West Bancorporation, Inc. — Form 10-Q Summary
Business context and reporting period
West Bancorporation, Inc. is a community banking holding company operating through West Bank in central and eastern Iowa and the Rochester, Minnesota area. The filing covers the quarter and six months ended June 30, 2018; financial statements are unaudited and dollar amounts are in thousands except per-share data.
Key financial metrics
| Metric | Three months ended June 30, 2018 | Six months ended June 30, 2018 |
|---|---|---|
| Net income | $6,764, up 6.3% | $14,148, up 13.5% |
| Diluted EPS | $0.41, versus $0.39 | $0.86, versus $0.76 |
| Net interest income | $15,299, up 1.4% | $30,715, up 4.2% |
| Net interest margin, FTE | 3.05%, down 39 basis points | 3.11%, down 35 basis points |
| Noninterest income | $2,023, down 12.7% | $3,936, down 12.1% |
| Noninterest expense | $8,958, up 9.6% | $17,245, up 6.4% |
| Return on average assets | 1.27% | 1.34% |
| Return on average equity | 15.15% | 15.96% |
At June 30, 2018, total assets were $2.197 billion, up 3.9% from December 31, 2017. Loans were $1.534 billion, up 1.6%, and deposits were $1.892 billion, up 4.5%. Stockholders’ equity was $182.4 million, compared with $178.1 million at year-end.
Cash and cash equivalents were $65.1 million, compared with $47.9 million at December 31, 2017. Net cash provided by operating activities was $17.0 million, while investing activities used $70.7 million, principally for purchases of investment securities and loan growth; financing activities provided $70.9 million, primarily from deposit growth. Management reported approximately $342 million of additional FHLB borrowing capacity and $67 million of unsecured federal funds lines.
Total debt and other borrowings included $77.1 million of FHLB advances, $20.4 million of subordinated notes and $19.6 million of long-term debt. Consolidated total capital and Tier 1 capital ratios were 12.08% and 11.19%, respectively; management stated that the Company and West Bank met applicable capital requirements.
Material changes versus prior comparable periods
- Net income increased primarily because of higher net interest income and lower income taxes following the Tax Cuts and Jobs Act, which reduced the federal corporate tax rate to 21% from 35%.
- Interest expense rose materially as deposit balances and rates increased. Deposit interest expense increased $2.017 million in the quarter and $3.834 million for the six-month period.
- Net interest margin declined because deposit and borrowing costs rose faster than loan yields. Management expects margin pressure to continue, particularly if the Treasury yield curve flattens.
- Noninterest income declined because 2017 included investment securities gains, a bank-owned life insurance gain and a gain related to the final payment from the sale of SmartyPig, LLC.
- Noninterest expense increased, including a $333 write-down of the Iowa City branch facility, higher salaries and benefits, and higher occupancy costs.
- Loans increased $23.9 million from year-end, led by a $70.7 million increase in commercial real estate loans, partly offset by lower commercial and construction real estate balances.
- Nonaccrual loans increased to $2.127 million from $622 thousand at December 31, 2017, primarily related to two customers. The Texas ratio rose to 1.07% from 0.32% but remained low by management’s comparison.
Outlook, commentary, risks and unusual items
Management stated that the loan pipeline was strong and expected loan growth in all three markets during the remainder of 2018. The Board declared a quarterly dividend of $0.20 per share, payable August 22, 2018.
The allowance for loan losses was $16.5 million, or 1.08% of loans, and management considered it adequate. The six-month provision was $150 thousand; no provision was recorded in the second quarter. Credit risks include commercial real estate, commercial lending and construction lending, where repayment depends substantially on borrower operations and collateral values.
The Company planned to consolidate its Iowa City and Coralville branches in fall 2018 and recognized the related Iowa City facility write-down. It transferred all held-to-maturity securities to available-for-sale securities on January 1, 2018, increasing balance-sheet flexibility; the transferred portfolio had an amortized cost of $45.5 million.
Available-for-sale securities had a fair value of $526.8 million and $11.9 million of gross unrealized losses at June 30, 2018. Management attributed the losses to market conditions rather than reduced cash flows and did not identify other-than-temporary impairment.
Off-balance-sheet commitments totaled approximately $662.3 million, including $657.4 million of commitments to extend credit and $4.8 million of standby letters of credit. The Company reported no material pending legal proceedings and no material changes to previously disclosed risk factors. Principal risks include interest-rate and margin pressure, credit deterioration, real estate values, competition, regulatory changes, cybersecurity and litigation.
Important facts for investors to verify
- Whether deposit pricing and additional Federal Reserve rate increases further compress the 3.05% quarterly net interest margin.
- The trend in nonaccrual loans, criticized assets and the 1.07% Texas ratio, particularly for commercial real estate and commercial borrowers.
- Whether the $16.5 million allowance remains adequate as the loan portfolio grows and the Company prepares for the expected credit-loss standard.
- The effect of unrealized securities losses and interest-rate changes on accumulated other comprehensive income and tangible common equity.
- The timing, costs and operating effects of the Iowa City and Coralville branch consolidation.
- The Company’s ability to fund loan growth while maintaining deposit costs, liquidity and capital ratios.
- The filing’s forward-looking statements, which are subject to interest-rate, economic, credit, regulatory, competitive, cybersecurity and litigation risks.