Business Context and Reporting Period
West Bancorporation, Inc., the holding company for West Bank, filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2023. The company operates primarily in central and eastern Iowa and southern Minnesota. Results are compared with the corresponding 2022 periods; amounts are in thousands except per-share data.
Key Financial Metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Net income | $5,906 | $11,602 | $19,612 | $37,453 |
| Diluted EPS | $0.35 | $0.69 | $1.17 | $2.23 |
| Net interest income | $16,634 | $23,004 | $52,670 | $71,071 |
| Noninterest income | $2,822 | $3,276 | $8,168 | $7,943 |
| Noninterest expense | $11,905 | $11,458 | $36,450 | $33,386 |
| Credit loss expense | $200 | $0 | $200 | $(2,500) |
| Net interest margin, FTE | 1.91% | 2.78% | 2.05% | 2.85% |
| Return on average assets | 0.64% | 1.32% | 0.72% | 1.43% |
| Return on average equity | 10.89% | 21.01% | 12.22% | 21.57% |
Net income declined 49.1% in the third quarter and 47.6% for the first nine months. The primary earnings pressure was higher funding costs: deposit interest expense increased to $17,156 in the quarter from $6,289, while total interest expense rose 166.9%. Higher loan interest income and loan growth only partially offset the increase.
At September 30, 2023, total assets were $3.702 billion, loans were $2.850 billion, and net loans were $2.822 billion. The allowance for credit losses was $28.147 million, or 0.99% of total loans. Deposits were $2.756 billion, down from $2.880 billion at December 31, 2022. Borrowings included $261.510 million of short-term borrowings, $315.000 million of Federal Home Loan Bank advances, $79.566 million of subordinated notes and $48.986 million of long-term debt.
Cash and cash equivalents were $20.621 million at September 30, 2023, compared with $26.539 million at year-end 2022. Operating activities provided $18.044 million of cash during the first nine months, while investing activities used $104.635 million and financing activities provided $80.673 million.
Stockholders’ equity was $203.933 million, compared with $211.112 million at December 31, 2022. The tangible common equity ratio was 5.51%. Consolidated regulatory capital ratios remained above applicable minimums, including an 8.80% common equity Tier 1 ratio, 9.37% Tier 1 risk-based ratio and 11.96% total risk-based capital ratio.
Material Changes Versus the Prior Comparable Period
- FTE net interest margin decreased 87 basis points in the quarter and 80 basis points for the nine months, primarily because deposit and borrowing costs repriced faster than loan and securities yields.
- Average loans increased 9.1% in the quarter and 10.2% for the nine months, while reported loans increased 3.9% from year-end 2022.
- Deposits decreased 4.3% from year-end 2022. Brokered deposits declined to $237.047 million from $272.692 million.
- Borrowed funding increased materially, including Federal Home Loan Bank advances rising from $155.000 million to $315.000 million and short-term borrowings rising from $200.000 million to $261.510 million.
- Noninterest income increased 2.8% for the nine months, helped by a $691 gain from bank-owned life insurance and higher trust-services revenue, partly offset by lower loan swap fees.
- Noninterest expense increased 9.2% for the nine months, driven by salaries and benefits, occupancy and equipment, professional fees, and FDIC insurance expense.
- Accumulated other comprehensive loss increased to $103.579 million, largely reflecting unrealized losses on available-for-sale securities as market interest rates rose.
- The company adopted the CECL standard on January 1, 2023, reducing retained earnings by $3.626 million and increasing the loan allowance by $2.458 million while establishing a $2.344 million allowance for off-balance-sheet exposures.
Guidance, Outlook, Commentary, Risks and Unusual Items
The filing does not provide formal earnings or financial guidance. Management expects interest-rate conditions, deposit competition and funding costs to remain important drivers of results. The Federal Reserve increased the federal funds target rate by 100 basis points during the first nine months of 2023, following 425 basis points of increases in 2022.
Management reported strong credit quality: nonaccrual loans were $303,000, there were no loans past due 90 days and still accruing, and nonperforming assets were 0.01% of total assets. There were no loan restructurings for borrowers experiencing financial difficulty as of September 30, 2023. Management considered the allowance for credit losses adequate, but noted that economic conditions, collateral values, regulatory reviews and changes in forecasts could require additional provisions or charge-offs.
Commercial real estate and construction lending exceeded specified regulatory guideline levels requiring heightened risk management, although management stated that the portfolios remained within internal policy limits. Total commitments to extend credit and standby letters of credit were $1.134 billion, including $444.205 million of commitments for real estate construction loans.
Liquidity sources included approximately $408 million of additional FHLB borrowing capacity, $3 million through the Federal Reserve discount window, $35 million of unsecured correspondent-bank federal funds lines and approximately $97 million through the Federal Reserve Bank Term Funding Program. No discount-window or Bank Term Funding Program borrowings were outstanding during the nine months. Management believed available liquidity and borrowing capacity were sufficient for liquidity and capital needs.
The company has remaining construction commitments of $18.625 million for its new headquarters, expected to be completed in the second quarter of 2024, and $2.023 million for a new Mankato office expected to be completed in the fourth quarter of 2023. The board declared a regular quarterly dividend of $0.25 per share payable November 22, 2023.
Key risks include further interest-rate increases, deposit outflows, liquidity and funding risk, unrealized securities losses, commercial real estate and construction credit risk, economic deterioration, uninsured deposits, regulatory changes, cybersecurity incidents and competition from nonbank and fintech providers. The filing reports no material changes to previously disclosed risk factors and no material pending legal proceedings.
Important Facts for Investors to Verify
- Whether deposit competition and increased wholesale funding continue to compress net interest margin and earnings.
- The stability of deposits, including the approximately 28.0% estimated uninsured-deposit share and $237.047 million of brokered deposits.
- The adequacy of the $28.147 million loan allowance under CECL as commercial real estate and construction exposures grow.
- The liquidity value and potential capital impact of the $159.295 million of gross unrealized losses in the securities portfolio.
- Progress and remaining costs for the headquarters and Mankato office construction projects.
- Whether reported regulatory capital ratios remain comfortably above minimum requirements if earnings weaken or credit losses increase.
- The assumptions underlying management’s interest-rate sensitivity analysis, which estimated a 14.24% decline in one-year net interest income under an immediate 300-basis-point rate increase.