlee Olafson.

Harlee Olafson, Chief Risk Officer

Thanks, Dave. Commercial real estate is what everyone seems to want to talk about today when assessing the quality of the loan portfolio. We have no past dues in our commercial real estate portfolio. I attribute this to our strong, seasoned customer base. We look to provide credit to borrowers that have significant net worth, liquidity, and multiple sources of income. We quarterly stress test our commercial real estate portfolio to see if we have trends that concern us. In our last stress test, we looked at all of the different types of commercial real estate and found the lowest loan to value we have experienced along with very strong and consistent net service coverages. Our watch list on our total portfolio stands at 0.03%. Here are some statistics on our commercial real estate portfolio by type: Multifamily, we have $621 million outstanding with an average loan-to-value of 69% and a debt service coverage of 1.35; warehouse properties, we have $303 million outstanding with a loan-to-value of 67% and an average debt service coverage of 1.9; our office properties totaled $188 million with an average loan-to-value of 67% and a debt service coverage of 1.38; mixed-use type properties stand at $103 million, with a loan-to-value of 65% and a debt service coverage of 1.95; our hotel properties totaled $278 million with a loan-to-value of 64% and an average debt service coverage of 1.37; our medical office properties totaled $178 million with an average loan-to-value of 58% and an average debt service coverage of 2.49; our senior care facilities totaled $108 million with a 64% average loan-to-value and a debt service coverage average of 1.38. Office property has come under a great deal of scrutiny due to many cities having downtown office and other retail crises with the work from home trend leaving those downtown cores devastated. We have no significant downtown office multi-tenant properties in our portfolio. About 40% of our office properties are owner-occupied. Another area that concerns me is senior care facilities due to the high cost of operations, although we have seen this cost coming down since the end of the pandemic. We have passed on doing more of this type of lending, not due to the market need, but due to the high cost of operations. The economy in our regional markets has remained strong. Our bankers have been focusing on building both sides of our balance sheet and have had numerous deposit successes. At the end of our prepared remarks, I will be available for questions. With that, I will turn it over to our Bank President, Brad Winterbottom.

Brad Winterbottom, Bank President

Thank you, Harlee. For the quarter ended June 30, 2024, our loan portfolio was relatively flat when compared to the first quarter ended March 31. Outstandings were just under $3 billion. For the first six months of 2024, our loan portfolio grew $71 million or 2.43%, driven primarily by vertical construction loan commitments. We have slightly over $123 million in unfunded commitments on vertical construction 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're winning our fair share of battles. We have and continue to see good opportunities in the markets we serve to grow our market share, but we remain selective in our loan opportunities. We remain confident in our abilities to create and maintain positive relationships with our customers and prospects that we are pursuing. With that, I'll turn it over to Mr. Peters.

Brad Peters, Minnesota Group President

Thanks, Brad. Good afternoon, everyone. I'm going to provide a brief update on our progress in Minnesota. We continue to build new business in each of our Minnesota regional centers. We are focused on commercial and industrial and high-value retail deposits. Our team is actively calling on and consistently winning new business. We continue to navigate through a challenging environment due to the rapid rise in interest rates. These challenges have created new opportunities for our team. The quality of our bankers and our relationship-based approach has set us apart from our competition. We have built facilities designed with relationship building in mind. We are leveraging these facilities to have high-quality one-on-one discussions that lead to opportunities to grow our business. The new facility in our Owatonna market is under construction, and we anticipate we'll be occupying the new bank late in the fourth quarter of this year. Those are the end of my comments. I will now turn the call back over to Jane.

Jane Funk, CFO

Thanks, Brad. Our net income this quarter was $5.2 million compared to $5.8 million in the first quarter of 2024 and $5.8 million in the second quarter of 2023. There was no provision for credit losses recorded in the second quarter. As previously mentioned, our credit quality remains pristine. Our net interest margin has stabilized over the last few quarters. Net interest income was up $480,000 in the second quarter compared to the first quarter of 2024, which is the second straight quarter of an increase in net interest income. Non-interest expenses have increased as expected with the occupancy of our new corporate headquarters. As mentioned earlier, our loan growth was about 2.4%, primarily due to the funding of construction loans. Our deposit balances at June 30 include a large deposit from a municipal customer that we expect to draw down over the next 12 to 18 months for a construction project. Excluding those funds and any broker deposit activity, the core deposits have increased 1.9% year-to-date. Those are the highlights I was going to cover. That's the end of our prepared comments, and now we'll open it for questions.

