West Bancorporation, Inc. — Q3 2015 Form 10-Q Summary
Business context and reporting period
West Bancorporation, Inc. is a bank holding company operating through West Bank and related subsidiaries in central Iowa, eastern Iowa and Rochester, Minnesota. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2015, with comparisons to the same periods in 2014 and to December 31, 2014 for balance-sheet data. Amounts are in thousands except per-share data.
Financial performance and condition
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net interest income | $13,706 | $12,289 | $40,023 | $36,213 |
| Net income | $5,426 | $5,063 | $15,801 | $14,202 |
| Diluted EPS | $0.34 | $0.32 | $0.98 | $0.89 |
| Net interest margin | 3.59% | 3.56% | 3.59% | 3.58% |
| Return on average assets | 1.28% | 1.32% | 1.28% | 1.27% |
| Return on average equity | 14.63% | 15.00% | 14.62% | 14.61% |
| Efficiency ratio | 46.30% | 48.39% | 47.12% | 50.16% |
For the quarter, net income increased 7.2%; for the first nine months, it increased 11.3%. Net interest income was the principal earnings driver, reflecting loan growth and lower funding costs. The provision for loan losses was $200 in Q3 and $400 for the nine-month period, compared with $100 and $250, respectively, in the prior-year periods.
Noninterest income declined to $1,935 in Q3 and $5,717 for the nine months, down 26.2% and 23.7%, respectively. The primary factors were lower residential mortgage banking revenue and lower realized investment securities gains. Noninterest expense increased 2.2% in Q3 but declined 1.4% for the nine months.
| Balance-sheet metric | September 30, 2015 | December 31, 2014 |
|---|---|---|
| Total assets | $1,733,167 | $1,615,833 |
| Loans, net | $1,225,378 | $1,170,438 |
| Gross loans | $1,240,038 | $1,184,045 |
| Investment securities available for sale | $325,617 | $272,790 |
| Total deposits | $1,387,136 | $1,270,462 |
| Stockholders’ equity | $149,217 | $140,175 |
| Cash and cash equivalents | $54,786 | $39,781 |
Assets increased 7.3%, gross loans increased $55,993, and deposits increased $116,674. The company invested $106,971 in available-for-sale securities during the first nine months, including $91,316 in the third quarter, primarily using deposit growth. The allowance for loan losses was $14,660, or 1.18% of gross loans, compared with $13,607, or 1.15%, at year-end 2014.
Liquidity remained strong: nine-month operating cash flow was $22,424, and West Bank reported approximately $136,000 of additional FHLB borrowing capacity and $67,000 of unsecured federal funds lines. Total borrowings included $59,000 of short-term borrowings, $98,008 of FHLB advances, $20,619 of subordinated notes and $9,730 of long-term debt.
Capital remained above regulatory minimums. At September 30, 2015, the consolidated total risk-based capital ratio was 11.94%, Tier 1 risk-based capital ratio was 10.99%, common equity Tier 1 ratio was 9.69%, and Tier 1 leverage ratio was 10.08%. Tangible common equity to tangible assets was 8.61%.
Material changes versus prior comparable periods
- Net interest income increased 11.5% in Q3 and 10.5% for the nine months, driven primarily by higher average loan balances.
- Average loans increased 14.5% in Q3 and 15.8% for the nine months, although loan yields declined 10 and 15 basis points, respectively.
- Residential mortgage banking revenue fell 90.2% in Q3 and 87.5% for the nine months after underwriting and processing were outsourced beginning in January 2015. The change also reduced related operating costs.
- Net realized securities gains declined to zero in Q3 and $47 for the nine months, versus $210 and $716 in the comparable 2014 periods.
- Credit quality improved: total nonperforming assets declined to $3,859 from $4,172 at year-end 2014, and the Texas ratio improved to 2.35% from 2.71%.
- Cash dividends declared increased to $0.16 per share in Q3 and $0.46 per share for the nine months, compared with $0.12 and $0.35, respectively.
- The company terminated two forward-starting interest-rate swaps during 2015, paying $541 in termination costs; one $30,000 notional swap remained outstanding and becomes effective in December 2015.
Guidance, outlook, risks and unusual items
Management expected strong loan growth to continue in the fourth quarter, subject to potential payoffs of construction and commercial real estate loans. Management expected the net interest margin to remain approximately stable through year-end if loan balances remained similar and Federal Reserve policy did not materially change.
The company broke ground on a permanent Rochester, Minnesota office on October 5, 2015, with an expected opening in the third quarter of 2016. The Board declared a $0.16-per-share dividend payable November 25, 2015.
Key risks include interest-rate and margin pressure, competition for loans and deposits, commercial and commercial real estate credit exposure, declining collateral values, local economic conditions, regulatory changes, cyber-attacks and potential changes to the allowance for loan losses. Management noted that regulators may require additional provisions after examinations.
West Bank is defending a class-action lawsuit concerning nonsufficient-funds fees and the historical sequencing of debit card transactions. The Iowa Supreme Court heard oral arguments on October 13, 2015. Potential loss could not reasonably be estimated because the legal issues, claims and remedies remained unresolved.
Deposits included approximately $175,000 from a significant related-party depositor, including approximately $45,000 of the year-to-date deposit increase. The company also had $532,376 of commitments to extend credit and standby letters of credit at September 30, 2015.
Important facts for investors to verify
- Whether loan growth and related net interest income offset continued loan-yield and low-interest-rate pressure.
- The sustainability of credit quality, including the allowance ratio, nonaccrual loans, criticized loans and commercial real estate exposure.
- The effect of reduced mortgage banking revenue and the company’s revised third-party mortgage arrangement.
- The concentration and stability of deposits, particularly the significant related-party depositor balance.
- The outcome and potential financial exposure of the debit-card-fee class-action litigation.
- The impact of the remaining interest-rate swap, termination-cost amortization and future interest-rate movements.
- Progress, cost and strategic returns from the Rochester, Minnesota office expected to open in the third quarter of 2016.
- Future capital-distribution capacity as the Basel III capital conservation buffer phases in.