West Bancorporation, Inc. — FY2011 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2011. The filing was submitted March 7, 2012. West Bancorporation is an Iowa bank holding company whose principal business is community banking through West Bank, serving primarily the Des Moines and Iowa City markets. The company operates as one banking segment.
Financial performance and condition
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net income | $15.268 million | $13.383 million | +14.1% |
| Net income available to common shareholders | $12.881 million | $11.099 million | +16.1% |
| Diluted EPS | $0.74 | $0.64 | +$0.10 |
| Net interest income | $41.402 million | $42.120 million | -1.7% |
| Provision for loan losses | $0.550 million | $6.050 million | -90.9% |
| Noninterest income | $9.460 million | $10.652 million | -11.2% |
| Noninterest expense | $28.873 million | $27.744 million | +4.1% |
| Return on average assets | 1.18% | 0.86% | +32 basis points |
| Return on average equity | 11.27% | 9.49% | +178 basis points |
| Net interest margin | 3.58% | 3.04% | +54 basis points |
| Efficiency ratio | 49.27% | 47.28% | Higher ratio; less efficient |
Balance sheet at December 31, 2011: Total assets were $1.270 billion, down from $1.305 billion. Loans, net of deferred fees, were $838.959 million, down 5.6% from $888.649 million. Deposits were $957.373 million, down 1.5%. Investment securities were $283.145 million, up from $256.326 million. Stockholders’ equity was $123.451 million, compared with $145.436 million, primarily reflecting the redemption of Treasury preferred stock.
Credit quality: Nonperforming loans declined to $10.693 million, or 1.27% of total loans, from $12.930 million, or 1.46%. Total nonperforming assets declined 31.5% to $22.905 million, or 1.80% of total assets. Other real estate owned declined to $10.967 million from $19.193 million. The allowance for loan losses was $16.778 million, equal to 2.00% of loans and 156.9% of nonperforming loans. Net charge-offs declined to $2.859 million from $6.089 million.
Liquidity and capital: Cash and cash equivalents were $87.104 million. Additional borrowing capacity included approximately $35.157 million from the Federal Home Loan Bank and $63 million of correspondent-bank federal funds lines. Net cash provided by operating activities was $26.030 million. The company and West Bank were well-capitalized, with consolidated total risk-based capital of 16.27%, Tier 1 risk-based capital of 15.01%, and Tier 1 leverage capital of 11.05%; West Bank’s corresponding ratios were 15.09%, 13.83%, and 9.95%.
Material changes versus the prior comparable period
- Profitability improved principally because the loan-loss provision fell by $5.5 million as credit quality and charge-off trends improved.
- Net interest income declined modestly because a 17.2% reduction in average earning assets outweighed lower funding costs; the net interest margin nevertheless improved from 3.04% to 3.58%.
- Noninterest income declined largely because the $1.314 million SmartyPig service fee ceased after the related deposits were transferred to another institution in 2010.
- Noninterest expense increased due primarily to higher salaries and benefits, including approximately 20 additional positions, and increased other real estate owned write-downs. FDIC insurance expense declined substantially.
- West Bank was released from its April 2010 memorandum of understanding with the Iowa Division of Banking and FDIC on June 3, 2011. Capital and dividend restrictions were subsequently released, and no extraordinary regulatory requirements remained at year-end.
- The company redeemed all $36 million of Treasury Capital Purchase Program preferred stock on June 29, 2011, and repurchased the related warrant for $0.7 million on August 31, 2011, without issuing equity or incurring additional debt. Preferred dividends were eliminated thereafter.
- Quarterly common dividends were reinstated in 2011. Dividends totaled $0.17 per share for the year, and an $0.08 per share dividend was declared for February 2012.
- Comprehensive income was $18.569 million, including $3.301 million of other comprehensive income, principally unrealized gains on available-for-sale securities.
Outlook, commentary, risks, and unusual items
Management expected 2012 to remain characterized by political, regulatory, and economic uncertainty, historically low interest rates, and muted opportunities. It expected the company to remain profitable at a level favorable to peers but below its longer-term aspirations. Management planned to grow the loan portfolio, citing an improving loan pipeline and opportunities to win customers from competitors. Acquisitions were not a priority, although potential transactions remained under review.
Key risks include the concentration of lending in commercial real estate, construction and land development, and commercial borrowers; potential declines in real estate values; further loan losses or allowance increases; deposit runoff and higher funding costs; interest-rate risk; intense competition; expanding regulatory and consumer-compliance requirements under the Dodd-Frank Act; cybersecurity and fraud; operational disruptions; and the relatively limited trading liquidity of the company’s common stock.
The investment portfolio included one pooled trust preferred security classified as other-than-temporarily impaired. It had a $1.245 million fair value and a $3.129 million unrealized loss at year-end; $0.099 million of credit loss was recognized in earnings during 2011. Gross unrealized securities losses totaled $4.721 million and were considered temporary by management.
Other unusual or material items included $3.109 million of other real estate owned write-downs, including a $1.360 million write-down on one property, and a subsequent-event adjustment that reclassified a $4.2 million substandard loan to nonaccrual status retroactively to December 31, 2011.
West Bank was defending a purported class-action lawsuit concerning overdraft or nonsufficient-funds fees and debit-card transaction posting practices. Management considered a loss reasonably possible, but the potential amount could not be reasonably estimated. The filing also disclosed $255.167 million of commitments to extend credit and $9.923 million of standby letters of credit.
Important facts for investors to verify
- Whether loan growth in 2012 materialized and whether commercial real estate and construction exposures generated additional nonperforming loans or charge-offs.
- The sustainability of the 2011 reduction in loan-loss provisions and the adequacy of the $16.778 million allowance.
- Future valuation changes, write-downs, or credit losses related to other real estate owned and the pooled trust preferred security.
- Deposit retention, particularly the renewal of approximately 65% of certificates of deposit maturing within one year, and the effect on funding costs and liquidity.
- Whether regular common dividends continued at the declared rate, given that dividends depend on West Bank earnings, capital, and regulatory approval.
- The outcome and potential financial exposure of the overdraft-fee class action and other off-balance-sheet commitments.
- Management’s interest-rate assumptions, including the modeled 5.35% increase in 2012 net interest income under an immediate 300-basis-point rate increase; actual results may differ materially.
- The effect of new banking regulations, interchange-fee pressure, compliance investments, cybersecurity events, and competitive conditions on future profitability.