Business Context and Reporting Period
West Bancorporation, Inc., an Iowa-based bank holding company operating through West Bank, filed this unaudited Form 10-Q for the three months ended March 31, 2015. Its markets include central Iowa, eastern Iowa and Rochester, Minnesota. The company provides commercial, real estate, consumer, deposit, trust and related banking services.
Key Financial Metrics
| Metric | Q1 2015 | Comparable period or date |
|---|---|---|
| Net income | $5.103 million | $4.400 million in Q1 2014 |
| Diluted EPS | $0.32 | $0.27 in Q1 2014 |
| Net interest income | $12.963 million | $11.808 million in Q1 2014 |
| Total noninterest income | $1.860 million | $2.553 million in Q1 2014 |
| Total noninterest expense | $7.446 million | $8.002 million in Q1 2014 |
| Net interest margin | 3.59% | 3.64% in Q1 2014 |
| Return on average assets | 1.27% | 1.23% in Q1 2014 |
| Return on average equity | 14.57% | 14.17% in Q1 2014 |
| Total assets | $1.649 billion | $1.616 billion at December 31, 2014 |
| Loans, net | $1.171 billion | $1.170 billion at December 31, 2014 |
| Total deposits | $1.365 billion | $1.270 billion at December 31, 2014 |
| Cash and cash equivalents | $88.959 million | $39.781 million at December 31, 2014 |
| Stockholders’ equity | $143.721 million | $140.175 million at December 31, 2014 |
| Net cash from operating activities | $7.328 million | $6.671 million in Q1 2014 |
Net income increased 16.0% year over year. The improvement primarily reflected a $1.155 million increase in net interest income, a $556,000 reduction in noninterest expense and the absence of significant other-real-estate-owned expenses. These benefits were partly offset by a $693,000 decline in noninterest income.
The allowance for loan losses was $13.878 million, or 1.17% of loans. No provision for loan losses was recorded in either Q1 2015 or Q1 2014. Net recoveries were $271,000 in Q1 2015, compared with net charge-offs of $508,000 in the prior-year quarter.
Total nonperforming assets were $4.301 million, or 0.26% of total assets, at March 31, 2015. The Texas ratio was 2.73%, and the company reported an equity-to-assets ratio of 8.72% and a tangible common equity ratio of 8.72%.
Liquidity was supported by $88.959 million of cash and cash equivalents, approximately $198 million of additional FHLB borrowing capacity, $67 million of unsecured federal funds lines and an unused $5 million secured commercial-bank line. The company repaid $66 million of short-term borrowings during the quarter.
West Bank exceeded applicable regulatory minimum capital requirements. At March 31, 2015, West Bank reported total capital of 11.61%, Tier 1 capital of 10.63%, common equity Tier 1 capital of 10.63% and a Tier 1 leverage ratio of 9.43%.
Material Changes Versus the Prior Comparable Period
- Average loans increased 17.2%, driving higher loan interest income, although the loan portfolio balance at quarter-end was essentially unchanged from December 31, 2014.
- Net interest income increased 9.8%, while the net interest margin declined five basis points to 3.59% because loan and asset yields declined in the low-rate environment.
- Noninterest income declined 27.1%, primarily because investment-securities gains fell to $11,000 from $506,000 and residential mortgage banking revenue fell to $35,000 from $226,000.
- Noninterest expense declined 7.0%, including the elimination of $286,000 of other-real-estate-owned expense recorded in Q1 2014 and lower miscellaneous losses.
- Residential mortgage underwriting and processing were outsourced beginning in January 2015. The company now receives a third-party fee for loans initiated and closed by its retail staff, with lower related revenue and operating costs.
- Deposits increased $94.958 million during the quarter. Approximately $82 million of the increase came from a significant related-party depositor and is expected to be withdrawn during 2015.
- The company terminated a $25 million interest-rate swap in March 2015 because management expected the low-interest-rate environment to continue. The termination fee was $158,000.
- The new eastern Iowa main office in Coralville opened January 21, 2015. The company expects to break ground on a permanent Rochester, Minnesota office during summer 2015.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management expects loan growth during the remainder of 2015 because commercial, construction and commercial-real-estate demand remains strong in its markets.
- Management expects residential mortgage activity to remain below 2014 levels following the outsourcing change.
- Management expects net interest margin to remain under pressure if the Federal Reserve maintains its monetary policy, although forward-starting swaps hedge portions of variable-rate borrowings.
- Management considered the allowance for loan losses adequate but noted that future adjustments could result from economic conditions, collateral values, credit quality changes or regulatory examinations.
- Primary risks include interest-rate and pricing pressure, competition, commercial and real-estate credit exposure, declining collateral values, local and national economic conditions, regulatory changes, cybersecurity and customer acceptance of products.
- A class-action lawsuit alleges that certain nonsufficient-funds fees and former debit-card transaction-posting practices violated Iowa law. West Bank is vigorously defending the case; potential loss cannot presently be reasonably estimated.
- The company had $484.517 million of commitments to extend credit and standby letters of credit at March 31, 2015, including $479.724 million of commitments to extend credit.
- The Board increased the quarterly dividend to $0.16 per share, payable May 20, 2015. It also renewed authorization to repurchase up to $2 million of common stock over the following twelve months, subject to restrictions and market conditions.
- The filing states that disclosure controls were effective, there were no material changes in internal control over financial reporting, and no material changes to previously disclosed risk factors.
Important Facts for Investors to Verify
- Whether the anticipated withdrawal of approximately $82 million in temporary related-party deposits affects liquidity, deposit funding costs or balance-sheet growth.
- Whether loan pipelines convert into sustained loan growth without deterioration in commercial, construction or commercial-real-estate credit quality.
- Whether the 3.59% net interest margin continues to decline in the low-rate environment and how future rate changes affect borrowing costs.
- Whether the $13.878 million allowance remains adequate as criticized loans, nonperforming loans and collateral values change.
- The potential exposure and timing of the Iowa class-action litigation, which the filing says cannot currently be estimated.
- The financial and operating impact of the mortgage-business outsourcing, Coralville office opening and planned Rochester office construction.
- The sustainability of Q1 earnings given the limited $11,000 of securities gains and the absence of a loan-loss provision.