West Bancorporation, Inc. — Form 10-Q Summary
Business Context and Reporting Period
West Bancorporation, Inc. is an Iowa-based bank holding company operating through West Bank in central and eastern Iowa and southern Minnesota. This unaudited Form 10-Q covers the three months ended March 31, 2020, compared primarily with the three months ended March 31, 2019 and, for balance-sheet items, December 31, 2019. The period included the initial effects of the COVID-19 pandemic, sharp Federal Reserve rate cuts, and enactment of the CARES Act.
Key Financial Metrics
| Metric | Q1 2020 | Comparable / Prior Period |
|---|---|---|
| Total assets | $2.520 billion | $2.474 billion at December 31, 2019 |
| Loans, gross | $1.994 billion | $1.942 billion at December 31, 2019 |
| Total deposits | $2.020 billion | $2.015 billion at December 31, 2019 |
| Net income | $8.089 million | $6.899 million in Q1 2019 |
| Diluted EPS | $0.49 | $0.42 in Q1 2019 |
| Net interest income | $18.464 million | $15.889 million in Q1 2019 |
| Net interest margin, FTE | 3.10% | 2.99% in Q1 2019 |
| Provision for loan losses | $1.000 million | None in Q1 2019 |
| Noninterest income | $2.520 million | $2.119 million in Q1 2019 |
| Noninterest expense | $9.663 million | $9.544 million in Q1 2019 |
| Cash and cash equivalents | $66.397 million | $53.290 million at December 31, 2019 |
| Stockholders’ equity | $200.693 million | $211.820 million at December 31, 2019 |
Return on average assets was 1.29%, return on average equity was 15.54%, and the adjusted FTE efficiency ratio was 45.64%. Net cash provided by operating activities was $10.412 million. Investing activities used $28.136 million, primarily reflecting net loan growth, while financing activities provided $30.831 million, including a $29.680 million increase in federal funds purchased.
Total debt and other borrowings included $179.620 million of Federal Home Loan Bank advances, $32.340 million of federal funds purchased, $20.442 million of subordinated notes, and $22.896 million of long-term debt. Management reported approximately $321 million of additional FHLB borrowing capacity, $98 million of Federal Reserve discount-window capacity, and $67 million of unsecured federal funds lines.
Material Changes Versus Prior Comparable Period
- Net income increased $1.190 million, or 17.25%, primarily because of higher net interest income and noninterest income, partly offset by the new loan-loss provision.
- Net interest income increased $2.575 million, or 16.2%. Average interest-earning assets increased $231.930 million, while lower funding costs more than offset lower asset yields.
- Net interest income on an FTE basis increased 15.36% to $18.642 million, and the FTE net interest margin increased 11 basis points to 3.10%.
- Noninterest income increased $401,000, primarily because of $586,000 of loan swap fees from the back-to-back interest-rate-swap program. The prior-year period included a $307,000 gain on the sale of premises that did not recur.
- Loans increased $52.769 million, or 2.7%, from year-end 2019, led by commercial, commercial real estate, and construction lending.
- The allowance for loan losses increased to $18.332 million from $17.235 million, and the allowance-to-total-loans ratio increased to 0.92% from 0.89% at year-end.
- Accumulated other comprehensive loss increased substantially to $18.800 million from $3.261 million, primarily because of a $15.688 million after-tax loss on interest-rate derivatives. Stockholders’ equity consequently declined despite quarterly earnings.
- Investment securities available for sale declined $26.158 million to $372.420 million as the Company sold securities to support expected loan growth and reposition interest-rate risk.
Guidance, Outlook, Risks, and Unusual Items
- Management expects COVID-19 to adversely affect loan demand, interest income, net interest income, net interest margin, credit quality, collateral values, and potentially capital in subsequent periods.
- The Company expects commercial real estate loan growth to slow, although PPP lending was expected to cause a temporary increase in the loan portfolio. The Bank was participating as a PPP lender.
- Through April 21, 2020, the Bank had modified 120 COVID-19-related loans totaling $378 million. Most modifications provided interest-only payments for up to six months; some hotel loans received full payment deferrals. None were classified as TDRs or impaired under applicable regulatory guidance.
- Management identified heightened exposure in hotel, restaurant, retail, and related commercial real estate borrowers. Increased line utilization, delinquencies, defaults, foreclosures, and additional loan-loss provisions remain possible.
- The Company maintained strong reported capital levels and stated that it met applicable capital requirements. Consolidated total capital to risk-weighted assets was 11.35%, CET1 capital was 9.66%, and Tier 1 capital to average assets was 9.47% at March 31, 2020.
- The Board maintained the quarterly dividend at $0.21 per share for the second quarter of 2020 rather than increasing it, citing economic uncertainty. The dividend was payable May 20, 2020 to shareholders of record May 6, 2020.
- Interest-rate swaps had total cash-flow-hedge notional amounts of $335 million. Their fair value declined materially as market rates fell, creating the large other comprehensive loss. The Company estimated that approximately $3.437 million would be reclassified from accumulated other comprehensive income to interest expense over the following 12 months.
- PPP participation creates risks involving borrower eligibility, SBA guaranty funding, regulatory compliance, litigation, reputational damage, and possible loss of SBA coverage if loan-origination or servicing deficiencies are identified.
- The Company had no material pending legal proceedings beyond ordinary routine litigation. Management stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Track COVID-19-related loan modifications, PPP loan balances and fees, borrower drawdowns, delinquency trends, charge-offs, and future provisions.
- Assess concentration risk in commercial real estate, construction and land development, hotels, restaurants, retail, and the Iowa and Minnesota markets.
- Monitor the allowance for loan losses and the timing and estimated impact of CECL adoption, which the Company planned for fiscal years beginning after December 15, 2022.
- Reconcile changes in stockholders’ equity and tangible common equity with derivative fair-value movements, dividend payments, and future capital requirements.
- Evaluate the sensitivity of earnings and liquidity to additional Federal Reserve rate changes, deposit outflows, increased borrowing, and utilization of unused credit commitments.
- Review the Company’s future disclosures for PPP-related legal or SBA-guaranty issues and for any deterioration in the $741.691 million of commitments to extend credit and standby letters of credit.