Earnings Call Transcript - WTBA Q1 2022

Operator, Operator

Good morning. Thank you for joining today's West Bancorporation, Inc., Earnings Call. My name is Tunia, and I will be your moderator. I would like to now hand the conference over to our host, Jane Funk, Chief Financial Officer of West Bancorporation. Please proceed.

Jane Funk, Chief Financial Officer

Thank you, and welcome everybody to our quarterly earnings call. Today, I’ve got with me Dave Nelson, our CEO; Harlee Olafson, our Chief Risk Officer; Brad Winterbottom, Bank President; and Brad Peters, our Minnesota Group President. I’ll start out with reading our fair disclosure statement. Comments made during this conference call may contain forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any forward-looking statement made by us during this call is based only on information currently available to us and speaks only as of today’s date. The company undertakes no obligation to revise or update such statements to reflect current events or circumstances after this call, or to reflect the occurrence of unanticipated events. And with that, I’ll turn it over to Dave Nelson, our CEO.

David Nelson, Chief Executive Officer

Thank you, Jane, and good morning, everyone. Thank you for joining us. And thank you for your continued support and interest in our company. I have just a few general comments I’ll make before I turn the call over to others for more details. As you have seen from our release, we had a record first quarter. Our first quarter growth was rather flat, but we do have a strong pipeline. Our credit quality remains very strong. In fact, the first quarter ended 3.31% was the third consecutive quarter end in which we did not have a single loan in our entire loan portfolio that was 30 days past due. And that, of course, does include the few classified loans that we do have. During the quarter, we added some more bankers and also moved into our recently completed new bank facility in St. Cloud, Minnesota. And we are also now positioned to start construction on our Mankato and West Des Moines bank buildings during May. During the quarter, we also received recognition from several publications naming West Bank as one of the top performing community banks in America during 2021, including the top 25 lists from Piper Sandler, Raymond James and S&P Global. And based upon our first quarter performance, our Board of Directors has declared a $0.25 dividend to shareholders of record as of May 11, and payable on May 25. So, with that, I’d like to turn the call over to Harlee Olafson, our Chief Risk Officer.

Harlee Olafson, Chief Risk Officer

Thank you, Dave, and good morning. I will make comments on our loan portfolio, credit quality, watchlist and our Eastern Iowa market. Just from a total perspective, it makes it interesting to note now that our credit portfolio consists of about 50% of our loan balances in our Central Iowa market, 25% in Eastern Iowa, and 25% in Minnesota. So we have created some geographic diversity with our new locations. And I would say also that all of our different locations and cities have strong economic bases at the current time. Our watchlist continues to decrease and it’s currently at 2.76% of loans. All credits on the watchlist and the nonaccruals are current and receiving payments. In fact, as Dave stated earlier, we had no 30-day past due loans in the entire loan portfolio for the third quarter in a row. We still have one credit that was considered a workout. Our specific reserve on that credit is $2.5 million and should be more than adequate to cover our risk. We have good expectations that we will work through that credit and be through with it sometime this year. Since we have very little current credit risk within the portfolio, we continue to focus our efforts on doing business with strong customers that have a good cash flow and/or significant liquidity. There’s still a lot of liquidity in the market, and the ability to lend at good spreads is a challenge. Shifting to our Eastern Iowa market, we continue to gain market share there and have a strong pipeline of business. We have a strong group of bankers that have developed solid relationships there, and are currently working on a lot of things that had come up previously that are still in the pipeline. But, I would say that there are fewer total projects in the works in Eastern Iowa due to high construction costs and rising rates. And to talk about our other markets, I’ll turn it over to Brad Winterbottom, our Bank President.

