West Bancorporation, Inc. — First-Quarter 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. The unaudited consolidated statements include West Bancorporation, Inc. and its banking subsidiaries. Unless otherwise stated, amounts are in thousands except per-share data and percentages.
Business Context and Financial Position
West Bancorporation is a bank holding company operating primarily through West Bank, with a concentration in commercial, commercial real estate, construction and land-development lending in central Iowa. Total assets increased to $1.321 billion at March 31, 2012, from $1.270 billion at December 31, 2011.
| Selected balance-sheet items | March 31, 2012 | December 31, 2011 |
|---|---|---|
| Cash and cash equivalents | $108,506 | $87,104 |
| Securities available for sale | $306,188 | $283,145 |
| Loans, gross | $849,041 | $838,959 |
| Allowance for loan losses | $(16,651) | $(16,778) |
| Total deposits | $969,030 | $957,373 |
| Total stockholders’ equity | $126,269 | $123,451 |
Revenue, Profitability, Cash Flow and Key Metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total interest income | $12,706 | $13,572 | $(866) |
| Interest expense | $2,528 | $3,095 | $(567) |
| Net interest income | $10,178 | $10,477 | $(299) |
| Provision for loan losses | $— | $500 | $(500) |
| Noninterest income | $2,401 | $2,671 | $(270) |
| Noninterest expense | $6,865 | $6,476 | $389 |
| Net income | $3,977 | $4,530 | $(553) |
| Net income available to common shareholders | $3,977 | $3,959 | $18 |
| Basic and diluted EPS | $0.23 | $0.23 | Unchanged |
| Cash flow from operating activities | $7,394 | $10,408 | $(3,014) |
- Tax-equivalent net interest margin declined to 3.50% from 3.62%; net interest spread declined to 3.20% from 3.28%.
- Return on average assets was 1.23%, compared with 1.39%; return on average equity was 12.82%, compared with 12.48%.
- The efficiency ratio increased to 51.82% from 46.13%, reflecting higher operating expenses.
- Net charge-offs declined to $127 from $2,077. The allowance for loan losses was $16,651, equal to 1.96% of loans and 155.75% of nonperforming loans.
- Cash and cash equivalents increased by $21,402 during the quarter, ending at $108,506.
- The company declared and paid a common dividend of $0.08 per share; the board declared another $0.08 quarterly dividend payable May 29, 2012.
Material Changes Versus the Prior Comparable Period
- Net income declined 12.2%, primarily because Q1 2011 included a $637 gain from bank-owned life insurance. Net income available to common shareholders increased slightly because preferred stock dividends and accretion ended after the preferred stock redemption in June 2011.
- Net interest income declined $299 as asset yields fell more than funding costs. Loan yield declined 25 basis points and investment-security yield declined 68 basis points.
- Mortgage-sale gains increased $563 to $747, supported by higher residential mortgage originations sold into the secondary market.
- Noninterest expense increased $389, primarily due to $581 of higher salaries and employee benefits, partly offset by a $383 reduction in FDIC insurance expense.
- Loans grew $10,082 from year-end, primarily in multifamily and other commercial real estate. Deposits increased $11,657, while federal funds purchased and repurchase obligations increased $37,655.
- Total nonperforming assets declined to $21,843 from $22,905 at year-end and $25,443 at March 31, 2011. Nonperforming loans were $10,691, or 1.26% of total loans.
Guidance, Outlook, Risks and Unusual Items
- Management expects the net interest margin to remain approximately at its current level for the remainder of 2012.
- Management expects residential mortgage-sale income to remain strong during 2012, but cautions that first-quarter activity may not be sustained at the same level.
- Management expects slow loan growth as the economy improves and loan demand increases.
- The investment portfolio included two trust preferred securities with a $6,061 cost basis and $1,946 fair value. A $46 credit-related impairment charge was recognized in Q1 2012; additional deterioration could reduce earnings and regulatory capital.
- Other real estate owned totaled $9,963, including $9,549 of construction, land-development and other land assets. Demand for commercial real estate and development land remained weak.
- Key risks include interest-rate and margin pressure, competition for loans and deposits, commercial and commercial real estate credit exposure, declining collateral values, economic conditions, regulatory changes and potential increases in the allowance for loan losses.
- Off-balance-sheet commitments totaled $290,876, consisting of $281,539 of commitments to extend credit and $9,337 of standby letters of credit.
- West Bank was categorized as well-capitalized. At March 31, 2012, West Bank’s total risk-based capital ratio was 15.26%, Tier 1 risk-based capital ratio was 14.00%, and Tier 1 leverage ratio was 10.13%.
- A purported class action concerning nonsufficient-funds fees and transaction-posting practices remains pending. Management characterized the likelihood of loss as reasonably possible, but stated that any potential loss could not be reasonably estimated.
- Management reported no material changes in market risk, risk factors or internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the low-rate environment continues to compress the net interest margin and loan yields.
- The sustainability of elevated mortgage-sale gains and the effect of refinancing volume on future noninterest income.
- Credit performance in commercial real estate, construction and land-development portfolios, including nonperforming loans, impaired loans and the allowance coverage ratio.
- Future valuation and credit-loss developments for the trust preferred securities, particularly the pooled ALESCO security.
- Progress in reducing other real estate owned and the potential for additional valuation write-downs.
- The outcome and potential financial exposure of the Iowa nonsufficient-funds fee litigation.
- Deposit trends, reliance on repurchase funding and other borrowings, and the continuing availability of stated liquidity sources.