West Bancorporation(WTBA) - 2021 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents West Bancorporation, Inc.'s unaudited consolidated financial statements and notes for Q1 2021 and prior periods Consolidated Balance Sheets Total assets slightly decreased from December 2020 to March 2021, driven by lower cash and deposits, partially offset by increased securities and net loans | Metric | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | Change (in thousands) | % Change | | :-------------------------- | :----------------------------- | :------------------------------- | :-------------------- | :------- | | Total assets | $3,172,906 | $3,185,744 | $(12,838) | -0.40% | | Cash and cash equivalents | $325,489 | $396,435 | $(70,946) | -17.90% | | Securities available for sale | $447,152 | $420,571 | $26,581 | 6.32% | | Loans, net | $2,273,991 | $2,251,139 | $22,852 | 1.01% | | Total deposits | $2,682,093 | $2,700,994 | $(18,901) | -0.70% | | Total liabilities | $2,938,377 | $2,962,049 | $(23,672) | -0.80% | | Total stockholders' equity | $234,529 | $223,695 | $10,834 | 4.84% | Consolidated Statements of Income Net income significantly increased in Q1 2021 versus Q1 2020, driven by higher net interest income and lower loan loss provision | Metric | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | Change (in thousands) | % Change | | :---------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------- | :------- | | Total interest income | $26,310 | $25,220 | $1,090 | 4.32% | | Total interest expense | $3,189 | $6,756 | $(3,567) | -52.80% | | Net interest income | $23,121 | $18,464 | $4,657 | 25.22% | | Provision for loan losses | $500 | $1,000 | $(500) | -50.00% | | Total noninterest income | $2,465 | $2,520 | $(55) | -2.18% | | Total noninterest expense | $10,271 | $9,663 | $608 | 6.29% | | Income before income taxes | $14,815 | $10,321 | $4,494 | 43.54% | | Net income | $11,752 | $8,089 | $3,663 | 45.28% | | Basic earnings per common share | $0.71 | $0.49 | $0.22 | 44.90% | | Diluted earnings per common share | $0.70 | $0.49 | $0.21 | 42.86% | Consolidated Statements of Comprehensive Income Comprehensive income significantly improved from a Q1 2020 loss to a Q1 2021 gain, mainly due to positive derivative shifts | Metric | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | Change (in thousands) | | :------------------------------------ | :--------------------------------------------- | :--------------------------------------------- | :-------------------- | | Net income | $11,752 | $8,089 | $3,663 | | Other comprehensive income (loss) on securities | $(6,240) | $149 | $(6,389) | | Other comprehensive income (loss) on derivatives | $9,525 | $(15,688) | $25,213 | | Total other comprehensive income (loss) | $3,285 | $(15,539) | $18,824 | | Comprehensive income (loss) | $15,037 | $(7,450) | $22,487 | Consolidated Statements of Stockholders' Equity Stockholders' equity increased from December 2020 to March 2021, driven by net income and other comprehensive income, offset by dividends | Metric | December 31, 2020 (in thousands) | March 31, 2021 (in thousands) | Change (in thousands) | | :-------------------------- | :------------------------------- | :---------------------------- | :-------------------- | | Total stockholders' equity | $223,695 | $234,529 | $10,834 | | Net income | - | $11,752 | $11,752 | | Other comprehensive income, net of tax | - | $3,285 | $3,285 | | Cash dividends declared | - | $(3,623) | $(3,623) | Consolidated Statements of Cash Flows Cash and cash equivalents significantly decreased in Q1 2021, primarily due to net cash used in investing and financing activities | Metric | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | Change (in thousands) | | :------------------------------------ | :--------------------------------------------- | :--------------------------------------------- | :-------------------- | | Net cash provided by operating activities | $15,049 | $10,412 | $4,637 | | Net cash used in investing activities | $(60,304) | $(28,136) | $(32,168) | | Net cash provided by (used in) financing activities | $(25,691) | $30,831 | $(56,522) | | Net increase (decrease) in cash and cash equivalents | $(70,946) | $13,107 | $(84,053) | | Ending cash and cash equivalents | $325,489 | $66,397 | $259,092 | Notes to Consolidated Financial Statements These notes provide essential context for financial