West Bancorporation, Inc. — 2014 First-Quarter Form 10-Q Summary
Business context and reporting period
West Bancorporation, Inc. is an Iowa bank holding company whose principal subsidiary is West Bank. This unaudited Form 10-Q covers the three months ended March 31, 2014, with operating results compared with the first quarter of 2013 and financial condition compared with December 31, 2013. Unless otherwise noted, amounts are in thousands, except per-share data.
Financial performance and condition
| Metric | Q1 2014 | Q1 2013 or prior period | Change |
|---|---|---|---|
| Net income | $4,400 | $3,948 | 11.4% increase |
| Diluted EPS | $0.27 | $0.23 | Increase |
| Net interest income | $11,808 | $10,824 | $984 increase |
| Net interest margin, tax-equivalent | 3.64% | 3.36% | 28 basis-point increase |
| Provision for loan losses | $0 | $150 | $150 decrease |
| Noninterest income | $2,553 | $2,221 | 14.9% increase |
| Noninterest expense | $8,002 | $7,246 | 10.4% increase |
| Return on average assets | 1.23% | 1.12% | 11 basis-point increase |
| Return on average equity | 14.17% | 11.84% | 233 basis-point increase |
| Efficiency ratio | 53.76% | 53.87% | Improved slightly |
- Total assets were $1.506 billion at March 31, 2014, up 4.4% from year-end 2013.
- Total loans were $1.019 billion, up $27.6 million from December 31, 2013. Growth was concentrated in commercial, construction and land development, and commercial real estate loans.
- Total deposits were $1.236 billion, up 6.2% from year-end. The increase included an approximately $45 million municipal real-estate-tax deposit that management expected to leave before June 2014.
- Cash and cash equivalents increased to $86.1 million from $42.4 million at year-end.
- Stockholders’ equity was $127.6 million, compared with $123.6 million at December 31, 2013. The tangible common equity-to-tangible assets ratio was 8.47%.
- Federal Home Loan Bank advances were $95.8 million, subordinated notes were $20.6 million, and long-term debt was $15.1 million at March 31, 2014.
- Operating cash flow was $6.7 million. Investing activities used $21.3 million, primarily reflecting the net increase in loans, while financing activities provided $58.4 million, principally from deposit growth.
- Annualized net charge-offs were 0.20% of average loans. The allowance for loan losses was $13.3 million, or 1.30% of loans, and management considered it adequate.
- Nonperforming loans declined to $2.7 million from $2.9 million at year-end; nonperforming assets declined to $9.8 million from $10.6 million. The Texas ratio was 6.99%, compared with 7.69% at year-end.
- West Bank remained well-capitalized, with total risk-based capital of 13.45%, Tier 1 risk-based capital of 12.31%, and a Tier 1 leverage ratio of 9.98%.
Material changes versus the prior comparable period
- Net income increased $452, driven primarily by higher net interest income, no loan-loss provision, and $506 of net realized investment-securities gains.
- Net interest income benefited from 10.6% growth in average loans, lower deposit funding costs, and a 28-basis-point increase in the tax-equivalent net interest margin.
- Residential mortgage-sale gains declined $285 because mortgage originations sold fell to approximately $10.5 million from $29.0 million; refinancing represented approximately 20% of originations versus 70% in the prior-year quarter.
- Noninterest expense increased $756. Major contributors were higher salaries and benefits, a $296 write-down of one other-real-estate-owned property, and a $197 increase in miscellaneous operational losses.
- Net charge-offs increased to $508 from $47, although nonperforming loans and the allowance balance both declined from year-end and the prior-year balance.
- Average stockholders’ equity declined year over year because the company repurchased approximately 1.4 million shares in June 2013 for $10.95 per share.
- Other comprehensive income was $1.2 million, compared with an after-tax loss of $366 in Q1 2013, primarily due to improved unrealized securities gains partly offset by derivative losses.
Guidance, outlook, commentary, risks and unusual items
- Management expected loan growth to continue during the remainder of 2014, citing strong demand for construction, commercial real estate and commercial loans. The Rochester, Minnesota office had approximately $23.2 million of loans after its first full year.
- The company purchased Rochester land for $1.0 million and expected, subject to regulatory approval, to build a permanent office in 2015. It was also funding a previously contracted $2.9 million eastern-Iowa main-office construction project with liquid assets.
- Management expected net interest margin to remain under pressure if the Federal Reserve maintained its monetary policy. Forward-starting interest-rate swaps with approximately $100 million of notional value were intended to hedge variable-rate borrowings.
- The investment portfolio included a pooled trust-preferred security with a $2.2 million fair value and a $2.0 million remaining unrealized loss. Management recorded no additional credit loss in the quarter but identified this security as the most significant potential future impairment risk.
- Other real estate owned was $5.0 million, including $4.98 million of construction and development land. Demand remained slow, although portions of properties were expected to close within the next two quarters.
- The company expected to invest an additional $5.0 million in bank-owned life insurance during Q2 2014.
- The board declared a quarterly dividend of $0.12 per share on April 23, 2014, up from $0.11, and renewed a $2 million stock-repurchase authorization. No shares were repurchased during Q1.
- West Bank was defending a class-action lawsuit concerning nonsufficient-funds fees and historical debit-card transaction posting practices. The court dismissed the plaintiffs’ treble-damages claim but certified two classes and denied summary judgment on other claims. The company appealed; potential loss could not reasonably be estimated.
- Key risks include interest-rate and margin pressure, competitive loan and deposit pricing, commercial and real-estate credit exposure, declining collateral values, economic conditions, regulatory changes, operational losses, and potential investment-security impairment.
Important facts for investors to verify
- Whether loan growth remains sustainable without deterioration in commercial real estate, construction and commercial credit quality.
- Whether the $45 million municipal deposit is withdrawn as expected and how deposit mix affects liquidity and funding costs.
- Future charge-offs, allowance adequacy and trends in nonperforming loans, other real estate owned and the Texas ratio.
- Fair-value changes or credit losses related to the pooled trust-preferred security and other securities with prolonged unrealized losses.
- The effect of Federal Reserve policy and changing rates on net interest margin, deposit costs and interest-rate swaps.
- Costs and timing of the Rochester and eastern-Iowa office projects and the planned bank-owned life-insurance investment.
- Developments in the debit-card and nonsufficient-funds-fee litigation, including potential damages and legal costs.
- Regulatory capital impacts from the Basel III framework, scheduled to affect community banks beginning January 1, 2015.