West Bancorporation, Inc. — Q2 2017 Form 10-Q Summary
Business Context and Reporting Period
West Bancorporation, Inc. is a bank holding company operating through West Bank and WB Funding Corporation in central and eastern Iowa and Rochester, Minnesota. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2017, with comparisons to the corresponding 2016 periods and December 31, 2016 balance-sheet data.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2017 | Six Months Ended June 30, 2017 |
|---|---|---|
| Net income | $6.4 million | $12.5 million |
| Diluted EPS | $0.39 | $0.76 |
| Net interest income | $15.1 million | $29.5 million |
| Noninterest income | $2.3 million | $4.5 million |
| Noninterest expense | $8.2 million | $16.2 million |
| Provision for loan losses | $0 | $0 |
| Net interest margin, FTE | 3.44% | 3.46% |
| Return on average assets | 1.33% | 1.34% |
| Return on average equity | 14.86% | 14.83% |
| Efficiency ratio, adjusted FTE | 45.93% | 46.38% |
At June 30, 2017, total assets were $1.918 billion, loans were $1.435 billion, deposits were $1.575 billion, and stockholders’ equity was $174.9 million. Cash and cash equivalents were $46.8 million. The allowance for loan losses was $16.5 million, or 1.15% of outstanding loans.
Six-month operating cash flow was $14.6 million. Investing activities used $92.7 million, primarily reflecting securities purchases and loan growth, while financing activities provided $48.1 million. Cash and cash equivalents declined by $30.1 million during the six months.
Total borrowings included $100.6 million of FHLB advances, $25.5 million of long-term debt, $20.4 million of subordinated notes, and $14.0 million of short-term borrowings. West Bank had approximately $282 million of additional FHLB borrowing capacity and $67 million of unsecured federal funds lines.
Material Changes Versus Comparable Periods
- Second-quarter net income increased 16.2% to $6.4 million; six-month net income increased 11.6% to $12.5 million.
- Net interest income increased 5.7% in the quarter and 5.4% year to date, primarily from loan growth. Average loans increased 9.7% in the quarter and 11.4% year to date.
- Net interest margin declined eight basis points in the quarter and six basis points year to date as deposit and borrowing costs rose faster than asset yields.
- No provision for loan losses was recorded in 2017, compared with $500,000 in the second quarter and $700,000 in the first six months of 2016. Net recoveries increased the allowance by $59,000 in the quarter and $374,000 year to date.
- Noninterest income increased 21.7% in the quarter and 8.3% year to date, supported by trust revenue, realized securities gains, and an $88,000 nonrecurring gain related to a final payment from the 2015 sale of SmartyPig, LLC.
- Noninterest expense increased 4.5% in the quarter and 3.8% year to date, with higher salaries, occupancy, data processing, and professional fees partly offset by lower investment advisory and FDIC insurance costs.
- Loans increased $35.5 million, or 2.5%, from year-end 2016, led by construction and commercial real estate lending. Loans declined $11.4 million during the second quarter because of payoffs.
- Deposits increased $28.5 million from year-end, although approximately $76 million of noninterest-bearing accounts were reclassified to interest-bearing accounts during a retail checking product restructuring.
- Available-for-sale securities increased $62.0 million to $322.6 million, reflecting purchases of $138.4 million and reinvestment in higher-yielding, slightly longer-duration securities.
- Long-term debt increased $20.3 million. In May 2017, the Company borrowed $25 million, replacing a prior $3 million facility, and used the proceeds together with an $18 million sale of four bank buildings to inject approximately $40 million into West Bank.
Guidance, Outlook, Risks, and Unusual Items
- Management expected loan growth to continue across all three markets during the remainder of 2017, supported by a strong loan pipeline and the increased lending capacity resulting from the capital injection.
- Management expected the interest-rate environment to continue pressuring net interest margin through the remainder of 2017. Deposit pricing and variable borrowing costs were already increasing after Federal Reserve rate increases.
- Management believed the allowance for loan losses was adequate and described credit quality as strong. Nonperforming assets were $817,000, or 0.04% of total assets, and the Texas ratio was 0.43% at June 30, 2017.
- Key risks include interest-rate and margin compression, competitive loan and deposit pricing, commercial and commercial real estate credit exposure, declining collateral values, economic weakness in the company’s geographic markets, regulatory changes, cyber-attacks, litigation, and changes in the allowance required by regulators or future conditions.
- Approximately $141 million of deposits were held by a significant related-party relationship at West Bank.
- Off-balance-sheet commitments included $576.0 million of commitments to extend credit and $4.4 million of standby letters of credit. The Company also had $6.4 million of remaining affordable-housing investment commitments.
- The Company reported no material pending legal proceedings and no material changes to previously disclosed risk factors. Management reported effective disclosure controls and no material changes in internal controls.
- Accounting developments included adoption of stock-compensation guidance, which reduced six-month income tax expense by $244,000. Management did not expect the other disclosed upcoming accounting standards to have a material near-term effect, although the eventual impact of the credit-loss standard was not yet determinable.
- The Board declared a quarterly dividend of $0.18 per share, payable August 23, 2017, representing the highest quarterly dividend reported by the Company.
Important Facts for Investors to Verify
- Whether loan growth continues while nonperforming loans and commercial real estate exposure remain controlled.
- Whether rising deposit and borrowing costs further reduce the 3.46% year-to-date net interest margin.
- Whether the absence of loan-loss provisions remains appropriate as the portfolio expands and economic or collateral conditions change.
- The sustainability of securities gains, trust-fee growth, tax-credit income, and the nonrecurring asset-sale gain included in 2017 results.
- The effect of the $25 million variable-rate term loan, the $40 million West Bank capital injection, and related borrowing costs on future earnings and capital.
- Liquidity trends following the $30.1 million six-month cash decline and the concentration of deposits, including the significant related-party balance.
- Implementation impacts of the forthcoming expected-credit-loss accounting standard, which management stated could not yet be assessed.