West Bancorporation, Inc. — Q1 2023 Form 10-Q Summary
Reporting period: Three months ended March 31, 2023, compared with the three months ended March 31, 2022. Balance-sheet comparisons are with December 31, 2022. The filing is unaudited. West Bancorporation operates West Bank in Iowa and southern Minnesota.
Financial performance and position
| Metric | Q1 2023 / March 31, 2023 | Comparable / Prior period |
|---|---|---|
| Net income | $7.844 million | $13.184 million in Q1 2022 |
| Diluted earnings per share | $0.47 | $0.78 in Q1 2022 |
| Net interest income | $18.695 million | $23.828 million in Q1 2022 |
| Net interest margin, FTE | 2.23% | 2.85% in Q1 2022 |
| Noninterest income | $2.957 million | $2.389 million in Q1 2022 |
| Noninterest expense | $12.071 million | $10.662 million in Q1 2022 |
| Return on average assets | 0.88% | 1.51% in Q1 2022 |
| Return on average equity | 14.77% | 20.96% in Q1 2022 |
| Total assets | $3.625 billion | $3.613 billion at December 31, 2022 |
| Total loans | $2.756 billion | $2.743 billion at December 31, 2022 |
| Total deposits | $2.798 billion | $2.880 billion at December 31, 2022 |
| Cash and cash equivalents | $22.480 million | $26.539 million at December 31, 2022 |
| Total stockholders’ equity | $216.992 million | $211.112 million at December 31, 2022 |
- Net income declined 40.5%, primarily because net interest income fell $5.133 million as deposit and borrowing costs increased substantially faster than asset yields. Interest expense rose to $18.484 million from $3.287 million.
- Loan interest income increased $9.662 million year over year, supported by loan growth and higher yields. Average loans increased 12.1%, while the average loan yield increased 100 basis points to 4.88%.
- Noninterest income increased 23.8%, including a $691,000 gain from a bank-owned life insurance death benefit and higher trust-services revenue.
- Noninterest expense increased 13.2%, driven primarily by salaries and employee benefits, occupancy and equipment, FDIC insurance, business development, and insurance costs.
- Adjusted FTE efficiency ratio increased to 55.34% from 40.14%, reflecting lower net interest income and higher operating expenses.
- The company declared a quarterly cash dividend of $0.25 per common share, payable May 24, 2023, to shareholders of record May 10, 2023.
Material changes versus prior comparable periods
- Loans increased $13.349 million, or 0.5%, from year-end, primarily from a $38.218 million increase in commercial real estate loans, partly offset by a $26.275 million decrease in construction, land and land-development loans.
- Deposits decreased $82.015 million, or 2.8%; brokered deposits declined to $234.213 million from $272.691 million. Excluding brokered deposits, deposits decreased 1.5%.
- Borrowings increased, including federal funds and other short-term borrowings of $229.290 million and FHLB advances of $220.000 million, up $65.000 million from year-end.
- Available-for-sale securities were $665.358 million and carried $127.075 million of gross unrealized losses. Unrealized losses improved by $11.667 million during the quarter as market yields declined. Management concluded the losses were market-related rather than credit-related and did not record an allowance for credit losses on the securities.
- Accumulated other comprehensive loss improved to $85.425 million from $91.471 million at year-end, primarily due to the securities portfolio.
- The company adopted CECL on January 1, 2023. The adoption reduced retained earnings by $3.626 million, increased the loan allowance by $2.458 million, and established a $2.344 million allowance for off-balance-sheet credit exposures.
Credit quality, liquidity, capital and risks
- The allowance for credit losses on loans was $27.941 million, or 1.01% of total loans, versus 0.93% at December 31, 2022. There was no credit-loss provision in Q1 2023 and no charge-offs; recoveries were $10,000.
- Credit quality remained strong: nonaccrual loans were $316,000, nonperforming assets were 0.01% of total assets, and all reported loans were current except the small nonaccrual balance.
- Estimated uninsured deposits were approximately 33.3% of total deposits. Management identified deposit competition, high market rates and recent banking-industry failures as liquidity risks.
- Additional borrowing capacity at March 31, 2023 included approximately $434 million from the FHLB, $3 million through the Federal Reserve discount window, $35 million in unsecured correspondent-bank lines and $14.067 million through the Bank Term Funding Program. No discount-window or Bank Term Funding Program borrowings were outstanding during the quarter.
- Management stated that liquid assets, unencumbered securities, operating cash flows and borrowing capacity were sufficient to meet liquidity and capital needs.
- Consolidated capital ratios remained above regulatory minimums and the capital conservation buffer, including total capital of 12.17%, Tier 1 capital of 9.51%, CET1 capital of 8.92% and Tier 1 leverage of 8.60%.
- Interest-rate risk is significant. Management’s static simulation estimated one-year net interest income would decline 9.12% under a 300-basis-point rate increase and increase 12.64% under a 200-basis-point decline; actual results may differ materially.
- Commercial real estate, commercial lending, construction and land-development exposure creates sensitivity to borrower performance, refinancing conditions and collateral values. Management noted that the commercial real estate portfolio exceeds certain regulatory guidelines but remains within internal policy limits.
- Construction commitments included approximately $30.415 million remaining for the new headquarters and $5.426 million for a new Mankato office.
- No material pending legal proceedings, material changes to previously disclosed risk factors, defaults or control deficiencies were reported.
Outlook and management commentary
Management expects continued sensitivity to Federal Reserve rate actions, deposit pricing competition, funding mix and the inverted yield curve. Loan yields may benefit from variable-rate repricing and higher renewal rates, but deposit and wholesale funding costs have repriced faster and reduced margins. The filing provides no formal earnings or revenue guidance.
Investor verification items
- Track deposit stability, uninsured and brokered deposit levels, deposit pricing and reliance on wholesale funding.
- Assess whether net interest margin stabilizes as loans reprice and funding costs evolve.
- Review commercial real estate and construction concentrations, borrower refinancing risk and collateral valuations.
- Monitor CECL assumptions, allowance coverage, criticized loans, charge-offs and future credit-loss provisions.
- Evaluate the securities portfolio’s unrealized losses, liquidity availability and potential effects of further interest-rate changes.
- Verify the funding and completion costs of the headquarters and Mankato office projects.