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DATE
Thursday, Jan. 29, 2026 at 3 p.m. ET
CALL PARTICIPANTS
- Chairman and CEO — David Nelson
- President and Chief Risk Officer — Harlee Olafson
- Banking Manager and Chief Credit Officer — Todd Mather
- Minnesota Group President — Bradley Peters
- Chief Financial Officer — Jane Funk
- Minnesota Market Leader — Brad Winterbottom
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TAKEAWAYS
- Net Income -- $7.4 million for the fourth quarter, down from $9.3 million in the prior quarter but up from $7.1 million in the same quarter last year.
- Annual Net Income -- $32.6 million, representing a 35% increase over 2024's $24.1 million despite a fourth-quarter securities loss trade.
- Securities Sale Impact -- Realized a $4 million pretax net loss on the sale of $64 million of securities available for sale, with proceeds intended for higher-earning redeployment or repayment of high-cost funding.
- Adjusted Earnings Reference -- CFO Funk said, "Without incurring the loss of the security sale, our fourth quarter net income would have exceeded $10 million."
- Net Interest Margin -- Increased 11 basis points sequentially and 49 basis points year over year; now approximately 2.5% entering the new year per CFO Funk.
- Deposit Balances -- Increased over $162 million in the fourth quarter, including $212 million quarterly and $223 million annually in core deposit balances, driven by retail, commercial, and public funds.
- Loan Portfolio -- Loan outstanding balances ended just under $3 billion, with declines due to $50 million in large payoffs from asset sales and refinance activity, partially replaced by new loans at higher rates.
- Deposit Cost -- Decreased 28 basis points from third quarter and 64 basis points year over year, contributing to margin improvement.
- Credit Quality -- No past dues over 30 days, no other real estate owned, no nonaccruals, and no substandard loans as of year-end, with no provision for credit losses recorded.
- Watch List Concentration -- Watch list at 1.7% of total loans, with 70% related to the trucking industry, which management describes as "well secured."
- Repricing Opportunity -- Fixed-rate portfolio repricing in 2026 is just under $400 million, with a probable yield pickup of around 1.5% to maybe 2% on these loans.
- Dividend Announcement -- $0.25 per share dividend declared, payable February 25 to shareholders of record as of February 11.
- Securities Repositioning Outlook -- No set targets for further securities repositionings in 2026; ongoing evaluation will be based on liquidity needs.
- Deposit Growth Outlook -- CFO Funk stated, "our outlook on deposits is a little bit uncertain at this point" due to the anticipated outflow of public funds raised from 2025 bond offerings.
SUMMARY
Management credited improved net interest margin and disciplined deposit gathering for the year’s earnings growth. Executives emphasized that credit quality remains pristine, with no nonperforming or substandard loans reported. The company’s securities portfolio sale resulted in a significant one-time loss, designed to enhance long-term strategic flexibility. Management indicated that loan growth may continue to face headwinds from asset payoffs and limited pipeline volume, while expressing confidence in outreach efforts targeting business and deposit relationships across the franchise.
- Management indicated potential margin uplift as fixed-rate loans reprice in 2026, with CFO Funk estimating yield increases on maturing balances in the low 4% range and an anticipated pickup of 1.5%-2%.
- Bradley Peters cited competitor M&A activities as generating new business opportunities, especially in the Minnesota market, contributing to both loan and deposit growth initiatives.
- The uncertain impact of public fund outflows could affect deposit trajectory in 2026, as recent inflows from municipal bond issuances are expected to reverse.
INDUSTRY GLOSSARY
- Watch List: Loans monitored due to potential credit concerns but not classified as nonperforming or impaired.
- Nonaccruals: Loans on which interest is no longer accrued due to borrower financial difficulties.
- Other Real Estate Owned (OREO): Foreclosed property held by a bank, typically acquired through loan default.
Full Conference Call Transcript
David Nelson: Thank you, Jane. Good morning, and thank you, everyone, for joining us. We appreciate your interest in our company. I have a few general comments and then others will add more detail. We had a really good fourth quarter. And during the quarter, we executed a securities loss trade to better position ourselves for 2026. Jane will speak more to this, but despite the loss trade, net income on the year was up 35% over last year. We also maintained a problem-free loan portfolio. Deposits are growing quite nicely. Margins are expanding with more of that to come. Loan growth is expected to pick up when the economic expansion begins.
