Business Context and Reporting Period
West Bancorporation, Inc. is a bank holding company for West Bank, serving central and eastern Iowa and southern Minnesota. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, with comparisons to the corresponding 2020 periods and to December 31, 2020 for balance-sheet items.
Financial Performance and Condition
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net interest income | $24.5 million | $21.1 million | $70.5 million | $60.3 million |
| Net income | $12.7 million | $8.1 million | $37.7 million | $24.2 million |
| Diluted EPS | $0.76 | $0.49 | $2.25 | $1.46 |
| Net interest margin, FTE | 3.06% | 3.21% | 3.07% | 3.19% |
| Return on average assets | 1.52% | 1.16% | 1.56% | 1.21% |
| Return on average equity | 20.02% | 15.20% | 20.98% | 15.47% |
- Q3 net income increased 56.9%; nine-month net income increased 56.0%.
- Net interest income increased 15.9% in Q3 and 16.8% for the nine-month period, primarily from higher loan and securities balances and lower funding costs.
- The provision for loan losses was zero in Q3 2021 versus $4.0 million in Q3 2020. For nine months, the Company recorded a negative provision of $1.5 million versus an $8.0 million provision in 2020.
- Noninterest income declined 25.0% in Q3 to $2.4 million, largely because loan swap fees fell by $983 thousand. Nine-month noninterest income declined 1.6% to $7.4 million.
- Noninterest expense increased 6.5% in Q3 and 8.1% for nine months, driven primarily by salaries and benefits and FDIC insurance expense.
- The FTE efficiency ratio improved to 39.41% in Q3 and 40.08% for nine months, compared with 41.35% and 42.68%, respectively.
Balance Sheet, Liquidity and Capital
- Total assets were $3.25 billion at September 30, 2021, up from $3.19 billion at December 31, 2020.
- Loans increased 3.5% to $2.36 billion. Excluding PPP loans, loan growth was 10.1%. Commercial real estate loans increased $98.2 million and construction and land-development loans increased $89.6 million.
- Securities available for sale increased $342.8 million to $763.4 million as the Company invested excess liquidity.
- Deposits increased $35.9 million to $2.74 billion. Cash and cash equivalents declined to $32.5 million from $396.4 million, primarily reflecting securities purchases and loan growth.
- Outstanding FHLB advances declined to $125.0 million from $175.0 million; total debt also included $20.5 million of subordinated notes and $17.7 million of long-term debt.
- Management reported approximately $553 million of additional FHLB borrowing capacity, $18 million of Federal Reserve discount-window availability and $67 million of unsecured federal funds lines.
- Stockholders’ equity increased to $252.4 million from $223.7 million. The tangible common equity ratio was 7.77% at September 30, 2021.
- Consolidated total capital, Tier 1 capital, CET1 capital and Tier 1 leverage ratios were 11.12%, 10.11%, 9.40% and 8.51%, respectively. Management stated that the Company and West Bank met applicable capital requirements.
Credit Quality and Cash Flow
- The allowance for loan losses was $28.1 million, or 1.19% of total loans and 1.22% excluding PPP loans, compared with 1.29% and 1.40%, respectively, at December 31, 2020.
- Nonaccrual loans declined to $9.1 million from $16.2 million; nonperforming assets were 0.28% of total assets versus 0.51% at year-end 2020.
- Watch-list loans increased substantially to $91.3 million from $26.7 million, primarily because $69.1 million of hotel, restaurant and other commercial real estate loans tied to one borrowing group were downgraded.
- Six modifications related to one borrower were classified as troubled debt restructurings, with $8.7 million of TDR loans at September 30, 2021 and a $2.5 million specific reserve.
- PPP loans declined to $47.4 million from $180.8 million and are 100% guaranteed by the SBA.
- Reported net cash provided by operating activities in the consolidated cash-flow statement was $42.4 million for the first nine months of 2021, compared with $31.1 million in 2020. The MD&A separately refers to $72.6 million of operating cash contribution; investors should reconcile this apparent inconsistency to the filed statements.
Material Changes Versus Prior Comparable Period
- Profitability improved materially because of higher net interest income, sharply lower credit-loss provisions and lower interest expense.
- Net interest margin compressed by 15 basis points in Q3 and 12 basis points for nine months as securities yields and reinvestment rates declined, despite lower deposit and borrowing costs.
- Loan mix shifted away from PPP and other commercial loans toward commercial real estate and construction lending.
- Credit metrics improved overall, but the watch-list concentration in hospitality and commercial real estate increased.
- Accumulated other comprehensive loss was $10.0 million at September 30, 2021. Nine-month comprehensive income was $39.5 million, including $1.8 million of other comprehensive income.
- The Company terminated interest-rate swaps with total notional amounts of $150 million in March 2021, recording net termination gains in noninterest income and reclassifying $3.6 million of pre-tax losses from accumulated other comprehensive income.
Guidance, Outlook, Risks and Unusual Items
- No formal earnings or revenue guidance was provided.
- Management expects low interest rates, loan repricing, competition and lower yields on reinvested funds to pressure future loan yields, net interest income and net interest margin.
- COVID-19, including potential Delta-variant effects, remains a risk to customer operations, economic conditions and credit quality. Management expects possible longer-term effects on hospitality, entertainment and other affected industries.
- The Company has significant commercial real estate, commercial lending and construction-loan concentrations. Declines in collateral values, borrower cash flows or refinancing availability could increase losses.
- Management stated that credit-loss qualitative factors were reduced as economic conditions improved, but remained above pre-pandemic levels. The allowance under the future CECL standard could differ materially from the current allowance.
- The Company expects to adopt CECL after the fiscal years beginning after December 15, 2022 and does not plan early adoption; the financial impact cannot yet be reasonably estimated.
- Interest-rate risk, reference-rate reform, cyberattacks, regulatory changes, competition, litigation and broader economic conditions are identified as additional risks. A modeled 300-basis-point rate increase was estimated to increase one-year net interest income by approximately 1.24%, or $1.1 million, subject to significant assumptions.
- The Board declared a quarterly dividend of $0.24 per common share, payable November 24, 2021 to shareholders of record November 10, 2021.
- There were no material pending legal proceedings, material changes to previously disclosed risk factors, or changes to disclosure controls that materially affected financial reporting.
Most Important Facts for Investors to Verify
- Reconcile the $42.4 million operating cash flow in the consolidated statement with the $72.6 million operating cash contribution cited in MD&A.
- Assess the $91.3 million watch-list balance, especially the $69.1 million hospitality and commercial real estate relationship, collateral values and subsequent payment performance.
- Evaluate whether the $28.1 million allowance remains adequate as PPP loans decline and commercial real estate and construction exposure grows.
- Monitor the effect of persistent low rates and securities reinvestment yields on the 3.06% quarterly net interest margin.
- Review liquidity after the reduction in cash and cash equivalents and confirm the availability and terms of reported borrowing capacity.
- Model the future impact of CECL adoption, COVID-19-related credit deterioration and the Company’s commercial real estate concentration.