West Bancorporation Q2 2024 Earnings Report

West Bancorporation EPS Results

• Actual EPS: $0.31
• Consensus EPS: $0.32
• Beat/Miss: Missed by -$0.01
• One Year Ago EPS: $0.35

West Bancorporation Revenue Results

• Actual Revenue: $49.91 million
• Expected Revenue: $19.29 million
• Beat/Miss: Beat by +$30.62 million
• YoY Revenue Growth: N/A

West Bancorporation Announcement Details

• Quarter: Q2 2024
• Date: 7/25/2024
• Time: Before Market Opens
• Conference Call Date: Thursday, July 25, 2024
• Conference Call Time: 3:00PM ET

West Bancorporation (NASDAQ:WTBA) is the bank holding company for West Town Bank and Trust, a full-service community bank headquartered in Chicago, Illinois. Through its subsidiary, the company offers a comprehensive suite of commercial and consumer banking products, including deposit accounts, residential and commercial mortgages, business loans and treasury management services. West Bancorporation focuses on delivering personalized financial solutions to small- and medium-sized businesses, real estate developers and individual customers within its urban market.

Since launching operations in 2006, West Town Bank and Trust has steadily expanded its presence across the Chicago metropolitan area. The bank provides checking, savings and money market accounts, certificates of deposit and a range of digital banking services, complemented by a network of full-service branches. Its commercial lending offerings encompass owner-occupied and investment real estate financing, construction and development loans, equipment financing and working capital lines of credit designed to support the growth of local enterprises.

West Bancorporation places strong emphasis on serving diverse and historically underserved communities in its footprint, with specialized programs for small-business support and community redevelopment. Its treasury management platform delivers cash management, ACH and wire transfer capabilities, remote deposit capture and fraud protection tools. To facilitate international trade and foreign exchange transactions, the bank maintains correspondent banking relationships that enable clients to conduct cross-border business efficiently.

The leadership team at West Bancorporation comprises experienced banking professionals with deep expertise in commercial lending, risk management and community development. Guided by a commitment to customer-centric service, prudent risk practices and sustainable growth, the company continues to pursue opportunities that enhance its competitive position and drive long-term value for stakeholders in the dynamic Chicago market.

West Bancorporation Q2 2024 Earnings Call Transcript

Key Takeaways

• Westbank’s loan growth was essentially flat in Q2 but rose 2.4% year-to-date, driven by vertical construction loan funding with $123 million in unfunded commitments.
• Net interest income increased for the second straight quarter and management said the net interest margin has stabilized as loan yields improve and deposit costs level off.
• The company’s credit quality remains pristine, with no past-due commercial real estate loans, a total watch list of 0.3%, and stress tests showing low LTVs and strong debt service coverage ratios.
• Deposits grew meaningfully, boosted by a large municipal deposit and core deposits rising 1.9% year-to-date, despite a competitive funding environment offering CD rates north of 5%.
• Westbank declared a quarterly dividend of $0.25 per share payable August 21, while non-interest expenses increased as expected from occupancy and one-time costs related to its new headquarters.

Presentation

[Operator]

Hello, and welcome to West Bancorporation, Inc.'s Q2 2024 Earnings Call. All participants are in a listen-only mode. After the speaker's remarks, we will have a question and answer session. You'll need to press star followed by the number one on your telephone keypad to ask a question. 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, Executive Vice President, Treasurer, CFO, and Director at West Bank]

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, President, Chairman, and Director at West Bank]

Thank you, Jane, and good afternoon, everyone.

[Jane Funk, Executive Vice President, Treasurer, CFO, and Director at West Bank]

Sorry. I got to go back.

[Dave Nelson, CEO, President, Chairman, and Director at West Bank]

Oh.

[Jane Funk, Executive Vice President, Treasurer, CFO, and Director at West Bank]

I got to read the fair value disclosure. Sorry about that. Got ahead of myself. I'll read the fair value—or the 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.

[Jane Funk, Executive Vice President, Treasurer, CFO, and Director at West Bank]

We caution that such statements are predictions and that actual results may differ materially. Please see the forward-looking statement disclosure in our 2024 second quarter earnings release for more information about risks and uncertainties, which may affect us. The information we will provide today is accurate as of June 30th, 2024, and we undertake no duty to update the information. Now I'll turn it over to Dave Nelson.

[Dave Nelson, CEO, President, Chairman, and Director at West Bank]

Well, thank you, Jane. Good afternoon, everyone, and thank you for joining us. Also, 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.

[Dave Nelson, CEO, President, Chairman, and Director at West Bank]

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 21st to owners of record as of August 7th. 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, Executive Vice President and Chief Risk Officer at West Bank]

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.

