West Bancorporation Q2 2023 Earnings Call Transcript

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July 27, 2023

There are 5 speakers on the call.

Operator

Hello, everyone, and welcome to the Westbank Corporation Incorporated Second Quarter Earnings Call. My name is Emily, and I'll be your moderator for today's call. After the prepared remarks, you will have the opportunity to ask any questions by pressing star followed by the number one on your telephone keypad. I will now turn the call over to our host, Jane Funk. Please go ahead.

Speaker 1

Thank you, and good afternoon, everybody. Welcome To the Westbank Corporation Inc. 2nd quarter earnings call, today I've got with me Dave Nelson, our CEO Harley Olesen, our Chief Risk Officer, Brad Winterbottom, Bank President and Brad Peters, our Minnesota President. I'll start out reading our Fair disclosure statement. During today's conference call, we may make projections or other forward looking statements within the meaning of Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding future events or the future financial performance of the company.

Speaker 1

We caution that such statements are predictions and that actual results may differ materially. Please see the forward looking statement disclosure in our 20 23 Q2 earnings release for more information about risks and uncertainties, which may affect us. The information we will provide today is accurate as of June 30, 2023, and we undertake no duty to update that information. And we'll start off the call with Dave Nelson.

Speaker 2

Thank you, Jane. Welcome, everyone, and thank you for joining us. We appreciate your interest in our company. I just have a Few brief summary statements and then we'll turn the call over to others for more detail. American Banker Magazine recently We came out with our list of the 2022 top performing large community banks between $3,000,000,000 $10,000,000,000 and ranked Westbank Number 18 in America.

Speaker 2

That was for last year. In the meantime, the Federal Reserve has been Successful in curtailing growth in our markets and their monetary policy has also resulted in dramatically increased depository rates, It's Christine. We declared a second quarter dividend of $0.25 per share payable August 23rd To shareholders of record as of August 9. I'd now like to turn the call over to our Chief Risk Officer, Harley Thank you, Dave. My comments will also be brief since there isn't a lot of credit quality choose to talk about.

Speaker 2

As with that, credit quality does remain very Strong at Westbank. Our watch list is at historically low levels. We had one pass through this Quarter for the first time in 2 years, and it's a fully guaranteed PPP loan that's In the process of being collected. Our commercial real estate portfolio is Forming very well. We have very little metro multi tenant office properties.

Speaker 2

The ones we have are doing Fine. Other categories of commercial real estate are performing as we would expect. Our Performance is really due to having strong customers in strong markets. Our bankers are staying close to their Customers and are continuing to prospect new opportunities. With that, I'm going to turn it over to Brad Winterbottom Adam, to provide some additional information.

Speaker 2

Good afternoon. For the 1st 6 months of the year, Dave mentioned Our loan portfolio did grow 2.3 percent to 2.8000000000 Interest rate environment has really slowed business activities in all markets. Many customers have told us they have put new projects on hold until there is a more Stable rate environment. As to the C and I businesses, we see a decline in cash balances versus borrowing, suggesting that They are using their own cash for their business needs. The financials of our customers remain strong, and we do not a general weakening of our customer base.

Speaker 2

Our bankers continue to do the things that they were hired to do and that's call on existing customers and prospects to build relationships. Deposit gathering remains important to us We are working hard to do that. Jane will speak about deposit trends in a little bit. Those are my comments. And now to Mr.

Speaker 2

Peters 1st, Minnesota.

Speaker 3

Thanks, Brad. Good afternoon, everyone. I want to provide a brief update on our Our team continues to build new relationships in each of our Minnesota regional centers. Our relationship based This approach has enabled us to grow new business and enhance existing relationships. In

Speaker 2

spite of

Speaker 3

the challenging environment, we continue to grow new business Majority of our new business is C and I, which has grown our deposit and treasury management businesses. Mankato market Looking forward to the completion of construction of their new facility and we anticipate occupying the new building early In the Q4, the Watanah market has purchased land for a new building, and we anticipate that Those are the end of my comments. I will now turn it back over to Jane.

Speaker 1

Thanks, Brett. I'll just make a few comments on

Speaker 2

the financials, and then we will open it up

Speaker 1

for questions. So, And then we will open it up for questions. So the obvious driver in our change in our earnings and efficiency ratio is our net interest income. Net interest income declined for the quarter compared to Q1 by $1,300,000 We continue to see very significant rate pressure And with the inverted yield curve, the increase in the interest costs continue to outpace the repricing of our loan While our business model is still incredibly cost efficient, our non interest expenses have increased from last With inflationary pressures on compensation benefits, an increase in the FDIC's minimum assessment rate and occupancy The costs associated with the opening of our new building last year in St. Cloud.

Speaker 1

We recorded no provision for credit losses this As mentioned earlier, our watch and classified loan listing, it has declined to less than $1,000,000 And our credit quality remains pristine with no glaring issues that we're seeing In the marketplace. So those are my comments. And now we will open it up for questions.

Operator

Thank Our first question comes from Brendan Nosal with Piper Sandler. Please go ahead.

Speaker 4

Hey, good afternoon. Hey, good afternoon, everybody. Hope you're doing well. Maybe just to start off here on And credit quality, specifically fantastic for the quarter. I was just hoping you could offer a little more insight into what drove the improvement in the crew relationship that was upgraded during the quarter.

Speaker 2

Sure. We were waiting for year end audited financial information Steve, we had pretty much knew that the commercial real estate properties that were underneath this that were See their audited financials and verified the cash flow and liquidity of the borrower prior to updating, but that's When it was updated. Got it. I would also It went on the list during the COVID, during the pandemic because their business really But it has since come back very strong.

