West Bancorporation, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2014. Comparisons are to the corresponding 2013 periods and to December 31, 2013 for balance-sheet measures. The financial statements are unaudited. The filing’s balance-sheet caption appears to state December 31, 2014, but the comparative amounts and discussion clearly refer to December 31, 2013.
Business Context and Financial Position
West Bancorporation operates West Bank in central and eastern Iowa and Rochester, Minnesota. Its principal activities are commercial, commercial real estate, construction and development, residential real estate, consumer lending, deposit gathering, investment securities and trust services.
| Metric | September 30, 2014 | December 31, 2013 |
|---|---|---|
| Total assets | $1.523 billion | $1.442 billion |
| Loans, net | $1.070 billion | $978 million |
| Total deposits | $1.205 billion | $1.164 billion |
| Stockholders’ equity | $135.7 million | $123.6 million |
| Cash and cash equivalents | $34.7 million | $42.4 million |
Financial Metrics
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net interest income | $12.3 million | $11.6 million | $36.2 million | $34.0 million |
| Provision for loan losses | $0.1 million | $(1.0) million | $0.3 million | $(0.9) million |
| Noninterest income | $2.6 million | $2.1 million | $7.5 million | $6.4 million |
| Noninterest expense | $7.4 million | $8.4 million | $22.8 million | $23.1 million |
| Net income | $5.1 million | $4.4 million | $14.2 million | $12.6 million |
| Diluted EPS | $0.32 | $0.27 | $0.89 | $0.75 |
| Net interest margin | 3.56% | 3.49% | 3.58% | 3.45% |
| Return on average assets | 1.32% | 1.19% | 1.27% | 1.17% |
| Return on average equity | 15.00% | 14.41% | 14.61% | 13.02% |
- Revenue and profitability: Third-quarter net income increased 16.0% and nine-month net income increased 12.6%. Net interest income rose 5.7% in the quarter and 6.6% year to date, primarily from loan growth and lower deposit costs.
- Margin: The net interest margin increased 7 basis points in the quarter and 13 basis points year to date. Management expects continued pressure from persistently low market rates.
- Credit costs: The allowance for loan losses was $13.3 million, or 1.23% of loans. Provision expense was higher than in 2013 because the prior-year periods included negative provisions.
- Cash flow: Operating activities provided $21.4 million in the first nine months. Investing activities used $89.6 million, mainly from net loan growth, while financing activities provided $60.6 million, primarily through deposit growth and $40.0 million of short-term borrowings. Cash and cash equivalents declined $7.7 million.
- Liquidity: Management reported strong liquidity, including approximately $120 million of additional FHLB borrowing capacity, $67 million of unsecured federal funds lines and a $5 million secured bank line that was undrawn at September 30, 2014.
- Debt: At September 30, 2014, the company reported $96.5 million of FHLB advances, $40.0 million of other short-term borrowings, $20.6 million of subordinated notes and $13.5 million of long-term debt.
- Capital: The consolidated total capital ratio was 13.37%, Tier 1 risk-based capital ratio was 12.32% and Tier 1 leverage ratio was 10.28%. Management stated that the company and West Bank met applicable capital requirements.
Material Changes Versus Prior Period
- Loans increased $91.4 million, or approximately 9.2%, from year-end 2013, led by commercial, construction and land development, and commercial real estate lending.
- Deposits increased $41.4 million, or 3.6%, primarily in savings and money-market accounts.
- Nonperforming loans declined to $2.3 million from $2.9 million at year-end 2013. Nonperforming assets declined to $9.3 million from $10.6 million, and the Texas ratio improved to 6.21% from 7.69%.
- Noninterest income increased 23.5% in the quarter and 17.8% year to date. The increase included $210,000 of third-quarter and $716,000 of year-to-date net gains on investment securities, as well as stronger trust fees and mortgage-sale gains.
- Noninterest expense declined 12.1% in the quarter and 1.4% year to date, primarily because of lower other-real-estate-owned expenses and valuation write-downs.
- The company transferred approximately $50.9 million of municipal securities from available-for-sale to held-to-maturity classification, reducing future equity sensitivity to market-value changes on those securities.
- Accumulated other comprehensive loss improved to $0.4 million from $3.5 million at year-end 2013, mainly due to gains on available-for-sale securities, partly offset by derivative losses.
- The company declared quarterly dividends of $0.12 per share during the first nine months and subsequently announced an increase to $0.14 per share payable November 19, 2014.
Guidance, Outlook, Risks and Unusual Items
- Management expects loan growth to continue during the remainder of 2014 and over the following several quarters, supported by loan demand in all three markets.
- Management expects net interest margin pressure while Federal Reserve policy keeps market rates low, at least through the first half of 2015. Forward-starting interest-rate swaps hedge approximately $80 million of variable-rate borrowings.
- Construction of a new Coralville main office was expected to be completed around January 15, 2015. The existing office was under contract for sale for $3.0 million, with an estimated after-tax gain of approximately $1.6 million after use of capital-loss carryforwards.
- The company expects to begin construction of a permanent Rochester, Minnesota office in 2015.
- Key risks include interest-rate and funding risk, competitive loan and deposit pricing, commercial and real estate credit exposure, collateral-value declines, local economic conditions, regulatory changes and potential changes to the allowance for loan losses.
- The company has a pending class-action lawsuit involving nonsufficient-funds fees and debit-card transaction posting practices. Two classes were certified, West Bank appealed adverse rulings, and the potential loss could not reasonably be estimated.
- Off-balance-sheet commitments totaled approximately $484.4 million, including $469.7 million of commitments to extend credit and $14.7 million of standby letters of credit.
- The investment portfolio included one pooled trust-preferred security with other-than-temporary impairment, valued at $2.4 million at September 30, 2014. Future credit-related losses could reduce earnings and regulatory capital.
- ICD IV, LLC was liquidated during the third quarter after the underlying loan matured. The filing states that the adoption of applicable recent accounting guidance did not, or was not expected to, have a material impact.
Investor Verification Items
- Verify the sustainability of loan growth and the effect of commercial real estate and construction concentrations on future credit costs.
- Monitor net interest margin sensitivity to low rates, deposit repricing and eventual increases in market rates.
- Review allowance adequacy, charge-offs, nonperforming assets and the valuation of other real estate owned.
- Assess the potential earnings contribution from securities gains, mortgage-sale gains and trust-fee growth versus recurring banking revenue.
- Track liquidity sources, short-term borrowing usage and the maturity profile of FHLB advances and other debt.
- Follow developments in the debit-card and nonsufficient-funds fee litigation, including the appeal and any potential liability.
- Confirm the timing and profitability of the Coralville office sale and construction projects.
- Review the company’s exposure to the impaired pooled trust-preferred security and changes in accumulated other comprehensive income.