[Harlee Olafson, Executive Vice President and Chief Risk Officer at West Bank]

We quarterly stress test our commercial real estate portfolio to see if we have trends that concern us. In our last stress test, we have looked at all of the different types of commercial real estate and have the lowest loan-to-value we have experienced and very strong and consistent debt service coverages. Our watch list on our total portfolio stands at 0.3%. Here are some statistics on our commercial real estate portfolio by type.

[Harlee Olafson, Executive Vice President and Chief Risk Officer at West Bank]

Multifamily, we have $621, $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 total $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 total $278 million, with a loan-to-value of 64% and an average debt service coverage of 1.37.

[Harlee Olafson, Executive Vice President and Chief Risk Officer at West Bank]

Our medical office properties total $178 million, with an average loan-to-value of 58% and an average debt service coverage of 2.49. Our senior care facilities total $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 a downtown office and other retail crisis with the work from home, 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.

[Harlee Olafson, Executive Vice President and Chief Risk Officer at West Bank]

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 had numerous deposit successes. At the end of our prepared remarks, I will be available for questions, and with that, I will turn it over to our Bank President, Brad Winterbottom.

[Brad Winterbottom, Executive Vice President of the Company and President of the Bank at West Bank]

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 on vertical construction loan commitments.

[Brad Winterbottom, Executive Vice President of the Company and President of the Bank at West Bank]

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 markets we grow—we serve, excuse me, to grow our market share, but 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're pursuing. With that, I'll turn it over to Mr. Peters.

[Brad Peters, Executive Vice President of the Company and Minnesota Group President at West Bank]

Thanks, Brad. Good afternoon, everyone. I'm gonna provide a brief update on our progress in Minnesota. We continue to build new business in each of our Minnesota regional centers. We're focused on C&I 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.

[Brad Peters, Executive Vice President of the Company and Minnesota Group President at West Bank]

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, Executive Vice President, Treasurer, CFO, and Director at West Bank]

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 the last few quarters.

[Jane Funk, Executive Vice President, Treasurer, CFO, and Director at West Bank]

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 funding of construction loans.

[Jane Funk, Executive Vice President, Treasurer, CFO, and Director at West Bank]

Our deposit balances at June 30th include a large deposit from a municipal customer that we expect to draw down over the next 12-18 months for a construction project. Excluding those funds and any brokered deposit activity, the core deposits have increased 1.9% year to date. Those are the highlights I was gonna cover. That's the end of our prepared comments, and now we'll open it for questions.

[Operator]

As a reminder, to ask a question, please press star, followed by the number one on your telephone keypad. Our first question comes from Andrew Liesch from Piper Sandler. Please go ahead. Your line is open.

[Andrew Liesch, Senior Equity Research Analyst at Piper Sandler Companies]

Hey, good afternoon, everyone.

[Jane Funk, Executive Vice President, Treasurer, CFO, and Director at West Bank]

Hi, Andrew.

[Andrew Liesch, Senior Equity Research Analyst at Piper Sandler Companies]

Hi, just wanna stick with the loan growth here. It's on a pretty good pipeline of construction. How is that looking here for the third quarter? And are there any large payoffs that you see coming down the pipe?

[Brad Winterbottom, Executive Vice President of the Company and President of the Bank at West Bank]

We have a few payoffs scheduled, probably in the maybe the 20-25 million range. That will get replaced with funded commitments. We, you know, you can get surprised with, "Hey, we sold this property, and it's gonna close in 60 days." But the ones that we are aware of are roughly around $25 million.

[Andrew Liesch, Senior Equity Research Analyst at Piper Sandler Companies]

Got it.

[Brad Winterbottom, Executive Vice President of the Company and President of the Bank at West Bank]

Have been very selective in adding new projects based upon where we stand with CRE and our liquidity position.

[Andrew Liesch, Senior Equity Research Analyst at Piper Sandler Companies]

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, larger deposits?

[Brad Winterbottom, Executive Vice President of the Company and President of the Bank at West Bank]

Well, we have roughly 30 commercial bankers and about 15 principal bankers, and that's their job daily, to go out and find those deposits. So we're chasing any and all. It's very competitive. We're seeing CDs that might be six months that are north of 5%, but we're competing. We're chasing the lower priced type 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, Senior Equity Research Analyst at Piper Sandler Companies]

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

[Jane Funk, Executive Vice President, Treasurer, CFO, and Director at West Bank]

It's, 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. And there was, you know, we had some one-time costs in there with the move and stuff, but it's probably a reasonable assumption.

