West Bancorporation, Inc. — Q1 2024 Form 10-Q Summary
Business context and reporting period
West Bancorporation, Inc. is an Iowa-based bank holding company whose subsidiary, West Bank, operates in central and eastern Iowa and southern Minnesota. The unaudited filing covers the three months ended March 31, 2024, with comparisons to the three months ended March 31, 2023 and balance-sheet comparisons to December 31, 2023. Dollar amounts are in thousands except per-share data.
Key financial metrics
| Metric | Q1 2024 | Q1 2023 or Dec. 31, 2023 | Change |
|---|---|---|---|
| Net income | $5,809 | $7,844 | Down 25.9% |
| Diluted EPS | $0.35 | $0.47 | Down $0.12 |
| Net interest income | $16,750 | $18,695 | Down 10.4% |
| Net interest margin, FTE | 1.88% | 2.23% | Down 35 basis points |
| Noninterest income | $2,299 | $2,957 | Down 22.3% |
| Noninterest expense | $11,868 | $12,071 | Down 1.7% |
| Efficiency ratio, adjusted FTE | 62.04% | 55.34% | Up 6.70 percentage points |
| Total assets | $3,962,692 | $3,825,758 | Up 3.6% from year-end |
| Total loans | $2,980,133 | $2,927,535 | Up 1.8% from year-end |
| Total deposits | $3,065,030 | $2,973,779 | Up 3.1% from year-end |
| Cash and cash equivalents | $148,017 | $65,357 | Up $82,660 from year-end |
| Stockholders’ equity | $223,756 | $225,043 | Down $1,287 from year-end |
Interest income increased to $44,570 from $37,179, primarily because of higher loan balances and yields. Interest expense increased to $27,820 from $18,484 as deposit and borrowing costs rose. Pretax income was $7,181 versus $9,581, and the effective tax rate was 19.1% versus 18.1%.
Annualized return on average assets was 0.61%, compared with 0.88% in Q1 2023. Annualized return on average equity was 10.63%, compared with 14.77%. Comprehensive income was $3,406, reflecting a $2,403 after-tax other comprehensive loss, primarily from securities valuation changes.
Operating cash flow was $6,121, compared with $2,494 in the prior-year quarter. Investing activities used $56,424, mainly due to a $52,567 net increase in loans and $10,328 of capital expenditures. Financing activities provided $132,963, primarily from a $91,251 increase in deposits and a $48,230 increase in short-term borrowings. The company paid $4,181 in common dividends.
Material changes versus the prior comparable period
- Net income declined $2,035, or 25.9%, mainly because of lower net interest income and the absence of a $691 bank-owned life insurance gain recognized in Q1 2023.
- Net interest income declined $1,945, or 10.4%. Management attributed the decline to rapidly rising short-term rates, an inverted yield curve, higher deposit pricing and increased use of borrowings, partly offset by loan growth and higher loan yields.
- Average loans increased $204,291, or 7.4%, year over year, while the average loan yield increased 61 basis points to 5.49%.
- Average deposits increased $231,543, or 10.6%, but the average deposit rate increased 111 basis points to 3.57%. Time deposits and savings and money market balances increased, while interest-bearing demand balances decreased.
- Noninterest income decreased $658, primarily because Q1 2023 included the bank-owned life insurance death-benefit gain. Trust-services revenue increased $70.
- Noninterest expense decreased $203. Salaries and employee benefits declined $378, but technology and software expense increased $187 and FDIC insurance expense increased $103.
- Securities available for sale declined $18,184 from year-end to $605,735. The portfolio carried $129,573 of gross unrealized losses, which management attributed primarily to higher market interest rates rather than credit deterioration.
Credit quality, debt and liquidity
The allowance for credit losses on loans was $28,373, or 0.95% of total loans, compared with 0.97% at December 31, 2023. No credit-loss expense or loan charge-offs were recorded in Q1 2024; recoveries were $31. Nonaccrual loans were $289, and nonperforming assets were 0.01% of total assets. Management stated that the allowance was adequate.
The loan portfolio increased primarily through $51,770 of growth in construction, land and land-development loans and $12,699 of growth in commercial loans, partly offset by a $14,930 decrease in commercial real estate loans. Commercial real estate exceeded applicable regulatory concentration guidelines, although management stated that the portfolio remained within internal policy limits and was subject to heightened monitoring.
At March 31, 2024, the company had $198,500 of federal funds purchased and other short-term borrowings, $315,000 of Federal Home Loan Bank advances, $79,697 of subordinated notes and $46,486 of long-term debt. Brokered deposits were $396,363, up from $305,411 at year-end. Estimated uninsured deposits were approximately 27.2% of total deposits.
Liquidity increased materially, with cash and cash equivalents of $148,017. West Bank reported approximately $479,000 of additional FHLB borrowing capacity, approximately $73,000 through the Federal Reserve discount window and $75,000 of unsecured correspondent-bank federal funds lines. Management stated that available liquidity and borrowing capacity were sufficient for liquidity and capital needs.
Regulatory capital remained above minimum requirements and the capital conservation buffer. At March 31, 2024, consolidated total capital to risk-weighted assets was 11.78%, Tier 1 capital was 9.23%, common equity Tier 1 capital was 8.67% and Tier 1 capital to average assets was 8.36%.
Guidance, outlook, management commentary, risks and unusual items
- The filing does not provide formal earnings, margin, loan-growth or revenue guidance. Management noted that future results remain sensitive to the direction and timing of Federal Reserve rate changes.
- Management expects deposit competition and elevated funding costs to continue affecting net interest margin. Interest-rate sensitivity modeling indicated estimated one-year net interest income would decline 16.94% under an immediate 300-basis-point rate increase and increase 1.57% under a 100-basis-point decline; these scenarios are not forecasts.
- Management uses interest-rate swaps to hedge certain FHLB advances, deposits and long-term debt. Cash-flow-hedge notional amounts totaled $515,000 at March 31, 2024, and approximately $11,514 was expected to be reclassified from accumulated other comprehensive income to reduce interest expense over the following 12 months.
- Principal risks include interest-rate and liquidity risk, deposit concentration and uninsured deposits, commercial real estate and construction-loan exposure, changing collateral values, economic weakness, cybersecurity incidents, competition from fintech companies, regulatory changes and litigation.
- The securities portfolio had significant unrealized losses, but management stated it did not intend, and was not more likely than not, to sell affected securities before recovery of amortized cost. No securities were sold during the quarter.
- The Board declared a regular quarterly dividend of $0.25 per common share on April 24, 2024, payable May 22, 2024, to shareholders of record May 8, 2024.
- There were no material pending legal proceedings, no material changes to previously disclosed risk factors, no unregistered equity sales and no reported Rule 10b5-1 or other trading-plan adoptions or terminations during the quarter.
Important facts for investors to verify
- Whether deposit pricing, brokered-deposit reliance and wholesale borrowing costs continue to compress net interest margin.
- Trends in commercial real estate, construction and land-development exposures, including concentration levels, collateral values and loan maturities.
- Whether nonperforming loans, charge-offs or the allowance for credit losses increase as economic conditions change.
- The potential capital and liquidity effects of the $129,573 gross unrealized loss position in available-for-sale securities if securities must be sold or rates remain elevated.
- Progress on loan growth, deposit retention, uninsured-deposit levels and available borrowing capacity.
- Whether technology, information-security and FDIC insurance costs continue to rise and affect the efficiency ratio.
- The assumptions underlying management’s interest-rate sensitivity analysis and the effect of actual Federal Reserve policy changes on earnings and capital.