West Bancorporation, Inc. — Q2 2021 Form 10-Q Summary
Business Context and Reporting Period
West Bancorporation, Inc. is a bank holding company headquartered in West Des Moines, Iowa. Through West Bank, it serves central and eastern Iowa and southern Minnesota. This unaudited Form 10-Q covers the three and six months ended June 30, 2021, with balance-sheet comparisons to December 31, 2020 and income and cash-flow comparisons to 2020.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Net income | $13.2 million vs. $8.0 million | $25.0 million vs. $16.1 million |
| Diluted earnings per share | $0.79 vs. $0.48 | $1.49 vs. $0.97 |
| Net interest income | $22.9 million vs. $20.7 million | $46.0 million vs. $39.2 million |
| Provision for loan losses | $(2.0) million vs. $3.0 million | $(1.5) million vs. $4.0 million |
| Noninterest income | $2.5 million vs. $1.8 million | $5.0 million vs. $4.3 million |
| Noninterest expense | $10.5 million vs. $9.4 million | $20.8 million vs. $19.1 million |
| Net interest margin, FTE | 2.99% vs. 3.27% | 3.08% vs. 3.19% |
| Return on average assets | 1.65% vs. 1.19% | 1.59% vs. 1.23% |
| Return on average equity | 22.20% vs. 15.68% | 21.50% vs. 15.61% |
At June 30, 2021, total assets were $3.269 billion, loans were $2.310 billion, deposits were $2.825 billion and stockholders’ equity was $246.5 million. Cash and cash equivalents were $270.8 million. The allowance for loan losses was $28.0 million, or 1.21% of total loans and 1.26% excluding PPP loans.
Six-month operating cash flow was $28.5 million. Investing activities used $216.6 million, primarily reflecting $258.2 million of securities purchases and a $28.8 million net increase in loans. Financing activities provided $62.4 million, including a $124.3 million increase in deposits and repayment of $50.0 million of Federal Home Loan Bank advances.
At June 30, 2021, available liquidity included $270.8 million of cash and cash equivalents, approximately $575 million of additional FHLB borrowing capacity, approximately $20 million of Federal Reserve discount-window capacity and $67 million of unsecured federal funds lines. The consolidated Tier 1 leverage ratio was 8.47%, total risk-based capital was 11.32% and common equity tier 1 capital was 9.51%.
Material Changes Versus Comparable Periods
- Second-quarter net income increased 66.1%; six-month net income increased 55.6%, primarily because of higher net interest income, higher noninterest income and the reduction in loan-loss provisioning.
- Net interest income increased 10.1% in the second quarter and 17.2% for the first six months. Average interest-earning assets expanded substantially, while funding costs declined.
- The FTE net interest margin declined 28 basis points in the quarter and 11 basis points year to date because of lower loan and securities yields and elevated low-yield liquidity balances.
- Loans increased $29.0 million, or 1.3%, from year-end; excluding PPP loans, loans increased $125.1 million, or 6.0%. Commercial real estate and construction loans increased, while commercial loans declined primarily because PPP balances fell by $96.2 million.
- Deposits increased $124.3 million. Securities available for sale increased $180.9 million to $601.5 million as the Company invested excess liquidity.
- Nonaccrual loans declined to $14.6 million from $16.2 million. However, loans classified as Watch increased to $90.7 million from $26.7 million, primarily due to a $68.4 million hotel, restaurant and other commercial real estate relationship.
- Noninterest expense increased 11.8% in the quarter and 9.0% year to date, driven primarily by salaries and benefits, FDIC insurance, professional fees and other operating expenses.
- Accumulated other comprehensive loss improved to $6.5 million from $11.8 million of loss at year-end, primarily because of improved derivative values.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide formal earnings guidance. It expects loan and securities yields, net interest income and net interest margin may decline because of the low-rate environment, strong competition, loan prepayments and reinvestment of liquidity at lower yields.
- COVID-19 conditions improved during the period, and there were no COVID-19-related loan modifications at June 30, 2021. Management nevertheless identified continuing risks from variants, reduced government assistance and lasting effects on local businesses.
- Hotel, restaurant and movie-theater exposures totaled approximately $218.0 million, $19.7 million and $17.4 million, respectively, or approximately 11.1% of the total loan portfolio collectively.
- The Company recorded negative loan-loss provisions of $2.0 million in the quarter and $1.5 million year to date, reflecting improved economic conditions and no loan losses since the pandemic began. Future provisions remain sensitive to credit quality, collateral values, economic conditions and regulatory review.
- Interest-rate swap terminations generated $3.6 million of pre-tax losses reclassified from accumulated other comprehensive income and $3.8 million of gains on forward-starting swaps; management reported net swap termination gains of $181,000 in other noninterest income for the six-month period.
- The Company’s commercial real estate and construction lending concentrations exceed specified regulatory guidelines, although management states that heightened monitoring procedures are in place.
- The Company plans to adopt the current expected credit loss standard after the amended effective date for smaller reporting companies, currently fiscal years beginning after December 15, 2022. Management cannot yet reasonably estimate the impact.
- The Board declared a quarterly dividend of $0.24 per common share on July 28, 2021, payable August 25, 2021.
Investor Verification Checklist
- Verify whether the increase in Watch-listed loans, particularly the hotel and commercial real estate relationship, develops into higher nonaccrual loans, charge-offs or provisions.
- Monitor net interest margin, loan yields, deposit pricing and the effect of continued low interest rates and excess liquidity.
- Assess the sustainability of the negative loan-loss provision and the adequacy of the allowance as PPP balances decline and CECL adoption approaches.
- Review exposure to commercial real estate, construction, hospitality, restaurants and entertainment borrowers, including collateral values and repayment sources.
- Track deposit stability as government stimulus programs taper and evaluate liquidity after securities purchases and FHLB debt repayment.
- Separate recurring earnings from unusual effects, including PPP fee recognition, swap termination activity, securities gains and COVID-19-related provision changes.
- Review the company’s forward-looking risk disclosures, interest-rate sensitivity assumptions and future effects of reference-rate reform.