statements, covering accounting policies, CECL adoption, and COVID-19 loan modification impacts - The Company plans to adopt ASU No. 2016-13 (CECL) for fiscal years beginning after December 15, 2022, as a smaller reporting company, and does not plan to early adopt[24] - COVID-19-related loan modifications totaled $109,078 thousand as of March 31, 2021, primarily deferring principal and/or interest payments, and were not reported as Troubled Debt Restructurings (TDRs) due to temporary suspension provisions[45][47] - The Company terminated interest rate swaps with a total notional amount of $50,000 thousand in March 2021, resulting in pretax losses of $3,600 thousand reclassified from AOCI to noninterest income, and terminated forward-starting interest rate swaps with a notional amount of $100,000 thousand, yielding gains of $3,781 thousand recorded in noninterest income[81][83] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the Company's Q1 2021 financial condition and results, highlighting COVID-19 impacts, key metrics, and detailed analysis "Safe Harbor" Concerning Forward-Looking Statements This section outlines forward-looking statements, noting that actual results may differ due to various risks, including COVID-19 and interest rate fluctuations - Forward-looking statements are subject to risks including the effects of the COVID-19 pandemic, interest rate risk, competitive pressures, changes in credit quality, legal and regulatory requirements, cyber-attacks, and other external events[112] Critical Accounting Policies The Company's financial statements adhere to GAAP, with no significant changes in critical accounting policies or underlying assumptions since December 31, 2020 - No significant changes in critical accounting policies or the assumptions and judgments used in applying them since December 31, 2020[113] Non-GAAP Financial Measures This section reconciles non-GAAP financial measures like FTE net interest income, adjusted efficiency ratio, and ALLL excluding PPP loans to GAAP | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net interest income on an FTE basis (non-GAAP) | $23,350 | $18,642 | | Net interest margin on an FTE basis (non-GAAP) | 3.17% | 3.10% | | Efficiency ratio on an adjusted and FTE basis (non-GAAP) | 39.75% | 45.64% | | Metric | March 31, 2021 | December 31, 2020 | | :------------------------------------------ | :------------- | :---------------- | | Loans, net of PPP loans (non-GAAP) | $2,152,877 | $2,100,000 | | Allowance for loan losses ratio, excluding PPP loans (non-GAAP) | 1.39% | 1.40% | Overview The Company operates across Iowa and southern Minnesota, comparing Q1 2021 results to Q1 2020 and Q1 2021 financial condition to December 31, 2020 - The Company conducts business in central Iowa (greater Des Moines), eastern Iowa (Iowa City and Coralville), and southern Minnesota (Rochester, Owatonna, Mankato, St. Cloud)[119] Impact of COVID-19 COVID-19 creates economic uncertainty, leading to a zero-interest rate policy, impacting deposit costs and loan yields, with significant loan modifications in affected industries - Federal Reserve returned to a zero-interest rate policy in March 2020 due to COVID-19, impacting the Company's cost of deposits and loan yields[121][122] - Exposure to hotel, restaurant, and movie theater industries totaled approximately $252,660 thousand (11.0% of total loan portfolio) as of March 31, 2021[123] - COVID-19-related loan modifications totaled $109,078 thousand as of March 31, 2021, primarily deferrals of principal and/or interest payments, with expirations ranging from April to June 2021[124] Summary Q1 2021 net income significantly increased to $11,752 thousand ($0.70 diluted EPS), driven by higher net interest income and lower loan loss provision, improving profitability ratios | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change | | :-------------------------- | :-------------------------------- | :-------------------------------- | :----- | | Net income | $11,752 | $8,089 | $3,663 | | Diluted EPS | $0.70 | $0.49 | $0.21 | | Return on average assets | 1.53% | 1.29% | 0.24% | | Return on average equity | 20.77% | 15.54% | 5.23% | - Net interest income increased by $4,657 thousand, primarily due to a $3,169 thousand decrease in interest expense on deposits[127] - Provision for loan losses decreased by $500 thousand (from $1,000 thousand in Q1 2020 to $500 thousand