West Bancorporation, Inc. 2014 Form 10-K Summary
Business context and reporting period
West Bancorporation, Inc. is an Iowa bank holding company whose primary operating subsidiary is West Bank, a business-focused community bank serving central and eastern Iowa and Rochester, Minnesota. The filing covers the fiscal year ended December 31, 2014; fourth-quarter data are included in the annual results. The company operates as one banking segment.
West Bank had 11 offices at year-end and approximately 178 full-time-equivalent employees. Its strategy emphasizes commercial banking relationships, local loan origination, deposit growth, trust services, cost control and credit-quality management.
Financial performance and key metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net income | $20.0 million | $16.9 million | 18.6% increase |
| Diluted EPS | $1.25 | $1.02 | 22.5% increase |
| Net interest income | $49.1 million | $45.7 million | 7.6% increase |
| Noninterest income | $10.3 million | $8.5 million | 21.2% increase |
| Noninterest expense | $32.0 million | $30.8 million | 3.8% increase |
| Net interest margin | 3.59% | 3.48% | 11 basis-point increase |
| Return on average assets | 1.32% | 1.17% | Improved |
| Return on average equity | 15.19% | 13.22% | Improved |
| Efficiency ratio | 49.93% | 52.55% | Improved |
Net income benefited primarily from loan growth, lower deposit funding costs, higher trust-services revenue, gains on the sale of premises and equipment, and a lower effective tax rate. Income taxes were $6.6 million, representing a 24.9% effective rate versus 30.2% in 2013, partly because the company utilized approximately $3.8 million of capital loss carryforwards.
Cash flow from operating activities was $26.3 million, compared with $23.4 million in 2013. Investing activities used $176.7 million, primarily because net loan growth consumed $193.6 million. Financing activities provided $147.8 million, including a $106.6 million increase in deposits and $66.0 million of short-term borrowings. Cash and cash equivalents ended the year at $39.8 million, compared with $42.4 million at year-end 2013.
Balance sheet, credit quality, debt and liquidity
- Total assets increased to $1.62 billion from $1.44 billion.
- Loans increased 19.4% to $1.184 billion. Loan growth was concentrated in commercial, commercial real estate, and construction and land-development lending; Rochester loans reached approximately $51.3 million.
- Deposits increased 9.2% to $1.270 billion. Loans represented approximately 93% of deposits and 73% of total assets.
- The allowance for loan losses was $13.6 million, or 1.15% of loans, compared with 1.39% in 2013. The 2014 provision was $750,000 versus a negative provision of $850,000 in 2013. Net charge-offs were $934,000, or 0.09% of average loans.
- Nonperforming loans declined to $1.9 million, or 0.16% of loans, from $2.9 million, or 0.29%. Total nonperforming assets declined 60.5% to $4.2 million, or 0.26% of assets, from $10.6 million, or 0.73%.
- The Texas ratio improved to 2.71% from 7.69%. Other real estate owned declined to $2.2 million, with one property remaining at year-end.
- Investment securities totaled approximately $324.1 million, including $272.8 million available for sale and $51.3 million held to maturity. Gross unrealized losses were considered temporary by management.
- Borrowings included $20.6 million of subordinated notes, $96.9 million of FHLB advances, $12.7 million of long-term debt, $66.0 million of short-term borrowings and $3.0 million of federal funds purchased.
- Available borrowing capacity included approximately $125.5 million from the FHLB, $67.0 million in unsecured federal funds lines and a $5.0 million secured commercial-bank line.
- Tangible common equity was 8.68% of tangible assets. Consolidated total risk-based capital, Tier 1 risk-based capital and Tier 1 leverage ratios were 12.81%, 11.81% and 10.17%, respectively. West Bank was classified as well-capitalized.
Material changes versus the prior comparable period
- Profitability strengthened, with net income, EPS, ROA and ROE all increasing.
- Loan and deposit growth accelerated, although management expected loan growth to moderate in 2015 because of anticipated payoffs.
