Q2 2023 West Bancorporation Inc Earnings Call
Participants
Brad Lee Winterbottom; EVP; West Bancorporation, Inc.
Bradley P. Peters; Senior VP, Minnesota Group President, Executive VP & Director; West Bank
David D. Nelson; CEO, President & Director; West Bancorporation, Inc.
Harlee N. Olafson; Executive VP & Chief Risk Officer; West Bancorporation, Inc.
Jane M. Funk; Executive VP, Treasurer & CFO; West Bancorporation, Inc.
Brendan Jeffrey Nosal; Director & Senior Research Analyst; Piper Sandler & Co., Research Division
David Welch
Presentation
Operator
Hello, everyone, and welcome to the West Bancorporation Inc. Second Quarter Earnings Call. My name is Emily, and I'll be your moderator for today's call. (Operator Instructions) I will now turn over to your host Mr. James Funk. Please go ahead.
Jane M. Funk
Thank you, and good afternoon, everybody. Welcome to the West Bancorporation Inc.'s Second Quarter 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 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 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 disclosure in our 2023 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 30, 2023, and we undertake no duty to update that information.
And we'll start off the call with Dave Nelson.
David D. Nelson
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 came out with their list of the 2022 top-performing large community banks between $3 billion and $10 billion and ranked West Bank as #18 in America. 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, which are squeezing our margin.
Our loan growth year-to-date is about 2%, our credit quality remains pristine. We declared a second quarter dividend of $0.25 per share payable August '23 to shareholders of record as of August 9.
I'd now like to turn the call over to our Chief Risk Officer, Harlee Olafson.
Harlee N. Olafson
Thank you, Dave. My comments will also be brief since there isn't a lot of credit quality issues to talk about. As with that, credit quality does remain very strong at West Bank. Our watch list is at historically low levels. We had 1 past due 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 performing very well. We have very little metro multi-tenant office properties. 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 to provide some additional information.
Brad Lee Winterbottom
Good afternoon. For the first 6 months of the year, Dave mentioned our loan portfolio did grow 2.3% to $2.8 billion in outstandings. The 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&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 see a general weakening of our customer base. Our bankers continue to do the things that they were hired to do, and that's called on existing customers and prospects to build relationships. Deposit gathering remains important to us, and 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. Peters for Minnesota.
Bradley P. Peters
Thanks, Brad. Good afternoon, everyone. I want to provide a brief update on our expansion in Minnesota. Our team continues to build new relationships in each of our Minnesota regional centers. Our relationship-based approach has enabled us to grow new business and enhance existing relationships. In spite of the challenging environment, we continue to grow new business household majority of our new business is C&I, which has grown our deposit and treasury management businesses. Mankato market is looking forward to the completion of construction of their new facility, and we anticipate occupying the new building early in the fourth quarter.
The Owatonna market has purchased land for a new building, and we anticipate that construction to begin this fall.
Those are the end of my comments. I will now turn it back over to Jane.
Jane M. Funk
Thanks, Brad. I'll just make a few comments on the financials 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 first quarter by $1.3 million. We continue to see very significant rate pressure on our deposit base. And with the inverted yield curve, the increase in the interest costs continue to outpace the repricing of our loan and securities portfolios. .
While our business model is still incredibly cost-efficient, our noninterest expenses have increased from last year with inflationary pressures on compensation benefits, an increase in the FDIC's minimum assessment rate and occupancy costs associated with the opening of our new building last year in St. Cloud.
We recorded no provision for credit losses this quarter. As mentioned earlier, our watch and classified loan listing, it has declined to less than $1 million of loans 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.
Question and Answer Session
Operator
(Operator Instructions) Our first question comes from Brendan Nosal with Piper Sandler.
Brendan Jeffrey Nosal
Maybe just to start off here on credit quality. It simply fantastic for the quarter. I was just hoping you could offer a little more insight into what drove the improvement in the co-relationship that was upgraded during the quarter.
Harlee N. Olafson
Sure. We were waiting for year-end audited financial information to be received. We had pretty much new that the commercial real estate properties that were underneath this that were on the watch list. We're performing, but we waited until we received their audited financials and verified the cash flow, liquidity of the borrower prior to updating, but that's when it was updated -- or operated, excuse me.