in Q1 2021)[128] - Total loans outstanding increased by $23,424 thousand (1.0%) during Q1 2021, with the allowance for loan losses at 1.39% of outstanding loans, excluding PPP loans, as of March 31, 2021[130] - The Board of Directors declared a quarterly cash dividend of $0.24 per common share, a $0.02 increase from the prior quarter, representing a record high[133] Results of Operations Q1 2021 results showed strong net income growth and improved profitability, driven by higher net interest income and lower loan loss provision, despite changes in noninterest items | Metric | March 31, 2021 | March 31, 2020 | Change | | :-------------------------- | :------------- | :------------- | :----- | | Net income | $11,752 | $8,089 | $3,663 | | Return on average assets | 1.53% | 1.29% | 0.24% | | Return on average equity | 20.77% | 15.54% | 5.23% | | Net interest margin (FTE) | 3.17% | 3.10% | 0.07% | | Efficiency ratio (adjusted, FTE) | 39.75% | 45.64% | -5.89% | | Texas ratio | 9.38% | 0.22% | 9.16% | Net Interest Income FTE net interest income increased by $4,708 thousand (25.25%) in Q1 2021, driven by lower deposit interest rates, offsetting declining loan yields, with net interest margin rising to 3.17% | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :----- | | Net interest income (FTE) | $23,350 | $18,642 | $4,708 | | Net interest margin (FTE) | 3.17% | 3.10% | 0.07% | | Total interest-earning assets (average) | $2,979,710 | $2,420,497 | $559,213 | | Total interest-bearing liabilities (average) | $2,168,508 | $1,908,221 | $260,287 | - Interest expense on deposits decreased by $3,169 thousand (62.80%) due to lower offered rates following the Federal Reserve's rate reductions in March 2020[140][147] - Interest income recognized on PPP loans was $2,842 thousand for Q1 2021, including $2,046 thousand of accelerated origination fees upon loan forgiveness, with management expecting loan interest income and yield to decline as PPP loan fees are recognized[145] Provision for Loan Losses and the Related Allowance for Loan Losses Provision for loan losses decreased by 50% to $500 thousand in Q1 2021, with the allowance for loan losses at $30,008 thousand (1.39% excluding PPP loans), reflecting ongoing COVID-19 monitoring | Metric | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | Change (in thousands) | | :---------------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------- | | Provision for loan losses charged to operations | $500 | $1,000 | $(500) | | Balance of allowance for loan losses at end of period | $30,008 | $18,332 | $11,676 | | Ratio of allowance for loan losses to total loans at end of period | 1.30% | 0.92% | 0.38% | | Ratio of allowance for loan losses to total loans at end of period, excluding PPP loans | 1.39% | 0.92% | 0.47% | - Nonaccrual loans increased by $15,700 thousand from March 31, 2020, to March 31, 2021, due to the COVID-19 pandemic[151] - The Company increased economic factors within the allowance for loan losses evaluation in 2020 due to COVID-19 and maintained them in Q1 2021[158] Noninterest Income Total noninterest income slightly decreased by $55 thousand (2.18%) in Q1 2021, mainly due to lower loan swap fees, partially offset by gains in trust services and other income | Noninterest Income Category | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | Change (in thousands) | % Change | | :------------------------------------ | :--------------------------------------------- | :--------------------------------------------- | :-------------------- | :------- | | Service charges on deposit accounts | $582 | $603 | $(21) | -3.48% | | Debit card usage fees | $442 | $382 | $60 | 15.71% | | Trust services | $652 | $463 | $189 | 40.82% | | Increase in cash value of bank-owned life insurance | $220 | $158 | $62 | 39.24% | | Loan swap fees | $0 | $586 | $(586) | -100.00% | | Realized securities gains (losses), net | $4 | $(6) | $10 | 166.67% | | Other income | $565 | $334 | $231 | 69.16% | | Total noninterest income | $2,465 | $2,520 | $(55) | -2.18% | - The increase in other income was primarily due to $181 thousand in net swap termination gains recognized in March 2021[162] Noninterest Expense Total noninterest expense increased by $608 thousand (6.29%) in Q1 2021, driven by higher salaries and FDIC insurance, partially offset by lower business development and a check fraud settlement | Noninterest