West Bancorporation, Inc. 10-Q Summary
Business Context and Reporting Period
West Bancorporation, Inc. (West Bank) is an Iowa-based financial holding company operating primarily through its banking subsidiary and an investment advisory segment (WB Capital Management). This report covers the quarterly period ended September 30, 2008, and the nine-month period ended on the same date. The company operates in a deteriorating economic environment characterized by significant stress in credit markets and the sub-prime mortgage crisis.
Key Financial Metrics
| Metric | Q3 2008 | Q3 2007 | 9M 2008 | 9M 2007 |
|---|---|---|---|---|
| Net Income (Loss) | $(360) thousand | $4,947 thousand | $5,528 thousand | $14,518 thousand |
| Earnings Per Share (Basic) | $(0.02) | $0.28 | $0.32 | $0.83 |
| Total Assets | $1,463.7 million | $1,339.9 million (Dec 2007) | - | - |
| Total Deposits | $1,118.8 million | $910.9 million (Dec 2007) | - | - |
| Net Interest Income | $10.4 million | $9.7 million | $30.5 million | $28.8 million |
| Provision for Loan Losses | $7.0 million | $0.5 million | $13.6 million | $1.2 million |
| Noninterest Expense | $7.5 million | $6.2 million | $21.3 million | $18.7 million |
| Cash and Cash Equivalents | $112.4 million | $49.9 million (Dec 2007) | - | - |
| Return on Average Assets (Annualized) | -0.10% | 1.51% | 0.55% | 1.48% |
| Return on Average Equity (Annualized) | -1.22% | 16.76% | 6.18% | 16.81% |
Material Changes vs. Prior Period
- Net Loss in Q3 2008: The company reported a net loss of $360,000 for the quarter, a reversal from the $4.9 million profit in Q3 2007. This was driven by a $7.0 million provision for loan losses and a $1.7 million impairment loss on a Lehman Brothers Holdings, Inc. unsecured note.
- Loan Loss Provisions: The provision for loan losses surged to $7.0 million in Q3 2008 (up $6.5 million from Q3 2007). This included a $4.0 million charge related to a customer fraud case and increased reserves due to the failure of a major Iowa homebuilder.
- Non-Performing Assets: Total non-performing assets increased 296% year-over-year to $23.9 million, primarily due to a rise in non-accrual loans to $19.3 million and an increase in other real estate owned (OREO) to $4.0 million.
- Investment Impairment: A $1.725 million "other than temporary" impairment was recognized on a Lehman Brothers note, written down from a $2 million carrying value to $275,000.
- Deposit Growth: Total deposits grew 22.8% to $1.12 billion, largely driven by an increase in brokered time deposits and the CDARS program to fund loan growth.
Guidance, Outlook, and Risks
- Outlook: Management expects the net interest margin to decline in the remainder of 2008 following the Federal Reserve's 0.5% cut to the federal funds rate. Loan growth is expected to slow in the fourth quarter.
- Capital Strategy: The Board authorized management to apply for the U.S. Treasury Department's Capital Purchase Program to purchase qualifying preferred stock and warrants. No material capital expenditures are anticipated aside from this potential transaction.
- Risks and Contingencies:
- Credit Risk: Significant exposure to the local real estate market, specifically related to the suspension of Iowa's largest homebuilder. Approximately $8.1 million of loans related to this developer remain in the portfolio.
- Fraud Risk: A $4.0 million provision was taken for a customer fraud case; final loss amounts depend on asset liquidation proceeds.
- Regulatory Risk: FDIC assessment rates are expected to double in 2009 due to proposed premium increases and risk-based adjustments.
- Market Risk: Continued volatility in credit markets affects the valuation of the investment securities portfolio, though management currently views unrealized losses (excluding Lehman) as temporary.
Investor Verification Checklist
- Lehman Brothers Exposure: Verify the status of the $1.725 million impairment and any remaining exposure to Lehman Brothers or similar distressed issuers in the investment portfolio.
- Homebuilder Loan Recovery: Monitor the recovery rate on the $8.1 million in loans related to the suspended Iowa homebuilder and the $4.0 million fraud-related provision.
- FDIC Assessment Impact: Assess the impact of the projected doubling of FDIC expenses in 2009 on future net income.
- Capital Adequacy: Confirm the status of the application for the Treasury Capital Purchase Program and its effect on dilution and capital ratios.
- Non-Performing Asset Trends: Track the ratio of non-performing assets to total loans (currently 1.78%) to ensure it does not deteriorate further given the economic environment.