West Bancorporation, Inc. — FY2018 Form 10-K Summary
Business context and reporting period
West Bancorporation, Inc. is an Iowa financial holding company whose principal business is conducted through West Bank, a business-focused community bank serving central and eastern Iowa and Rochester, Minnesota. The filing covers the fiscal year ended December 31, 2018; quarterly data for the fourth quarter is unaudited. The company operated as one community-banking segment and had approximately 163 full-time equivalent employees.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net income | $28.5 million | $23.1 million | 23.6% increase |
| Basic/diluted EPS | $1.75/$1.74 | $1.42/$1.41 | Increase |
| Net interest income | $62.1 million | $60.1 million | 3.3% increase |
| Net interest margin | 3.02% | 3.37% | Down 35 basis points |
| Noninterest income | $7.8 million | $8.6 million | 10.4% decrease |
| Noninterest expense | $35.0 million | $32.3 million | 8.5% increase |
| Efficiency ratio | 48.92% | 45.39% | Higher, indicating weaker efficiency |
| Return on average assets | 1.31% | 1.18% | Improved |
| Return on average equity | 15.68% | 13.29% | Improved |
| Total assets | $2.30 billion | $2.11 billion | 8.6% increase |
| Loans, net of deferred fees | $1.72 billion | $1.51 billion | 14.0% increase |
| Total deposits | $1.89 billion | $1.81 billion | 4.6% increase |
| Stockholders’ equity | $191.0 million | $178.1 million | 7.3% increase |
Net cash provided by operating activities was $34.7 million, compared with $29.4 million in 2017. Investing activities used $188.7 million, principally reflecting $210.8 million of net loan growth. Financing activities provided $153.5 million, including deposit growth and additional borrowings. Ending cash and cash equivalents were $47.5 million.
Total borrowings were approximately $205.3 million at year-end, consisting primarily of $137.9 million of FHLB advances, $27.0 million of long-term debt, $20.4 million of subordinated notes and $20.0 million of federal funds purchased. West Bank reported approximately $289 million of additional FHLB borrowing capacity and $67 million of unsecured federal funds lines. Management stated that liquidity was sufficient.
West Bank remained well-capitalized. The consolidated Common Equity Tier 1 ratio was 9.70%, total capital ratio was 11.50%, and Tier 1 leverage ratio was 9.74%. The tangible common equity ratio was 8.32%. Cash dividends were $0.78 per share in 2018, compared with $0.71 in 2017.
Material changes versus the prior comparable period
- Record net income increased by $5.4 million, primarily from higher net interest income, a $250 thousand negative provision for loan losses, and substantially lower income taxes.
- The effective tax rate declined to 18.7% from 36.7%. The 2017 rate included a $2.34 million one-time charge related to revaluing deferred tax assets after the Tax Cuts and Jobs Act; the 2018 benefit also reflected the lower 21% federal corporate rate and tax credits.
- Loan growth was concentrated in commercial, construction and land development, and commercial real estate lending. Commercial real estate and construction-related loans represented approximately 75% of total loans.
- Net interest income increased despite margin compression. Deposit and borrowing costs rose faster than asset yields, and management expects continued pressure on the net interest margin in 2019.
- Noninterest income declined because 2017 included a gain from bank-owned life insurance and net investment-securities gains, while 2018 included net investment-securities losses.
- Noninterest expense increased due to higher salaries and benefits, occupancy costs, a $333 thousand write-down of the Iowa City branch facility, and amortization related to a new markets tax credit investment.
- Nonperforming assets increased to $1.9 million, or 0.08% of assets, from $0.6 million, or 0.03%, primarily because loans to one borrower were placed on nonaccrual status. The Texas ratio increased to 0.93% from 0.32%, but remained low.
- The allowance for loan losses increased to $16.7 million, equal to 0.97% of loans. Net recoveries of $509 thousand exceeded charge-offs and supported the negative loan-loss provision.
- The company consolidated its Iowa City and Coralville branches in the fourth quarter; the Iowa City facility was sold in January 2019.
- Accumulated other comprehensive loss increased to $6.8 million from $1.9 million, primarily due to unrealized losses on available-for-sale securities.
Guidance, outlook, risks and unusual items
Management described the earnings outlook as positive and anticipated profitability in 2019 at a level comparable with peers. It expects additional loan growth, but identified loan losses, market interest rates and local and national economic conditions as important variables. Management also expects higher average rates on certain money-market and insured cash-sweep deposits in 2019.
- Commercial real estate concentration is a principal credit risk. The company exceeded the regulatory guideline for non-owner-occupied commercial real estate; reported concentrations were 453% of capital for relevant commercial real estate exposure and 100% for construction, land and development exposure.
- Interest-rate risk includes rising deposit costs, a potentially narrowing net interest margin, variable-rate borrowings and deposits, and exposure to the planned phaseout of LIBOR after 2021.
- CECL credit-loss accounting was scheduled to become effective for the company in 2020. Management had not yet estimated the effect and warned that implementation could increase the allowance, expenses and capital requirements.
- Investment securities had $11.1 million of gross unrealized losses at year-end. Management considered the losses temporary and stated that it did not intend or expect to be required to sell the affected securities before recovery.
- Off-balance-sheet commitments included $641.6 million of commitments to extend credit and $6.6 million of standby letters of credit. Management did not expect significant losses from these commitments.
- The company had $20.6 million of junior subordinated debentures. These obligations rank ahead of common stock and permit distributions to be deferred for up to five years, during which common dividends could not be paid.
- Other risks include liquidity and deposit runoff, competition, cybersecurity and third-party technology failures, regulatory changes, economic deterioration, collateral-value declines, litigation and the ability to manage growth.
The independent auditor, RSM US LLP, issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management and the auditor concluded that internal controls were effective as of December 31, 2018.
Important facts for investors to verify
- Whether loan growth, particularly in commercial real estate and construction lending, remains consistent with underwriting standards and whether credit deterioration develops in the concentrated portfolio.
- The trajectory of deposit pricing, funding costs and the net interest margin as interest rates and competitive conditions change.
- The ultimate effect of CECL adoption on the allowance for credit losses, retained earnings and regulatory capital.
- The stability and renewal rate of time deposits, approximately 78% of which matured within one year, and the availability of FHLB and other backup funding.
- Whether nonperforming assets and the Texas ratio remain low after the increase associated with one borrower in 2018.
- The duration, unrealized losses and credit quality of the available-for-sale securities portfolio.
- The company’s ability to sustain quarterly dividends while servicing subordinated debt, funding growth and maintaining regulatory capital buffers.