Q2 2022 West Bancorporation Inc Earnings Call

Ladies and gentlemen, thank you for standing by when it comes to the West Bancorporation incorporated earnings call. My name is Irene and I would be coordinating this event I would like to turn the conference over to our host Jane Fox Chief Financial Officer. James. Please go ahead.

Thank you and good morning, everybody. Thanks for joining us on the call. This morning are today on the call. We've got myself, Dave Nelson, our CEO and President of W. TBA, We've got Harley Olafson, our chief risk Officer, Brad Winterbottom our.

West Bank, President and Brad Peter's, our Minnesota region President.

I'll start out reading, our fair disclosure statement any 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 the call over to Dave Nelson to get started thank you Jane and thank you everyone for joining us we very much appreciate your interest in our company.

We had another good quarter with strong performance metrics.

I just have a few general comments and then we'll turn the call over to others for more details. We have declared a 25 cent dividend to common stockholders payable August 24th to shareholders of record as of August 10 2022.

Well I'm well the increasing rate environment is putting pressure on our margin our credit quality has continued to improve to the point where are we almost have an absence of problem loans or even past due loans and most of our communities in which we do business are all sitting on record building permit.

Yes.

The extent.

The impact of that are inflationary marketplace, coupled with the corresponding increasing interest rates.

We'll have on delaying or perhaps stalling. Some of this activity is remains unknown. However in any event, we have a strong pipeline in pristine credit quality.

With that I'd like to turn the call over to our Chief risk Officer, Mr. Harley Olafson.

Well. Thank you Dave our again this is Harley olafson I'm going to make a few comments.

Or credit quality first being our credit quality.

In our opinion is in the best shape that it has ever been.

We have no past due loans over 30 days.

Our philosophy that there is not enough margin in banking to take on risky credit has served us well in the past and hopefully in the future.

We don't feel we have concentrations in business that may suffer a unduly in a recession certainly there maybe some challenges, but we believe our strong customer base, we'll manage through an economic downturn.

Previously we had one significant credit on non accrual within our portfolio that has now been resolved we had a two and a half million dollar specific loss reserve assigned to that credit.

The loss after payoff was less than 500000.

This freed up a little over $2 million in reserve.

Before I turn the call over to Brad Winterbottom I will comment on our eastern Iowa performance loan growth in Eastern Iowa has continued to be strong.

Approximately 9% year to date.

Spokes for future business there are good.

But we also see that there has been a slowdown in new projects.

There and in our other markets.

Again, I will now turn the call over to our bank President Brad Winterbottom.

Thanks Harley.

For the quarter, our total loan growth is approximately 3%.

<unk>, which was an excellent quarter.

Going forward, we have headwinds.

In front of US we have a couple we have three.

Our loans that are commercial construction projects that have.

They'd have a.

Matured and.

To have paid off as of today with a third one are expected to pay off through the remainder of this year and those three total of $100 million.

We have some replacement for those.

But in terms of the growth pattern I think that that will that will probably slow some things up.

We're seeing our homebuilding business, which we have a nice portfolio of dealing with very reputable long term homebuilding customers in central Iowa.

They're slowing up of given that the interest rate environment.

And and we're seeing some deals getting passed on or we're in the planning stages, we're working on.

Do do the supply chain issues are uncertain.

Structuring costs are in there and the rising rate environment. They are some of those folks have just put that on hold and.

It makes sense to them it makes sense to us.

We have a very long list of of other things that we're working on to replace some of this volume I can't tell you where that will all end up but are you know obviously with the rising rate environment. It's a it's a lot harder to go refinance something.

Today than it was maybe six months ago.

We're in a deposit gathering mode right now we've lost some deposits.

Uh huh.

Existing customers using their money to do other things one was a significant acquisition.

They funded out of cash.

So where.

Where we're gathering deposits, where we're still making calls daily on on customers and prospects and I anticipate that will not change.

Mr Peters.

You are next.

Thanks, Brad good morning, everyone I'm.

I'm going to provide a brief update on our market expansion into Minnesota.

Our team continues to make good progress in growing business in each of our Minnesota regional centers.

Each of our markets are seeing solid growth our bankers are focused on building relationships and our activities have created ongoing new business opportunities.

We continue to grow our business by adding new relationships focused on C&I.

Focus has driven strong core deposit growth in Treasury management business.

We opened our new building in St cloud during the month of March and the Mankato market has begun construction of a new facility with plans for completion in the middle of next year.

