West Bancorporation, Inc. — Form 10-Q Summary
Business context and reporting period
West Bancorporation, Inc. operates community banking businesses through West Bank in central Iowa, eastern Iowa and Rochester, Minnesota. This unaudited Form 10-Q covers the three and six months ended June 30, 2014, compared primarily with the corresponding 2013 periods and, for financial condition, December 31, 2013.
The filing index contains an apparent date typographical error referring to December 31, 2014; the balance sheet and management discussion use December 31, 2013 as the comparative date.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net income | $4.739 million, up 10.3% | $9.139 million, up 10.8% |
| Diluted EPS | $0.30, versus $0.25 | $0.57, versus $0.48 |
| Net interest income | $12.116 million, up 5.1% | $23.924 million, up 7.0% |
| Provision for loan losses | $0.150 million, versus none | $0.150 million, unchanged |
| Noninterest income | $2.318 million, up 14.9% | $4.871 million, up 14.9% |
| Noninterest expense | $7.364 million, down 0.7% | $15.366 million, up 4.8% |
| Net interest margin | 3.55%, versus 3.51% | 3.60%, versus 3.44% |
| Return on average assets | 1.26%, versus 1.19% | 1.24%, versus 1.16% |
| Return on average equity | 14.62%, versus 12.93% | 14.40%, versus 12.39% |
All dollar amounts above are as reported in the filing and are stated in thousands unless otherwise noted.
- Balance sheet: Total assets were $1.536 billion at June 30, 2014, up 6.5% from year-end 2013. Loans were $1.076 billion, up $84.3 million, while net loans were $1.063 billion after a $13.2 million allowance.
- Deposits and liquidity: Deposits were $1.262 billion, up $98.6 million from year-end. Cash and cash equivalents were $58.6 million, compared with $42.4 million at year-end. The company reported approximately $164 million of additional FHLB borrowing capacity, $67 million of unsecured federal funds lines and a $5 million secured bank line; none was drawn at quarter-end.
- Cash flow: Six-month operating cash flow was $13.6 million, investing cash usage was $78.0 million, and financing cash inflow was $80.5 million. Cash and cash equivalents increased $16.2 million during the period.
- Capital: Stockholders’ equity was $132.1 million, up from $123.6 million at year-end. The consolidated total capital ratio was 13.18%, Tier 1 risk-based capital ratio was 12.13% and Tier 1 leverage ratio was 10.10%. Management stated that the company and West Bank met applicable capital requirements.
- Dividends: Cash dividends declared were $0.12 per share for the second quarter and $0.23 per share for the first half, compared with $0.10 and $0.20, respectively, in 2013.
Material changes versus the prior comparable period
- Net income increased primarily from higher net interest income, loan growth, lower deposit pricing and improved trust-service revenue. First-half results also included $506,000 of net realized investment-security gains.
- Average loans increased 10.3% in the first half, while loan yields declined 29 basis points. Average deposits increased 9.8%, but the average deposit rate fell from 0.44% to 0.29%.
- Trust-service revenue rose 36.3% year to date. Residential mortgage sale gains declined 18.3% year to date because of lower mortgage-sale volume and fewer refinancings, although second-quarter results improved from the prior year.
- First-half noninterest expense increased $705,000, primarily because of a $346,000 write-down and related costs on other real estate owned. The property sale closed in July 2014.
- Nonperforming loans declined to $2.290 million from $2.915 million at year-end, and nonperforming assets declined to $9.502 million from $10.565 million. The Texas ratio improved to 6.54% from 7.69%.
- Investment securities available for sale declined to $337.6 million from $345.2 million. Unrealized gross losses declined to $6.6 million from $13.7 million, while accumulated other comprehensive loss improved to $770,000 from $3.5 million.
Guidance, outlook, risks and unusual items
- Management expected loan growth to continue during the remainder of 2014, supported by demand for commercial, construction and development, and commercial real estate loans across its markets.
- Management expected mortgage-sale volumes in the second half of 2014 to remain similar to the first half and stated that net interest margin would remain under pressure. A $20 million interest-rate swap became effective June 30, 2014 and was expected to increase quarterly interest expense by approximately $80,000 beginning in the third quarter.
- The company was constructing a new Coralville main office, with occupancy expected around January 1, 2015. It also planned, subject to regulatory approval, to build a permanent Rochester, Minnesota office in 2015.
- The company had $438.5 million of commitments to extend credit and $12.4 million of standby letters of credit at June 30, 2014. These off-balance-sheet commitments create potential credit exposure.
- A class-action lawsuit against West Bank concerns nonsufficient-funds fees and the former sequencing of debit-card transactions. The court dismissed the plaintiffs’ treble-damages claim but certified two classes and denied summary judgment on other claims. The bank appealed; potential loss could not be reasonably estimated.
- The investment portfolio included one pooled trust-preferred security with other-than-temporary impairment. Its fair value was $2.207 million, versus a $4.171 million cost basis. Future credit losses could reduce earnings and regulatory capital.
- Key risks include interest-rate movements, deposit and loan pricing pressure, commercial and real estate credit risk, declining collateral values, economic conditions, regulatory changes, competition and potential changes to the allowance for loan losses.
- Management stated that no material changes had occurred in previously disclosed risk factors or market-risk exposures. Disclosure controls were deemed effective, and no material changes to internal control over financial reporting were reported.
Facts investors should verify
- Whether projected commercial and real estate loan growth is achieved without deterioration in credit quality or increased charge-offs.
- The sustainability of the 3.60% year-to-date net interest margin given management’s expectation of continued margin pressure and higher swap-related borrowing costs.
- The effect of the $346,000 other-real-estate-owned write-down and subsequent property sales, including the anticipated approximately $1.6 million after-tax gain on the sale of the former eastern Iowa office.
- The collectability and valuation of the impaired pooled trust-preferred security and the potential impact of additional credit-related losses.
- The outcome and potential financial exposure from the class-action litigation involving debit-card fees and transaction posting practices.
- The stability of the unusually large deposit increase, including a municipal deposit that management expected could be withdrawn as funding needs arose.
- Implementation effects of Basel III capital rules scheduled to affect community banks beginning January 1, 2015.