West Bancorporation, Inc. — 2019 Q3 Form 10-Q Summary
Business Context and Reporting Period
West Bancorporation, Inc. is an Iowa-based bank holding company operating West Bank in central and eastern Iowa and southern Minnesota. The unaudited report covers the three and nine months ended September 30, 2019, with comparisons to the same 2018 periods and to December 31, 2018 for balance-sheet data.
The company expanded into Owatonna, Mankato and St. Cloud, Minnesota during the first quarter of 2019. Management expects the initiative to cost approximately $3.0 million annually and stated that the timing of achieving break-even in these markets remains uncertain.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Net income | $7.5 million, up 5.5% | $21.1 million, down 0.9% |
| Diluted EPS | $0.46 vs. $0.43 | $1.28 vs. $1.30 |
| Net interest income | $17.1 million, up $1.4 million | $49.0 million, up $2.6 million |
| Provision for loan losses | $0.3 million vs. $(0.4) million | $0.3 million vs. $(0.25) million |
| Noninterest income | $2.2 million, up 2.1% | $6.3 million, up 3.7% |
| Noninterest expense | $9.5 million, up 11.4% | $28.8 million, up 11.7% |
| Net interest margin, FTE | 2.91% vs. 2.95% | 2.92% vs. 3.05% |
| Return on average assets | 1.22% vs. 1.28% | 1.20% vs. 1.32% |
| Return on average equity | 14.76% vs. 15.40% | 14.25% vs. 15.77% |
Financial Condition, Cash Flow, Debt and Liquidity
- Total assets were $2.46 billion at September 30, 2019, up from $2.30 billion at December 31, 2018.
- Loans were $1.84 billion, up $114.9 million, or 6.7%, from year-end. Growth was concentrated in commercial and commercial real estate loans; approximately $85 million of growth came from the new Minnesota markets.
- Total deposits were $2.02 billion, up $130.3 million. Time deposits increased substantially, including $50 million of brokered certificates of deposit.
- Investment securities available for sale declined to $410.4 million from $453.8 million as securities were sold to support loan growth and reposition the portfolio. The company held $71.9 million of collateralized loan obligations, all rated AA or AAA.
- Cash and cash equivalents increased to $129.3 million from $47.5 million. Net cash provided by operating activities was $27.3 million; investing activities used $59.2 million; and financing activities provided $113.7 million.
- Federal Home Loan Bank advances were $154.0 million, subordinated notes were $20.4 million and long-term debt was $23.0 million at September 30, 2019.
- Additional borrowing capacity included approximately $313 million from the FHLB and $67 million through unsecured federal funds lines.
- Stockholders’ equity was $204.1 million, up from $191.0 million. Tangible common equity to tangible assets was 8.31%.
- Regulatory capital ratios exceeded applicable minimums, and management stated that the company and West Bank met all capital adequacy requirements.
Material Changes Versus Prior Comparable Period
- Net income increased in the third quarter but declined modestly for the first nine months because higher net interest income and noninterest income were more than offset by higher operating expenses and loan-loss provisions.
- Net interest income benefited from loan growth and higher loan yields, but the FTE net interest margin contracted as deposit costs rose faster than asset yields. Management expected lower policy rates to reduce deposit costs and ease margin pressure during the remainder of 2019.
- Noninterest expense increased primarily from salaries, new Minnesota branch costs, occupancy expenses and amortization of a new market tax credit investment. Minnesota growth-related costs were $0.7 million in the third quarter and $1.9 million year to date.
- Income tax expense and the effective tax rate declined in the third quarter, partly because the third quarter of 2018 included $0.5 million of additional tax expense related to amended prior-year tax returns. Year-to-date results also benefited from approximately $0.9 million of federal low-income housing and new markets tax credits.
- Credit quality improved: nonaccrual loans declined to $0.5 million from $1.9 million, nonperforming assets were 0.02% of total assets, and the Texas ratio improved to 0.24% from 0.93%.
- The allowance for loan losses increased to $17.0 million, or 0.93% of loans, from $16.7 million, or 0.96% of loans, at year-end.
- Accumulated other comprehensive loss improved to $6.0 million from $6.8 million, although derivative-related unrealized losses increased as the company added interest-rate swaps.
Guidance, Outlook, Risks and Unusual Items
- Management expected above-average loan growth in the fourth quarter as the Minnesota expansion gained momentum and stated that the loan pipeline was strong.
- The Minnesota expansion is expected to require approximately $3.0 million of annual costs, with no clear timetable for reaching break-even.
- The company entered into additional interest-rate swaps, including forward-starting swaps, to manage funding-cost exposure. Total swap notional amounts were $335 million at September 30, 2019, with a net fair-value liability of approximately $10.8 million.
- Management identified interest-rate risk, deposit and loan pricing pressure, competition, commercial and real estate credit risk, collateral-value declines, economic conditions, regulatory changes, cybersecurity and litigation as material risks.
- The loan portfolio is concentrated in commercial, commercial real estate, and construction and land-development lending, where repayment may depend on borrowers’ business performance, refinancing or collateral values.
- The company adopted the new lease standard in 2019, recording a right-of-use asset of $9.2 million and an operating lease liability of $9.4 million. The adoption did not materially affect other financial statements.
- The company was evaluating the expected-credit-loss standard. As of the filing date, it could not estimate the effect of adoption; the company later expected the effective-date delay for smaller reporting companies to apply.
- A $0.3 million gain on the sale of the Iowa City branch facility benefited year-to-date noninterest income. A $0.3 million premises write-down recorded in the 2018 period did not recur.
- There were no material pending legal proceedings, no material changes to previously disclosed risk factors, and no defaults upon senior securities reported.
- The board declared a quarterly dividend of $0.21 per common share, payable November 20, 2019, to shareholders of record November 6, 2019.
Important Facts for Investors to Verify
- Whether loan growth, particularly in the new Minnesota markets, offsets continuing expansion costs and produces the expected profitability.
- Whether deposit pricing and declining interest rates further compress or stabilize the net interest margin.
- The sustainability of credit-quality improvements, the adequacy of the $17.0 million loan-loss allowance and the effect of future expected-credit-loss accounting.
- Exposure to commercial real estate, construction and land-development lending, including collateral values and refinancing requirements.
- The cost, maturity profile and fair-value sensitivity of FHLB advances, brokered CDs and interest-rate swaps.
- Whether nonrecurring items, including the branch-sale gain, tax credits and prior-year tax adjustments, affect comparability of future earnings.
- Future FDIC assessment credits, Minnesota market staffing and occupancy costs, and the recurring amortization of the new market tax credit investment.