[Andrew Liesch, Senior Equity Research Analyst at Piper Sandler Companies]

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

[Jane Funk, Executive Vice President, Treasurer, CFO, and Director at West Bank]

Yeah, that'll be probably January, December, January.

[Andrew Liesch, Senior Equity Research Analyst at Piper Sandler Companies]

Got it.

[Jane Funk, Executive Vice President, Treasurer, CFO, and Director at West Bank]

That's a smaller, that's the smallest building that we've constructed, so

[Andrew Liesch, Senior Equity Research Analyst at Piper Sandler Companies]

Got you.

[Jane Funk, Executive Vice President, Treasurer, CFO, and Director at West Bank]

That'll be smaller scale.

[Andrew Liesch, Senior Equity Research Analyst at Piper Sandler Companies]

Okay. Very helpful. And then, Harlee, just the increase in the watchlist, any commentary behind that? Like, what drove that increase this quarter?

[Harlee Olafson, Executive Vice President and Chief Risk Officer at West Bank]

We just have a couple of commercial customers that had a weaker operating performance, that they're well, well capitalized, well secured. We expect, we expect them to meet their projections for this next year and come through it and continue to be good commercial customers. And again, like I said, I almost get embarrassed talking about our watchlist because it's so low at 0.3% of our total portfolio.

[Harlee Olafson, Executive Vice President and Chief Risk Officer at West Bank]

We have a, we have a couple of non-accruals that have been with us for a while, that we expect will pay off in the next. Well, I think they'll all be gone before the end of the year, but there's some closings that are scheduled from sale or refinance of those.

[Andrew Liesch, Senior Equity Research Analyst at Piper Sandler Companies]

Got it. That's really helpful and some good trends to hear. And then I guess towards the end of my question, the deposit that came on looked like you, that was used to fund some payoffs of some brokered funding. Just if you have handy, what was the rate that the deposits came on versus the brokers that were paid off, just that spread?

[Jane Funk, Executive Vice President, Treasurer, CFO, and Director at West Bank]

They were very similar.

[Andrew Liesch, Senior Equity Research Analyst at Piper Sandler Companies]

Okay.

[Jane Funk, Executive Vice President, Treasurer, CFO, and Director at West Bank]

Yeah.

[Andrew Liesch, Senior Equity Research Analyst at Piper Sandler Companies]

Gotcha.

[Jane Funk, Executive Vice President, Treasurer, CFO, and Director at West Bank]

There wasn't much of a difference.

[Andrew Liesch, Senior Equity Research Analyst at Piper Sandler Companies]

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, Executive Vice President, Treasurer, CFO, and Director at West Bank]

We probably don't. I mean, we're seeing good improvement on the loan yields, and, you know, our cost of deposits is really kind of is 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. And, you know, a couple of those have rates below 2%. So we'll be, you know, refinancing, resetting rates on those. So but I think we are seeing yield improvement on loans that's a little bit in excess of what we had expected, so.

[Andrew Liesch, Senior Equity Research Analyst at Piper Sandler Companies]

Great. So a little bit of margin expansion, then we'll get some rate cuts and help a little bit after that, then.

[Jane Funk, Executive Vice President, Treasurer, CFO, and Director at West Bank]

Yeah.

[Andrew Liesch, Senior Equity Research Analyst at Piper Sandler Companies]

Does that sound reasonable? Good.

[Jane Funk, Executive Vice President, Treasurer, CFO, and Director at West Bank]

We hope so.

[Andrew Liesch, Senior Equity Research Analyst at Piper Sandler Companies]

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

[Jane Funk, Executive Vice President, Treasurer, CFO, and Director at West Bank]

Thanks, Andrew.

[Operator]

Once again, to ask a question, please press star followed by one on your telephone keypad. We have no further questions. I would like to turn the call back over to Jane Funk for any closing remarks.

[Jane Funk, Executive Vice President, Treasurer, CFO, and Director at West Bank]

All right. Thank you. We just want to thank everybody for joining us today, and we look forward to talking to you again next quarter. Thank you.

[Operator]

This concludes today's conference call. Thank you for your participation. You may now disconnect.

Participants

Analysts

• Andrew Liesch, Senior Equity Research Analyst at Piper Sandler Companies
• Brad Peters, Executive Vice President of the Company and Minnesota Group President at West Bank
• Brad Winterbottom, Executive Vice President of the Company and President of the Bank at West Bank
• Dave Nelson, CEO, President, Chairman, and Director at West Bank
• Harlee Olafson, Executive Vice President and Chief Risk Officer at West Bank
• Jane Funk, Executive Vice President, Treasurer, CFO, and Director at West Bank