West Bancorporation, Inc. — Fiscal 2013 Form 10-K Summary
Business context and reporting period
West Bancorporation, Inc. is an Iowa bank holding company whose primary operating subsidiary is West Bank, a business-focused community bank serving markets in Iowa and Rochester, Minnesota. The filing covers the fiscal year ended December 31, 2013, with comparisons primarily to 2012. The company operates as one banking segment.
West Bank expanded its Rochester, Minnesota presence during 2013, opened a branch there, and began construction of a new Coralville, Iowa office. It had approximately 187 full-time equivalent employees at year-end.
Key financial metrics
| Metric | 2013 | 2012 | Change or comment |
|---|---|---|---|
| Net income | $16.891 million | $16.011 million | Up 5.5% |
| Diluted EPS | $1.02 | $0.92 | Up 10.9%, aided by share repurchase |
| Net interest income | $45.683 million | $41.198 million | Up $4.485 million |
| Net interest margin | 3.48% | 3.42% | Up 6 basis points |
| Noninterest income | $8.503 million | $10.994 million | Down 22.7% |
| Noninterest expense | $30.825 million | $28.792 million | Up 7.1% |
| Return on average assets | 1.17% | 1.21% | Declined modestly |
| Return on average equity | 13.22% | 12.34% | Improved |
| Efficiency ratio | 52.55% | 50.83% | Worsened modestly |
| Total assets | $1.442 billion | $1.448 billion | Essentially stable |
| Loans, net of deferred fees | $991.720 million | $927.401 million | Up 6.9% |
| Total deposits | $1.164 billion | $1.135 billion | Up 2.6% |
| Stockholders’ equity | $123.625 million | $134.587 million | Declined primarily from share repurchase and AOCI losses |
| Tangible common equity ratio | 8.57% | 9.29% | Declined |
Profitability, cash flow, liquidity and debt
- Net interest income benefited from higher average earning-asset balances and lower deposit and borrowing costs, despite lower loan yields in the low-rate environment.
- The provision for loan losses was a negative $850,000 in 2013 versus a $625,000 provision in 2012, reflecting improved credit quality. Net charge-offs declined to $888,000, or 0.09% of average loans, from $1.874 million, or 0.22%.
- Net cash provided by operating activities was $23.391 million, compared with $24.289 million in 2012. Investing activities used $135.135 million, primarily because of loan growth and purchases of investment securities. Financing activities used $17.305 million, including the common-stock repurchase and dividends.
- Cash and cash equivalents declined to $42.425 million from $171.474 million, primarily because funds were invested in securities and loans. Management stated that liquidity remained strong, supported by operating cash flow, liquid assets, approximately $121.098 million of additional FHLB borrowing capacity, and $67 million of unsecured federal funds lines, of which approximately $7 million was outstanding.
- Year-end borrowings included $20.619 million of subordinated notes, $95.392 million of net FHLB advances, and $15.935 million of long-term debt. The long-term debt largely reflects a $16 million secured loan used to finance the stock repurchase.
- The Company’s total risk-based capital ratio was 13.94%, Tier 1 risk-based capital ratio was 12.74%, and Tier 1 leverage ratio was 10.04%. West Bank’s corresponding ratios were 13.86%, 12.63%, and 9.80%; West Bank was classified as well-capitalized.
- Common dividends totaled $0.42 per share, or $6.995 million, compared with $0.36 per share in 2012.
Material changes versus the prior comparable period
- Loans increased $64.319 million, with the largest growth in commercial real estate loans. Rochester loans reached approximately $11.6 million after three full quarters of operations.
- Credit quality improved substantially: nonperforming loans declined to $2.915 million, or 0.29% of loans, from $7.256 million, or 0.78%; total nonperforming assets declined to $10.565 million, or 0.73% of assets, from $16.894 million, or 1.17%.
- Noninterest income declined mainly because mortgage originations sold into the secondary market fell to $93.593 million from $129.322 million, reducing mortgage-sale gains and fees by $1.829 million. The 2012 results also included an $841,000 gain from bank-owned life insurance and $246,000 of net securities gains that did not recur.
- Noninterest expense increased $2.033 million, primarily from higher salaries and benefits, occupancy costs, professional fees, and miscellaneous operational losses.
- The company repurchased and canceled 1,440,592 shares, or 8.27% of outstanding shares at the time, for $15.774 million. The transaction reduced shares outstanding and contributed to the increase in EPS, but also reduced equity and increased leverage.
- Accumulated other comprehensive income declined to a loss of $3.538 million from income of $1.926 million, mainly because of unrealized losses on available-for-sale securities, partially offset by gains on interest-rate swaps.
Guidance, outlook, risks and unusual items
- Management expected the company to remain profitable in 2014 at a level comparing favorably with peers. The outlook depended substantially on continued loan growth and future loan losses.
- Management expected historically low interest rates to continue and anticipated continued pressure on net interest margin. The filing states that a 300-basis-point immediate rate increase could increase estimated 2014 net interest income by approximately 6.42%, or $3.265 million; the effect of a rate decrease was not reasonably calculable.
- Management expected mortgage origination volume in 2014 to be lower than in 2013, although somewhat lower long-term rates early in 2014 could support activity.
- The company held one pooled trust preferred security with a $1.850 million fair value and a $2.321 million unrealized loss. It remained classified as other-than-temporarily impaired, although no additional credit-loss expense was recorded in 2013. Future credit deterioration could affect earnings and regulatory capital.
- Basel III capital rules were scheduled to begin applying to community banks on January 1, 2015, with phase-in provisions. Management expected the company and West Bank to remain well-capitalized and intended to elect the available treatment excluding most accumulated other comprehensive income effects from regulatory capital.
- A purported class-action lawsuit alleges that certain nonsufficient-funds fees and former debit-card posting practices violated Iowa law. Motions for summary judgment and class certification were pending in early 2014. The potential loss could not be reasonably estimated.
- Off-balance-sheet commitments totaled approximately $391.743 million, including $388.197 million of commitments to extend credit and $3.546 million of standby letters of credit. Management did not expect significant losses from these commitments.
- Key risks include concentrations in commercial and commercial real estate lending, changes in collateral values, interest-rate and funding pressure, competition for loans and deposits, liquidity constraints, mortgage-market conditions, regulatory and capital changes, operational errors, fraud, cybersecurity events, litigation, and dependence on key personnel.
Important facts for investors to verify
- Whether loan growth remains strong without a deterioration in commercial real estate and construction credit quality.
- Whether the low-rate environment further compresses loan yields and net interest margin, and whether deposit costs can remain low.
- Whether nonperforming assets, charge-offs and the allowance for loan losses continue to improve after the 2013 negative provision.
- The liquidity impact of reduced cash balances, upcoming certificate-of-deposit maturities, planned office construction and debt amortization.
- The effect of the $16 million repurchase-financing loan on future capital, interest expense and dividend capacity.
- The valuation and future credit performance of the pooled trust preferred security and the broader securities portfolio.
- The outcome and potential exposure from the Iowa class-action litigation.
- The company’s actual compliance with Basel III capital requirements when implemented and the effect of the AOCI opt-out election.
- Management’s statement that consolidated financial statements and internal control over financial reporting received unqualified audit opinions from McGladrey LLP.