West Bancorporation, Inc. — Form 10-K Summary
Business context and reporting period
West Bancorporation, Inc. is an Iowa financial holding company operating primarily through West Bank, a business-focused community bank serving central and eastern Iowa and southern Minnesota. The filing covers the fiscal year ended December 31, 2022; it is an annual report rather than a standalone fourth-quarter filing. West Bank operated through 11 locations and provides commercial, real estate and consumer lending, deposit, treasury management and trust services.
Key financial metrics
| Metric | 2022 | 2021 | Change or comment |
|---|---|---|---|
| Net income | $46.4 million | $49.6 million | Down 6.5% |
| Basic / diluted EPS | $2.79 / $2.76 | $3.00 / $2.95 | Both decreased |
| Net interest income | $91.7 million | $95.1 million | Down 3.5% |
| Net interest margin, FTE | 2.76% | 3.05% | Down 29 basis points |
| Noninterest income | $10.2 million | $9.7 million | Up 4.9% |
| Noninterest expense | $45.1 million | $43.4 million | Up 3.9% |
| Return on average assets | 1.32% | 1.52% | Decreased |
| Return on average equity | 20.71% | 20.33% | Increased |
| Total assets | $3.61 billion | $3.50 billion | Up 3.2% |
| Loans | $2.74 billion | $2.46 billion | Up 11.7%; up 12.6% excluding PPP loans |
| Deposits | $2.88 billion | $3.02 billion | Down 4.5% |
| Borrowings | $485.9 million | $199.9 million | Material increase |
| Stockholders’ equity | $211.1 million | $260.3 million | Down primarily from accumulated OCI losses |
| Net cash from operating activities | $59.4 million | $57.9 million | Increased modestly |
Material changes versus the prior comparable period
- Loan growth, particularly commercial real estate lending, was the principal balance-sheet expansion driver. Commercial real estate loans secured by real estate totaled $2.13 billion, or 77.7% of total loans.
- Deposit balances declined as customers used liquidity for business transactions and moved funds to higher-yielding investments. Brokered deposits increased to $272.7 million from $176.0 million.
- Borrowed funds increased to $485.9 million, including $200.0 million of short-term borrowings, $155.0 million of FHLB advances and approximately $79.4 million of subordinated notes, net.
- Rising Federal Reserve rates increased loan yields but increased deposit and borrowing costs more rapidly, compressing net interest margin.
- The company issued $60.0 million of 5.25% fixed-to-floating subordinated notes in June 2022 and contributed $58.65 million of the proceeds to West Bank.
- Credit quality improved: nonperforming loans declined to $0.3 million from $8.9 million, and nonperforming assets were 0.01% of total assets versus 0.26%.
- The allowance for loan losses declined to $25.5 million from $28.4 million, and the company recorded a negative provision of $2.5 million. The reduction reflected improved classified loans, sustained performance after COVID-19 modifications and reversal of a specific reserve.
- Accumulated other comprehensive loss increased substantially because of interest-rate-driven declines in the fair value of available-for-sale securities. Net unrealized securities losses were approximately $138.7 million at year-end.
Cash flow, liquidity, capital and debt
Operating activities provided $59.4 million of cash. Investing activities used $357.8 million, primarily from net loan growth, securities purchases and premises investments. Financing activities provided $132.1 million, principally from increased short-term borrowings, FHLB advances and subordinated-note proceeds. Cash and cash equivalents declined to $26.5 million from $192.8 million.
Management reported approximately $372.0 million of additional FHLB borrowing capacity, $3.8 million available at the Federal Reserve discount window and $67.0 million of unsecured federal funds lines. No amounts were outstanding under the discount window or unsecured lines at year-end. Management concluded that liquid assets, operating cash flows and borrowing capacity were sufficient for liquidity needs at December 31, 2022.
The tangible common equity ratio declined to 5.84% from 7.44%, primarily because of accumulated other comprehensive losses; management stated that these losses did not reduce regulatory capital. The consolidated common equity tier 1, tier 1, total capital and leverage ratios were 8.96%, 9.55%, 12.08% and 8.81%, respectively. West Bank was classified as well-capitalized and the company and bank met the capital conservation buffer requirements.
Guidance, outlook, risks and unusual items
- Management expects Federal Reserve policy and higher rates to continue affecting deposit activity, loan demand, funding costs and securities values in 2023. Loan growth could slow because of higher rates, economic uncertainty, labor and wage pressures and reduced borrower debt-service capacity.
- The company expects deposit rates and borrowing costs to increase further if rates continue rising. Its year-end interest-rate sensitivity model estimated that a 100-basis-point rate increase would reduce one-year net interest income by 2.88% relative to the base case, while a 200-basis-point increase would reduce it by 5.00%.
- Commercial real estate concentration remains a significant risk. West Bank exceeded the regulatory monitoring guideline for certain CRE concentrations, reporting concentrations of 80% and 398% under the disclosed measures.
- The company adopted the current expected credit loss standard on January 1, 2023. Preliminary estimates indicated a one-time increase of $4.5 million to $5.5 million in the allowance for credit losses, including unfunded commitments. The final amount remained subject to review.
- Available-for-sale securities had significant unrealized losses that management considered temporary and related to market rates rather than credit deterioration. Forced sales or further rate increases could adversely affect earnings, liquidity or capital.
- Construction commitments included a remaining $34.9 million commitment for a new headquarters and $6.5 million for a Mankato branch. Headquarters construction is expected to be completed in 2024; the Mankato project is expected to be completed in 2023.
- Other principal risks include deposit runoff and liquidity pressure, credit losses in commercial and real estate portfolios, interest-rate risk, cybersecurity and third-party technology failures, regulatory changes, competition from banks and fintech companies, labor shortages and economic deterioration.
- The company paid $1.00 per common share in dividends during 2022 and declared a $0.25 quarterly dividend payable in February 2023. Future dividends remain subject to earnings, capital, regulatory requirements and West Bank’s ability to upstream dividends.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. The allowance for loan losses was identified as a critical audit matter because of the subjectivity of management’s qualitative loss-factor judgments.
Most important facts for investors to verify
- Final first-quarter 2023 CECL adoption adjustment versus the preliminary $4.5 million–$5.5 million estimate.
- Deposit trends, brokered-deposit dependence and availability of secured and unsecured borrowing capacity.
- Net interest margin performance as deposit and wholesale funding costs reprice.
- Commercial real estate concentration, borrower performance, collateral values and migration of loans to watch or classified status.
- Realized losses, liquidity effects or capital consequences if securities with unrealized losses must be sold.
- Compliance with regulatory capital and dividend requirements after CECL adoption and continued balance-sheet growth.
- Actual costs and completion timing for the headquarters and Mankato construction projects.