Earnings Call Transcript - WTBA Q1 2024

Operator, Operator

Thank you for standing by. My name is Mandeep and I will be your conference operator today. At this time, I would like to welcome everyone to the West Bancorporation, Inc. Q1 2024 Earnings Call.

Jane Funk, CFO

Thank you. Welcome, everybody, and thank you for joining us today on our earnings call. Today, I've got Dave Nelson, our CEO; Harlee Olafson, Chief Risk Officer; Brad Winterbottom, Bank President; and Brad Peters, our Minnesota Group President, today for the call, and we'll all be making comments. I'll start off by reading our 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 disclosures in our 2024 first quarter earnings release for more information about risks and uncertainties, which may affect us. The information we will provide today is accurate as of March 31, 2024, and we undertake no duty to update the information. And at this point, I'll turn it over to Dave for opening comments.

David Nelson, CEO

Thank you, Jane. Welcome, everyone. Good afternoon, and thank you for joining us. Also, thank you for your interest in our company. Our quarter has actually been expected to be a bit better than forecasted. Jane will speak more to this, but hopefully, we have found the bottom in terms of our margin, and Harlee will speak in more detail to our credit quality, but it continues to be pristine with essentially no problem loans and no past due loans over 30 days at quarter end. Exciting news at West Bank is that we have just moved into our new main office headquarters facility, and this has generated a lot of excitement and community attention. We completed a redevelopment for our new headquarters, turning a rather high-profile site into something very special. We've declared a regular quarterly dividend of $0.25, with a payment date of May 22 to shareholders of record as of May 8. Those are the extent of my prepared comments; I'd like to turn the call over to Chief Risk Officer, Mr. Harlee Olafson.

Harlee Olafson, Chief Risk Officer

Thanks, Dave. As Dave mentioned earlier, credit quality is very strong at West Bank. Our watch list on our almost $3 billion portfolio is only $431,000. We have no past due loans at quarter end over 30 days. Quarterly, we stress test our portfolio and have seen improving trends in total loan-to-value and debt service coverage. We have looked closely at our office portfolio, which totals about $180 million. The average loan to value is 68%, and the debt service coverage of the non-owner-occupied office properties is 1.41 to 1. About half of our office portfolio consists of owner-occupied properties. The remainder of our commercial real estate portfolio is strong and seasoned. We have stress-tested commercial real estate loans that will be repricing in the next year. It appears that most will still have enough net operating income to cover the increased payments. With rising interest rates, there have not been a lot of significant new projects added to the portfolio. Our continuing focus is to provide the best service to our customers that have a comprehensive relationship with us. We are not providing financing to applicants that just want us to do a deal. Our bankers have been doing a good job capturing more of our customers' business. The economy in our markets remains strong. We keep looking for cracks and areas of concern regarding having to increase our deposit rates to maintain our customer base, and we keep prospecting those relationships that add to both sides of the balance sheet. With that, I will turn it over to our bank President, Brad Winterbottom.

Brad Winterbottom, Bank President

Thank you. My comments will be brief. For the quarter ended March 31, our loan portfolio grew to $2.98 billion in outstandings, a 1.8% increase from year-end 2023. Our growth in the portfolio was primarily driven by vertical construction draws on previously committed transactions. We have roughly $150 million in unfunded commitments on vertical construction draws that will take place over the next 12 months, and these loans are primarily variable rate pricing. Deposit gathering remains a priority with our sales staff. Competition is stiff, but we are winning our fair share of the battles. What we're seeing is a slight reduction in existing customers' balances from a year ago, but we have picked that up with new deposit gathering. We remain confident in our ability to create and maintain positive relationships with our customers and prospects that we are pursuing. With that, Mr. Peters, all yours.

Bradley 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 navigate through a challenging environment due to the rapid rise in interest rates. In spite of those challenges, we are growing new business and enhancing existing relationships. Our focus has been on commercial and industrial growth and deposit growth, and our bankers have been intentional in their calling efforts to draw new deposits and treasury management business. The Mankato market has now opened its new facility. As with our other locations, the new bank is designed for relationship building. Our new facilities have served as a great tool to attract new business and enhance existing relationships. The new facility in our Owatonna market is under construction, and we anticipate we will be occupying the new bank in the fourth quarter of this year. Those are the end of my comments. I will now turn it back over to Jane.

