West Bancorporation, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2016. The filing is unaudited and compares results with the corresponding 2015 periods and the December 31, 2015 balance sheet. West Bancorporation operates West Bank in central and eastern Iowa and the Rochester, Minnesota market.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2016 | Six Months Ended June 30, 2016 | Comparable Change |
|---|---|---|---|
| Net income | $5.476 million | $11.172 million | +3.9% quarter; +7.7% year to date |
| Diluted EPS | $0.34 | $0.69 | Up from $0.33 and $0.65 |
| Net interest income | $14.273 million | $27.972 million | +6.9% quarter; +6.3% year to date |
| Provision for loan losses | $0.500 million | $0.700 million | Up from $0.200 million in each 2015 comparison period |
| Noninterest income | $1.903 million | $4.133 million | -1.0% quarter; +9.3% year to date |
| Noninterest expense | $7.819 million | $15.618 million | +5.1% quarter; +4.9% year to date |
| Net interest margin | 3.52% | 3.52% | Down 7 basis points in both comparisons |
| Return on average assets | 1.22% | 1.27% | Down from 1.28% in both comparisons |
| Return on average equity | 13.90% | 14.33% | Down from 14.64% and 14.61% |
- Assets: $1.832 billion at June 30, 2016, up 4.8% from December 31, 2015.
- Loans: $1.381 billion before the allowance, up $134.2 million, or 10.8%, primarily from commercial, construction and commercial real estate lending.
- Allowance for loan losses: $15.829 million, or 1.15% of outstanding loans, compared with $14.967 million at year-end 2015.
- Deposits: $1.510 billion, up $69.5 million, or 4.8%, driven principally by savings and public-funds deposits.
- Cash and cash equivalents: $48.144 million, down from $72.651 million at year-end.
- Stockholders’ equity: $160.979 million, up from $152.377 million; tangible common equity to tangible assets was 8.79%.
- Debt and borrowings: Federal Home Loan Bank advances were $99.131 million, subordinated notes were $20.392 million, short-term borrowings were $26.000 million, and long-term debt was $6.779 million.
- Liquidity: West Bank reported approximately $216 million of additional FHLB borrowing capacity and $67 million of unsecured federal-funds lines.
- Cash flow: Operating activities provided $14.496 million; investing activities used $106.801 million, principally from loan growth; financing activities provided $67.798 million. Cash and cash equivalents declined $24.507 million during the first six months.
Material Changes Versus Prior Comparable Periods
- Profitability improved as loan growth increased net interest income. Average loans rose 10.1% in the second quarter and 7.9% year to date versus 2015.
- Margin performance weakened: the net interest margin fell to 3.52% from 3.59%, reflecting higher deposit and borrowing costs and lower investment-security yields.
- The provision for loan losses increased to $500,000 for the quarter and $700,000 year to date, which management attributed primarily to loan growth.
- Year-to-date noninterest income benefited from a $443,000 tax-exempt gain on bank-owned life insurance following the deaths of a colleague and a former employee. Related costs contributed approximately $171,000 to higher noninterest expense.
- Noninterest expense increased because of salaries and benefits, stock-based compensation, data processing, professional fees and other operating costs. Legal and consulting expenses increased in connection with litigation.
- Investment securities available for sale declined $28.8 million, largely due to principal paydowns, calls and $1.5 million of sales used to support loan funding.
- Nonperforming assets improved to $1.067 million from $1.461 million at year-end. The Texas ratio declined to 0.60% from 0.87%.
- Cash dividends declared increased to $0.33 per share for the first half from $0.30 per share in the 2015 period. The July 27, 2016 quarterly dividend was increased to $0.17 per share.
Guidance, Outlook, Risks and Unusual Items
- Management expects loan growth to continue in the second half of 2016, but at a slower pace than in the first half, with continued demand for commercial, construction and development, and commercial real estate loans.
- Management expects the low-interest-rate environment to continue pressuring the net interest margin.
- A new Rochester, Minnesota office is expected to open in the fourth quarter of 2016. The remaining construction contract was approximately $6.668 million, of which $3.290 million had been paid through June 30.
- The company expects approximately $115,000 of additional annual FDIC insurance expense from the revised assessment-rate system.
- Key risks include interest-rate changes, deposit and loan pricing pressure, commercial and real estate credit quality, declining collateral values, economic conditions, competition, regulatory changes, cybersecurity threats and potential changes to the allowance for loan losses.
- A pending class-action lawsuit involving debit-card transaction posting practices remains unresolved. The Iowa Supreme Court dismissed certain claims but allowed a breach-of-contract claim to proceed. Trial was scheduled for June 19, 2017; potential loss could not be reasonably estimated.
- Off-balance-sheet commitments totaled approximately $594.2 million, including $586.5 million of commitments to extend credit and $7.7 million of standby letters of credit.
- Approximately $38 million of new commercial real estate loans during the period were made to entities managed by a related party. A significant related-party relationship maintained approximately $151 million of deposits at West Bank.
- The company stated that it met applicable regulatory capital requirements and that its capital ratios exceeded the fully phased-in conservation-buffer requirements.
Important Facts for Investors to Verify
- Whether rapid loan growth remains manageable and whether credit losses or provisions increase beyond management’s current expectations.
- The sustainability of the 3.52% net interest margin amid higher funding costs and a low-rate environment.
- The concentration and performance of commercial real estate, construction and development loans.
- The outcome and potential financial exposure from the debit-card class-action litigation.
- The effect of public-funds deposit concentration, related-party lending and the approximately $151 million related-party deposit relationship.
- Completion costs, timing and expected operating impact of the Rochester office.
- Future FDIC assessment expense and other regulatory or accounting changes, including the expected credit-loss standard.