West Bancorporation, Inc. 2021 Form 10-K Summary
Business Context and Reporting Period
West Bancorporation, Inc. is an Iowa financial holding company whose primary business is conducted through West Bank, a business-focused community bank serving central and eastern Iowa and southern Minnesota. The filing covers the fiscal year ended December 31, 2021, with comparisons primarily to 2020. The Company operates as a single community-banking segment.
Financial statement amounts are in thousands of dollars, except per-share data, unless otherwise noted. The consolidated financial statements received an unqualified audit opinion, and the auditor also issued an unqualified opinion on internal control over financial reporting.
Financial Performance and Key Metrics
| Metric | 2021 | 2020 | Change or comment |
|---|---|---|---|
| Net income | $49.6 million | $32.7 million | 51.6% increase; record annual result |
| Basic EPS | $3.00 | $1.99 | Increase |
| Diluted EPS | $2.95 | $1.98 | Increase |
| Net interest income | $95.1 million | $82.8 million | 14.8% increase |
| Net interest margin, FTE | 3.05% | 3.20% | Down 15 basis points |
| Noninterest income | $9.7 million | $9.6 million | 1.3% increase |
| Noninterest expense | $43.4 million | $39.1 million | 11.1% increase |
| Return on average assets | 1.52% | 1.19% | Improved |
| Return on average equity | 20.33% | 15.49% | Improved |
| Efficiency ratio | 40.91% | 41.96% | Improved; lower is better |
| Total assets | $3.50 billion | $3.19 billion | 9.9% increase |
| Loans | $2.46 billion | $2.28 billion | 7.7% increase; 15.9% excluding PPP loans |
| Deposits | $3.02 billion | $2.70 billion | 11.7% increase |
| Stockholders’ equity | $260.3 million | $223.7 million | 16.4% increase |
Net income benefited primarily from higher net interest income and a significant reduction in credit-loss provisioning. Net interest income increased as asset growth and lower funding costs more than offset lower yields on loans and investments. Interest expense declined 29.8% to $12.2 million.
The Company recorded a negative provision for loan losses of $1.5 million in 2021, compared with a $12.0 million provision in 2020. The 2021 benefit reflected improved economic conditions, reduced specific impairments, recoveries and the expiration of COVID-19 payment deferrals, partly offset by loan growth.
Credit Quality, Capital, Debt and Liquidity
- Nonperforming loans declined to $8.9 million, or 0.36% of loans, from $16.2 million, or 0.71%, at December 31, 2020.
- The allowance for loan losses was $28.4 million, equal to 1.15% of total loans and 1.17% excluding PPP loans, compared with 1.29% and 1.40%, respectively, in 2020.
- The Texas ratio improved to 3.10% from 6.40%. The filing states that a lower ratio indicates stronger credit quality.
- Commercial real estate and construction lending remain significant concentrations. Commercial real estate loans, including construction, totaled approximately $1.89 billion, or 76.8% of total loans. The Company reported regulatory concentration measures of 448% for specified commercial real estate exposures and 100% for construction and land development exposures.
- Watch-classified loans increased to $64.0 million from $26.7 million, primarily because of hotel loans in one borrowing group. Management reported that the relationship was well collateralized, with a weighted-average loan-to-value ratio of 62%.
- Total borrowings were approximately $199.9 million at year end, including $125.0 million of FHLB advances, $20.5 million of subordinated notes and $51.5 million of long-term debt.
- In December 2021, the Company borrowed $40.0 million under a new commercial-bank credit agreement and used the proceeds for a capital injection into West Bank. The loan bears interest at the Wall Street Journal Prime Rate less 1.00% and is secured by all West Bank stock.
- Cash and cash equivalents were $192.8 million at year end, compared with $396.4 million in 2020, after substantial investment-security purchases and loan funding.
- West Bank reported approximately $556.0 million of additional FHLB borrowing capacity, $16.3 million of Federal Reserve discount-window availability and $67.0 million of unsecured federal funds lines, with no balances outstanding under the latter two sources.
- Net cash provided by operating activities was $57.9 million. Investing activities used $537.2 million, principally for securities purchases and loan growth, while financing activities provided $275.7 million.
- The Company’s tangible common equity ratio was 7.44%, compared with 7.02% in 2020. The Company and West Bank exceeded applicable well-capitalized regulatory thresholds and met the capital conservation buffer requirements.
