WEST BANCORPORATION INC annual report, FY2016

West Bancorporation, Inc. — Fiscal 2016 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2016. The filing covers West Bancorporation, Inc. and its principal subsidiary, West Bank, an Iowa-chartered community bank serving central and eastern Iowa and Rochester, Minnesota. The company operates as a single banking segment and elected financial holding company status in the third quarter of 2016.

Financial performance and condition

Metric	2016	2015	Change
Net income	$23.016 million	$21.742 million	+5.9%
Basic diluted EPS	$1.43 / $1.42	$1.35 / $1.35	Improved
Net interest income	$57.118 million	$54.154 million	+5.5%
Noninterest income	$7.982 million	$8.203 million	-2.7%
Noninterest expense	$31.148 million	$30.068 million	+3.6%
Provision for loan losses	$1.000 million	$0.850 million	+$0.150 million
Net interest margin	3.49%	3.59%	-10 basis points
Return on average assets	1.27%	1.30%	Down modestly
Return on average equity	14.35%	14.88%	Down modestly
Efficiency ratio	46.03%	46.30%	Improved modestly

All dollar amounts are presented in the filing in thousands unless otherwise noted.

Total assets increased to $1.854 billion from $1.748 billion.
Loans increased 12.3% to $1.400 billion, driven primarily by commercial real estate and construction and land-development lending. Rochester loans reached approximately $111.5 million.
Deposits increased 7.3% to $1.547 billion. Loans represented approximately 91% of deposits and 75% of total assets.
Net cash provided by operating activities was $30.193 million. Investing activities used $105.439 million, primarily reflecting $153.037 million of net loan growth and $12.802 million of premises and equipment purchases. Financing activities provided $79.431 million, largely from deposit growth.
Cash and cash equivalents increased to $76.836 million from $72.651 million.
Stockholders’ equity increased to $165.376 million from $152.377 million. The tangible common equity ratio was 8.92%, compared with 8.71% in 2015.
Outstanding borrowings included $99.886 million of FHLB advances, $20.398 million of subordinated notes, $9.690 million of federal funds purchased and $5.126 million of long-term debt.
West Bank had approximately $300 million of additional FHLB borrowing capacity and $67 million of unsecured federal funds lines available at year-end.
Common dividends totaled $0.67 per share, up from $0.62 per share in 2015. A quarterly dividend of $0.17 per share was declared for early 2017.

Material changes versus the prior comparable period

Record annual net income increased by $1.274 million, primarily from higher loan volumes and net interest income.
Interest expense increased substantially as deposit and borrowing costs rose, limiting margin expansion despite loan growth.
Noninterest income declined because 2015 included a $0.590 million gain on the sale of the company’s SmartyPig investment. This was partly offset by a $0.443 million tax-exempt bank-owned life insurance gain in 2016.
Noninterest expense increased $1.080 million, including higher salaries and benefits, data-processing costs, FDIC insurance expense and amortization of low-income housing investments.
Credit quality improved: nonperforming assets declined to $1.022 million, or 0.06% of assets, from $1.461 million, or 0.08%; nonperforming loans declined to $1.022 million, or 0.07% of loans.
The allowance for loan losses increased to $16.112 million, but declined to 1.15% of total loans from 1.20%.
Investment securities available for sale declined to $260.637 million from $320.714 million, while premises and equipment increased to $23.314 million from $11.562 million, reflecting branch and facility investments.
The company began managing its investment portfolio internally in October 2016 and expects approximately $0.280 million of annual cost savings.

Quarterly and fourth-quarter information

Fourth-quarter 2016 net income was $6.031 million, compared with $5.941 million in the fourth quarter of 2015. Fourth-quarter diluted EPS was $0.37 in both periods. Fourth-quarter net interest income was $14.425 million, provision for loan losses was $0.100 million, noninterest income was $1.930 million and noninterest expense was $7.537 million.

Guidance, outlook, risks and unusual items

Management stated that the earnings outlook was positive and expected 2017 profitability to compare favorably with peers. Growth was expected to continue, particularly in the Rochester market.
Future results depend heavily on loan growth, credit losses, interest-rate movements and local and national economic conditions.
Management expected interest costs on money-market deposits, time deposits and other borrowed funds to increase in 2017 following Federal Reserve rate increases and higher deposit pricing.
The company’s one-year interest-rate simulation estimated that a permanent 300-basis-point rate increase would increase 2017 net interest income by approximately 0.90%, or $0.550 million. The effect of declining rates was not reasonably calculable because rates were already low.
Commercial real estate and construction lending exceeded regulatory concentration guidelines. Reported concentrations were 109% of capital for construction, land and development loans and 417% for broader commercial real estate exposure, requiring heightened monitoring and stress testing.
Identified potential problem loans totaled approximately $2.254 million at year-end; approximately $0.915 million was guaranteed by the Small Business Administration. None were in default at year-end.
Gross unrealized investment-security losses were $3.933 million and were considered temporary by management. No credit-related other-than-temporary impairment was recognized in 2016.
The company reached a proposed $0.250 million settlement in previously disclosed class-action litigation and received a $0.300 million insurance reimbursement for litigation costs. Future administrative costs were expected to be minimal.
The company had $614.681 million of commitments to extend credit and $5.487 million of standby letters of credit. Management did not expect significant losses from these commitments.
Key risks include commercial real estate concentration, borrower and collateral deterioration, allowance-estimation risk, liquidity and funding pressures, interest-rate risk, competition, cybersecurity and third-party service-provider risk, regulatory changes, litigation and the potential future impact of the CECL credit-loss standard.
The company and West Bank met applicable regulatory capital requirements; West Bank was well-capitalized and the company reported capital sufficient to meet the fully phased-in capital conservation buffer.

Important facts for investors to verify

Whether loan growth, particularly in commercial real estate and construction lending, remains sustainable without deterioration in credit quality.
Whether the 1.15% allowance-to-loans ratio adequately covers losses as the portfolio expands and as CECL implementation approaches.
The sensitivity of net interest income and deposit costs to additional Federal Reserve rate increases and competitive deposit pricing.
The maturity and repricing profile of FHLB advances, subordinated notes and other borrowings, including the related interest-rate swaps.
Whether Rochester expansion and facility investments generate the expected revenue and efficiency benefits.
The impact of the declining wind-energy tax-credit revenue stream after its agreement ends in May 2017.
The amount and terms of related-party loans and deposits, including approximately $191.697 million of related-party loans and a significant related-party deposit relationship of approximately $188 million.
The company’s ability to continue quarterly dividends, which depends primarily on West Bank earnings, regulatory capital and dividend capacity.
The filing text reports effective disclosure controls and internal control over financial reporting, with unqualified auditor opinions; investors should nevertheless review subsequent filings for changes.