Andrew Liesch, Analyst

Hi. Good afternoon, everyone. I just want to stick with the loan growth here, some of the pretty good pipeline of construction. How is that looking here for the third quarter? Are there any large payoffs that you see coming down the pipe?

Brad Winterbottom, Bank President

We have a few payoffs scheduled probably in the $20 million to $25 million range that will get replaced with funded commitments. You can get surprised with, 'Hey, we sold this property, and it's going to close in 60 days.' But the ones that we are aware of are roughly around $25 million. We have been very selective in adding new projects based upon where we stand with commercial real estate and our liquidity position.

Andrew Liesch, Analyst

Got it. That's very helpful. Then on the funding side, great to get that win from the municipality. It sounds like there are some other potential commercial customers. Where do those stand? And any timing of some potential deposit trends of larger deposits?

Brad Winterbottom, Bank President

Well, we have roughly 30 commercial bankers and about 15 principal bankers, and that's their job daily; they go out and find those deposits. So we're chasing any and all. It's very competitive. We're seeing CDs that might be for six months that are above 5%, but we're competing. We're chasing the lower-priced types of deposits as well as non-interest-bearing deposits. I'm not answering your question very well, but we're out hunting every day.

Andrew Liesch, Analyst

No, that's very helpful. Very good information. Thank you. Jane, on the expense front going forward, higher on the occupancy like you mentioned and as was expected. Is this like $13.2 million number a good run rate until maybe the next branch in office in Minnesota hits expenses?

Jane Funk, CFO

It's probably pretty close. I mean I think we would have had a full quarter of occupancy in the new headquarters in this quarter. There were some one-time costs in there with the move-in stuff, but it's probably a reasonable assumption.

Andrew Liesch, Analyst

Got it. And then a little bit of an uptick once the new Minnesota office comes in there?

Jane Funk, CFO

Yes, that will probably be around December or January. And that's a smaller building that we've constructed. So that will be on a smaller scale.

Andrew Liesch, Analyst

Okay. Very helpful. And then, Harlee, the increase in the watch list. Any commentary behind that? Like what drove that increase this quarter?

Harlee Olafson, Chief Risk Officer

We have a few commercial customers experiencing weaker operating performance, but they are well-resourced and secure. We anticipate they will achieve their projections for the upcoming year and remain valuable clients. I feel almost embarrassed mentioning our watch list since it is exceptionally low at just 0.03% of our total portfolio. There are a few non-accrual accounts that have been with us for some time, and we expect them to resolve before the year's end, with some scheduled closings from either sales or refinancing.

Andrew Liesch, Analyst

Got it. That's really helpful and some good trends to hear. Regarding my question about the deposits that came in, it seems that these were used to pay off some brokered funding. If possible, could you share the rate of the deposits compared to the broker rates that were paid off to establish the spread?

Jane Funk, CFO

They were very similar.

Andrew Liesch, Analyst

Okay.

Jane Funk, CFO

Yes. There wasn't much of a difference.

Andrew Liesch, Analyst

Okay. So it really does seem like the margin stabilized here. Do you think that you need rate cuts for it to start moving higher?

Jane Funk, CFO

We probably don't. I mean we're seeing good improvement on the loan yields, and our cost of deposits is really stabilizing. Probably one of the challenges that we'll see in the net interest margin is we do have a couple of fixed-rate interest rate swaps that will be maturing in the second half of the year. A couple of those have rates below 2%. So we'll be refinancing and resetting rates on those. But I think we are seeing yield improvement on loans that's slightly in excess of what we had expected.

Andrew Liesch, Analyst

Great. It's a little bit of margin expansion then we get some rate cuts and help a little bit after that. Does that sound reasonable?

Jane Funk, CFO

We hope so.

Andrew Liesch, Analyst

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

Jane Funk, CFO

Thanks, Andrew.

Operator, Operator

Our first question comes from Andrew Liesch from Piper Sandler. Please go ahead. Your line is open. This concludes today's conference call. Thank you for your participation. You may now disconnect.