Business Context and Reporting Period
West Bancorporation, Inc., the holding company for West Bank, filed this unaudited Form 10-Q for the quarter ended March 31, 2022. The company operates community banking businesses primarily in central and eastern Iowa and southern Minnesota. Results are compared with the three months ended March 31, 2021, and balance-sheet data with December 31, 2021.
Key Financial Metrics
| Metric | Q1 2022 | Comparable Period or Date | Change |
|---|---|---|---|
| Net income | $13.184 million | $11.752 million in Q1 2021 | Up 12.2% |
| Diluted EPS | $0.78 | $0.70 in Q1 2021 | Up $0.08 |
| Net interest income | $23.828 million | $23.121 million in Q1 2021 | Up 3.1% |
| Net interest margin, FTE | 2.85% | 3.17% in Q1 2021 | Down 32 basis points |
| Provision for loan losses | $(0.750) million | $0.500 million in Q1 2021 | $1.250 million favorable swing |
| Noninterest income | $2.389 million | $2.465 million in Q1 2021 | Down 3.1% |
| Noninterest expense | $10.662 million | $10.271 million in Q1 2021 | Up 3.8% |
| Return on average assets | 1.51% | 1.53% in Q1 2021 | Down 2 basis points |
| Return on average equity | 20.96% | 20.77% in Q1 2021 | Up 19 basis points |
| Total assets | $3.547 billion | $3.500 billion at December 31, 2021 | Up 1.3% |
| Total loans | $2.485 billion | $2.456 billion at December 31, 2021 | Up 1.2% |
| Total deposits | $3.091 billion | $3.016 billion at December 31, 2021 | Up 2.5% |
| Cash and cash equivalents | $144.255 million | $192.825 million at December 31, 2021 | Down $48.570 million |
| Stockholders’ equity | $236.480 million | $260.328 million at December 31, 2021 | Down 9.2% |
Profitability and Revenue
Net income increased primarily because of higher net interest income and a favorable change in the loan-loss provision, partly offset by higher operating expenses. Net interest income on a fully taxable equivalent basis increased 3.5% to $24.157 million, while the FTE net interest margin declined to 2.85% from 3.17%.
Loan interest income declined by $0.720 million, largely because of reduced PPP loan income. Securities interest income increased by $1.544 million as the company expanded its securities portfolio. Deposit interest expense increased by $0.274 million, while interest expense on Federal Home Loan Bank advances declined by $0.353 million.
The efficiency ratio was 40.14%, compared with 39.75% in Q1 2021. Salaries and employee benefits rose 12.3%, primarily because of restricted stock unit expense, additional commercial bankers and normal compensation increases.
Credit Quality and Loan Portfolio
Loans excluding PPP loans increased 1.7% during the quarter. Growth was concentrated in commercial real estate and construction, land and land development loans. PPP loans declined to $9.398 million from $22.206 million at year-end.
The allowance for loan losses was $27.623 million, or 1.11% of total loans and 1.12% excluding PPP loans, compared with 1.17% excluding PPP loans at December 31, 2021. There were no charge-offs during the quarter and $9,000 of recoveries. Nonaccrual loans were $8.800 million, representing 0.35% of total loans; nonperforming assets were 0.25% of total assets.
Management attributed the negative provision to sustained loan performance after COVID-related modifications expired and improvement in classified loans. Management stated that the allowance was adequate as of March 31, 2022.
Cash Flow, Liquidity and Capital
Operating activities provided $15.519 million of cash. Investing activities used $130.763 million, primarily because of $120.077 million of securities purchases, $29.161 million of net loan growth and $6.951 million of property and equipment purchases. Financing activities provided $66.674 million, principally from a $75.247 million increase in deposits.
Available-for-sale securities increased to $797.912 million, but their fair value declined by approximately $54.594 million during the quarter as market interest rates rose. The resulting $40.782 million after-tax securities loss was recorded in accumulated other comprehensive income, not current-period net income.
West Bank had approximately $548 million of additional FHLB borrowing capacity, $15 million available through the Federal Reserve discount window and $67 million through unsecured correspondent-bank lines. Management believed liquidity was strong.
At March 31, 2022, consolidated total capital, Tier 1 capital and common equity Tier 1 capital ratios were 10.72%, 9.81% and 9.16%, respectively. Management stated that the company and West Bank met applicable capital requirements and the capital conservation buffer.
Material Changes Versus Prior Comparable Period
- Net income increased 12.2%, and diluted EPS increased to $0.78 from $0.70.
- The loan-loss provision changed from a $0.500 million expense to a $0.750 million negative provision.
- Net interest income increased, but the FTE net interest margin contracted by 32 basis points because of lower loan and securities yields and a greater mix of lower-yielding securities.
- Average interest-earning assets increased 15.2%, while average deposits increased 20.9%.
- Noninterest expense increased 3.8%, led by higher salaries and employee benefits.
- Accumulated other comprehensive loss increased by $32.131 million, primarily because of securities valuation losses and partly offset by derivative gains.
- Total equity declined despite net income because the securities-related accumulated other comprehensive loss exceeded earnings retained after dividends.
- Cash and cash equivalents declined by $48.570 million as the company invested in securities, loans and facilities.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings or financial guidance. Management expected additional Federal Reserve rate increases during 2022. Higher rates could improve reinvestment yields but may increase deposit and borrowing costs and produce additional unrealized losses in the securities portfolio.
Key risks include interest-rate and liquidity risk, inflation, supply-chain disruption, labor shortages, COVID-19 effects, competitive pricing pressure, commercial and residential real estate values, credit losses, regulatory changes, cybersecurity, litigation, geopolitical events including the Russian invasion of Ukraine, and uncertainty related to reference-rate reform.
The company has significant exposure to commercial real estate, commercial lending, and construction and land development loans. Management noted that commercial borrowers may require refinancing or large maturity payments and that collateral values can decline during economic downturns.
The company had $1.043 billion of commitments to fund construction loans, extend other credit and issue standby letters of credit. It also had $3.947 million of remaining commitments to invest in qualified affordable housing projects. The filing reports no material pending legal proceedings.
The company plans to adopt the current expected credit loss standard in the period required for smaller reporting companies, after December 15, 2022, and had not yet estimated the effect. It was also evaluating other credit-loss, troubled-debt-restructuring and reference-rate-reform accounting updates.
The St. Cloud branch office was completed and opened in March 2022. The company also purchased land for a new headquarters in West Des Moines and began construction of a new Mankato, Minnesota office.
Most Important Facts to Verify
- Whether the lower net interest margin persists as Federal Reserve rate increases reprice loans, deposits and borrowings.
- The sustainability of the $0.750 million negative loan-loss provision and whether credit quality remains stable in commercial real estate and construction lending.
- The magnitude and duration of unrealized securities losses and their effect on tangible common equity and liquidity, notwithstanding management’s statement that regulatory capital is unaffected.
- Future deposit levels, including the potential runoff of government-stimulus-related liquidity and the company’s reliance on deposit funding.
- The effect of CECL adoption on the allowance for credit losses and regulatory capital.
- Execution and funding requirements for the new headquarters and Minnesota branch projects.
- The company’s ability to maintain dividend payments while equity and tangible common equity ratios are affected by accumulated other comprehensive losses.