West Bancorporation, Inc. 10-Q Summary
Business Context and Reporting Period
West Bancorporation, Inc. (the Company) is an Iowa-based bank holding company. This report covers the quarterly period ended September 30, 2010. The Company operates primarily through its subsidiary, West Bank. Notable operational changes during the period included the transfer of the "SmartyPig" savings program to Compass Bank on July 30, 2010, and the continued classification of the former subsidiary WB Capital Management Inc. as discontinued operations following its sale in December 2009.
Key Financial Metrics
| Metric | Q3 2010 (3 Months) | Q3 2009 (3 Months) | YTD 2010 (9 Months) | YTD 2009 (9 Months) |
|---|---|---|---|---|
| Net Income (Loss) | $3,941 | $1,905 | $9,883 | $(17,433) |
| EPS (Basic & Diluted) | $0.19 | $0.08 | $0.47 | $(1.10) |
| Net Interest Income | $10,697 | $10,773 | $31,094 | $30,905 |
| Provision for Loan Losses | $2,000 | $3,000 | $5,400 | $21,500 |
| Total Assets (Period End) | $1,349,151 | $1,575,054 | $1,349,151 | $1,575,054 |
| Total Deposits (Period End) | $1,034,202 | $1,246,617 | $1,034,202 | $1,246,617 |
| Stockholders' Equity (Period End) | $145,181 | $133,059 | $145,181 | $133,059 |
| Cash & Cash Equivalents | $88,587 | $131,495 | $88,587 | $131,495 |
Note: All figures in thousands except per share data.
Material Changes vs. Prior Period
- Profitability Turnaround: The Company reported net income of $9.9 million for the first nine months of 2010, a significant improvement from a net loss of $17.4 million in the same period of 2009. This reversal was driven by a $16.1 million reduction in the provision for loan losses, the absence of a $13.4 million goodwill impairment recorded in 2009, and the elimination of losses from discontinued operations.
- Asset Contraction: Total assets declined 14.3% to $1.35 billion, and total loans decreased by $94.2 million. This reduction was primarily due to the transfer of $187.4 million in SmartyPig savings deposits and lower loan demand/payoffs exceeding originations.
- Deposit Shifts: Total deposits fell 17.0% to $1.03 billion. While noninterest-bearing demand accounts increased by $27.7 million, the loss of SmartyPig deposits and a runoff of brokered certificates of deposit drove the overall decline.
- Nonperforming Assets: Total nonperforming assets decreased 29.4% to $37.4 million. Nonaccrual loans dropped to $11.3 million, and Other Real Estate Owned (OREO) declined to $19.7 million.
Guidance, Outlook, and Risks
- Outlook: Management expects the Company to remain profitable for the remainder of 2010, though the magnitude depends on future loan losses. The loan portfolio is expected to remain flat or decline slightly, with demand not anticipated to exceed payoffs.
- Regulatory Constraints: The Company is subject to a Memorandum of Understanding (MOU) with the Iowa Division of Banking and FDIC. Additionally, the Federal Reserve requires prior approval for common stock dividends, debt increases, or stock redemptions. Management believes it can comply without material operational impact.
- Investment Portfolio Risks: The Company holds Trust Preferred Securities (TPS) with significant unrealized losses. One pooled TPS is classified as Other Than Temporarily Impaired (OTTI) with a fair value of $1.2 million against a cost basis of $4.5 million. Another single-issuer TPS (Heartland Financial) has an unrealized loss but is not currently deemed OTTI.
- Legal Proceedings: On September 29, 2010, West Bank was named a defendant in a class action lawsuit alleging overdraft fees violate Iowa usury laws. The Company intends to vigorously defend the litigation.
- Dodd-Frank Act: The Company notes that the full impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act is unknown, anticipating increased compliance costs and regulatory burdens.
Investor Verification Checklist
- TPS Valuation: Verify the ongoing credit quality and fair value assumptions for the pooled TPS (ALESCO Preferred Funding X) and the single-issuer TPS (Heartland Financial), as these represent significant unrealized losses.
- Loan Portfolio Quality: Review the composition of the $16.4 million in nonperforming loans, specifically the concentration in commercial real estate and construction sectors, to assess future charge-off risks.
- Regulatory Capital: Confirm that the Company continues to meet the MOU requirements (12.0% Total Capital, 8.0% Tier I Capital) and Federal Reserve restrictions on dividends.
- Legal Exposure: Monitor the status of the class action lawsuit regarding overdraft fees and potential financial impact.
- Deposit Stability: Assess the stability of remaining deposit bases following the significant runoff of SmartyPig and brokered CD deposits.