Business Context and Reporting Period
West Bancorporation, Inc., an Iowa-based bank holding company for West Bank, filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2011. Comparative results are for the same periods in 2010; balance-sheet comparisons are with December 31, 2010. Amounts are in thousands except per-share data and ratios.
Financial Performance and Condition
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Net income | $3,083 in 2011 vs. $3,941 in 2010 | $11,536 vs. $9,883 |
| Net income available to common shareholders | $3,083 vs. $3,369 | $9,149 vs. $8,170 |
| Basic and diluted EPS | $0.18 vs. $0.19 | $0.53 vs. $0.47 |
| Net interest income | $10,325 vs. $10,697 | $31,215 vs. $31,094 |
| Provision for loan losses | $0 vs. $2,000 | $950 vs. $5,400 |
| Noninterest income | $2,233 vs. $3,107 | $7,020 vs. $8,298 |
| Noninterest expense | $8,318 vs. $6,581 | $21,170 vs. $20,343 |
| Return on average assets | 0.97% vs. 1.03% | 1.19% vs. 0.82% |
| Return on average equity | 10.12% vs. 10.89% | 11.03% vs. 9.50% |
| Net interest margin | 3.64% vs. 3.14% | 3.61% vs. 2.92% |
- Total assets were $1.227 billion at September 30, 2011, down from $1.305 billion at December 31, 2010.
- Loans were $866.6 million, down $22.0 million year to date, although loans increased $28.5 million during the third quarter. The allowance for loan losses was $17.5 million, or 2.02% of loans.
- Nonperforming loans declined to $7.7 million from $12.9 million at year-end 2010. Total nonperforming assets declined to $21.4 million from $33.5 million.
- Other real estate owned declined to $12.4 million from $19.2 million, but third-quarter expense included $1.7 million of property write-downs, including a $1.35 million write-down on one property.
- Deposits were $918.5 million, down 5.5% from year-end, primarily because of lower savings and time deposits. Cash and cash equivalents were $52.8 million, compared with $88.0 million at December 31, 2010.
- Debt included $105.0 million of Federal Home Loan Bank advances, $20.6 million of subordinated notes, and $53.2 million of federal funds purchased and repurchase agreements.
- Net cash provided by operating activities was $20.6 million. Investing activities provided $37.7 million, while financing activities used $93.5 million, primarily reflecting the redemption of preferred stock and deposit reductions.
- Stockholders’ equity was $121.1 million, or 9.88% of assets, compared with $145.4 million, or 11.14%, at year-end. West Bank remained classified as well-capitalized, with total risk-based capital of 14.3%, Tier 1 risk-based capital of 13.1%, and Tier 1 leverage capital of 10.0%.
- Liquidity included approximately $44 million of additional FHLB borrowing capacity, $53 million of unsecured federal funds lines, and $10 million of secured federal funds lines. None of these lines was drawn at September 30.
Material Changes Versus Prior Comparable Period
- Third-quarter net income decreased 21.8%, primarily because noninterest income fell $874 and noninterest expense increased $1.7 million. Year-to-date net income increased 16.7%, aided by a $4.45 million reduction in the provision for loan losses.
- Net interest margin improved substantially because the transfer of SmartyPig-related deposits reduced deposit costs and because subordinated-note pricing moved to a lower variable rate. However, lower earning-asset balances limited net interest income growth.
- Noninterest income declined because SmartyPig service-fee income ended, mortgage-sale income decreased, and the prior-year quarter included a $420 gain from bank-owned life insurance.
- Noninterest expense increased because of higher salaries and benefits and other real estate owned write-downs. Lower FDIC insurance expense and lower miscellaneous losses partially offset these increases.
- Net charge-offs declined to $314 in the third quarter and $2.6 million year to date, compared with $4.0 million and $5.4 million, respectively, in 2010.
- The company redeemed all $36.0 million of U.S. Treasury preferred stock on June 29, 2011, and repurchased the related common-stock warrant for $700 on August 31, 2011. This eliminated preferred dividends and future warrant dilution but reduced equity.
- Accumulated other comprehensive income improved to $852 from a $2.6 million loss at year-end, primarily from unrealized gains on available-for-sale securities.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected the net interest margin to remain relatively stable in the fourth quarter of 2011 and believed loan growth would continue as the economy improved and new customer relationships developed.
- Management expected fourth-quarter residential mortgage-sale fees to be at or above the third-quarter level, supported by historically low mortgage rates and increased refinancing activity.
- Management stated that the allowance for loan losses was adequate, but noted that future adjustments could be required if economic conditions, collateral values, delinquency trends, regulatory assessments, or borrower performance deteriorate.
- The investment portfolio included two trust preferred securities with a combined cost basis of $6.2 million and fair value of $2.1 million. One pooled security was considered other-than-temporarily impaired; an additional $22 credit loss was recognized in third-quarter earnings, while $3.1 million of remaining unrealized loss was recorded in accumulated other comprehensive income.
- The company remains exposed to commercial real estate, construction, land-development, and commercial lending risks, including declining collateral values and borrowers’ inability to refinance or repay at maturity.
- A purported Iowa class-action lawsuit alleges that certain nonsufficient-funds fees and former item-posting practices violated Iowa law. Management considers a loss reasonably possible, but the potential amount cannot be reasonably estimated.
- Off-balance-sheet commitments totaled approximately $239.4 million, consisting of $229.0 million of commitments to extend credit and $10.4 million of standby letters of credit.
- Management identified interest-rate risk, competitive and pricing pressure, economic conditions, regulatory changes, credit quality, real estate values, and potential interchange-fee restrictions as material forward-looking risks.
- The April 2010 regulatory memorandum of understanding was terminated, and the company’s participation in the Treasury Capital Purchase Program ended, reducing previously disclosed dividend, capital, and corporate-action restrictions.
Most Important Facts for Investors to Verify
- Whether nonperforming assets and commercial real estate exposures continue to decline without requiring significant additional loan-loss provisions or property write-downs.
- Whether the improved 3.61% year-to-date net interest margin is sustainable as deposit balances, loan volumes, and market interest rates change.
- Whether deposit outflows and the reduction in cash balances affect future loan growth or require greater reliance on wholesale funding.
- The valuation and expected cash flows of the impaired pooled trust preferred security and the potential for additional OTTI charges.
- The effect of preferred-stock redemption and warrant repurchase on capital, dividends, and future shareholder returns.
- The outcome and potential financial exposure of the nonsufficient-funds-fee litigation.
- Whether property markets, particularly commercial real estate and development land in the company’s markets, support current OREO carrying values.