Business Context and Reporting Period
West Bancorporation, Inc. is an Iowa-based bank holding company operating through West Bank in central and eastern Iowa and southeastern Minnesota. The unaudited Form 10-Q covers the quarter and six months ended June 30, 2019, compared with the corresponding 2018 periods; balance-sheet comparisons are to December 31, 2018.
West Bank began operations in Owatonna, Mankato and St. Cloud, Minnesota during the first half of 2019 following regulatory approval for full branch operations.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Net interest income | $16.0 million, up 4.8% | $31.9 million, up 3.9% |
| Noninterest income | $2.0 million, down 1.2% | $4.1 million, up 4.6% |
| Noninterest expense | $9.8 million, up 8.8% | $19.3 million, up 11.9% |
| Net income | $6.7 million, down 1.6% | $13.6 million, down 4.2% |
| Diluted earnings per share | $0.41 versus $0.41 | $0.83 versus $0.86 |
| Net interest margin, FTE | 2.90% versus 3.05% | 2.92% versus 3.11% |
| Adjusted efficiency ratio, FTE | 54.05% versus 49.05% | 53.79% versus 48.05% |
| Return on average assets | 1.14% versus 1.27% | 1.18% versus 1.34% |
| Return on average equity | 13.49% versus 15.15% | 13.98% versus 15.96% |
All dollar amounts are in thousands unless otherwise stated. FTE and adjusted efficiency-ratio measures are non-GAAP measures.
Balance Sheet, Credit and Capital
- Total assets were $2.363 billion, compared with $2.297 billion at December 31, 2018.
- Loans were $1.793 billion, up $70.9 million, or 4.1%; growth was concentrated in commercial and commercial real estate loans.
- Deposits were $1.966 billion, up $71.3 million. Time deposits increased $88.2 million, including $75 million of brokered CDs obtained during the second quarter.
- Investment securities available for sale were $398.5 million, down $55.2 million, reflecting portfolio repositioning and liquidity needs.
- The allowance for loan losses was $16.7 million, or 0.93% of loans. No provision for loan losses was recorded in the 2019 quarter or first half.
- Nonperforming assets were $1.6 million, or 0.07% of total assets, versus $1.9 million, or 0.08%, at year-end. The Texas ratio improved to 0.72% from 0.93%.
- Total stockholders’ equity was $201.9 million, and tangible common equity to tangible assets was 8.55%. Management stated that the Company and West Bank met applicable capital requirements and capital-conservation-buffer requirements.
Cash Flow, Debt and Liquidity
- Operating activities provided $16.6 million of cash in the first six months, compared with $17.0 million in the prior-year period.
- Investing activities used $3.5 million, versus $70.7 million used in 2018, primarily reflecting securities sales and changes in loan funding.
- Financing activities provided $31.9 million, including a $71.3 million increase in deposits, $100 million of FHLB advances and $110 million of FHLB advance repayments.
- Cash and cash equivalents increased to $92.6 million from $47.5 million at December 31, 2018.
- At June 30, 2019, West Bank reported approximately $325 million of additional FHLB borrowing capacity and $67 million of unsecured federal funds lines.
- Reported debt included $128.6 million of FHLB advances, $23.0 million of long-term debt and $20.4 million of subordinated notes, net.
Material Changes Versus Prior Comparable Period
- Net interest income increased as average loans and loan yields grew, but the net interest margin contracted because deposit costs increased faster than asset yields.
- Interest expense on deposits increased 75.6% in the quarter and 85.5% year to date, driven by higher deposit rates and larger balances.
- Noninterest expense increased $0.8 million in the quarter and $2.0 million year to date. Higher salaries, occupancy, FDIC insurance and new market tax credit amortization more than offset the absence of the $333,000 premises write-down recorded in 2018.
- Six-month noninterest income benefited from a $307,000 gain on the sale of the Iowa City branch facility, while 2018 included one-time estate fees from trust services that did not recur.
- Accumulated other comprehensive loss improved to $3.3 million from $6.8 million at year-end, primarily due to unrealized gains on available-for-sale securities, partly offset by derivative losses.
- The Company adopted lease accounting guidance effective January 1, 2019, recording a $9.6 million right-of-use asset and $9.8 million operating lease liability; management stated that the adoption did not materially affect other financial statements.
Guidance, Outlook, Risks and Unusual Items
- No formal earnings guidance was provided. Management expects above-normal loan growth in the third quarter as the Minnesota expansion gains momentum and expects organic loan growth across its markets during the remainder of 2019.
- The Minnesota growth initiative is expected to cost approximately $3.0 million annually. Twelve employees were added during the first half, and management expects related compensation and occupancy costs to remain elevated. Management stated that the timing of reaching break-even in the new markets is difficult to project.
- Management expects continued pressure on net interest margin during the remainder of 2019, particularly if the Treasury yield curve remains flat or inverted or short-term rates decline.
- The Company entered into four new interest-rate swaps with total notional amounts of $100 million during the first half to hedge funding costs. Two additional swaps entered in June had notional amounts of $25 million each and fixed rates of 1.93% and 2.01%.
- Management considered the allowance for loan losses adequate, but acknowledged that economic conditions, collateral values, portfolio composition, regulatory examinations and implementation of the expected-credit-loss standard could require future adjustments.
- ASU 2016-13, the current expected credit loss standard, was not yet adopted. The Company was evaluating models and stated that it could not reasonably estimate the adoption impact. A proposed delay for smaller reporting companies, if approved, could move the effective date to fiscal years beginning after December 31, 2022.
- Key disclosed risks include interest-rate and funding-cost risk, competitive pricing pressure, commercial real estate and construction exposure, economic weakness, credit losses, regulatory changes, cybersecurity and litigation. No material pending legal proceedings or material risk-factor changes were reported.
Facts Investors Should Verify
- Whether loan growth in the new Minnesota markets develops as expected and when those markets reach break-even.
- Whether higher deposit costs and a potentially flatter or inverted yield curve further reduce net interest margin.
- The sustainability of expense growth, including Minnesota expansion costs and recurring new market tax credit amortization.
- The credit quality of the commercial and commercial real estate portfolios, including concentrations that exceed certain regulatory guideline thresholds.
- The eventual impact of CECL adoption on the allowance for loan losses, retained earnings and regulatory capital.
- The liquidity and interest-rate implications of brokered CDs, FHLB funding and the Company’s interest-rate swaps.
- The filing’s stated $0.21-per-share quarterly dividend, payable August 21, 2019 to shareholders of record August 7, 2019.