- Net interest margin expanded despite historically low interest rates, primarily because of loan growth and lower deposit rates. Management continued to identify low rates as a major earnings challenge.
- Credit metrics improved substantially, including lower nonperforming assets, lower nonperforming loans and a lower Texas ratio.
- Noninterest income increased partly because of a $1.1 million gain on the sale of the former Iowa City office and other assets, higher trust-services income and $223,000 of net investment-security gains.
- Other real estate owned expense increased to $1.9 million, including approximately $1.8 million of valuation write-downs.
- The company sold a previously impaired pooled trust-preferred security at a $493,000 loss, but the transaction enabled utilization of capital loss carryforwards and generated a tax benefit exceeding the book loss.
- In September 2014, the company transferred approximately $50.9 million of municipal securities from available-for-sale to held-to-maturity classification, reducing future equity volatility from changes in fair value.
- The company changed its residential mortgage model in the fourth quarter by using retail staff across its banking locations and outsourcing underwriting and processing. Management expected lower operating costs but lower 2015 mortgage fee income because of lower anticipated origination volume.
- The company declared and paid $0.49 per common share in 2014, versus $0.42 in 2013. No shares were repurchased under the renewed $2 million repurchase authorization.
Guidance, outlook, risks and unusual items
Management expected unusually low interest rates to continue through at least the first six months of 2015, expected continued pressure on the net interest margin, and anticipated 2015 profitability that would compare favorably with peers. Management expected loan growth to continue at a more modest rate. Future results were identified as depending substantially on loan losses and the ability to continue growing the loan portfolio.
Basel III capital rules became effective for the company and West Bank on January 1, 2015. Management expected both entities to remain well-capitalized and expected to elect the available treatment that excludes most accumulated other comprehensive income effects from regulatory capital.
- The loan portfolio is heavily weighted toward commercial and commercial real estate lending. Commercial real estate loans exceeded the regulatory concentration guideline of 300% of capital, requiring additional monitoring.
- Adverse economic conditions, declining commercial or residential real estate values, refinancing constraints and higher interest rates could increase credit losses and reduce net interest income.
- The cumulative one-year interest-rate gap ratio was 0.54, indicating liability sensitivity over the next 12 months. Management estimated that an immediate 300-basis-point rate increase could increase 2015 net interest income by approximately 3.35%, or $1.9 million, but noted that actual results could differ materially.
- The company faced a class-action lawsuit alleging that certain nonsufficient-funds fees were usurious and that debit-card transaction posting practices violated applicable duties. Two classes were certified, the company appealed, and potential loss could not be reasonably estimated.
- Off-balance-sheet commitments totaled approximately $441.1 million for commitments to extend credit and $14.6 million for standby letters of credit.
- The company had $20.6 million of junior subordinated debentures. Interest payments rank ahead of common dividends, and deferral of interest for up to five years would prohibit common-stock dividends during the deferral period.
- Key operational risks include cybersecurity, third-party processing, fraud, regulatory compliance, changing consumer-protection requirements, liquidity, competition and dependence on local Iowa and Minnesota economies.
Most important facts an investor should verify
- Whether loan growth, especially commercial real estate and construction lending, remains controlled as the portfolio expands.
- Whether nonperforming assets and net charge-offs remain near 2014 levels and whether the allowance remains adequate under adverse economic conditions.
- The effect of interest-rate changes on the 3.59% net interest margin, deposit pricing and borrowing costs.
- Compliance with Basel III capital requirements and the effect of the company’s accumulated-other-comprehensive-income election.
- The outcome and potential financial exposure of the nonsufficient-funds-fee class action.
- Whether deposit growth and available borrowing capacity continue to support loan growth and liquidity needs.
- The sustainability of the reduced 24.9% effective tax rate, including remaining tax-loss carryforwards and valuation allowances.
- The recurring versus nonrecurring nature of the Iowa City property gain, investment-security transactions and other unusual 2014 items.