Jane Funk, CFO

Thanks, Brad. Net income for the quarter was $5.8 million compared to $4.5 million in the fourth quarter of 2023 and $7.8 million in the first quarter of 2023. There was no provision for loan losses recorded in the first quarter as compared to a small provision of $500,000 in the fourth quarter of 2023. As previously mentioned, our credit quality remains pristine. Net interest income was up $389,000 in the first quarter compared to the fourth quarter of 2023, and our net interest margin increased 1 basis point quarter-over-quarter. Net interest margin has ranged from 1.87% to 1.91% for the last three quarters. Loan and investment cash flows; the maturities continue to reprice at higher prevailing market rates. However, competition for deposits and an extended inverted yield curve and higher-for-longer rate expectations continue to put upward pressure on deposit rates. Market rate volatility, our customers' cash flow activities, and competition for deposits continue to create uncertainty in any forecasting of net interest margin. With that, those are the end of our prepared remarks, and we'll take any questions.

Operator, Operator

Your first question comes from the line of Andrew Liesch with Piper Sandler.

Andrew Liesch, Analyst

Jane, regarding the margin, there's some notable resilience here. I understand it can be challenging to forecast given the potential for ongoing upward pressure in this environment. That being said, it appears you've reached a point where you can stabilize, considering that the upward pressure on deposit costs has diminished this quarter. You are also seeing improved yields on new loans. So, is this a solid level to build upon or to maintain as you move forward?

Jane Funk, CFO

I would say that the yield on the loan portfolio is improving at a little bit faster pace than what we had originally projected for this year. So that's a good thing. But at the same time, the deposit costs have also gone up, but they have slowed to a much more manageable pace. So we really hesitate to give any forecast of margin. We do have some interest rate swaps that are going to be repricing in the second and third quarters that we're at some pretty low rates. And so they'll reprice on the cost side to more market rates. So while we're seeing good movement in the right direction at this point in time, we know that there's going to be other things repricing throughout the year that could continue to give us challenges. But like Dave said, we hope we've kind of reached the bottom.

Andrew Liesch, Analyst

Got it. That's really helpful commentary. And I have in my notes here that you have about $800 million that's indexed through deposits. Is that correct, around that number?

Jane Funk, CFO

Yes. It's been running pretty steady at that level.

Andrew Liesch, Analyst

Got it. And then on the loan growth side, some good construction, it sounds like the pipeline there is solid. CRE may be a little more challenging, but you also had some good commercial and industrial growth. How is the pipeline there? And I guess, where is that growth coming from?

Brad Winterbottom, Bank President

I would say our emphasis is more on deposit gathering. Yes, we've picked up a few customers. But quite frankly, we're trying to get the right side of the balance sheet to grow a little bit more than the left side, if that makes sense.

Andrew Liesch, Analyst

Yes, certainly. And then I guess along those lines, how is that deposit pipeline here looking as you go throughout the year? First quarter can be pretty tough to grow commercial deposits and the same with April, but how are you planning for the rest of the year on the funding side?

Brad Winterbottom, Bank President

I think we have a handful of fairly significant relationships that we're chasing right now. And we think that we're going to be successful on a majority of those. So our fingers are crossed, but it's good. Does that answer your question?

Andrew Liesch, Analyst

Yes, very helpful. And then, Jane, last question for you just on the expense base. So good cost control here, came in much lower than I was expecting. Is this a good run rate to build off of? Or is there anything that might affect operating costs as we're heading into the quarter, that could push us higher?

Jane Funk, CFO

Well, I think essentially, we know occupancy is going to go up with our addition of the new building. That's yet to be determined with the costs. We'll have some one-time expenses in the second quarter just for the logistics of the physical move and things like that. But other than that, we're not expecting any significant shifts on the expense side.

Operator, Operator

That concludes our Q&A session. I will now turn the conference back over to Jane Funk for closing remarks.

Jane Funk, CFO

Again, we just want to thank everybody for joining us on our call today, and we look forward to talking to you again next quarter. Thank you.

Operator, Operator

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