West Bancorporation, Inc. — 2015 Second-Quarter Form 10-Q
Reporting period: Three and six months ended June 30, 2015; unaudited consolidated results for West Bancorporation, West Bank and subsidiaries. Amounts are in thousands except per-share data and percentages. The company operates banking markets in central and eastern Iowa and Rochester, Minnesota.
Financial performance and condition
| Metric | Three months ended June 30, 2015 | Prior-year change | Six months ended June 30, 2015 | Prior-year change |
|---|---|---|---|---|
| Net income | $5,272 | +$533, or 11.2% | $10,375 | +$1,236, or 13.5% |
| Diluted EPS | $0.33 | From $0.30 | $0.65 | From $0.57 |
| Net interest income | $13,354 | +$1,238, or 10.2% | $26,317 | +$2,393, or 10.0% |
| Net interest margin | 3.59% | Up 4 basis points | 3.59% | Down 1 basis point |
| Noninterest income | $1,922 | Down $396, or 17.1% | $3,782 | Down $1,089, or 22.4% |
| Noninterest expense | $7,443 | Up $79, or 1.1% | $14,889 | Down $477, or 3.1% |
- Annualized return on average assets was 1.28% for both the quarter and first half, compared with 1.26% and 1.24%, respectively, in 2014. Return on average equity was 14.64% for the quarter and 14.61% for the first half.
- Loans were $1.217 billion at June 30, up $33.3 million, or 2.8%, from December 31, 2014. Growth was concentrated in commercial and commercial real estate loans.
- The allowance for loan losses was $14.4 million, or 1.18% of loans. Second-quarter provision expense was $200, compared with $150 in the prior-year quarter.
- Noninterest income declined primarily because residential mortgage banking revenue fell $324 in the quarter and $515 for the first half, and investment securities gains declined $459 for the first half.
- Cash and cash equivalents increased to $82.1 million from $39.8 million at year-end. Six-month operating cash flow was $16.4 million, compared with $13.6 million in 2014.
- Deposits increased $96.1 million, or 7.6%, to $1.367 billion. Short-term borrowings declined to zero from $66.0 million at year-end. Other borrowings included $97.6 million of FHLB advances, $20.6 million of subordinated notes and $11.0 million of long-term debt.
- Stockholders’ equity was $145.4 million, up from $140.2 million at December 31, 2014. The tangible common equity ratio was 8.79%.
- Cash dividends declared were $0.16 per share in the second quarter and $0.30 per share for the first half, compared with $0.12 and $0.23, respectively, in 2014.
Material changes versus the prior comparable periods
- Net interest income benefited from substantial loan growth and lower rates paid on time deposits. Average loans increased 15.8% in the quarter and 16.5% for the first half, although loan yields declined.
- The company changed its residential mortgage process in January 2015. Underwriting and processing were outsourced, third-party funding was used, and West Bank received fees for loans initiated and closed by its retail staff. This reduced mortgage banking revenue but also reduced related operating costs. Management expected residential mortgage activity to remain below 2014 levels.
- First-half investment securities gains were $47, compared with $506 in 2014. Available-for-sale securities declined $27.6 million, primarily from mortgage-backed security and collateralized mortgage obligation paydowns.
- Credit indicators remained generally strong, but nonaccrual loans increased to $2.878 million from $1.561 million at year-end. Total nonperforming assets increased to $5.484 million from $4.172 million, and the Texas ratio increased to 3.43% from 2.71%.
- Accumulated other comprehensive income changed from a $254 thousand gain at year-end to a $534 thousand loss, primarily reflecting unrealized securities and derivative losses.
- Two interest rate swaps with aggregate notional amounts of $50 million were terminated during the first half, producing $541 thousand of termination costs paid; one $30 million swap remained outstanding at June 30.
Guidance, outlook, risks and unusual items
- Management expected loan growth to continue during the remainder of 2015 because demand for commercial, construction and development, and commercial real estate loans remained strong. It expected the net interest margin to remain approximately 3.59% if loan balances remained stable and Federal Reserve policy did not change materially.
- Management stated that the allowance for loan losses was adequate and that credit quality remained strong. However, commercial, commercial real estate, construction and land-development lending creates exposure to borrower cash-flow deterioration, refinancing risk and declining collateral values.
- Liquidity was described as strong. In addition to cash and cash equivalents, West Bank had approximately $200 million of FHLB borrowing capacity and $67 million of unsecured federal funds lines. A $5 million secured line expiring August 5, 2015 was not expected to be renewed.
- Management expected to begin construction of a permanent Rochester, Minnesota office during the third quarter of 2015.
- The company was defending a class-action lawsuit concerning nonsufficient-funds fees and historical debit-card transaction posting practices. The Iowa Supreme Court appeal was expected to be heard during its 2015-2016 term; potential loss could not reasonably be estimated.
- Management identified interest-rate risk, competitive and pricing pressures, credit and real estate risk, economic conditions, regulatory changes, cybersecurity threats and deposit or customer behavior as principal risks. The filing reported no material change in market risk or risk factors from the 2014 Form 10-K.
- The company estimated that proposed FDIC assessment changes could increase annual FDIC insurance expense by approximately $180 based on the current balance sheet.
Important facts for investors to verify
- Whether loan growth, particularly in commercial and commercial real estate categories, continues without a material deterioration in credit quality or increased provision expense.
- The trend in nonaccrual loans, troubled debt restructurings, impaired loans and the adequacy of the $14.4 million allowance.
- Whether the lower residential mortgage banking revenue and reduced securities gains represent a continuing limitation on noninterest income.
- The effect of interest-rate changes on the 3.59% net interest margin, deposit pricing, FHLB funding costs and the remaining interest-rate swap.
- The outcome and potential financial exposure of the Iowa class-action litigation, which the filing states cannot currently be estimated.
- Deposit concentration: approximately $157 million of deposits were held by a significant related-party depositor at June 30, 2015, including approximately $27 million of the first-half deposit increase.
- Whether regulatory capital remains comfortably above minimum and well-capitalized thresholds as the Basel III capital conservation buffer phases in.