West Bancorporation, Inc. — Q2 2022 Form 10-Q Summary
Business Context and Reporting Period
West Bancorporation, Inc. is a bank holding company for West Bank, serving central and eastern Iowa and southern Minnesota. This unaudited Form 10-Q covers the three and six months ended June 30, 2022, compared with the same periods in 2021, and balance-sheet changes from December 31, 2021. Unless otherwise stated, amounts are in thousands.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2022 | Year-over-Year Change | Six Months Ended June 30, 2022 | Year-over-Year Change |
|---|---|---|---|---|
| Net interest income | $24,239 | 6.1% | $48,067 | 4.6% |
| Net interest income, FTE | $24,565 | 6.2% | $48,722 | 4.9% |
| Net income | $12,667 | (4.3%) | $25,851 | 3.4% |
| Diluted earnings per share | $0.75 | Compared with $0.79 | $1.54 | Compared with $1.49 |
| Net interest margin, FTE | 2.93% | Down 6 basis points | 2.89% | Down 19 basis points |
| Return on average assets | 1.45% | Down 20 basis points | 1.48% | Down 11 basis points |
| Return on average equity | 22.81% | Up 61 basis points | 21.83% | Up 33 basis points |
| Noninterest income | $2,278 | Down 9.4% | $4,667 | Down 6.3% |
| Noninterest expense | $11,266 | Up 7.0% | $21,928 | Up 5.4% |
Loans were $2.573 billion at June 30, 2022, up $116.9 million, or 4.8%, from year-end 2021. Excluding PPP loans, loan growth was 5.6%. The allowance for loan losses was $25.4 million, or 0.99% of loans excluding PPP loans, compared with 1.17% at December 31, 2021.
Total assets were $3.475 billion, compared with $3.500 billion at year-end. Securities available for sale were $732.0 million, down $26.9 million, while their unrealized loss increased by $99.0 million during the first six months because of higher market interest rates. Total deposits declined to $2.842 billion from $3.016 billion, primarily reflecting customer liquidity use and higher-yield investment alternatives. Cash and cash equivalents declined to $26.9 million from $192.8 million.
Stockholders’ equity declined to $216.2 million from $260.3 million, primarily because of after-tax unrealized securities losses recorded in accumulated other comprehensive income. The tangible common equity ratio was 6.22% at June 30, 2022. Management stated that the Company and West Bank met applicable regulatory capital requirements; the consolidated total risk-based capital ratio was 12.53% and the common equity Tier 1 ratio was 9.17%.
Operating cash flow was $33.6 million. Investing activities used $205.0 million, principally because of net loan growth and securities purchases. Financing activities provided $5.5 million, including $58.8 million of net proceeds from subordinated debt issuance, offset by the decline in deposits. Available borrowing capacity included approximately $490 million from the Federal Home Loan Bank, $4 million through the Federal Reserve discount window and $67 million through unsecured correspondent-bank lines.
Material Changes Versus Prior Comparable Period
- Second-quarter net income decreased $572 thousand, while six-month net income increased $860 thousand.
- Net interest income increased because of higher average loan and securities balances, but margin contracted as loan yields declined and deposit and borrowing costs increased.
- Noninterest income declined because of lower trust revenue and the absence of prior-year loan swap fees and securities gains.
- Noninterest expense increased, led by salaries and employee benefits, additional commercial bankers, restricted stock unit expense and higher technology and information-security costs.
- The Company recorded negative provisions for loan losses of $1.75 million in the quarter and $2.5 million year to date, compared with negative provisions of $2.0 million and $1.5 million, respectively, in 2021. The 2022 reversals reflected improved classified loans, sustained loan performance and reversal of a $2.5 million specific reserve after settlement of an impaired loan.
- Nonperforming assets fell to $335 thousand, or 0.01% of total assets, from $8.9 million, or 0.26%, at December 31, 2021. The remaining nonaccrual balance was a $335 thousand residential real estate loan.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management expected additional Federal Reserve rate increases during the second half of 2022. Higher rates could improve reinvestment yields but also increase deposit and borrowing costs and further reduce the fair value of securities. The Company estimated that a parallel 300-basis-point rate increase would reduce one-year net interest income by approximately 2.91%, or $2.847 million, based on its interest-rate simulation.
On June 14, 2022, the Company issued $60 million of subordinated notes bearing 5.25% interest initially, resetting in 2027 to an expected three-month SOFR plus 2.41%, and maturing in 2032. Net proceeds were used for a $58.65 million capital injection into West Bank.
A one-time $671 thousand increase in second-quarter income tax expense resulted from the remeasurement of deferred tax assets following Iowa bank franchise tax legislation. Excluding this item, the effective tax rate would have been 21.55% for the quarter and 20.37% for the first six months, versus reported rates of 25.49% and 22.38%.
Key risks include interest-rate and deposit pricing pressure, concentration in commercial and commercial real estate lending, potential declines in collateral values, inflation, supply-chain and labor issues, economic conditions, future CECL adoption, competition from non-bank and fintech firms, cybersecurity, regulatory changes, litigation, reference-rate reform and effects of the COVID-19 pandemic or other external events. The Company expects to adopt CECL after December 15, 2022 and stated that the financial impact could not yet be reasonably estimated.
At June 30, 2022, unfunded commitments totaled $1.013 billion, including $295.1 million for real estate construction loans, $699.0 million of other credit commitments and $19.4 million of standby letters of credit. Management stated that no material legal proceedings were pending and that disclosure controls were effective.
Important Facts for Investors to Verify
- Whether deposit outflows and increased use of brokered deposits, which totaled $196.5 million, continue and affect liquidity or funding costs.
- Whether additional rate increases compress net interest margin or produce the modeled reduction in interest income.
- Whether unrealized securities losses, totaling $105.7 million gross at June 30, 2022, recover as expected and do not require sales or credit-loss recognition.
- Whether commercial real estate, construction and land-development concentrations create increased credit risk during economic or property-market deterioration.
- The eventual effect of CECL adoption on the allowance for credit losses, capital and earnings.
- Whether loan growth remains strong while asset quality remains consistent with the quarter-end nonperforming asset ratio of 0.01%.
- The sustainability of negative loan-loss provisions, elevated returns on equity and the 6.22% tangible common equity ratio after considering accumulated other comprehensive losses.