West Bancorporation, Inc. 10-Q Summary
Reporting period: Quarterly report for the three and six months ended June 30, 2013. Financial statements are unaudited and presented in thousands of dollars, except per-share data. The company is a bank holding company whose principal subsidiary is West Bank.
Key Financial Metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net income | $4,298 | $4,383 | $8,246 | $8,360 |
| Diluted EPS | $0.25 | $0.25 | $0.48 | $0.48 |
| Net interest income | $11,533 | $10,391 | $22,357 | $20,569 |
| Provision for loan losses | $0 | $0 | $150 | $0 |
| Noninterest income | $2,017 | $3,346 | $4,238 | $5,747 |
| Noninterest expense | $7,415 | $7,813 | $14,661 | $14,678 |
| Net interest margin | 3.51% | 3.44% | 3.44% | 3.47% |
| Return on average assets | 1.19% | 1.32% | 1.16% | 1.28% |
| Return on average equity | 12.93% | 13.69% | 12.39% | 13.26% |
- Total assets were $1.452 billion at June 30, 2013, compared with $1.448 billion at December 31, 2012.
- Loans increased to $969.1 million from $927.4 million at year-end 2012. The allowance for loan losses was $16.0 million, or 1.65% of loans.
- Securities available for sale increased to $376.3 million from $292.3 million, primarily from reinvestment of federal funds sold.
- Total deposits were $1.125 billion, down from $1.135 billion. Cash and cash equivalents declined to $41.3 million from $171.5 million.
- Borrowings included $94.6 million of FHLB advances, $20.6 million of subordinated notes, $65.7 million of repurchase-related borrowings and $16.8 million of new long-term debt.
- Six-month operating cash flow was $8.5 million; investing activities used $136.3 million, principally for securities purchases and loan growth. Financing activities used $2.5 million.
- West Bank remained well capitalized: total risk-based capital was 13.75%, Tier 1 risk-based capital was 12.49%, and Tier 1 leverage was 9.60% at June 30, 2013.
Material Changes Versus Prior Comparable Period
- Second-quarter net income declined 1.9%, while six-month net income declined 1.4%. EPS remained $0.25 for the quarter and $0.48 year to date, supported by the reduction in shares outstanding.
- Net interest income increased 11.0% in the quarter and 8.7% year to date. Lower deposit and borrowing costs and higher earning-asset balances more than offset lower loan yields.
- Noninterest income declined 39.7% in the quarter and 26.3% year to date. The prior-year periods included an $841 tax-exempt bank-owned life insurance gain and investment securities gains; mortgage-sale income also declined.
- Noninterest expense declined 5.1% in the quarter and was essentially flat year to date. Lower other-real-estate-owned costs offset higher salaries, benefits and occupancy expenses.
- Nonperforming loans improved to $4.2 million from $7.3 million at year-end 2012, while nonperforming assets declined to $13.8 million from $16.9 million. The Texas ratio improved to 10.00% from 11.25%.
- Accumulated other comprehensive income declined to a loss of $0.2 million from income of $1.9 million, primarily because of market-value losses on available-for-sale securities, partly offset by gains on interest-rate swaps.
Guidance, Outlook, Risks and Unusual Items
- Management expects loan growth to continue during 2013, citing a strong loan pipeline and the Rochester, Minnesota branch, which began operating as a branch on July 1, 2013.
- Management expects net interest margin to remain under pressure but relatively consistent through the remainder of 2013 if market rates do not rise above June 2013 levels.
- The company plans to begin construction of a new eastern Iowa main office during the second half of 2013, funded with liquid assets.
- On June 5, 2013, the company repurchased and canceled 1,440,592 shares, or approximately 8.27% of outstanding shares, at $10.95 per share. The $15.8 million transaction was financed primarily with a new five-year, $16.0 million secured term loan.
- The Board subsequently authorized up to $2.0 million of additional common-stock repurchases through April 2014 and increased the quarterly dividend 10% to $0.11 per share.
- Interest-rate risk increased the volatility of securities values. Available-for-sale securities had gross unrealized losses of $9.1 million at June 30, 2013. Management did not identify most losses as other-than-temporary impairment because it expects to hold the securities and collect principal and interest.
- The company continues to hold a pooled trust preferred security with a $1.6 million fair value and previously recognized credit-related impairment. No additional credit loss was recorded in the first half of 2013.
- Risks include interest-rate movements, pressure on loan and deposit pricing, commercial and real-estate credit exposure, collateral-value declines, regulatory changes, competition, economic conditions and potential changes to the allowance for loan losses.
- West Bank is defending a purported class-action lawsuit concerning nonsufficient-funds fees and transaction-posting practices. The potential loss cannot currently be reasonably estimated.
Investor Verification Checklist
- Verify whether loan growth continues without deterioration in commercial real estate, construction and commercial-credit quality.
- Monitor the allowance for loan losses, charge-offs, recoveries, nonperforming assets and the Texas ratio.
- Assess the effect of rising interest rates on securities unrealized losses, mortgage-sale revenue, funding costs and net interest margin.
- Review the leverage, cost and earnings-per-share effects of the debt-financed share repurchase program and any additional repurchases.
- Evaluate liquidity after the substantial reduction in cash and cash equivalents and the planned securities purchases and office construction.
- Track the valuation and future impairment risk of the pooled trust preferred security and other Level 3 assets.
- Review developments in the nonsufficient-funds-fee litigation and any related legal-expense or contingency disclosures.