West Bancorporation, Inc. 2020 Form 10-K Summary
Business context and reporting period
West Bancorporation, Inc. is an Iowa financial holding company whose primary business is ownership of West Bank, a business-focused community bank serving central and eastern Iowa and southern Minnesota. The filing covers the fiscal year ended December 31, 2020; fourth-quarter results are included in the unaudited quarterly data.
West Bank operated 13 locations and had 175 employees at year-end. Its products include commercial, real estate and consumer lending, deposits, trust services, digital banking and treasury management. The company operated as one community-banking segment.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change or commentary |
|---|---|---|---|
| Net income | $32.7 million | $28.7 million | Record; up 14.0% |
| Basic diluted EPS | $1.99 / $1.98 | $1.75 / $1.74 | Improved year over year |
| Net interest income | $82.8 million | $66.4 million | Up 24.7% |
| Net interest margin, FTE | 3.20% | 2.95% | Up 25 basis points |
| Provision for loan losses | $12.0 million | $0.6 million | Increased substantially due to COVID-19 risk |
| Noninterest income | $9.6 million | $8.3 million | Up 15.4% |
| Noninterest expense | $39.1 million | $38.4 million | Up 1.7% |
| Efficiency ratio | 41.96% | 50.96% | Improved; lower is better |
| Return on average assets | 1.19% | 1.20% | broadly stable |
| Return on average equity | 15.49% | 14.34% | Improved |
Fourth-quarter 2020 net income was $8.6 million, or $0.52 diluted EPS, compared with $7.6 million, or $0.46 diluted EPS, in the fourth quarter of 2019. Fourth-quarter net interest income was $22.5 million, with a $4.0 million provision for loan losses.
Loans totaled $2.28 billion at December 31, 2020, up 17.5% from $1.94 billion. The balance included $180.8 million of PPP loans; excluding PPP loans, loans increased approximately 8.0%. Deposits rose 34.1% to $2.70 billion, and total assets increased 28.8% to $3.19 billion.
Cash and cash equivalents were $396.4 million at year-end, compared with $53.3 million in 2019. Net cash provided by operating activities was $42.3 million. Available liquidity included approximately $378.0 million of additional FHLB borrowing capacity, $36.2 million of Federal Reserve discount-window capacity and $67.0 million of unsecured federal funds lines. No amounts were outstanding under the latter two facilities.
Year-end borrowings included $175.0 million of FHLB advances, $20.5 million of subordinated notes, $21.6 million of long-term debt and $5.4 million of federal funds purchased. Total stockholders’ equity was $223.7 million, while the tangible common equity ratio declined to 7.02% from 8.56% because of rapid asset growth and lower accumulated other comprehensive income.
The allowance for loan losses increased to $29.4 million, or 1.29% of total loans and 1.40% excluding PPP loans, compared with $17.2 million and 0.89%, respectively, in 2019. Nonperforming loans rose to $16.2 million, or 0.71% of loans, from $0.5 million, and the Texas ratio increased to 6.40% from 0.23%.
Material changes versus the prior comparable period
- Net income increased primarily because of higher net interest income and noninterest income, partly offset by the higher loan-loss provision.
- Interest expense declined 46.0%, reflecting Federal Reserve rate cuts and lower deposit and borrowing costs. The company expects low deposit rates and lower asset yields to continue affecting 2021 results.
- Loan swap fees generated $1.6 million of 2020 noninterest income but may not recur at the same level.
- The Minnesota expansion, which generated significant startup costs in 2019, became profitable in 2020 and contributed to the improved efficiency ratio.
- Commercial real estate and commercial loans secured by real estate represented a significant concentration. Commercial loans secured by real estate totaled $1.61 billion, or approximately 70% of total loans.
- The company’s commercial real estate concentration exceeded regulatory guideline levels, with reported concentrations of 80% for construction, land and development loans and 464% for broader commercial real estate categories relative to capital.
Guidance, outlook, risks and unusual items
Management expects the company to remain profitable in 2021 at a level comparable with peers, but stated that results depend heavily on loan growth, credit losses, interest rates, local and national economic conditions and the COVID-19 recovery. Management expects loan growth and deposits may slow or decline as government relief diminishes, customers use accumulated liquidity and economic conditions evolve.
West Bank originated 925 PPP loans totaling $224.5 million in 2020; $180.8 million remained outstanding at year-end and forgiveness processing was expected to extend into the second quarter of 2021. As of February 19, 2021, the bank had originated 256 additional PPP loans totaling approximately $43.1 million under the second round.
COVID-19-related payment deferrals covered 35 loans totaling $139.9 million at year-end, or 6.1% of total loans, primarily involving hotels, theaters, mixed-use commercial real estate and other commercial borrowers. The deferrals were scheduled to expire from January through June 2021. The company identified approximately $197.2 million of exposure to hotels, retail, restaurants and movie theaters, collectively about 15.1% of the loan portfolio.
Key risks include deterioration in commercial real estate and hospitality-related credit, additional provisions and charge-offs, deposit outflows, prolonged low interest rates, competition, cybersecurity and third-party systems, regulatory requirements, LIBOR transition, and possible litigation or SBA guarantee disputes related to PPP lending. The company also expects to adopt CECL for fiscal years beginning January 1, 2023 and cannot yet reasonably estimate the financial impact.
The company paid $0.84 per common share in 2020 and declared a $0.22 quarterly dividend for the first quarter of 2021. Dividend payments remain subject to earnings, West Bank dividend capacity, capital requirements and regulatory restrictions. The company had no material pending legal proceedings, and management and the auditors reported effective internal control over financial reporting.
Construction of a new Sartell, Minnesota branch was underway, with an $8.3 million remaining commitment at year-end and expected completion by the end of 2021.
Investor verification checklist
- Verify the performance and collateral outlook for the $139.9 million of COVID-19-modified loans as deferrals expire.
- Monitor nonperforming loans, criticized and classified assets, charge-offs and the adequacy of the $29.4 million allowance, particularly in commercial real estate and stressed industries.
- Assess whether PPP forgiveness timing, second-round PPP volume and related fee amortization create material 2021 earnings volatility.
- Evaluate the sustainability of the 3.20% net interest margin in a near-zero-rate environment and as excess deposits or loans normalize.
- Review deposit retention, available borrowing capacity and the maturity or repricing profile of FHLB advances, time deposits and other debt.
- Reconcile the decline in tangible common equity to 7.02% with future asset growth, dividend payments and potential credit losses.
- Track the company’s commercial real estate concentration, hospitality exposure, LIBOR transition and CECL implementation plans.
- Confirm the recurring nature of the $1.6 million of loan swap fees and the effect of derivative fair-value changes on accumulated other comprehensive income.