Our autonomy market is in the process of exploring potential new sites for.

For a building.

That is the end of my comments I will now turn it back over to Jane.

Thanks, Brad I'll.

I'll make just a couple of comments on that.

All statements.

Income statement, we did record a negative provision this quarter total negative provision for the years, two and a half million dollars. That's primarily driven by the impaired loan that we had that was a significant impaired loan that was settled in June .

We had a specific reserve on that particular relationship.

Two and a half a million or ultimate charge off was 451000.

So that was the primary reason.

For the negative provision in the second quarter.

Our income tax our effective income tax rate was higher this quarter.

Sure.

The Iowa Bank franchise tax rates there.

Was it changed in those rates that were enacted in June and that resulted in us re measuring our deferred tax assets as a result of those changes in tax rates.

And resulted in an additional tax expense of 671000 in June . So that's a one time event, one time remeasurement of the deferred tax assets.

And the significance of the amount is really driven by the large deferred tax asset on the investment portfolio.

From a margin standpoint, our margin for the quarter with a $2 93 compared to 299 last year and year to date, we are at $2 89, compared to three O eight the 2020, one numbers or has more of an impact from the PPP loans.

You look at the decline in margin part of that is driven by M. A C. O R. P. P. P. A.

Fees recognized in 2022, and then also just recognition of the.

The rate environment that we're in are the pressure on the deposit side for pricing as the market rates increase and then it continued really continued pressure also on the loan side in our markets, we're still seeing.

A fairly high level of competition and pricing competition on loans.

We did complete our sub debt issuance in June around June 15th.

Or we issued $60 million of sub debt at the holding company level. The net proceeds of that was injected.

Into West Bank is capital.

Uh huh.

Brad had mentioned our decline in deposits.

Primarily driven by our existing customers using some of their liquidity to complete business transactions, so rather than borrowing for those transactions, they're using their cash and then also some at some accounts that were a little bit more sensitive to market rates and earn some money into treasuries.

That accounted for the vast majority of our shift in deposits in the second quarter.

That's all the comments that I have on.

The financial statements and I think we will open it up for questions at this time.

Thank you ladies and gentlemen, we will now begin our question and answer session to ask a question. Please press Star then one on your telephone keypad now to withdraw your question. Please press Star then two if you are using a speakerphone. Please pick up your handset before pressing the keys.

Yeah.

Our first question comes from Brendan Nosal from Piper Sandler Brendan Your line is open.

Hey, good morning folks how are you.

Good morning, Brandon.

I guess first congratulations on the credit clean up in this quarter, but it's certainly nice to see.

Maybe to start off on the growth side of things.

Based on your prepared comments, you know definitely some competing factors with strong pipelines, but higher anticipated payoffs.

Move through the year I've got $100 million can you help me just kind of tie that yet.

So what you're expecting for loan growth through the balance of the year.

Uh huh.

That's really kind of hard to.

Hard to say, but I'll give it a shot we are we have picked up a couple of other nice construction projects and the large ones.

So that's going to replace the items that are that I talked about in terms of the payoffs that happened in the month of July and another one that as a condo project that that will get paid off as those units are are are sold and those are all.

All scheduled to be closed.

The vast majority of those by the end of this year. So I think we have some construction projects that are right behind the ones that are paying off.

So.

You know, we should we should catch that up problem, but that will probably take us.

Maybe year to to do that but in the meantime, we're working on.

Literally I got a list here of our.

Our weekly pipeline report is things that we're working on and there's probably over 40 names that we're chasing that are we're having significant conversations with so.

I would not anticipate a double digit loan growth by the end of the year, but that's just my opinion and I have nothing in front of me that says it well.

We'll have that or don't have that I don't know if that helps or.

Yeah. It certainly does thank you.

So you're saying you don't think you'll achieve double digits and that's for the full year correct.

That's where the.

That's for the full year based on what I know today.

Perfect perfect that's helpful.

Maybe moving on to the funding side here.

Kind of I get there.

The dynamics you guys highlighted during the.

Prepared remarks, and hear you loud and clear that your deposit gathering mode.

Just kind of help me understand the potential for additional deposit outflows as you look at things today will that pressure Wayne or do you think that that dynamic will continue as rates move higher.

I think that what we saw in the second quarter.

Was a little bit you know this is kind of a timing thing that's when the fed started moving rates. So we had some people that moved them.