Speaker 4

Thank you. Maybe turning over to the net interest margin. Do you folks happen to have where The NIM was for the month of June, just to give us a sense of where the margin might start the 3rd quarter?

Speaker 1

Yes. Our June net interest margin was right around 2%.

Speaker 4

Okay. That's helpful. I mean, I guess then if you ran 202 for the quarter and June was 2%, it certainly feels like the monthly pace of compression Ease pretty meaningfully correct.

Speaker 1

Well, for June May June, we did see some easing, but the Fed just raised rates yesterday and we still have Pressure on deposit rates, those continue significantly retaining deposits, Trying to gather deposits. So we're not really making any predictions on what net interest margin will do because there's still a lot of volatility in

Speaker 4

Of course, of course. No, that's helpful. Maybe turning to lending and particularly the Minnesota markets. Can you just update us where loan and deposit balances stood at quarter end within those markets?

Speaker 2

Sure. Well, collectively,

Speaker 3

we're just under 7 $100,000,000 on the loan side and deposits between the four markets are in the neighborhood of 3

Speaker 2

Okay. Perfect.

Speaker 4

Let's Maybe on loan growth more specifically, definitely a stronger quarter in the second versus the first. Just curious what sort of opportunities you're seeing in the marketplace to add new loans and how you think about growth For the balance of

Speaker 2

the year? I would say that certainly it Slowed in all markets, all four Minnesota and 2 Iowa markets. We do have activities. We've had a fair amount of payoffs too. Entities selling their assets primarily in the real estate side of We have some construction projects that will add to our volume.

Speaker 2

There are a few C and I business, those are long lead times to really gather, but we're We're visiting with those folks on a daily basis as well. I do not anticipate significant growth like you've seen in The last couple of years from us, 2% for the 1st 6 months, I would say we're going to be In that range for the year, maybe another 2%. Okay.

Speaker 4

Yes. Okay. That's certainly helpful. Very good. And then Do you happen to have what low yield you're getting on new production in the second quarter Roughly?

Speaker 2

It's in the mid-7s mid- to low-7s right now on new stuff. If it's Fixed in the 5 year.

Speaker 4

Okay. Excellent. Maybe turning to the funding side of things. It looks like deposits wrapped nicely for the quarter, including some good growth in core money market and savings accounts. Maybe walk through deposit flows and mix shifts as it occurred over the course of the quarter.

Speaker 1

Yes. Probably a good portion of that growth from the Q1 Was from public fund deposits. So they would have received tax payment monies in like April. So we would generally see an uptick in the second quarter. As far as Other core deposits, there's still a fair amount of volatility kind of from day to day as money is moving around.

Speaker 1

So I think on average, It's relatively stable, but we do continue to see dollars go out for interest rates and treasuries or The 5% competing institutional specials that are out there, but we are also successful in bringing in New relationships and new customers and new dollars. So it's a little bit of feels like recycling right now.

Speaker 4

Yes. Yes. Okay. All right. Good.

Speaker 4

And then let's see. On the securities portfolio, Can you update us on how much cash flow you expect to get from the portfolio over the next 12 months?

Speaker 1

It Should be around $50,000,000 over the next 12 months at just right around 2%, I believe is the roll off rate.

Speaker 4

Okay, great. Last one for me before I set that. It looks like your tax rate was a little bit lower over the past Couple of quarters than it kind of had been in the past. Wondering if there's anything particularly driving that and then expectations for your tax Going forward?

Speaker 1

Nothing in particular. We do have a fair amount of tax Credit that won't fluctuate with our income level. So when you apply some of those tax credits and stuff, it reduces our effective rate in this type of environment. Our effective rate in this type of environment.

Speaker 4

Understood. All right, fantastic. Thank you for taking all

Speaker 1

Thanks, Brendan.

Operator

Our next Question comes from David Wilkes with River Oaks Capital. Please go ahead, David. Your line is open.

Speaker 2

Thank you. And I apologize, maybe I was just missing the disclosure in the past on this, but I had no idea that you had a $53,000,000 credit relationship. I guess the good news is it's been upgraded, but that's almost a quarter of Q2 capital or equity, excuse me. Can you just tell us a little bit about what that relationship is? I'm sensing CRE, but geographies, how many buildings, Core business, just to me that feels like a very large relationship.

Speaker 2

So I guess I'm looking for elaboration. And then Is this your largest relationship in the bank as well? All right. How many buildings? I would say that This would include hotels and restaurant chains that would multiple, I want Say, probably in the 7 to 10 Building range in various markets throughout the Midwest.

Speaker 2

So they're sprinkled All over. So no real significant Exposure in any one market, maybe the biggest market would have been Kansas City, but they're in Des Moines. They're headquartered in Des Moines. Okay. Is it our largest?

Speaker 2

No, it's not our largest. Okay. I'll then add with my follow-up question is, What is the largest and how many I'm just picking a number, you can give me a different number, but how many relationships are say More than $40,000,000 or some other number you might prefer? Maybe in the $40,000,000 range, I would say that we've got 4, 5 Relationships in that range? Okay.

Speaker 2

I mean, just to clarify on some of those, these Are typically entities that have might have a A common manager that might have different Ownership shares, so they become a combinable type entity, not from a legal lending perspective, but More from a how we look at them perspective. Typically have guarantees, personal Corporate guarantees, borrowing entities, the parent would have Significant liquidity. We know these folks. These people are all in Des Moines. Okay.

Speaker 2

All right.

Operator

And with that, we have no further questions. So I'll turn the call back to the management team for any further comments.

Speaker 1

No further comments. We just want to thank everybody for your interest in our company and thank you for joining us on the call today. Thank you.

Operator

Thank you, everyone, for joining us today. This concludes our call. You may now disconnect your lines.

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Earnings Conference Call
West Bancorporation Q2 2023
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