West Bancorporation, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2012, compared with the same periods in 2011; balance-sheet comparisons are to December 31, 2011. Financial statement amounts are in thousands, except per-share data.
Business context
West Bancorporation is an Iowa-based bank holding company whose principal subsidiary is West Bank. Its business is concentrated in commercial, commercial real estate, construction and land-development lending in Central Iowa, supplemented by residential mortgage origination and sales, investment securities, deposit services and trust services.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | YTD 2012 | YTD 2011 |
|---|---|---|---|---|
| Net income | $3,752 | $3,083 | $12,112 | $11,536 |
| Net income available to common | $3,752 | $3,083 | $12,112 | $9,149 |
| Basic EPS | $0.22 | $0.18 | $0.70 | $0.53 |
| Diluted EPS | $0.22 | $0.18 | $0.69 | $0.53 |
| Net interest income | $10,257 | $10,325 | $30,826 | $31,215 |
| Total noninterest income | $2,548 | $2,211 | $8,295 | $6,998 |
| Total noninterest expense | $7,104 | $8,318 | $21,782 | $21,170 |
| Return on average assets | 1.14% | 0.97% | 1.23% | 1.19% |
| Return on average equity | 11.36% | 10.12% | 12.61% | 11.03% |
| Net interest margin | 3.45% | 3.64% | 3.46% | 3.61% |
Balance sheet at September 30, 2012: Total assets were $1.268 billion, loans were $854.2 million, securities available for sale were $311.1 million, deposits were $928.9 million, total liabilities were $1.135 billion and stockholders’ equity was $132.6 million. Equity represented 10.46% of assets.
Cash flow and liquidity: For the first nine months, operating activities provided $14.3 million, investing activities used $43.8 million and financing activities used $15.7 million. Cash and cash equivalents declined to $41.8 million from $87.1 million at year-end 2011. Additional reported borrowing capacity included approximately $37 million from the FHLB, $53 million through unsecured federal funds lines and $10 million through secured lines; $20 million was borrowed on these lines at September 30.
Debt and funding: FHLB advances were $105.0 million and subordinated notes were $20.6 million, both unchanged from year-end. Federal funds purchased and repurchase agreements increased to $73.1 million from $55.8 million. Deposits declined 3.0% from year-end, primarily because of lower money-market and certificate-of-deposit balances.
Credit quality: The allowance for loan losses was $15.6 million, or 1.83% of loans, and represented 171.95% of nonperforming loans. Nonperforming loans were $9.1 million, or 1.06% of total loans, versus $10.7 million at year-end. Total nonperforming assets were $19.3 million, or 1.52% of assets, compared with $22.9 million at year-end. Other real estate owned declined to $8.9 million from $11.0 million.
Material changes versus prior comparable periods
- Q3 net income increased 21.7% to $3.8 million; year-to-date net income increased 5.0% to $12.1 million. Year-to-date income available to common increased 32.4%, partly because preferred stock dividends and discount accretion of $2.4 million occurred in 2011 but not in 2012.
- Mortgage-sale gains and fees increased to $816 thousand in Q3 and $2.1 million year-to-date, supported by historically low interest rates, refinancing activity and expanded mortgage staff. Residential mortgage originations sold increased to $89.0 million from $37.9 million year-to-date.
- Net interest income declined modestly as lower asset yields outweighed balance growth. The year-to-date net interest margin fell 15 basis points to 3.46%; management attributed the pressure to historically low market rates.
- Q3 provision for loan losses was $300 thousand versus none in 2011; year-to-date provision declined to $300 thousand from $950 thousand. Although overall credit quality improved, specific allowance allocations increased by $1.0 million in Q3 because of lower appraised collateral values.
- Q3 noninterest expense declined 14.6%, primarily because other real estate owned write-downs fell substantially. Year-to-date noninterest expense nevertheless increased 2.9%, mainly due to higher salaries, benefits, occupancy, data processing and consulting costs.
- Loans increased $15.2 million from year-end but declined $4.2 million from June 30. Management characterized expected loan growth as subdued.
- Available-for-sale securities increased $27.9 million to $311.1 million as low-yielding short-term funds were redeployed. Accumulated other comprehensive income increased to $2.2 million from $654 thousand at year-end.
Guidance, outlook, risks and unusual items
- Management expected mortgage-sale income to remain strong through 2012 and into 2013 because of low rates, while expecting loan growth to continue slowly. Management also indicated that net interest margin could decline slightly if rates remained historically low.
- The company planned to purchase up to $5 million of additional corporate notes and preferred stock during Q4 2012 to enhance portfolio yield.
- The investment portfolio included one impaired pooled trust preferred security, ALESCO Preferred Funding X, with a cost basis of $4.2 million and fair value of $1.3 million. A $6 thousand Q3 credit loss brought 2012 impairment recognized in earnings to $179 thousand; additional credit deterioration could reduce earnings and regulatory capital.
- Other real estate values remain exposed to weak commercial real estate and development-land demand. Q3 and year-to-date property valuation write-downs were $195 thousand and $1.2 million, respectively.
- Material risks include interest-rate and margin compression, competition and pricing pressure, commercial and real estate credit deterioration, declining collateral values, economic conditions in Central Iowa, regulatory changes including proposed Basel III-related requirements, and possible future allowance adjustments.
- The company remained well-capitalized under applicable regulatory standards. West Bank’s total risk-based capital ratio was 14.98%, Tier 1 risk-based capital ratio was 13.73% and Tier 1 leverage ratio was 10.12%.
- West Bank is defending a purported class action concerning nonsufficient-funds fees and transaction-posting practices. Management stated that potential loss cannot currently be reasonably estimated.
- The board declared a $0.10 per-share quarterly dividend payable November 27, 2012, to shareholders of record November 7, 2012.
Important facts for investors to verify
- Whether low interest rates continue to compress the net interest margin and whether mortgage-sale gains remain sustainable after refinancing activity normalizes.
- Trends in commercial real estate, construction and land-development loans, collateral appraisals, nonperforming assets and required loan-loss provisions.
- The valuation and future credit performance of the impaired pooled trust preferred security and its potential effect on earnings and capital.
- The decline in cash balances and deposits, available borrowing capacity, and reliance on repurchase agreements and other short-term funding.
- The outcome and potential exposure from the nonsufficient-funds fee litigation.
- Execution costs and benefits from mortgage-staff expansion, new loan-management systems and other consulting initiatives.