West Bancorporation, Inc. — 2017 Q1 Form 10-Q Summary
Business context and reporting period
West Bancorporation, Inc., through West Bank, operates community banking businesses in central Iowa, eastern Iowa and Rochester, Minnesota. This unaudited Form 10-Q covers the three months ended March 31, 2017, compared primarily with the three months ended March 31, 2016 and, for balance-sheet items, December 31, 2016. Amounts are in thousands except per-share data.
Key financial metrics
| Metric | Q1 2017 | Comparable period | Change |
|---|---|---|---|
| Net income | $6,106 | $5,696 | 7.2% |
| Diluted EPS | $0.37 | $0.35 | $0.02 |
| Net interest income | $14,389 | $13,699 | 5.0% |
| Provision for loan losses | $0 | $200 | $(200) |
| Noninterest income | $2,160 | $2,230 | (3.1%) |
| Noninterest expense | $8,043 | $7,799 | 3.1% |
| Net interest margin | 3.48% | 3.51% | (3) basis points |
| Return on average assets | 1.35% | 1.31% | Up 4 basis points |
| Return on average equity | 14.80% | 14.77% | Up 3 basis points |
| Efficiency ratio | 46.84% | 46.91% | Improved 7 basis points |
| Cash dividends declared per share | $0.17 | $0.16 | 6.3% |
At March 31, 2017, total assets were $1.868 billion, up 0.7% from year-end 2016. Loans were $1.447 billion, up $46.9 million, or 3.3%, driven mainly by construction and commercial real estate growth. Total deposits were $1.529 billion, down $17.9 million, or 1.2%. Stockholders’ equity was $169.8 million, compared with $165.4 million at December 31, 2016.
Cash and cash equivalents declined to $42.5 million from $76.8 million at year-end. Net cash provided by operating activities was $7.1 million, while investing activities used $47.1 million, primarily because of loan growth. Financing activities provided $5.8 million, including $36.0 million of new short-term borrowings.
Total borrowings included $100.3 million of Federal Home Loan Bank advances, $20.4 million of subordinated notes, $36.0 million of short-term borrowings and $4.3 million of long-term debt. West Bank reported approximately $276 million of additional FHLB borrowing capacity and $67 million of unsecured federal funds lines.
Material changes versus prior periods
- Net income increased $410, or 7.2%, primarily because of higher net interest income and the absence of a loan-loss provision.
- Average loans increased $165.2 million, or 13.2%, year over year; loan interest income increased $1.5 million despite a five-basis-point decline in average loan yield.
- Interest expense increased $577, or 31.6%, as deposit and borrowing rates rose. Management reported continuing pressure on the net interest margin from the higher-rate environment.
- Noninterest income declined $70, mainly because gains from bank-owned life insurance were lower, partially offset by higher trust-services revenue.
- Noninterest expense increased $244, with higher occupancy, data-processing and professional-fee costs, partly offset by lower investment advisory and other expenses.
- The allowance for loan losses increased to $16.4 million from $16.1 million despite no provision, reflecting net recoveries. The allowance was 1.14% of outstanding loans.
- Nonaccrual loans declined to $920 from $1.022 million at year-end. Nonperforming assets were 0.05% of total assets, and the Texas ratio improved to 0.49% from 0.56%.
- Accumulated other comprehensive income improved from a $1.042 million loss to $30 thousand of income, primarily due to unrealized investment-security gains.
Guidance, outlook, risks and unusual items
- Management expected loan growth to continue across all three markets during the remainder of 2017.
- Management expected the prevailing interest-rate environment to continue pressuring the net interest margin, while continuing strategies to manage that pressure.
- The Board declared a quarterly dividend of $0.18 per share on April 26, 2017, payable May 24, 2017. This was a 5.9% increase from the prior $0.17 dividend.
- Approximately $76 million of noninterest-bearing deposits were reclassified to interest-bearing accounts in April 2017. Management estimated that annual interest expense could increase by approximately $40 thousand at then-current rates and balances.
- The company’s agreement to purchase discounted State of Iowa wind-energy tax credits ended May 1, 2017; management was evaluating other transferable tax-credit opportunities.
- Major risks include interest-rate and margin risk, competition and pricing pressure, commercial and real-estate credit exposure, declining collateral values, economic conditions, regulatory changes, cyber-attacks and litigation.
- Commercial, commercial-real-estate and construction lending comprise significant portfolio exposures. Management noted that these loans can carry higher risk because repayment may depend on business operations, refinancing or collateral values.
- Investment securities had gross unrealized losses of $2.0 million available-for-sale and $474 thousand held-to-maturity. Management attributed the losses to market conditions, did not identify other-than-temporary impairment and expected full principal and interest collection.
- Off-balance-sheet commitments totaled approximately $664.5 million, including $658.7 million of commitments to extend credit and $5.8 million of standby letters of credit.
- Management stated that the company and West Bank met applicable regulatory capital requirements and that capital ratios were sufficient to meet the fully phased-in capital conservation buffer.
- The filing reported no material pending legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether loan growth, particularly in construction and commercial real estate, remains supported by stable credit quality and adequate reserves.
- Whether deposit pricing and higher borrowing costs further compress the net interest margin.
- Whether liquidity remains comfortable as cash balances declined and short-term borrowings increased.
- The sustainability of earnings given the absence of a loan-loss provision and the contribution from bank-owned life insurance gains.
- The effect of the April 2017 deposit-product changes and the related increase in funding costs.
- Future developments in the company’s adoption of credit-loss accounting guidance and the eventual impact on retained earnings and the allowance.
- Concentration and collateral risks in Iowa and Minnesota commercial and real-estate markets, as well as the company’s $664.5 million of unfunded or contingent credit commitments.