We are in a really good shape to grow and are looking forward to a special year. West Bank has declared a $0.25 dividend payable February 25 to shareholders of record as of February 11. Those are the extent of my prepared remarks. I'd now like to turn the call over to Mr. Harlee Olafson.
Harlee Olafson: Thank you, Dave. Good afternoon, everyone. For the year-end 2025, credit quality is very strong. We have no past dues over 30 days. We have no other real estate owned. We have no nonaccruals. We have no substandard loans. Our watch list has increased, but our watch list of total loans is still at a very low 1.7% of loans. 70% of our watch list is related to the trucking industry. The trucking industry has been suffering through low freight and excess capacity. The industry has a history of going through good times and bad times. Our portfolio is well secured, and we believe the businesses are making good decisions to remain viable.
Our commercial real estate portfolio continues to perform very well. We are diversified in both the type of commercial real estate we have and by location. Our commitment to strong underwriting is the foundation of our credit quality, customer relationships with multiple sources of repayment and liquidity are sought after. Our portfolio is strong because we have chosen good customers that have the financial characteristics that align with our underwriting. After all prepared remarks, I'm available for questions. And now I'll turn it over to Todd Mather, our Banking Manager and Chief Credit Officer.
Todd Mather: Thank you, Harlee. For the quarter ended 12/31/25, our loan outstandings were down slightly at just under $3 billion. We experienced a few larger payoffs from asset sales and refinance activity. The majority of those assets were priced below the current rate environment. We replaced those assets with quality new assets at better interest rates. Deposit gathering efforts continue to be an emphasis, and we have been successful in attracting new depositors. During the quarter, deposit balances increased just over $162 million with increases in core commercial and retail deposits. We remain selective in obtaining new loan opportunities, and those opportunities are less than in prior years.
We are confident in our abilities to create and maintain positive relationships with our customers and prospects that we are pursuing in a highly competitive market. I will now turn it over to Brad Peters, our Minnesota Group President.
Bradley Peters: Thanks, Todd. Good afternoon, everyone. I'm going to provide you a brief update on our Minnesota banks. But first, I want to describe to you a history of where we started and how we have built our Minnesota regional center banks. Each of our locations started as a loan production office with 0 revenue, beginning with our Rochester Bank in 2013. We added the St. Cloud, Mankato and Owatonna locations in early 2019 with our lift-out strategy. Our bankers had existing relationships with business owners, key executives and community leaders. We built an efficient model using a small staff supplemented with community leaders as advisory board members.
These leaders have been key in building our business through their endorsement and advocacy efforts. Each market grew quickly with a time line of 8 months to achieve a positive run rate. We then constructed permanent single bank locations in each market that became full-service banks. These facilities are designed as a relationship building tool, hosting client and prospect entertaining events and high-quality one-on-one conversations. These unique facilities align perfectly with our strategy of building business based on strong relationships. Our team has embraced this and has done an outstanding job of leveraging our buildings to grow our business. Today, we are seeking new business opportunities with the recent M&A activity from our competitors in our markets.
Our bankers have specific activity plans that target high-quality prospects. Each market has been successful in attracting new business to West Bank. Our bankers are focusing on full relationships, including deposit-rich business banking opportunities. Our disciplined calling approach has enabled our team to have success in building this new business. Our business banking focus and our seasoned group of bankers set us apart from our competition. As part of our relationship focus, we are also targeting high-value retail deposits. We have been successful in winning the retail deposits of our business owners, key executives and employees. We are also attracting new deposits from high-earning individuals in our communities. Those are the end of my comments.
I will now turn the call back over to Jane.
Jane Funk: Thanks, Brad. I will make just a couple of financial comments, and then we'll open it up for questions. So net income was $7.4 million for the fourth quarter compared to $9.3 million in the third quarter of 2025 and $7.1 million in the fourth quarter of last year. Net income for 2025 was $32.6 million compared to $24.1 million in 2024. As Dave mentioned, in the fourth quarter, we sold $64 million of securities available for sale and realized a pretax net loss of $4 million. We believe this transaction improves the flexibility of our balance sheet.