Expense Category | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | Change (in thousands) | % Change | | :------------------------------------ | :--------------------------------------------- | :--------------------------------------------- | :-------------------- | :------- | | Salaries and employee benefits | $5,608 | $5,284 | $324 | 6.13% | | Occupancy | $1,228 | $1,213 | $15 | 1.24% | | Data processing | $602 | $630 | $(28) | -4.44% | | FDIC insurance | $404 | $237 | $167 | 70.46% | | Professional fees | $283 | $239 | $44 | 18.41% | | Director fees | $191 | $234 | $(43) | -18.38% | | Other expenses | $1,955 | $1,826 | $129 | 7.06% | | Total noninterest expense | $10,271 | $9,663 | $608 | 6.29% | - Business development expense decreased due to limitations from COVID-19 shutdowns and social distancing guidelines[166] - Other expenses increased primarily due to the settlement of a loss on a check fraud scheme[166] Income Tax Expense Income tax expense increased to $3,063 thousand in Q1 2021 from $2,232 thousand in Q1 2020, with effective tax rates of 20.7% and 21.6%, respectively, influenced by tax-exempt income and restricted stock units | Metric | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | Change (in thousands) | | :---------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------- | | Income tax expense | $3,063 | $2,232 | $831 | | Effective tax rate | 20.7% | 21.6% | -0.9% | - A tax benefit of $199 thousand was recorded in Q1 2021 due to the increase in fair value of restricted stock, compared to a $94 thousand tax expense in Q1 2020 due to a decrease in fair value[167] Financial Condition Total assets slightly decreased to $3.17 billion as of March 31, 2021, influenced by lower deposits and cash, offset by increased securities and loans, with a rise in nonperforming assets - Total assets decreased to $3,172,906 thousand at March 31, 2021, from $3,185,744 thousand at December 31, 2020[168] Securities Securities available for sale increased by $26,581 thousand in Q1 2021, with purchases aimed at improving yield on excess liquidity, and government agency guaranteed securities comprising 54% of the portfolio - Securities available for sale increased by $26,581 thousand in Q1 2021, with purchases aimed at improving yield on excess liquidity[169] - Approximately 54% of the available for sale securities portfolio consisted of government agency guaranteed collateralized mortgage obligations and mortgage-backed securities as of March 31, 2021[169] Loans and Nonperforming Assets Loans outstanding increased by $23,424 thousand to $2,303,999 thousand as of March 31, 2021, driven by real estate loans, while nonperforming assets rose by $8,610 thousand, increasing the Texas ratio to 9.38% | Metric | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | Change (in thousands) | | :------------------------------------ | :----------------------------- | :------------------------------- | :-------------------- | | Loans outstanding | $2,303,999 | $2,280,575 | $23,424 | | Commercial real estate loans increase | $41,781 | - | $41,781 | | 1-4 family residential first mortgage loans increase | $11,720 | - | $11,720 | | Commercial loans decline | $(37,276) | - | $(37,276) | | PPP loans outstanding | $151,122 | $180,757 | $(29,635) | | Nonperforming Asset Metric | March 31, 2021 | December 31, 2020 | Change | | :------------------------------------ | :------------- | :---------------- | :----- | | Total nonperforming assets | $24,804 | $16,194 | $8,610 | | Nonperforming loans to total loans | 1.08% | 0.71% | 0.37% | | Nonperforming assets to total assets | 0.78% | 0.51% | 0.27% | | Texas ratio | 9.38% | 6.40% | 2.98% | - Watch classification of loans increased to $100,057 thousand from $26,715 thousand, primarily due to $69,386 thousand in hotel, restaurant, and other commercial real estate loans from one borrowing group, with $45,051 thousand of these in COVID-19-related modification status[172] Deposits Total deposits decreased by $18,901 thousand in Q1 2021, with declines across various account types, attributed to customer activity and corporate liquidity, with further decreases anticipated - Deposits decreased by $18,901 thousand during the first three months of 2021[178] - Noninterest-bearing demand accounts decreased by $5,402 thousand, and interest-bearing demand and savings accounts decreased by $42,686 thousand[178] Borrowed Funds