West Bancorporation, Inc. — Form 10-Q Summary
Reporting period: Quarterly and nine-month periods ended September 30, 2017, compared with the corresponding 2016 periods. The company operates West Bank in central and eastern Iowa and the Rochester, Minnesota market. The financial statements are unaudited and prepared under U.S. GAAP.
Business Context and Financial Position
- Total assets increased 9.5% to $2.030 billion from $1.854 billion at December 31, 2016.
- Loans increased 4.1% to $1.457 billion, led by construction and land development loans and commercial real estate loans.
- Available-for-sale investment securities increased to $418.4 million from $260.6 million, reflecting significant purchases and reinvestment in higher-yielding securities.
- Total deposits increased 6.8% to $1.651 billion. Approximately $76 million of noninterest-bearing accounts were reclassified to interest-bearing accounts in April 2017 as part of a retail product restructuring.
- Stockholders’ equity increased to $178.1 million from $165.4 million. The tangible common equity ratio was 8.77% at September 30, 2017.
Revenue, Profitability and Key Metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Net income | $6.405 million | $5.813 million | $18.876 million | $16.985 million |
| Diluted EPS | $0.39 | $0.36 | $1.16 | $1.05 |
| Net interest income | $15.031 million | $14.721 million | $44.513 million | $42.693 million |
| Noninterest income | $2.264 million | $1.919 million | $6.740 million | $6.052 million |
| Noninterest expense | $8.020 million | $7.993 million | $24.235 million | $23.611 million |
| Net interest margin, FTE | 3.31% | 3.50% | 3.41% | 3.51% |
| Efficiency ratio, adjusted FTE | 45.10% | 46.25% | 45.95% | 46.59% |
| Return on average assets | 1.29% | 1.26% | 1.32% | 1.26% |
| Return on average equity | 14.41% | 14.20% | 14.69% | 14.29% |
Q3 net income increased 10.2%, while nine-month net income increased 11.1%. Net interest income benefited from loan growth and higher investment-security balances, although the net interest margin contracted as deposit and borrowing costs rose. The company recorded no provision for loan losses in either the quarter or nine-month period, compared with $200 thousand and $900 thousand, respectively, in 2016.
Cash Flow, Debt and Liquidity
- Operating cash flow for the first nine months was $22.0 million, compared with $22.3 million in 2016.
- Investing activities used $213.1 million, primarily because of $267.1 million of investment-security purchases and $56.8 million of net loan growth.
- Financing activities provided $153.8 million, including $104.7 million of deposit growth, $48.0 million of short-term borrowings and $22.0 million of long-term debt proceeds.
- Cash and cash equivalents declined to $39.5 million from $76.8 million at December 31, 2016.
- At September 30, 2017, West Bank had approximately $255 million of additional FHLB borrowing capacity and $67 million of unsecured federal funds lines.
- Long-term debt increased to $24.2 million. A May 2017 term loan of $25 million replaced a prior $3 million facility and helped fund a $40 million capital injection into West Bank, together with the sale of four bank buildings to West Bank.
- The quarterly dividend increased to $0.18 per share, payable November 22, 2017.
Material Changes Versus Prior Comparable Period
- Average loans increased $47.0 million in Q3 and $113.7 million for the first nine months versus 2016; average investment securities increased $68.1 million in Q3.
- Interest expense increased substantially, particularly on deposits, as market rates rose and customers shifted balances toward higher-yielding products.
- Noninterest income increased 18.0% in Q3 and 11.4% for the nine months, aided by trust-service revenue and realized investment-security gains.
- Noninterest expense was essentially flat in Q3 but increased 2.6% for the nine months, mainly from salaries, occupancy, data processing and professional fees.
- The allowance for loan losses increased to $16.4 million, while net recoveries for the first nine months were $246 thousand. The allowance was 1.12% of outstanding loans at September 30, 2017.
- Nonaccrual loans declined to $517 thousand from $1.022 million at year-end 2016. Nonperforming assets were 0.03% of total assets, and the Texas ratio was 0.27%.
- Other comprehensive income for the first nine months was $1.114 million, but Q3 produced a $916 thousand loss primarily from unrealized investment-security losses.
- Adoption of ASU 2016-09 reduced nine-month income-tax expense by $285 thousand. The company expects no material impact from the other accounting updates discussed, except that the future credit-loss standard’s impact remains too early to assess.
Guidance, Outlook, Risks and Unusual Items
- Management stated that the loan pipeline was strong and expected loan growth to continue across all three markets during the remainder of 2017.
- Management expected the interest-rate environment to continue pressuring the net interest margin through the remainder of 2017, despite strategies to protect margin.
- Management believed the allowance for loan losses was adequate and credit quality remained strong, but noted that commercial, commercial real estate, and construction lending carry heightened risks from borrower performance, refinancing needs and collateral values.
- Key forward-looking risks include interest-rate changes, deposit and loan pricing pressure, competition, economic conditions, real-estate values, regulatory requirements, cyber-attacks and litigation.
- The company recognized $423 thousand of net investment-security gains for the nine months and an $88 thousand nonrecurring gain related to a final payment from the 2015 sale of SmartyPig, LLC.
- Investment securities with unrealized losses totaled $2.362 million for available-for-sale securities and $48 thousand for held-to-maturity securities. Management attributed the losses to market conditions and did not identify other-than-temporary impairment.
- The company reported no material pending legal proceedings and no material changes to previously disclosed risk factors. Disclosure controls were reported effective.
Facts Investors Should Verify
- Whether deposit-cost increases and further Federal Reserve rate changes continue to compress the 3.41% year-to-date net interest margin.
- Whether projected loan growth is sustained without deterioration in commercial real estate, construction or commercial-credit quality.
- Whether the $16.4 million allowance remains adequate under the forthcoming expected-credit-loss accounting standard.
- The sustainability of noninterest income, including investment-security gains, trust fees and other nonrecurring items.
- Liquidity after the sharp decline in cash and cash equivalents and the increased use of short-term and long-term borrowings.
- The effect of the $40 million West Bank capital injection, related debt service and the company’s ability to maintain capital and dividend capacity.
- The impact of the $146 million significant related-party deposit relationship on funding stability.