Brad Lee Winterbottom
I would also just add that it went on the list during the COVID -- during the pandemic because their business is really slow. But it is since come back very strong fantastic.
Brendan Jeffrey Nosal
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 third quarter?
Jane M. Funk
Yes. Our June net interest margin was right around 2%.
Brendan Jeffrey Nosal
Okay. All right. That's helpful. So I mean -- I guess then if you ran [202] for the quarter and June was 2%. Certainly feels like the monthly pace of compression has eased pretty meaningfully, correct?
Jane M. Funk
Well, for June -- May and June, we did see some easing, but the Fed has 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 the market.
Brendan Jeffrey Nosal
Of course, of course. No, that's helpful. Maybe turning to lending and in particular, the Minnesota markets. Can you just update us where loan and deposit balances stood at quarter end within those markets?
Bradley P. Peters
Sure. Well, collectively, we're just under $700 million on the loan side and deposits between the 4 markets are in the neighborhood of $350 million. .
Brendan Jeffrey Nosal
Okay. Perfect. Let's see. 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're thinking about growth through the balance of the year?
Brad Lee Winterbottom
I would say that certainly, it's slowed in all markets, all 4 Minnesota and 2 Iowa markets. we do have activities. We've had a fair amount of payoffs, too. Entity is selling their assets, primarily in the real estate side of that. We have some construction projects that will add to our volume. There are a few opportunities out there that we are looking at. In terms of the C&I business, those are long lead times to really gather. But 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 first 6 months, I would say we're going to be in that range for the year. Maybe another 2%, what is that to say.
Brendan Jeffrey Nosal
Yes. Okay. That's certainly helpful. All right, good. And then do you happen to have what loan yields you're getting on new production in the second quarter roughly?
Brad Lee Winterbottom
It's in the mid-7s -- mid- to low 7s right now on new stuff. If it's fixed in a 5-year.
Brendan Jeffrey Nosal
Okay. Excellent. Maybe turning to the funding side of things. It looks like deposits were up nicely for the quarter, including some good growth in core money market and savings accounting. Maybe walk through deposit flows and mix shift as it occurred over the course of the quarter.
Jane M. Funk
Yes. Probably a good portion of that growth from the first quarter 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 the other core deposit there's still a fair amount of volatility kind of from day to day as money is moving around. 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 -- it feels like recycling right now.
Brendan Jeffrey Nosal
Yes, yes. Okay. All right. Good. 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?
Jane M. Funk
It should be around $50 million over the next 12 months at just right around 2%, I believe, is a roll-off rate.
Brendan Jeffrey Nosal
Okay. Great. Last one for me before I step back. 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 rate going forward?
Jane M. Funk
Nothing in particular. We do have a fair amount of tax credits 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. .
Operator
Our next question comes from David Welch with River Oaks Capital.
David Welch
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 million credit relationship. And I guess the good news is it's been upgraded. But that's almost 1/4 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. So I guess I'm looking for elaboration. And then is this your largest relationship in the bank as well.
Brad Lee Winterbottom
All right. How many buildings? I would say that this would include hotels and restaurant chains that would multiple, I want to say, in the probably in the 7 to 10 building range in various markets throughout the Midwest. So they're sprinkled all over. So no real significant exposure in any 1 market, maybe the biggest market would have been Kansas City, but they're in Des Moines. They're headquartered into Des Moines,Is it our largest? No, it's not our largest.
David Welch
Okay. I'll then 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 million or some other number you might prefer?
Brad Lee Winterbottom
Maybe in the $40 million range, I would say that we've got 4, 5 relationships in that range.
Harlee N. Olafson
I mean just to clarify on some of these, these are typically entities that have might have a common manager but 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.
Brad Lee Winterbottom
Typically have guarantees, personal guarantees, corporate guarantees, borrowing entities. The parent would have significant liquidity. We know these folks. These people are all in Des Moines, relationship that stands beyond 30 years.
Operator
At this time, we have no further questions registered. (Operator Instructions) And with that, we have no further questions. So I'll turn the call back to the management team for any further comments.
Jane M. Funk
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.
