West Bancorporation, Inc. — 2016 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended September 30, 2016, compared with the corresponding 2015 periods. The company operates West Bank in central and eastern Iowa and Rochester, Minnesota. Financial statements are unaudited and presented in thousands, except per-share data.
Key Financial Metrics
| Metric | Three months ended Sept. 30, 2016 | Year-over-year change | Nine months ended Sept. 30, 2016 | Year-over-year change |
|---|---|---|---|---|
| Net income | $5,813 | 7.1% | $16,985 | 7.5% |
| Diluted EPS | $0.36 | From $0.34 | $1.05 | From $0.98 |
| Net interest income | $14,721 | 7.4% | $42,693 | 6.7% |
| Provision for loan losses | $200 | Unchanged | $900 | From $400 |
| Noninterest income | $1,919 | (0.8%) | $6,052 | 5.9% |
| Noninterest expense | $7,993 | 5.9% | $23,611 | 5.2% |
| Net interest margin | 3.50% | Down 9 basis points | 3.51% | Down 8 basis points |
| Return on average assets | 1.26% | From 1.28% | 1.26% | From 1.28% |
| Return on average equity | 14.20% | From 14.63% | 14.29% | From 14.62% |
Balance Sheet, Liquidity and Capital
- Total assets were $1.825 billion, up 4.4% from December 31, 2015.
- Loans were $1.383 billion, up $136.2 million, or 10.9%, primarily from commercial real estate growth of $103.3 million and construction loans growth of $33.4 million.
- Deposits were $1.492 billion, up $50.9 million, or 3.5%. Savings deposits increased $66.7 million, while time deposits declined $9.3 million.
- Cash and cash equivalents were $50.9 million, down from $72.7 million at year-end. Management reported approximately $238 million of additional FHLB borrowing capacity and $67 million of unsecured federal funds lines.
- Total borrowings included $34.5 million of short-term borrowings, $99.5 million of FHLB advances, $20.4 million of subordinated notes and $6.0 million of long-term debt.
- Stockholders’ equity increased to $164.9 million from $152.4 million. Tangible common equity to tangible assets was 9.03%, compared with 8.72% at December 31, 2015.
- West Bank exceeded applicable regulatory capital requirements and remained well-capitalized under prompt corrective action standards.
- Operating cash flow was $22.2 million for the first nine months. Investing activities used $97.8 million, principally because of net loan growth, while financing activities provided $53.8 million.
Material Changes and Unusual Items
- Net interest income increased because average loans grew $155.4 million in the third quarter and $115.1 million for the first nine months, despite margin pressure.
- The nine-month provision for loan losses increased $500,000 year over year to support loan growth. The allowance for loan losses was $16.0 million, or 1.15% of outstanding loans.
- The company recognized a $443,000 tax-exempt gain from bank-owned life insurance following the deaths of a current and a former employee.
- A $250,000 expense was recorded for a proposed settlement of a class-action lawsuit concerning debit-card transaction posting and nonsufficient-funds fees. The settlement remained subject to execution, notice, court approval and potential class-member objections. The company expected a $300,000 insurance reimbursement for defense costs in the fourth quarter.
- The company elected to become a financial holding company, providing additional flexibility for activities through affiliates, although management stated that no new activities were currently planned.
- A new Rochester, Minnesota office was under construction and expected to open in November 2016. Occupancy expense was expected to increase after opening.
- Investment securities available for sale declined $42.3 million, primarily from principal paydowns, calls and $1.5 million of securities sales. Management did not identify other-than-temporary impairment in securities with unrealized losses.
- The quarterly dividend was increased to $0.17 per share in April 2016. The board declared another $0.17 dividend payable November 23, 2016.
Outlook, Risks and Contingencies
- Management expected loan growth to continue in all three markets through the remainder of 2016, but at a slower pace than during the first nine months.
- Management expected the low-interest-rate environment to continue pressuring the net interest margin. Deposit pricing and higher borrowing costs had already reduced the margin.
- Primary risks include interest-rate and pricing pressure, competition, commercial and residential real-estate exposure, changes in credit quality and allowance requirements, economic conditions, regulatory changes, cybersecurity and litigation outcomes.
- The loan portfolio is concentrated in commercial, commercial real estate and construction lending, which may carry greater repayment and collateral-value risk than residential or consumer lending.
- Nonperforming assets were $1.0 million, or 0.05% of total assets, down from $1.5 million at year-end. Nonaccrual loans were $1.0 million, and no loans were 90 days past due and still accruing interest.
- Off-balance-sheet commitments totaled approximately $578.2 million, including $571.6 million of commitments to extend credit and $6.5 million of standby letters of credit.
- Management stated that market-risk exposure had not materially changed from December 31, 2015, and that disclosure controls and internal controls over financial reporting were effective.
Investor Verification Points
- Verify whether the proposed class-action settlement received court approval and whether the expected insurance reimbursement was recognized.
- Monitor loan growth, commercial real estate and construction concentrations, nonperforming assets and future provision expense.
- Assess the effect of deposit repricing, borrowing costs and interest-rate changes on the 3.51% year-to-date net interest margin.
- Evaluate liquidity after the decline in cash and cash equivalents and the increase in short-term borrowings.
- Review the effect of the Rochester office opening, financial holding company election and internal investment-portfolio management on future expenses and growth.
- Consider the nonrecurring $443,000 bank-owned life insurance gain when evaluating underlying earnings.