Material Changes Versus the Prior Comparable Period
- Loans grew $175.6 million, while PPP loans declined to $22.2 million from $180.8 million. Excluding PPP loans, core loans increased 15.9%.
- Deposits grew $315.0 million, primarily due to pandemic-related customer liquidity preferences and government relief funds. Management cautioned that deposits could decline as stimulus programs end.
- Securities available for sale increased to $758.8 million from $420.6 million as excess liquidity was invested. The portfolio had $11.8 million of gross unrealized losses, which management considered temporary and related to market interest-rate movements.
- Net interest margin declined despite higher net interest income because of lower asset yields, substantial low-yield liquidity balances and lower reinvestment yields.
- Noninterest expense increased by $4.3 million, including higher salaries and benefits, FDIC insurance, technology and security costs, business development spending and charitable contributions.
- Loan swap fee income fell to $66 thousand from $1.6 million, although other income included $181 thousand of net swap termination gains.
- Cash dividends increased to $0.94 per share from $0.84 per share. The quarterly dividend declared for early 2022 was $0.25 per share, a record quarterly amount at the filing date.
- All COVID-19-related loan modifications expired during 2021, and the modified loans returned to regular payment status.
Guidance, Outlook, Risks and Unusual Items
Management stated that its earnings outlook was positive and expected the Company to remain profitable in 2022 at a level comparable with peers. Future profitability is expected to depend significantly on loan growth, credit losses, market interest rates and local and national economic conditions. Management indicated that loan growth could slow because of anticipated Federal Reserve rate increases, inflation, labor shortages and supply-chain disruptions.
Higher short-term interest rates could improve reinvestment yields but could also increase deposit and borrowing costs. The Company’s interest-rate simulation estimated that a permanent 300-basis-point increase would increase one-year net interest income by approximately 2.85%, or $2.6 million, based on assumptions described in the filing.
Management plans to complete a permanent Sartell, Minnesota branch in 2022, begin construction of a Mankato branch and construct a new West Des Moines headquarters, expected to be completed in 2024. These initiatives may increase occupancy and operating costs.
- Key risks include commercial real estate and hotel concentration, collateral-value declines, borrower refinancing risk and potential changes in local economic conditions.
- COVID-19 variants, inflation, supply-chain disruptions, labor shortages and the withdrawal of government support could affect borrowers, deposits and loan demand.
- Excess liquidity has pressured net interest margin and may be difficult to deploy profitably.
- Competitive pressure from banks, credit unions, mortgage companies and fintech companies may reduce loan pricing, deposit retention and fee income.
- Cybersecurity incidents, fraud, vendor failures and technology interruptions could result in losses, regulatory scrutiny, litigation and reputational damage.
- CECL adoption is scheduled for the fiscal year beginning January 1, 2023. The Company had not estimated the effect and warned that adoption could increase the allowance and reduce capital.
- The Company has exposure to LIBOR-linked instruments and stated that the financial impact of the transition to alternative reference rates could not yet be determined.
- Off-balance-sheet commitments totaled approximately $897.6 million, including $294.6 million of construction commitments, $585.7 million of other commitments to extend credit and $17.4 million of standby letters of credit. Management did not expect significant losses from these commitments.
- No material pending legal proceedings were reported beyond ordinary litigation incidental to banking activities.
Most Important Facts for Investors to Verify
- Whether loan growth, particularly commercial real estate and construction growth, remains sustainable without a corresponding deterioration in credit quality.
- Whether the $64.0 million watch list balance, hotel exposure and commercial real estate concentrations lead to higher provisions or charge-offs.
- Whether deposit balances remain stable as pandemic-related liquidity and government support decline, and how deposit repricing affects net interest margin.
- Whether the 2021 negative provision for loan losses was nonrecurring and how CECL adoption affects reserves and regulatory capital.
- Whether higher interest rates improve asset yields faster than they increase deposit and borrowing costs.
- The funding, construction costs and operating impact of the planned branches and new headquarters.
- The terms, covenants and repayment requirements of the $40.0 million parent-company credit agreement and the Company’s ability to continue dividends.
- The assumptions underlying management’s 2022 profitability outlook and interest-rate sensitivity estimates.