WEST BANCORPORATION INC annual report, FY2012

West Bancorporation, Inc. — 2012 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2012. The company is an Iowa bank holding company whose principal business is conducted through West Bank, a community bank serving the Des Moines and Iowa City markets. The filing was dated March 6, 2013. Amounts below are in thousands, except per-share data and ratios.

Business context and key metrics

West Bank operates one banking segment, providing commercial, real estate, consumer, mortgage, deposit, and trust services.
The bank had approximately 180 full-time equivalent employees and 11 full-service offices at year-end.
Loans grew to $927,401, and deposits grew to $1,134,576, reflecting continued relationship-based commercial banking expansion.
Management reported 2012 return on average assets of 1.21%, return on average equity of 12.34%, an efficiency ratio of 50.83%, and a Texas ratio of 11.25%.

Financial performance and condition

Metric	2012	2011	Change or commentary
Net income available to common stockholders	$16,011	$12,881	Up more than 24%
Diluted earnings per share	$0.92	$0.74	Improved; no preferred-stock dividend burden in 2012
Net interest income	$41,198	$41,402	Down modestly
Net interest margin	3.42%	3.58%	Down 16 basis points
Noninterest income	$10,994	$9,361	Up 17.4%, primarily mortgage-sale income
Noninterest expense	$28,792	$28,873	Essentially flat
Provision for loan losses	$625	$550	Slightly higher
Total assets	$1,448,175	$1,269,524	Up 14.1%
Stockholders’ equity	$134,587	$123,451	Up primarily from earnings less dividends
Common dividends per share	$0.36	$0.17	2013 first-quarter dividend declared at $0.10

Revenue and profitability

Interest income declined to $50,662 from $53,319 as loan and securities yields fell in the low-rate environment.
Interest expense fell to $9,464 from $11,917, mainly due to lower deposit and borrowing costs.
Mortgage originations sold into the secondary market increased to $129,322 from $69,952. Gains and fees on mortgage sales rose to $3,104 from $1,454.
Net income was $16,011, compared with $15,268 in 2011. The increase primarily reflected higher mortgage-sale revenue and lower other-real-estate-owned write-downs.
The effective tax rate increased to 29.7% from 28.5%.

Credit quality

Nonperforming loans declined to $7,256, or 0.78% of loans, from $10,693, or 1.27%.
Nonperforming assets declined to $16,894, or 1.17% of assets, from $22,905, or 1.80%.
Other real estate owned declined to $8,304 from $10,967.
The allowance for loan losses was $15,529, equal to 1.67% of loans and 214.0% of nonperforming loans.
Net charge-offs were $1,874, or 0.22% of average loans, versus $2,859, or 0.34%, in 2011.
The portfolio remains concentrated in commercial and commercial real estate lending, including construction and land-development loans.

Cash flow, liquidity, debt, and capital

Net cash provided by operating activities was $24,289, compared with $26,030 in 2011.
Investing activities used $99,460, primarily because loan growth required $90,301 of cash.
Financing activities provided $159,541, primarily from a $177,203 increase in deposits.
Cash and cash equivalents increased to $171,474 from $87,104.
West Bank had approximately $69,533 of additional FHLB borrowing capacity, plus $57,000 of unsecured and $10,000 of secured federal funds lines; none of those correspondent lines was drawn at year-end.
Total borrowings included $20,619 of junior subordinated notes and $93,890 of FHLB advances, net of discount.
The company’s total risk-based capital ratio was 15.56%, Tier 1 risk-based capital ratio was 14.31%, and Tier 1 leverage ratio was 11.23%. West Bank’s corresponding ratios were 14.03%, 12.77%, and 9.85%; the bank was classified as well-capitalized.
Tangible common equity to tangible assets was 9.29%, down from 9.72%.

Material changes versus the prior comparable period

Profitability improved, with common-stockholder earnings up $3,130 and diluted EPS up $0.18. The comparison benefited from the absence of preferred dividends and accretion after the preferred stock was redeemed in June 2011.
Loan balances increased 10.5%, while deposits increased 18.5%, supporting balance-sheet expansion.
Credit metrics improved substantially, including lower nonperforming loans, nonperforming assets, other real estate owned, and net charge-offs.
Net interest margin contracted because asset yields declined faster than funding costs.
Mortgage-sale activity more than doubled in volume, materially increasing noninterest income.
FDIC insurance expense fell 48.2%, and other-real-estate-owned expense fell 48.3%; these savings largely offset higher salaries, benefits, occupancy, data processing, professional fees, and consulting costs.
The company modified $80,000 of FHLB advances to variable-rate borrowings and entered into forward-starting swaps to convert the borrowings to fixed rates beginning in 2014 and 2015.

Outlook, risks, contingencies, and unusual items

Management expected 2013 to remain uncertain politically, economically, and regulatorily, but anticipated profitability at a level comparing favorably with peers.
Management expected historically low interest rates to continue and planned actions to protect net interest margin, including repricing borrowings and investing approximately $100,000 of excess funds in securities.
Loan growth was expected to continue because of a strong pipeline, although future growth and loan losses remain uncertain.
Management identified commercial real estate concentration and future real estate valuations as key credit risks. Four commercial real estate customers represented approximately $10,301 of potential problem loans at year-end, although none was in default.
The company planned to open a loan production office in Rochester, Minnesota, and construct a new main office in eastern Iowa during 2013.
One pooled trust-preferred security had an estimated fair value of $1,334 and an unrealized loss of $2,837 at year-end. Credit-related impairment expense of $203 was recognized in 2012, and additional impairment remains possible.
Basel III implementation was indefinitely delayed as of the filing date, but future capital rules could increase requirements, change risk weightings, and limit the regulatory capital treatment of trust-preferred securities.
West Bank faced a purported class-action lawsuit concerning nonsufficient-funds fees and historical transaction-posting practices. The potential loss could not be reasonably estimated.
Off-balance-sheet commitments included $360,879 of commitments to extend credit and $10,488 of standby letters of credit. Management did not expect significant losses from these arrangements.
The company disclosed no material disagreements with its accountants. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.

Important facts investors should verify

Whether net interest margin stabilizes or continues to decline as low interest rates persist and deposit pricing becomes more competitive.
Whether commercial real estate, construction, and land-development exposures produce additional nonperforming loans, charge-offs, or allowance requirements.
The performance and valuation of the impaired pooled trust-preferred security and the potential for further OTTI charges.
Whether the strong 2012 mortgage-sale contribution is sustainable as refinancing activity slows.
The timing, cost, and profitability of the Rochester loan-production office and eastern Iowa office construction.
The effect of final Basel III and other regulatory rules on capital, dividends, growth, and trust-preferred securities.
The status and potential financial exposure of the nonsufficient-funds fee class-action litigation.
The maturity and renewal behavior of certificates of deposit, with approximately 66% of certificates outstanding at year-end scheduled to mature during 2013.