The Company had $179,060 thousand in overnight federal funds and short-term FHLB advances outstanding at March 31, 2021, planning to repay $50,000 thousand of FHLB advances due to excess liquidity - Outstanding overnight federal funds purchased and short-term FHLB advances totaled $179,060 thousand at March 31, 2021[179] - The Company plans to repay $50,000 thousand of FHLB advances in April and May 2021 due to high deposit balances and excess liquidity[179] Derivatives Notional interest rate swap contracts decreased to $255,000 thousand at March 31, 2021, with derivative liabilities increasing by $12,733 thousand due to rising rates, and $150,000 thousand in swaps terminated for net gains - Notional amount of interest rate swap contracts decreased to $255,000 thousand at March 31, 2021, from $305,000 thousand at December 31, 2020[180] - Fair value of derivative liabilities increased by $12,733 thousand due to increases in projected long-term market interest rates[180] - The Company terminated $150,000 thousand in interest rate swaps in March 2021, including $100,000 thousand in forward-starting swaps and $50,000 thousand hedging FHLB advances, resulting in net termination gains[181] Liquidity and Capital Resources The Company maintains strong liquidity with $325,489 thousand in liquid assets and significant borrowing capacity, with stockholders' equity increasing to $234,529 thousand, meeting all regulatory capital requirements - Liquid assets (cash and cash equivalents) were $325,489 thousand at March 31, 2021, down from $396,435 thousand at December 31, 2020[182] - Additional borrowing capacity included approximately $462,000 thousand from FHLB, $31,000 thousand from Federal Reserve discount window, and $67,000 thousand from unsecured federal funds lines of credit[183] - Total stockholders' equity increased to $234,529 thousand at March 31, 2021, from $223,695 thousand at December 31, 2020[184] - The Company and West Bank met all regulatory capital adequacy requirements as of March 31, 2021, including the Basel III capital conservation buffer[186][189] Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company's primary market risk is interest rate risk, managed via earnings simulation, with a 300 basis point rate increase estimated to boost net interest income by 4.83% ($4,112 thousand) over one year - Primary market risk is interest rate risk, managed via an Asset Liability Committee using earnings simulation[190][192] | Scenario | % Change in Net Interest Income (1 year) | | :------------------- | :--------------------------------------- | | 300 basis points rising | 4.83% | | 200 basis points rising | 3.37% | | 100 basis points rising | 1.74% | | Base | — | - The estimated effect of a 300 basis point increase in interest rates would be an increase of net interest income by approximately 4.83%, or $4,112 thousand, in 2021[194] Item 4. Controls and Procedures Disclosure controls and procedures were effective as of March 31, 2021, with no material changes in internal control over financial reporting during Q1 2021 - Disclosure controls and procedures were effective as of March 31, 2021[196] - No material changes in internal control over financial reporting occurred during Q1 2021[197] PART II. OTHER INFORMATION Item 1. Legal Proceedings Neither the Company nor West Bank is involved in any material pending legal proceedings beyond routine litigation - No material pending legal proceedings against the Company or West Bank, other than ordinary routine litigation[199] Item 1A. Risk Factors No material changes to risk factors previously disclosed in the Company's Form 10-K filed on March 1, 2021 - No material changes in risk factors since the Form 10-K filed on March 1, 2021[200] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds to report Item 3. Defaults Upon Senior Securities No defaults upon senior securities to report Item 4. Mine Safety Disclosures This item is not applicable to the Company Item 5. Other Information No other information to report under this item Item 6. Exhibits This section lists exhibits filed, including Sarbanes-Oxley Act certifications and Inline XBRL documents - Exhibits include certifications of CEO and CFO under Sections 302 and 906 of the Sarbanes-Oxley Act, and Inline XBRL documents[205] Signatures The report is duly signed by West Bancorporation, Inc.'s CEO, President, CFO, and Chief Accounting Officer