West Bancorporation, Inc. 2019 Form 10-K Summary
Business context and reporting period
West Bancorporation, Inc. is an Iowa financial holding company operating principally through West Bank, a business-focused community bank. The company provides commercial, real estate and consumer lending, deposit, trust, treasury management and electronic banking services across central and eastern Iowa and southern Minnesota. This filing covers the fiscal year ended December 31, 2019; amounts are in thousands except per-share data.
In 2019, West Bank expanded into Owatonna, Mankato and St. Cloud, Minnesota, opening loan-production offices in March and obtaining full branch approvals in May. The company operated through 13 locations at year-end and had approximately 171 full-time-equivalent employees.
Financial performance and condition
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net income | $28.690 million | $28.508 million | 0.6% increase |
| Basic/diluted EPS | $1.75/$1.74 | $1.75/$1.74 | Essentially unchanged |
| Net interest income | $66.430 million | $62.058 million | 7.0% increase |
| Provision for loan losses | $0.600 million | $(0.250) million | Higher expense |
| Noninterest income | $8.318 million | $7.752 million | 7.3% increase |
| Noninterest expense | $38.406 million | $34.992 million | 9.8% increase |
| Income before taxes | $35.742 million | $35.068 million | 1.9% increase |
| Total assets | $2.474 billion | $2.297 billion | 7.7% increase |
| Loans, net of fees | $1.942 billion | $1.722 billion | 12.8% increase |
| Total deposits | $2.015 billion | $1.895 billion | 6.3% increase |
| Stockholders’ equity | $211.820 million | $191.023 million | 10.9% increase |
| Net interest margin | 2.95% | 3.06% | Down 11 basis points |
| Return on average assets | 1.20% | 1.31% | Down 11 basis points |
| Return on average equity | 14.34% | 15.68% | Down 134 basis points |
| Efficiency ratio | 50.96% | 48.33% | Higher by 263 basis points |
Net cash provided by operating activities was $36.967 million, compared with $34.744 million in 2018. Investing activities used $155.499 million, primarily reflecting a $219.887 million net increase in loans. Financing activities provided $124.348 million, including $120.227 million of deposit growth and $40.000 million of additional FHLB advances, partially offset by dividends and debt repayments. Cash and cash equivalents ended at $53.290 million, compared with $47.474 million at year-end 2018.
Credit quality remained strong. Nonperforming assets declined to $0.538 million, or 0.02% of assets, from $1.928 million, or 0.08%, in 2018. Nonperforming loans were 0.03% of total loans. The allowance for loan losses was $17.235 million, or 0.89% of loans, and net charge-offs were $0.054 million. The Texas ratio improved to 0.23% from 0.93%.
At December 31, 2019, West Bank was well-capitalized and met its capital conservation buffer requirements. The consolidated tangible common equity ratio was 8.56%, compared with 8.32% in 2018. Consolidated total capital, Tier 1 capital, common equity Tier 1 capital and leverage ratios were 11.40%, 10.62%, 9.72% and 9.53%, respectively. The company paid $0.83 per common share in dividends during 2019 and declared a $0.21 quarterly dividend payable in February 2020.
Material changes versus the prior comparable period
- Loans grew substantially, led by commercial, construction and commercial real estate lending, while deposits grew more slowly.
- Average loans increased by $245.515 million and supported higher interest income, but higher deposit costs and funding costs compressed the net interest margin.
- Interest expense increased to $32.245 million from $22.735 million as deposit rates rose and borrowings increased.
- Noninterest expense increased by $3.414 million, primarily due to the Minnesota expansion. Expansion-related compensation, occupancy, equipment, professional fee and business-development costs totaled approximately $2.8 million pretax, versus approximately $1.1 million of pretax net interest income and related fee income from those markets.
- The company sold and repositioned investment securities to fund loan growth and improve portfolio yields. Available-for-sale securities declined to $398.578 million from $453.758 million.
- The company adopted the new lease accounting standard in 2019, recording right-of-use assets and lease liabilities without a material impact on the other consolidated financial statements.
- Other comprehensive income was $3.553 million, reversing the $4.552 million loss recorded in 2018, primarily due to improved unrealized gains on securities partly offset by derivative valuation losses.
Guidance, outlook, risks and unusual items
Management expressed a positive earnings outlook and expected the company to remain profitable in 2020 at a level comparable with peers. Management expected continued loan growth, lower deposit pricing following 2019 Federal Reserve rate reductions, and a relatively flat yield curve. A flat curve was expected to continue pressuring net interest margin.
Key risks include concentration in commercial real estate and commercial lending, changes in property values and borrower cash flows, interest-rate and deposit-cost pressure, liquidity and refinancing risk, competition from banks and financial technology companies, cybersecurity and third-party technology failures, regulatory changes, and the transition away from LIBOR. Commercial real estate concentrations were above regulatory guidance thresholds, with reported concentrations of 101% and 464% of capital under the applicable measures.
The company had $225.388 million of borrowings at year-end, including $179.365 million of FHLB advances, $20.438 million of subordinated notes and $22.925 million of long-term debt. It had approximately $322 million of additional FHLB borrowing capacity and $67 million of unsecured federal funds lines. Short-term brokered CDs totaled $50 million, and approximately 87% of total time deposits mature within one year.
Off-balance-sheet commitments included $672.117 million of commitments to extend credit and $8.029 million of standby letters of credit. Management did not expect significant losses from these commitments. The filing reports no material pending legal proceedings and no unresolved SEC staff comments.
The allowance for loan losses continued to be based on the incurred-loss model in 2019. The company expects to adopt CECL for fiscal years beginning after December 15, 2022, but stated that it could not reasonably estimate the effect on capital, earnings or the allowance at the filing date.
Most important facts for investors to verify
- Whether rapid loan growth, particularly in commercial real estate, remains consistent with underwriting standards and produces a sustainable return after funding costs.
- Whether net interest margin stabilizes or continues to decline as deposit repricing, the yield curve and Federal Reserve policy evolve.
- Whether the Minnesota expansion reaches profitability after the disclosed $2.8 million of 2019 pretax costs.
- Whether nonperforming assets and charge-offs remain near historically low levels as the loan portfolio grows.
- The eventual effect of CECL adoption on the allowance for credit losses, earnings and regulatory capital.
- The maturity and repricing risk associated with brokered CDs, FHLB advances, LIBOR-linked obligations and interest-rate swaps.
- The company’s ability to maintain dividends while servicing subordinated debt and meeting regulatory capital requirements.
- Execution of cybersecurity, third-party technology, regulatory compliance and LIBOR-transition controls.