West Bancorporation, Inc. — Third-Quarter 2013 Form 10-Q
Reporting period: Quarterly period ended September 30, 2013; comparisons are primarily with September 30, 2012, and balance-sheet figures with December 31, 2012. Financial statements are unaudited and reported in thousands of dollars except per-share data.
Business Context and Financial Overview
West Bancorporation is an Iowa-based bank holding company operating primarily through West Bank. Its portfolio is concentrated in commercial, commercial real estate, construction and land-development lending, with operations in Iowa and a new Rochester, Minnesota office.
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net income | $4,363 | $3,752 | $12,609 | $12,112 |
| Basic EPS | $0.27 | $0.22 | $0.75 | $0.70 |
| Diluted EPS | $0.27 | $0.22 | $0.75 | $0.69 |
| Net interest income | $11,626 | $10,257 | $33,983 | $30,826 |
| Total noninterest income | $2,130 | $2,548 | $6,368 | $8,295 |
| Total noninterest expense | $8,413 | $7,104 | $23,074 | $21,782 |
| Provision for loan losses | $(1,000) | $300 | $(850) | $300 |
| Net interest margin | 3.49% | 3.45% | 3.45% | 3.46% |
| Return on average assets | 1.19% | 1.14% | 1.17% | 1.23% |
| Return on average equity | 14.41% | 11.36% | 13.02% | 12.61% |
Financial Position, Cash Flow, Debt and Liquidity
- Total assets were $1.471 billion at September 30, 2013, up from $1.448 billion at December 31, 2012.
- Loans, net of fees and allowance, increased to $959.016 million from $927.401 million. The allowance for loan losses was $14.741 million, or 1.54% of loans.
- Securities available for sale increased to $359.556 million from $292.314 million as the company reinvested low-yielding federal funds into securities.
- Total deposits increased to $1.166 billion from $1.135 billion, led by savings balances. Cash and cash equivalents declined to $91.992 million from $171.474 million.
- Debt included $95.015 million of Federal Home Loan Bank advances, $20.619 million of subordinated notes and $16.750 million of new long-term debt. The new $16 million secured, five-year term loan financed the common-stock repurchase.
- Operating activities provided $19.200 million of cash during the first nine months. Investing activities used $113.735 million, primarily for securities purchases and loan growth; financing activities provided $15.053 million.
- Additional liquidity included approximately $116.294 million of FHLB borrowing capacity, $67 million of unsecured federal funds lines and a $5 million corporate line of credit. None was drawn at September 30.
- West Bank remained well capitalized, with total risk-based capital of 14.07%, Tier 1 risk-based capital of 12.82% and Tier 1 leverage capital of 9.67%.
Material Changes Versus Comparable Periods
- Q3 net income increased 16.3%, while nine-month net income increased 4.1%. The improvement was driven mainly by higher net interest income and the negative loan-loss provision.
- Net interest income increased 13.3% in Q3 and 10.2% for nine months, reflecting loan and securities growth and lower deposit and borrowing costs. Loan yields declined, but the Q3 net interest margin improved four basis points.
- Noninterest income declined 16.4% in Q3 and 23.2% year to date. Mortgage-sale gains and fees fell $604 in Q3 and $1.195 million year to date because of higher long-term interest rates, lower originations and a less favorable refinancing mix. The prior-year period also included an $841 gain on bank-owned life insurance and $246 of securities gains.
- Noninterest expense increased 18.4% in Q3 and 5.9% year to date. Q3 expense included $1.2 million of other-real-estate-owned write-downs, and salaries increased because of employee additions and higher compensation costs.
- The company repurchased and canceled 1,440,592 shares, or approximately 8.27% of shares outstanding, for $15.774 million. Shares outstanding declined to approximately 15.976 million at September 30, and stockholders’ equity declined to $121.157 million from $134.587 million at year-end.
- Other comprehensive income was a loss of $5.301 million for the first nine months, primarily from unrealized securities losses, reducing accumulated other comprehensive income to a $3.375 million deficit.
- Total nonperforming loans increased to $8.860 million from $7.256 million, but two loans totaling $1.046 million that were past due at quarter-end were subsequently brought current. Other real estate owned declined to $6.276 million from $8.304 million.
Guidance, Outlook, Risks and Unusual Items
- Management expected loan growth to continue through the remainder of 2013, supported by a strong loan pipeline and the Rochester office, which had approximately $7.2 million of loans after two quarters of operations.
- Management expected net interest margin to remain under pressure from low market interest rates but to remain relatively consistent through year-end if rates did not change significantly.
- The company planned to begin construction of a new eastern Iowa main office during the fourth quarter, funded with liquid assets.
- Management deemed the allowance for loan losses adequate, citing improving credit quality, although commercial and real estate lending remain exposed to borrower cash-flow weakness, refinancing risk and declining collateral values.
- The investment portfolio had $12.706 million of gross unrealized losses, largely attributed to rising interest rates. Management did not consider most losses to be other-than-temporary impairment and expected collection of principal and interest.
- The company continued to hold an impaired pooled trust-preferred security valued at $1.802 million. No additional credit loss was recognized in 2013, but future credit losses could reduce earnings and regulatory capital.
- Interest-rate swaps with total notional amounts of $100 million were used to hedge future variable-rate FHLB and subordinated debt payments. Interest-rate risk remains the principal market risk.
- A purported class-action lawsuit alleges that certain nonsufficient-funds fees and debit-card posting practices violated Iowa law. The company is defending the matter, and potential loss cannot currently be estimated.
- Other risks include regulatory changes, Basel III implementation, competitive pricing pressures, economic conditions in Iowa, fraud losses, mortgage-market activity and possible additional loan or real-estate write-downs.
Important Facts for Investors to Verify
- Whether loan growth and the Rochester office offset declining loan yields and mortgage-sale revenue.
- Whether the $1.0 million quarterly negative provision is sustainable, particularly given increased nonperforming loans and commercial real estate exposure.
- Future fair values and credit performance of the pooled trust-preferred security and the broader securities portfolio.
- Capital and liquidity effects of the stock repurchase, new secured borrowing, planned office construction and future buybacks.
- Progress and potential exposure from the Iowa nonsufficient-funds-fee class-action lawsuit.
- Whether other-real-estate-owned valuations, commercial loan payoffs and local economic conditions lead to additional write-downs or charge-offs.