Kind of quickly to alternative investments that's.

I haven't seen that the last few months that would have been early in the second quarter and then certainly the significant customer that had the significant transaction and using cash for that you know.

Good for them for being having the ability to do that.

It's part of our deposit management process to manage those flows I'm not seeing at this point in time.

Any other large things like that happening, but we certainly know that you know the fed just moved another 75 basis points they were expected.

Got it and maybe move another 100 basis points this year and that that certainly you know our customers are certainly monitoring that as closely as we are so it's hard to predict what the flows are going to do but but what's happened in the last couple of months has been a pretty steady pretty stable.

Okay Fantastic that's.

A couple of color.

Let's see maybe turning to deposit pricing so interest bearing deposit costs were up 18 basis points quarter over quarter. It makes it kind of feels like at the data of 25% to 38% so far albertsons, what fed funds this quarter and if so can you update us on your deposit beta assumption through the cycle and then what Youre seeing.

On kind of deposit pricing.

In the past couple of bikes.

Well I think on deposit pricing.

You know what what you just mentioned forbade us as you know our betas might be.

A little bit higher than the industry in general.

But certainly that's an ongoing management Ah <unk>.

Process for us in this environment of a regular volatility.

And communication with our customers and what they're seeing in an alternative or their funds and so I think the betas that you. Just mentioned are probably you know well, we'll continue to see those betas them throughout the year I think.

Okay. Okay.

Turning to the margin this quarter I guess once you strip out P. P. P. The result was quite nice actually.

And it looks like kind of remixing of the earning asset base really drove a lot of that expansion be more loans and less cash and security. So I'm curious if there's any more remixing of the asset base that you intend to do at this point.

Not no nothing specific.

Okay Alright.

And then maybe kind of your thoughts on on the margin outlook as we move through the balance of the year and in light of what.

What the fed has and will likely continue with short term rates.

Yeah, the margins really going to be a function of managing.

The deposits the deposit betas on the deposit volumes that we can bring in.

A function of the local markets, our competition and the local comp.

Competition on the loan side also not just the deposit side. So I think you know.

A little bit more liability sensitive.

We're still expecting to see.

Some pressure on margin we did.

Issued sub debt in middle of June and so that pricing really isn't reflective.

Reflected in our margin yet so it'll just be a factor of how we manage through.

Loan generation and managing deposit betas.

Yeah understood Okay.

Okay.

Let's see maybe on expenses I.

Core expenses were up about 556% for the quarter.

To $11 $3 million is that a run rate that you feel.

Pretty good about for the remainder of the year or is there. Thank you all for some more upward pressure.

Hum.

I'll take the rest of the year would be pretty similar.

Okay.

Right.

Maybe finally on the capital ratios capital ratios like many other banks were impacted again by a OCI, but the red ratio there are still quite healthy.

Any updated thoughts on kind of how you view that discrepancy with that's been your TCE ratio today, but still strong red ratios.

Yeah, our GAAP capital you know is right now are the biggest impact on that as the investment portfolio and the fair value hedge.

That adjustment on the investment portfolio so.

That's that'll be.

That'll vary among institutions, depending on whether they've got held to maturity securities.

What their level of available for sale is so the comparability to other institutions gets a little bit clouded from stuff like that but it's yes, we continue to watch it but we don't have any specific actions that we plan at the time to to.

You know change.

Change our strategy.

Yeah, Yeah, Okay perfect.

One final one for me before I step back here just on.

On the tax rate I know that there was the one time expense this quarter relating to the Io a tax law change.

Outside of the one time expense, but it will be any go forward ramification on on your effective tax rate.

Yeah.

Not that I'm aware of at this time.

Okay perfect.

Well. Thank you so much for taking my question.

Thanks Brendan.

Thank you.

Ladies and gentlemen, as a reminder, if you would like to ask a question. Please press Star then one on your telephone keypad. If you are using a speakerphone. Please pick up your handset before pressing the keys.

Yeah.

Ladies and gentlemen, it seems that we currently have no further questions. Therefore, I would like to hand back to Jane funk for any closing remarks, Jim over to you.

Yeah. Thank you once again, we just want to thank everybody for joining us and having an interest in our company. This morning, and we'll talk to you all again next quarter. Thank you.

Ladies and gentlemen. This concludes today's conference call. Thank you for being with US today have a lovely day ahead you may disconnect your lines now.

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