Business Context and Reporting Period
West Bancorporation, Inc. filed an unaudited Form 10-Q for the three months ended March 31, 2013. The company is a bank holding company whose principal subsidiary is West Bank. Comparisons are principally with the three months ended March 31, 2012, and with December 31, 2012 for balance-sheet data. Dollar amounts are in thousands except per-share data.
Key Financial Metrics
| Metric | Q1 2013 | Comparable period or prior date | Change |
|---|---|---|---|
| Net income | $3,948 | $3,977 in Q1 2012 | Down $29, or 0.7% |
| Basic and diluted EPS | $0.23 | $0.23 in Q1 2012 | Unchanged |
| Net interest income | $10,824 | $10,178 in Q1 2012 | Up $646, or 6.3% |
| Provision for loan losses | $150 | None in Q1 2012 | Increase of $150 |
| Noninterest income | $2,221 | $2,401 in Q1 2012 | Down $180, or 7.5% |
| Noninterest expense | $7,246 | $6,865 in Q1 2012 | Up $381, or 5.6% |
| Net interest margin | 3.36% | 3.50% in Q1 2012 | Down 14 basis points |
| Return on average assets | 1.12% | 1.23% in Q1 2012 | Down 11 basis points |
| Return on average equity | 11.84% | 12.82% in Q1 2012 | Down 98 basis points |
| Total assets | $1,436,722 | $1,448,175 at December 31, 2012 | Down $11,453 |
| Total loans | $937,031 | $927,401 at December 31, 2012 | Up $9,630 |
| Deposits | $1,113,455 | $1,134,576 at December 31, 2012 | Down $21,121 |
| Stockholders’ equity | $136,492 | $134,587 at December 31, 2012 | Up $1,905 |
Cash Flow, Liquidity and Capital
- Operating activities provided $5,201 of cash, compared with $7,394 in Q1 2012.
- Investing activities used $105,308, principally because the company purchased approximately $114,100 of available-for-sale securities.
- Financing activities used $14,199, including a $21,121 decline in deposits and $1,740 of dividends paid.
- Cash and cash equivalents declined to $57,168 from $171,474 at year-end, primarily due to the planned securities purchases.
- Additional borrowing capacity was approximately $83,300 from the Federal Home Loan Bank and $67,000 through unsecured federal funds lines; none of these lines was being drawn at March 31, 2013.
- Consolidated total capital and Tier I leverage ratios were 15.63% and 10.90%, respectively. Management stated that the company and West Bank met applicable capital requirements.
- Debt included $94,265 of Federal Home Loan Bank advances, $20,619 of subordinated notes, and $64,258 of federal funds purchased and repurchase agreements.
Material Changes Versus Prior Comparable Period
- Net income was essentially stable despite higher net interest income because lower mortgage-sale gains, higher operating expenses and a loan-loss provision offset the benefit from lower funding costs.
- Tax-equivalent net interest income increased $588, while the net interest margin declined from 3.50% to 3.36%. Average interest-earning assets increased 10.7%, while the average yield on loans declined 50 basis points.
- Interest expense declined $780, or 30.9%, primarily from lower deposit costs and the refinancing of $80,000 of FHLB advances.
- Gains and fees on residential mortgage sales declined $236, or 31.6%, even though mortgage originations sold into the secondary market increased slightly. Management attributed the decline to lower sale margins and a lower proportion of refinancings.
- Noninterest expense increased 5.6%, including higher salaries and benefits, occupancy, FDIC insurance, marketing and business-development costs. Salaries and benefits rose $333.
- Loans increased $9,630 during the quarter and were approximately $87,990 higher than at March 31, 2012. The allowance for loan losses was $15,632, or 1.67% of loans.
- Nonperforming loans declined to $7,113 from $7,256 at year-end, while total nonperforming assets declined to $16,776 from $16,894. A $3,356 nonaccrual construction loan was paid off on April 5, 2013, after quarter-end.
- Available-for-sale securities increased $93,308 to $385,622 as federal funds sold were reinvested. Unrealized losses increased, principally because of market-value changes, but management recorded no additional credit loss on the company’s pooled trust preferred security.
Guidance, Outlook, Risks and Unusual Items
- Management expected loan growth to continue during 2013, supported by a strong loan pipeline and the March 18, 2013 opening of a loan production office in Rochester, Minnesota.
- Management expected the net interest margin to remain under pressure if historically low interest rates persisted. The company used interest-rate swaps to effectively convert $80,000 of variable-rate FHLB advances to fixed-rate debt beginning in 2014 and 2015.
- The company planned to build and own a new main office in eastern Iowa during the latter half of 2013, funded with liquid assets.
- The largest investment-related exposure was a pooled trust preferred security with a $4,171 cost basis and $1,431 fair value. It had accumulated credit-related losses recognized in earnings of $729; no additional credit loss was recognized in Q1 2013.
- Commercial real estate, construction and commercial lending create exposure to borrower cash-flow deterioration, refinancing risk and declining collateral values. Geographic concentration exists in central Iowa.
- Other real estate owned totaled $8,232, primarily construction, land-development and other land. Management noted that demand for commercial real estate and development land remained weak.
- Off-balance-sheet commitments to extend credit totaled $429,534 and standby letters of credit totaled $3,787.
- West Bank continued to defend a purported class-action lawsuit concerning nonsufficient-funds fees and transaction-posting practices. The potential loss could not reasonably be estimated from the filing.
- Management reported no material changes in previously disclosed risk factors or market-risk exposure and stated that disclosure controls were effective.
Important Facts for Investors to Verify
- Whether loan growth continues without a corresponding deterioration in credit quality, particularly in commercial real estate and construction portfolios.
- Future provisions, charge-offs and allowance adequacy, including the effect of regulatory examinations or changes in economic conditions.
- The valuation and expected cash flows of the pooled trust preferred security and the possibility of future impairment charges.
- The sustainability of the 3.36% net interest margin in a prolonged low-rate environment and the effectiveness of the FHLB refinancing and interest-rate swaps.
- Liquidity after the substantial securities purchases and the effect of deposit declines, planned office construction and future loan growth.
- The outcome and potential financial exposure of the nonsufficient-funds-fee litigation.
- The company’s ability to execute its Rochester expansion, mortgage-origination growth plans and 2013 office-construction plans while controlling operating expenses.