Business Context and Reporting Period
West Bancorporation, Inc., an Iowa bank holding company, filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2011. Results primarily reflect West Bank and subsidiaries. Comparative periods are the three and six months ended June 30, 2010; balance-sheet comparisons are to December 31, 2010. Amounts are in thousands except per-share data.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2011 | Six Months Ended June 30, 2011 |
|---|---|---|
| Net income | $3,923 | $8,453 |
| Net income available to common stockholders | $2,107 | $6,066 |
| Basic and diluted EPS | $0.12 | $0.35 |
| Net interest income | $10,413 | $20,890 |
| Provision for loan losses | $450 | $950 |
| Total noninterest income | $2,116 | $4,787 |
| Total noninterest expense | $6,376 | $12,852 |
| Net interest margin, tax-equivalent | 3.58% | 3.60% |
| Return on average assets | 1.21% | 1.30% |
| Return on average equity | 10.36% | 11.40% |
- Total assets were $1,261,136 at June 30, 2011, down from $1,305,463 at year-end 2010.
- Loans were $838,076 before the allowance and $820,286 net, down $50,573 from year-end; loans increased $7,498 during the second quarter.
- The allowance for loan losses was $17,790, or 2.12% of loans, compared with 2.15% at December 31, 2010. Net charge-offs were $2,247 for the six months.
- Total deposits were $961,933, down 1.0% from year-end. Borrowings included $105,000 of Federal Home Loan Bank advances and $20,619 of subordinated notes.
- Cash and cash equivalents were $102,481. Management reported approximately $35,000 of additional FHLB borrowing capacity, $53,000 of unsecured federal funds lines and $10,000 of secured lines, none of which was drawn at June 30.
- Stockholders’ equity was $119,190, down from $145,436 primarily because the company redeemed all $36,000 of Treasury-held preferred stock. The end-of-period equity-to-assets ratio was 9.45% and tangible common equity ratio was 9.45%.
- West Bank was categorized as well-capitalized. Its total risk-based capital ratio was 14.4%, Tier 1 risk-based capital ratio was 13.2% and Tier 1 leverage ratio was 9.5%.
Material Changes Versus Prior Comparable Period
- Second-quarter net income increased 50.7% to $3,923 from $2,603; six-month net income increased 42.3% to $8,453 from $5,942.
- Net income available to common stockholders increased only 3.7% in the quarter because $1,371 of preferred-stock discount accretion was accelerated upon the June 29 redemption. Management stated this reduced second-quarter EPS by approximately $0.07.
- Net interest income increased $150 in the quarter and $493 year to date. The tax-equivalent net interest margin increased 78 basis points in the quarter and 79 basis points year to date, principally because of lower funding costs and the transfer of SmartyPig deposits to another institution.
- The loan-loss provision declined $950 in the quarter and $2,450 year to date, reflecting improved credit conditions and lower problem-loan levels.
- Noninterest income declined $803 in the quarter and $404 year to date, primarily because SmartyPig service fees ceased after the related deposits were transferred in 2010. Year-to-date results included a $637 gain from bank-owned life insurance following the death of a bank officer.
- Noninterest expense declined $1,390 in the quarter and $910 year to date. Prior-year expense included approximately $900 of losses from a renewable-energy closed-end fund, while other real estate owned costs and FDIC insurance expense also declined. Salaries and benefits increased $858 year to date.
- Total nonperforming assets declined to $23,210 from $33,462 at year-end 2010 and $50,238 at June 30, 2010. Nonperforming loans declined to $6,935 from $12,930 at year-end.
Guidance, Outlook, Risks and Unusual Items
- Management expects loan balances to grow during the second half of 2011 as the economy improves and customer-development efforts continue. It expects the net interest margin to remain relatively stable absent a significant increase in market interest rates.
- The June 3 termination of the regulatory memorandum of understanding removed certain dividend-approval and enhanced-capital requirements. The Federal Reserve also removed prior-approval requirements for common dividends, certain debt or trust-preferred issuance and share redemptions.
- The board declared a $0.05 per-share quarterly common dividend payable August 30, 2011. Preferred dividends will no longer be paid following redemption of the Treasury preferred stock.
- Trust preferred securities remained a material investment risk. Two securities with a $6,199 cost basis had a June 30 fair value of $2,180. The pooled ALESCO security was considered other-than-temporarily impaired, with a $2,891 unrealized loss in accumulated other comprehensive income; no additional credit loss was recognized in second-quarter earnings. Future credit deterioration could reduce earnings and regulatory capital.
- Other real estate owned totaled $14,693, including $11,680 of construction, land-development and other land. Management noted weak demand for commercial real estate and development land and continued valuation and disposition risk.
- The company faces a purported Iowa class action concerning nonsufficient-funds fees and transaction-posting practices. Management assessed the likelihood of loss as reasonably possible but stated that any potential loss could not be reasonably estimated.
- Key forward-looking risks include interest-rate and margin risk, competitive loan and deposit pricing, credit deterioration, declining commercial or residential real-estate values, regulatory changes, local and national economic conditions and potential changes to the allowance for loan losses.
- Off-balance-sheet commitments totaled $237,925 at June 30, 2011, including $227,363 of commitments to extend credit and $10,562 of standby letters of credit.
Most Important Facts to Verify
- Whether expected second-half loan growth materializes without reversing the improvement in credit quality and nonperforming assets.
- The performance, valuation and future credit-loss exposure of the pooled and single-issuer trust preferred securities.
- The sustainability of the 3.60% year-to-date net interest margin amid potential changes in market rates and deposit pricing.
- The adequacy of the $17,790 allowance for loan losses relative to commercial real-estate, construction and commercial-loan concentrations.
- The financial impact, if any, of the Iowa nonsufficient-funds fee class action and the status or disposition of the Treasury warrant.
- Whether lower SmartyPig-related revenue, mortgage-sale volume and potential interchange-fee pressure affect future noninterest income.