10-Q: West Bancorporation Reports Mixed Second Quarter Results Amidst Rising Interest Rates

West Bancorporation's second quarter earnings declined compared to the previous year, influenced by increased deposit costs and a non-recurring gain in the prior year, despite loan growth.

Summary

• West Bancorporation reported a net income of $5.192 million, or $0.31 per diluted share, for the three months ended June 30, 2024, down from $5.862 million, or $0.35 per diluted share, in the same period of 2023.
• For the six months ended June 30, 2024, net income was $11.001 million, or $0.65 per diluted share, compared to $13.706 million, or $0.82 per diluted share, for the same period in 2023.
• The company's annualized return on average assets was 0.53% and 0.57% for the three and six months ended June 30, 2024, respectively, compared to 0.64% and 0.76% for the same periods in 2023.
• Net interest income decreased by 0.6% and 5.7% for the three and six months ended June 30, 2024, respectively, primarily due to increased interest expenses on deposits.
• Noninterest income decreased by $43 and $701 for the three and six months ended June 30, 2024, respectively, with the six-month decrease largely due to a non-recurring gain from bank-owned life insurance in 2023.
• Noninterest expenses increased by $720 and $517 for the three and six months ended June 30, 2024, respectively, driven by higher occupancy, technology, and FDIC insurance costs.
• Total loans outstanding increased by $71.239 million, or 2.4%, during the first six months of 2024.
• The allowance for credit losses was 0.95% of total outstanding loans as of June 30, 2024, compared to 0.97% as of December 31, 2023.

Sentiment

Score: 4

Explanation: The sentiment is moderately negative due to the decline in net income and profitability metrics, despite loan growth. The report highlights challenges from rising interest rates and increased expenses, which overshadow the positive aspects.

Positives

• Total loans outstanding increased by $71.239 million, or 2.4%, during the first six months of 2024, indicating growth in lending activities.
• The company's credit quality remained strong, with nonperforming loans at 0.01% of total assets.
• The company's capital ratios were sufficient to meet regulatory requirements and the conservation buffer.
• Trust service revenue increased due to higher one-time estate fees.

Negatives

• Net income decreased by 11.43% for the quarter and 19.74% for the six months ended June 30, 2024, compared to the same periods in 2023.
• Net interest income declined due to increased interest expenses on deposits and other borrowings.
• Noninterest income decreased due to the absence of a non-recurring gain from bank-owned life insurance in 2023.
• Noninterest expenses increased due to higher occupancy, technology, and FDIC insurance costs.
• The net interest margin decreased by 16 and 25 basis points for the three and six months ended June 30, 2024, respectively.
• The company's return on average assets and return on average equity decreased compared to the same periods in 2023.

Risks

• The company faces interest rate risk, including the effects of sustained high interest rates.
• Fluctuations in the values of securities held in the investment portfolio, including as a result of rising interest rates, pose a risk.
• Competitive pressures from non-bank competitors, such as fintech companies, could impact the company's performance.
• Changes in credit and other risks posed by the loan portfolio, including declines in real estate values, could affect the company.
• The concentration of large deposits from certain clients, who have balances above current FDIC insurance limits, is a risk.
• Changes in local, national, and international economic conditions, including high rates of inflation and possible recession, could impact the company.
• The effects of recent developments and events in the financial services industry, including large-scale deposit withdrawals, pose a risk.
• Changes in legal and regulatory requirements, limitations, and costs, including in response to recent bank failures, could affect the company.
• The occurrence of fraudulent activity, breaches, or failures of information security controls or cyber-security related incidents is a risk.
• Unexpected outcomes of existing or new litigation involving the company could impact its performance.
• Acts of war or terrorism, widespread disease or pandemics, or other adverse external events could affect the company.
• Risks related to climate change and the negative impact it may have on customers and their businesses are a concern.
• Potential changes in federal policy and at regulatory agencies as a result of the upcoming 2024 presidential election could impact the company.
• Talent and labor shortages pose a risk to the company.

Future Outlook

The company expects the securities portfolio as a percentage of total assets to decrease over time as the proceeds from paydowns and maturities may be used for loan growth or repayment of borrowed funds. The yield on the loan portfolio is expected to increase in flat and rising rate environments as variable-rate loans reprice at higher rates and renewals and new originations are priced at prevailing market rates.

Management Comments

• Management believed the allowance for credit losses at June 30, 2024 was adequate to absorb expected losses in the loan portfolio as of that date.
• Management believed that the combination of high levels of potentially liquid assets, unencumbered securities, cash flows from operations, and additional borrowing capacity were sufficient to meet our liquidity and capital needs as of June 30, 2024.

Industry Context

The report highlights the challenges faced by financial institutions in a rising interest rate environment, including increased deposit costs and pressure on net interest margins. The company's performance is compared to a peer group of Midwestern, publicly traded financial institutions, indicating its relative position within the industry.

Comparison to Industry Standards

• The company's return on average equity of 10.07% for the six months ended June 30, 2024, is within the peer group range of 2.48% to 16.36%.
• The company's efficiency ratio of 64.62% for the six months ended June 30, 2024, is within the peer group range of 49.14% to 80.96%.
• The company's nonperforming assets to total assets ratio of 0.01% as of June 30, 2024, is within the peer group range of 0.00% to 0.69%.
• The peer group consists of 22 Midwestern, publicly traded financial institutions, including Bank First Corporation, Bridgewater Bancshares Inc., ChoiceOne Financial Services, Inc., Civista Bancshares, Inc., CrossFirst Bankshares, Inc., Equity Bancshares, Inc., Farmers National Banc Corp., Farmers & Merchants Bancorp., First Business Financial Services, Inc., First Financial Corp., First Mid Bancshares, Inc., German American Bancorp, Inc., HBT Financial Inc., Hills Bancorporation, Isabella Bank Corporation, LCNB Corp., Macatawa Bank Corporation, Mercantile Bank Corporation, MidWest One Financial Group, Inc., Nicolet Bankshares, Inc., Peoples Bancorp, Inc., and Southern Missouri Bancorp, Inc.

Stakeholder Impact

• Shareholders will experience reduced earnings per share and a lower return on equity.
• Customers may see changes in deposit rates and loan terms due to the current interest rate environment.
• Employees may be affected by changes in the company's financial performance and strategic decisions.

Next Steps

• The company will pay a regular quarterly cash dividend of $0.25 per common share on August 21, 2024, to stockholders of record on August 7, 2024.

Key Dates

Keywords

net interest income, loans, deposits, interest rates, credit quality, noninterest income, noninterest expense, financial performance, bank, capital, FDIC, securities, mortgage, real estate, commercial lending