Proceeds may be used for strategic improvement in our long-term earnings profile through redeployment into higher earning assets or repayment of high-cost funding. Without incurring the loss of the security sale, our fourth quarter net income would have exceeded $10 million. We are very pleased with the continuous improvement in core earnings and believe we are set up for a strong 2026. Net interest income continued to improve through improvement in our net interest margin. Margin increased 11 basis points compared to third quarter and 49 basis points compared to fourth quarter last year. The cost of deposits declined 28 basis points compared to third quarter and 64 basis points compared to fourth quarter last year.
Core deposit balances, excluding brokered funds, increased approximately $212 million in the fourth quarter and $223 million for the year. We saw increases in all sectors, including retail, commercial and public fund deposits. We consider our public funds to be core deposits because of the relationships we have with those municipalities. As described earlier, the credit quality remains pristine and no provision for credit losses was recorded this quarter. Those are the end of our comments, and we'll open it up for questions.
Operator: [Operator Instructions] Your first question comes from Nathan Race with Piper Sandler.
Nathan Race: I was wondering if you could just kind of walk us through some of the loan growth dynamics in the quarter. It sounds like maybe payoffs were elevated. And I would just be curious to get a sense for how the loan pipeline stands heading into this year? I know Brad mentioned there's a lot of opportunities going on in around the twin cities and south of there across the locations in those geographies. So I would just love to get some more color along those lines.
Brad Winterbottom: This is Brad Winterbottom. We had one specific customer sell some medical office buildings, and that was north of $50 million in payoffs. We've had some other customers sell or refinance out into the secondary markets and multifamily, large multifamily. So we've -- that activity was very active in the fourth quarter. And I think we'll have a little bit more of that in the first quarter, but we've -- we're out trying to replace that volume.
Bradley Peters: Nate, this is Brad Peters. The other -- I mean, I mentioned the opportunities we've had with the M&A. We kind of see that as continuing into next year, even though that transition took place with the [ Bremer ] merger. But we've also seen some opportunities with the [ Aleris ] transaction as well. So I see that continuing into 2026.
Nathan Race: Okay. Great. And then, Jane, can you just update us in terms of the amount of loans you have repricing over the balance of this year and kind of what the yield pickup could be [ on the fixed [indiscernible] side of things ]?
Jane Funk: Yes. The fixed rate portfolio that reprices in 2026, I think it's just under $400 million. And the pickup is probably going to be around 1.5%, maybe 2% on those. So they're in the 4s. I think the average rate on that, what's maturing is in the low 4s.
Nathan Race: Okay. Great. And then as you described, the deposit growth among core categories was quite pronounced in the quarter. Any seasonality there or any kind of unique flows? And just generally, are you expecting kind of continued mid-single-digit growth in terms of both loans and deposits this year?
Jane Funk: Yes. I would say our outlook on deposits is a little bit uncertain at this point just because some of that growth comes from public funds. We've got some public entities that did some bonds, raised funds through bond offerings this year. We know that money is going to flow out in 2026. So whatever growth we can transact in retail and commercial might be offset by public funds, but that would just be normal public fund volatility.
Nathan Race: Okay. Great. And then maybe just one last one. It seems that securities portfolio repositionings have been pretty well received among investors these days, and I think that's reflected in your stock today and among other banks that have executed securities portfolio repositionings lately. So just curious what the appetite and potential magnitude would be to execute additional kind of bite-sized repositionings over the course of 2026?
Jane Funk: Yes. We look at it on a regular basis. I think part of that depends on kind of our liquidity and our needs for that cash, where else can we deploy it. So that's an ongoing evaluation that we do. So we don't have any set goal or plans for 2026, but we will continue to evaluate that.
Nathan Race: Okay. Great. And then, Jane, if I could just sneak one more in, I apologize. Just any thoughts on kind of a good starting point for the margin, just given the timing of the repositioning in the quarter? And just it seems like you guys still have some opportunities to reduce deposit costs on the heels of the December rate cut. So just trying to put all the pieces that we discussed together in terms of margin starting point for the first quarter.
Jane Funk: Yes. I would say right now, kind of for the December end of year, January, beginning of year, we're probably running around 2.5% margin. And we think that there's room certainly to improve that throughout the year without any changes in the rate environment.
Operator: [Operator Instructions] Thank you. I'm showing no further questions in queue. I'd like to turn the conference back over to Jane Funk for closing remarks.
Jane Funk: We appreciate everybody's interest in our company that's on the call today and just want to thank you for joining us. Have a good day.
Operator: This concludes today's conference call. You may now disconnect.