Business Context and Reporting Period
West Bancorporation, Inc., a community banking holding company operating through West Bank, filed this unaudited Form 10-Q for the quarter ended March 31, 2016. The company serves central Iowa, eastern Iowa and the Rochester, Minnesota area. Results are compared with the three months ended March 31, 2015; balance-sheet changes are compared with December 31, 2015.
Financial Performance and Position
| Metric | Q1 2016 | Comparable period | Change |
|---|---|---|---|
| Net income | $5.696 million | $5.103 million | +11.6% |
| Diluted earnings per share | $0.35 | $0.32 | +$0.03 |
| Net interest income | $13.699 million | $12.963 million | +$0.736 million |
| Net interest margin | 3.51% | 3.59% | -8 basis points |
| Noninterest income | $2.230 million | $1.860 million | +19.9% |
| Noninterest expense | $7.799 million | $7.446 million | +4.7% |
| Return on average assets | 1.31% | 1.27% | +4 basis points |
| Return on average equity | 14.77% | 14.57% | +20 basis points |
| Cash dividends per share | $0.16 | $0.14 | +$0.02 |
Income before taxes was $7.930 million and income tax expense was $2.234 million, representing an effective tax rate of 28.2%, compared with 30.8% in Q1 2015. The lower rate benefited from $443,000 of tax-exempt gain from bank-owned life insurance.
- Total assets were $1.755 billion, up 0.38% from year-end 2015.
- Loans were $1.275 billion, up $28.241 million from December 31, 2015, driven primarily by construction, commercial and commercial real estate lending.
- The allowance for loan losses was $15.280 million, or 1.20% of loans, compared with $14.967 million at year-end. The company recorded a $200,000 provision, versus no provision in Q1 2015.
- Total deposits were $1.446 billion, up $5.018 million from year-end. Savings deposits increased $62.543 million, while demand and time deposits declined.
- Cash and cash equivalents were $56.723 million, down from $72.651 million at year-end. Operating activities provided $7.099 million of cash; investing activities used $21.318 million and financing activities used $1.709 million.
- Stockholders’ equity was $156.926 million, compared with $152.377 million at year-end. Tangible common equity to tangible assets was 8.94%.
- Debt included $98.758 million of Federal Home Loan Bank advances, $20.388 million of subordinated notes, $17.000 million of short-term borrowings and $7.592 million of long-term debt.
- West Bank reported a total risk-based capital ratio of 11.19%, a common equity Tier 1 ratio of 10.23% and a Tier 1 leverage ratio of 9.39%; management stated that applicable capital requirements were met.
Material Changes Versus Prior Periods
- Net interest income increased because of loan growth, although the net interest margin narrowed as deposit and other borrowing costs rose and investment-security yields declined.
- Noninterest income increased primarily because of the $443,000 bank-owned life insurance gain related to the deaths of a colleague and a former employee. The gain is unusual and may not recur.
- Noninterest expense increased $353,000, including higher salaries and benefits, legal fees, director fees and low-income housing project amortization. Employee-related death costs increased expense by approximately $171,000.
- Credit metrics remained strong: nonperforming assets declined to $1.306 million from $1.461 million, and the Texas ratio improved to 0.76% from 0.87%.
- The company purchased a previously leased Waukee, Iowa branch facility for approximately $4.512 million. It also continued construction of a Rochester, Minnesota office, expected to open in the third quarter of 2016.
- Accumulated other comprehensive income improved to $799,000 from a $430,000 loss at year-end, primarily from unrealized gains on available-for-sale securities, partly offset by derivative losses.
Guidance, Outlook, Risks and Unusual Items
Management expected loan growth to remain strong during 2016 because of demand for commercial, construction and development, and commercial real estate loans. Management also expected the low interest-rate environment to continue pressuring the net interest margin if Federal Reserve policy remained unchanged.
- Liquidity was described as strong, supported by liquid assets, operating cash flow and approximately $206 million of additional FHLB borrowing capacity plus $67 million of unsecured federal funds lines.
- Commercial, commercial real estate, construction and land-development lending creates concentration and repayment risks, particularly if economic conditions weaken or collateral values decline.
- Management stated that the allowance for loan losses was adequate, but future provisions may be required because of economic conditions, portfolio growth, credit deterioration or regulatory review.
- Unrealized losses on investment securities totaled $1.064 million for available-for-sale securities and $225,000 for held-to-maturity securities. Management attributed the losses to market conditions and concluded that no other-than-temporary impairment existed.
- The company continued defending a class-action lawsuit concerning historical debit-card transaction posting practices. The Iowa Supreme Court dismissed or reversed certain claims but allowed a breach-of-contract claim to proceed. A trial was scheduled for June 19, 2017, and potential loss could not be reasonably estimated.
- Off-balance-sheet commitments totaled approximately $686.932 million, including $678.001 million of commitments to extend credit and $8.931 million of standby letters of credit.
- The board declared a quarterly dividend of $0.17 per share on April 27, 2016, payable May 25, 2016. The existing share-repurchase authorization expired in April 2016 and was not renewed.
- Management reported no material change in market-risk exposure, no material change in risk factors, and effective disclosure controls as of March 31, 2016.
Important Facts for Investors to Verify
- Whether loan growth, particularly in commercial real estate and construction, remains sustainable without deterioration in credit quality.
- Whether the $200,000 provision and $15.280 million allowance adequately reflect future portfolio losses and regulatory expectations.
- The sustainability of earnings excluding the nonrecurring $443,000 bank-owned life insurance gain and related employee costs.
- Whether margin compression continues as funding costs rise and investment-security yields remain low.
- The outcome and potential financial exposure from the debit-card litigation.
- The timing and final cost of the Rochester office construction and the expected occupancy savings from the Waukee facility purchase.
- Future dividend capacity and capital ratios after the capital-conservation buffer phases in.