Business Context and Reporting Period
West Bancorporation, Inc. is a community banking holding company operating through West Bank in central and eastern Iowa and southern Minnesota. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2023, compared primarily with the same periods in 2022 and the December 31, 2022 balance sheet.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 |
|---|---|---|---|---|
| Net income | $5.9 million | $12.7 million | $13.7 million | $25.9 million |
| Diluted EPS | $0.35 | $0.75 | $0.82 | $1.54 |
| Net interest income | $17.3 million | $24.2 million | $36.0 million | $48.1 million |
| Net interest margin, FTE | 2.02% | 2.93% | 2.12% | 2.89% |
| Noninterest income | $2.4 million | $2.3 million | $5.3 million | $4.7 million |
| Noninterest expense | $12.5 million | $11.3 million | $24.5 million | $21.9 million |
| Credit loss expense | $0 | $(1.8) million benefit | $0 | $(2.5) million benefit |
- Return on average assets was 0.64% for the quarter and 0.76% for the six months; return on average equity was 11.03% and 12.90%, respectively.
- Total assets were $3.679 billion at June 30, 2023, up from $3.613 billion at December 31, 2022.
- Loans were $2.807 billion, up $64.2 million, or 2.3%, from year-end 2022. The allowance for credit losses was $27.9 million, or 1.00% of loans.
- Deposits were $2.836 billion, down $44.1 million, or 1.5%, from year-end 2022. Brokered deposits declined to $230.7 million from $272.7 million.
- Cash and cash equivalents were $31.7 million, compared with $26.5 million at December 31, 2022.
- Borrowings included $184.2 million of federal funds and other short-term borrowings, $280.0 million of FHLB advances, $79.5 million of subordinated notes and $50.2 million of long-term debt.
- Stockholders’ equity was $217.1 million, compared with $211.1 million at year-end 2022. The equity-to-assets and tangible common equity ratios were each 5.90%.
- Net cash provided by operating activities was $10.3 million. Investing activities used $59.6 million, primarily for loan growth and premises and equipment, while financing activities provided $54.5 million, principally from increased FHLB advances.
Material Changes Versus Prior Comparable Period
- Quarterly net income declined 53.7%; six-month net income declined 47.0%. The principal driver was a sharp reduction in net interest income as deposit and borrowing costs repriced faster than asset yields.
- Quarterly net interest income decreased 28.5%, and six-month net interest income decreased 25.0%. Interest expense increased substantially, particularly on deposits, federal funds and other short-term borrowings, and FHLB advances.
- Loan interest income increased because of higher average loan balances and higher loan yields. Average loans rose 9.7% in the quarter and 10.9% for the six months compared with 2022.
- Noninterest income increased 4.9% in the quarter and 14.6% for the six months, aided by higher trust services revenue and a $691,000 bank-owned life insurance death-benefit gain in the six-month period.
- Noninterest expense increased 10.7% in the quarter and 11.9% for the six months, reflecting higher compensation, occupancy, technology, professional fees and FDIC insurance expense.
- The company adopted the CECL standard on January 1, 2023, reducing retained earnings by $3.6 million. The adoption increased the loan allowance by $2.5 million and established a $2.3 million allowance for off-balance-sheet credit exposures.
- Accumulated other comprehensive loss improved to $(87.8) million from $(91.5) million at year-end, primarily due to reduced unrealized losses on available-for-sale securities and gains on derivatives.
Guidance, Outlook, Risks and Unusual Items
- No formal earnings or financial guidance is provided in the filing. Management stated that the timing and extent of further Federal Reserve rate changes were unknown.
- Management expects rising rates and an inverted yield curve to continue affecting funding costs and net interest income. Deposit competition and changes in deposit mix remain significant pressures.
- Interest-rate sensitivity modeling estimated that a parallel 300-basis-point increase could reduce one-year net interest income by 11.42%, while a 200-basis-point decline could increase it by 14.51%; these are model outputs, not management forecasts.
- Liquidity sources included cash, securities, operating cash flow, FHLB borrowing capacity of approximately $549 million, approximately $99 million of Federal Reserve Bank Term Funding Program capacity, approximately $35 million of unsecured correspondent-bank lines and approximately $3 million of discount-window capacity. No discount-window or Bank Term Funding Program borrowings were outstanding during the six months.
- Estimated uninsured deposits, excluding certain reciprocal, brokered and protected public-fund deposits, were approximately 27.5% of total deposits.
- Credit quality remained strong: nonperforming assets were $309,000, or 0.01% of total assets; only $229,000 of loans was 60–89 days past due; and there were no troubled restructurings or loans 90 days or more past due and accruing.
- The loan portfolio is concentrated in commercial and commercial real estate lending in Iowa and southern Minnesota. Management identified risks from weakening borrower cash flows, declining commercial real estate values, refinancing needs and economic deterioration.
- Available-for-sale securities had a fair value of $645.1 million and gross unrealized losses of $135.9 million. Management attributed the losses primarily to market interest-rate changes and concluded they were not credit-related.
- Construction commitments included $24.5 million remaining for the new headquarters and $4.0 million for a new Mankato office. The headquarters project has a guaranteed maximum price of $42.3 million and is expected to be completed in 2024.
- The Board declared a regular quarterly dividend of $0.25 per share on July 26, 2023, payable August 23, 2023.
- Management reported effective disclosure controls, no material changes in internal control over financial reporting and no material pending legal proceedings.
Investor Verification Items
- Verify the sustainability of net interest margin and earnings as deposit pricing and wholesale funding costs remain elevated.
- Monitor deposit levels, uninsured deposits, brokered deposits and reliance on FHLB and other wholesale funding.
- Assess commercial real estate and construction-loan concentrations, collateral values and the adequacy of the CECL allowance as economic forecasts change.
- Review the $135.9 million of unrealized securities losses, liquidity availability and the potential effect of any required security sales.
- Track construction spending and remaining commitments for the headquarters and Mankato projects.
- Reconcile non-GAAP measures, including FTE net interest margin and the efficiency ratio, to GAAP results when comparing with other banks.