West Bancorporation, Inc. 10-Q Summary
Business Context and Reporting Period
West Bancorporation, Inc. (the Company) is a bank holding company headquartered in West Des Moines, Iowa, operating primarily through its subsidiary, West Bank. The Company also operates an investment advisory segment through WB Capital Management Inc. This report covers the quarterly period ended June 30, 2009, and compares results to the same period in 2008 and the year-end position of December 31, 2008.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 | Dec 31, 2008 (Balance Sheet) |
|---|---|---|---|
| Net Income (Loss) | $(22,279) thousand | $(19,338) thousand | N/A |
| Net Income (Loss) Available to Common | $(22,849) thousand | $(20,475) thousand | N/A |
| Earnings Per Share (Basic/Diluted) | $(1.32) | $(1.18) | N/A |
| Total Assets | N/A | N/A | $1,513,901 thousand |
| Total Deposits | N/A | N/A | $1,176,894 thousand |
| Stockholders' Equity | N/A | N/A | $128,668 thousand |
| Net Interest Margin | 2.63% | 2.74% | N/A |
| Return on Average Assets | -5.10% | -2.34% | N/A |
| Return on Average Equity | -58.33% | -25.54% | N/A |
| Allowance for Loan Losses | N/A | N/A | $23,662 thousand |
| Non-Performing Assets | N/A | N/A | $64,341 thousand |
Material Changes vs. Prior Period
- Significant Net Loss: The Company reported a net loss of $22.3 million for the quarter and $19.3 million for the six months ended June 30, 2009, compared to net income of $4.5 million and $5.9 million, respectively, in the prior year periods.
- Goodwill Impairment: A non-cash goodwill impairment charge of $23,036 thousand was recorded in the second quarter of 2009. This consisted of $13,376 thousand related to West Bank and $9,660 thousand related to WB Capital, triggered by the Company's stock trading below book value.
- Provision for Loan Losses: The provision increased significantly to $15,000 thousand for the quarter and $18,500 thousand for the six months, compared to $1,000 thousand and $6,600 thousand in the prior year periods. This was driven by higher net charge-offs ($9,353 thousand for the quarter) and deteriorating economic conditions.
- Non-Performing Assets: Total non-performing assets increased 79.9% to $64.3 million from $35.8 million at year-end 2008, primarily due to increases in non-accrual loans and loans past due 90 days.
- Investment Securities: The Company recorded other-than-temporary impairment (OTTI) losses. In the second quarter, a total impairment of $1,013 thousand was recognized on a pooled trust preferred security, with $275 thousand recognized in earnings as a credit loss.
- FDIC Expenses: FDIC insurance expense surged to $1,283 thousand for the quarter (up from $153 thousand in 2008) due to rate increases and a special assessment of $695 thousand.
Outlook, Risks, and Management Commentary
- Economic Environment: Management cites the continued recession, particularly in construction, real estate development, and commercial business sectors, as a primary driver for increased loan losses and reduced loan demand.
- Liquidity: The Company maintains strong liquidity with $88.2 million in cash and cash equivalents. It has additional borrowing capacity of approximately $75 million from the Federal Home Loan Bank and $78 million through unsecured federal funds lines.
- Capital Resources: Despite the net loss and goodwill impairment, the Company and West Bank remain "well-capitalized" under regulatory guidelines. The goodwill impairment had a negligible impact on regulatory capital ratios as goodwill is excluded from these calculations.
- Net Interest Margin Pressure: The net interest margin declined to 2.63% for the quarter due to a significant increase in low-yielding federal funds sold to maintain liquidity and a temporary influx of money market deposits. Management expects margin improvement in future quarters as these deposits normalize.
- Investment Portfolio Risks: The Company holds trust preferred securities and a note from CIT Group Inc. that are being closely monitored due to market illiquidity and issuer-specific liquidity issues. Management does not currently consider these OTTI but notes the risk of future impairment.
- Dividends: Cash dividends per common share were reduced to $0.01 for the quarter and $0.09 year-to-date, compared to $0.16 and $0.32 in the prior year.
Key Facts for Investor Verification
- Goodwill Impairment Validity: Verify the third-party valuation methodology used to determine the $23 million goodwill impairment, specifically the discount rates (12.04% for West Bank, 16.66% for WB Capital) and cash flow projections.
- Allowance Adequacy: Assess whether the $23.7 million allowance for loan losses is sufficient given the 79.9% increase in non-performing assets and the concentration of charge-offs in the construction and commercial real estate sectors.
- Trust Preferred Securities: Monitor the valuation of the $4.2 million portfolio of trust preferred securities, which are currently valued at $2.0 million, for potential future credit losses.
- FDIC Assessments: Confirm if additional emergency FDIC assessments will be levied in the remainder of 2009, as the Company noted the possibility of up to two more assessments.
- Deposit Composition: Review the sustainability of the $102 million in deposits from the "SmartyPig" program and the $39 million in "Reward Me Checking" accounts, which are paying rates higher than traditional CDs.