Brad Winterbottom, Bank President

Good morning. Overall, our loan portfolio net of PPP loans continued to shrink. We had a growth rate of about 1.7% approximately. That is despite roughly $60 million of payoffs that took place in the first quarter, and those payoffs were the result of businesses being sold, assets being sold, or assets being refinanced elsewhere. The pipeline is very strong. And it’s good in all markets, including Minnesota, Eastern Iowa, and Des Moines area. We did add two very seasoned bankers in the first quarter of this year, one in the Des Moines market and one in the Minnesota market. And these are bankers that have had very large relationships elsewhere, very seasoned bankers who know what they’re doing, and we’re expecting good things from them along with the rest of our team. With that, I’ll turn it over to Mr. Peters here, and he’ll talk about Minnesota.

Brad Peters, Minnesota Group President

Thanks, Brad. Good morning, everyone. I’m going to provide a brief update on our expansion into Minnesota. Our team continues to make good progress in growing our business in each of our Minnesota regional centers. Each of our markets is seeing solid growth and our bankers continue to be focused on building relationships, and those activities have created ongoing new business opportunities. Loan growth has been strong. Our C&I focus has driven strong core deposit growth and treasury management business. As Dave mentioned, our new building in the St. Cloud market opened during the last week of March, and the Mankato market has purchased a building site with construction expected to begin next month. The Mankato team has also added a seasoned business banker to take advantage of our growth opportunities. Our Owatonna market continues to explore potential new sites for a new facility, and that work is ongoing. Those are the end of my comments. I will now turn it back to Jane.

Jane Funk, Chief Financial Officer

Thanks, Brad. Just a couple of comments on the financials, and then we’ll open it up for questions. We did take a negative provision this quarter of $750,000. That was primarily the result of reducing one of our qualitative factors in the commercial real estate portfolio related to past due trends and classifications; it was a factor that we had increased during the pandemic. And we’ve got consistent performance in our portfolio those past dues and classifications, and all of our loans continued to perform strongly. So we reduced that factor back to the pre-pandemic level. So that resulted in the $750,000 negative provision. And our margin does continue to see pressure. In the first quarter of 2022, when we remove the impact of the PPP loans, our net interest margin was 2.81% compared to the first quarter of 2021 which was 2.94%. There’s a 13 basis point reduction in margin. Our deposit rates pretty much held back in 2020, so there wasn’t a lot of movement on the cost side. But loan yields continue to decline, as rate competition is pretty intense through 2021 and into 2022, so that the loan yield competition continues in this environment where we’ve got a lot of liquidity in the market. Those are my comments on the financials and, I think, we would open it up for questions now.

Operator, Operator

Thank you. The first question is from Brendan Nosal with Piper Sandler. Your line is open.

Brendan Nosal, Analyst

Hey, good morning, folks. How are you doing?

Jane Funk, Chief Financial Officer

Hi, Brendan. How are you doing today?

Brendan Nosal, Analyst

Great. Thanks. Maybe just to start off here on the loan growth side of things, so despite the payoffs, I still thought it was a pretty solid quarter for growth, and you folks mentioned strong pipelines multiple times throughout your prepared remarks. So just kind of curious, do you have any other large payoffs in the pipeline? And then, how you think about loan growth through the balance of the year?

David Nelson, Chief Executive Officer

We actually do have some additional known payoffs coming up here in the second quarter and these would be due to asset sales. And as of today, that number is close to another $60 million. However, our pipeline is good. And we think we can replace that in the second quarter as well.

Brendan Nosal, Analyst

Understood. Okay. That’s certainly helpful. And then maybe turning to the margin, Jane, thanks for the detail you provided. Just kind of curious now that rates are starting to rise and perhaps do so quite rapidly coming up. Can you remind us how much of the loan book is variable or adjustable rate? And then on the liability side, how much deposit do you have indexed to Fed funds today?

Jane Funk, Chief Financial Officer

Well, on the loan side, I would say about 35% of the portfolio is either variable rate or has maturities over the next 12 months. So what we’re looking at on the loan side, now, we do still expect some pressure on the loans, even though the market's going up, we’re seeing still a lot of competition at low rates in our environment. So, it’s kind of yet to be determined how that will play out once the Fed increases rates. On the deposit side, we’ve got a portion of our deposit base that is more sensitive to the Fed funds rate. And so we expect our betas to maybe be a little bit higher than the rest of other financial institutions, but that’s something that we are actively managing. Right now, we’re having a lot of discussions and conversations and trying to manage that sensitivity with the upcoming expected rate increases.

Brendan Nosal, Analyst

Yeah. Understood. Understood. Makes sense. Okay. Let’s see on capital, I mean, your kind of tangible book value and capital ratios were impacted like every other bank this quarter due to the AOCI impairment. I guess, kind of, in my point of view, it’s mostly accounting noise and regulatory ratios remain strong overall. But just wondering if that kind of temporary impairment changes the way you think about balance sheet growth or capital return in the near-term?

Jane Funk, Chief Financial Officer

Not significantly like you said, it’s not – it wasn’t unexpected. I mean, I think we knew going into an increasing rate environment that we would have declines in the value of the investment portfolio. And, we were not an outlier in the industry. And so it’s – like you said, it’s kind of accounting noise.

Brendan Nosal, Analyst

Yeah. Yeah. Of course. Okay. And then, you folks continue to add bankers in your markets, which certainly showed up in loan growth over the past couple of years. Just curious, do you see any opportunities to do so and then maybe tie that opportunity into expectations for expenses for the next couple of quarters?

David Nelson, Chief Executive Officer

I would say that we’re always looking for good bankers. We don’t have any planned new hires. So I would say, no, to your question. If somebody shows up and says, throw me a rope, we might throw him a rope; we might not.

Brad Peters, Minnesota Group President

Hi. I would add to that. We are always recruiting. If we do hire someone, it would be a seasoned revenue producer, so maybe the expense effect would be very short-term.

Brendan Nosal, Analyst

Got it. Okay, good. Maybe turn into credit quality briefly. I mean, as you folks know, it’s just remarkably strong today. But just kind of curious conceptually, if the Fed does over-tighten and gets us into a hard landing scenario, any thoughts on kind of what part of the portfolio you might be a little more concerned about if that did come to pass?

Harlee Olafson, Chief Risk Officer

Frankly, right now, we’re very diversified. Again, we’re not into niche lending categories. We are in situations where even if we are into a recession, our current customer mix has strong balance sheets and are very liquid right now. And generally, liquidity helps you get through more difficult times. We do not have an abundance of credit that’s in areas that I would say are really subject to downturn right now. So I feel very good that our credit portfolio will continue to be very good, even with some increasing rates and possible downturn in the economy.

Brendan Nosal, Analyst

Perfect. Perfect. Okay. Last question for me, and then I’ll step back. The tax rate looks a little bit lower this quarter than we’ve been running, I guess, roughly 19% on a GAAP basis versus the 21% or so that it had been for the past couple quarters. Just kind of curious if this lower level is an expected run rate or if it will kind of bounce back to where it had been.

Jane Funk, Chief Financial Officer

It will bounce back. That benefit this quarter related to the vesting of RSUs and the tax benefits from the tax benefit versus book benefit that had been recorded. So that usually happens in the first quarter when our RSUs vest and this year we just had a bigger difference there.

Brendan Nosal, Analyst

Got it. Got it. Okay. Fantastic. Well, thank you so much for taking the questions.

Jane Funk, Chief Financial Officer

Thank you.

Operator, Operator

Thank you, Mr. Nosal. There are no additional questions waiting at this time. I will now turn the conference over to the management team for any concluding remarks.

Jane Funk, Chief Financial Officer

Thank you, everyone, for joining us today. That’s the end of our remarks and we’ll end the call here. Thank you.

Operator, Operator

That concludes the West Bancorporation, Inc., earnings call. Thank you for your participation. You may now disconnect your line.