West Bancorporation, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2012. Results cover West Bancorporation, Inc. and its consolidated banking subsidiaries. Financial statements are unaudited and amounts are in thousands except per-share data.
Business Context and Financial Position
West Bancorporation operates primarily through West Bank, a community bank serving Iowa markets, with lending concentrated in commercial, commercial real estate, construction and land development, residential real estate, and related banking services.
| Metric | June 30, 2012 | December 31, 2011 |
|---|
| Total assets | $1,350,019 | $1,269,524 |
| Loans, net | $843,041 | $822,181 |
| Securities available for sale | $317,958 | $283,145 |
| Total deposits | $1,027,134 | $957,373 |
| Stockholders’ equity | $130,032 | $123,451 |
| Cash and cash equivalents | $112,858 | $87,104 |
- Total assets increased 6.3%, driven primarily by higher deposits, securities and loans.
- Loans increased $19,455, or approximately 2.3%, during the first six months.
- Deposits increased $69,761, or 7.3%; most of the increase was in savings and money-market accounts, including significant temporary balances from one corporate customer and one public entity.
- Federal Home Loan Bank advances remained $105,000. Subordinated notes remained $20,619.
Revenue, Profitability, Cash Flow and Margins
| Metric | Three months ended June 30, 2012 | Three months ended June 30, 2011 | Six months ended June 30, 2012 | Six months ended June 30, 2011 |
|---|
| Net interest income | $10,391 | $10,413 | $20,569 | $20,890 |
| Provision for loan losses | $0 | $450 | $0 | $950 |
| Noninterest income | $3,346 | $2,116 | $5,747 | $4,787 |
| Noninterest expense | $7,813 | $6,376 | $14,678 | $12,852 |
| Net income | $4,383 | $3,923 | $8,360 | $8,453 |
| Net income available to common shareholders | $4,383 | $2,107 | $8,360 | $6,066 |
| Diluted earnings per share | $0.25 | $0.12 | $0.48 | $0.35 |
- Second-quarter net income increased 11.7%, while net income available to common shareholders increased 108.0%, primarily because preferred stock dividends and discount accretion affected the 2011 period but not 2012.
- Six-month net income declined 1.1%; net income available to common shareholders increased 37.8% for the same preferred-stock-related reason.
- Net interest margin declined to 3.44% for the quarter from 3.58% and to 3.47% for the six months from 3.60%, reflecting continued low market interest rates.
- Quarterly annualized return on average assets was 1.32% and return on average equity was 13.69%. Six-month figures were 1.28% and 13.26%, respectively.
- Noninterest income rose $1,230 in the quarter and $960 year to date. Drivers included mortgage-sale gains, realized securities gains and an $841 gain from bank-owned life insurance following the death of a long-time bank officer.
- Operating cash flow was $10,314 for the first six months, compared with $17,153 in the prior-year period. Investing activities used $56,407, while financing activities provided $71,847. Cash increased $25,754 to $112,858.
Material Changes Versus Prior Comparable Period
- Interest income declined because of lower loan and securities yields, but interest expense fell more substantially as deposit pricing and time-deposit balances declined.
- No loan-loss provision was recorded in 2012, compared with $950 in the first half of 2011, due to improving credit quality.
- Noninterest expense increased 22.5% in the quarter and 14.2% for the six months. Key increases included salaries and benefits, other real estate owned expenses, professional fees and technology-related costs.
- Other real estate owned expense included property valuation write-downs of $885 in the second quarter and $1,008 for the six months.
- Residential mortgage originations sold into the secondary market increased substantially, with proceeds from loan sales of $53,755 versus $23,111 in the first half of 2011.
- The company redeemed all outstanding preferred stock on June 29, 2011; therefore, 2012 earnings were not reduced by preferred dividends or discount accretion.
Credit Quality, Debt and Liquidity
| Credit metric | June 30, 2012 | December 31, 2011 |
|---|
| Nonperforming loans | $8,525 | $10,693 |
| Other real estate owned | $9,241 | $10,967 |
| Total nonperforming assets | $18,903 | $22,905 |
| Nonperforming loans to total loans | 0.99% | 1.27% |
| Nonperforming assets to total assets | 1.40% | 1.80% |
| Allowance for loan losses | $15,373 | $16,778 |
- Total nonperforming assets declined 17.5% from year-end and 18.6% from June 30, 2011.
- Net charge-offs were $1,405 for the first six months, including $1,466 of second-quarter charge-offs on two construction and land loans. The allowance covered 180.33% of nonperforming loans at June 30, 2012.
- Management considered the allowance adequate, but noted that future adjustments could result from economic conditions, collateral values, borrower performance or regulatory review.
- Cash and cash equivalents were $112,858. Additional borrowing capacity included approximately $41,000 from the FHLB, $53,000 through unsecured federal funds lines and $10,000 through secured lines. None of these lines was drawn at quarter-end.
- West Bank was classified as well-capitalized. Its total capital, Tier 1 risk-based capital and Tier 1 leverage ratios were 14.69%, 13.44% and 9.69%, respectively.
Guidance, Outlook, Commentary and Risks
- Management expects loan growth to continue at a subdued rate because customers remain cautious amid economic uncertainty.
- Management expects net interest margin to compress slightly during the remainder of 2012 if market interest rates remain historically low.
- Mortgage-sale income was expected to remain strong through 2012 because of low rates, refinancing activity and improved home sales; the company planned to expand its mortgage origination staff.
- The securities portfolio included two trust preferred securities with a $5,937 cost basis and $1,898 fair value. One pooled security was classified as other-than-temporarily impaired; an additional $127 credit loss was recognized in the second quarter and $173 year to date. Further defaults or deferrals could reduce its value and affect earnings and capital.
- Commercial, commercial real estate, construction and land-development lending carries elevated exposure to borrower cash flows, refinancing conditions and real estate values, particularly in the company’s Central Iowa markets.
- Commitments to extend credit totaled $280,612 and standby letters of credit totaled $9,393. The company also reported a $404 liability associated with its Mortgage Partnership Finance guarantee commitments through February 28, 2013.
- A purported class action involving nonsufficient-funds fees and transaction-posting practices remained pending. Management stated that potential loss could not reasonably be estimated.
- Management reported no material changes in market risk or previously disclosed risk factors, and concluded that disclosure controls were effective.
- The Board subsequently declared a quarterly common dividend of $0.10 per share, payable August 28, 2012, representing a 25% increase from the previous quarterly dividend.
Most Important Facts for Investors to Verify
- Whether low interest rates continue to pressure loan and securities yields and reduce net interest margin.
- The sustainability and concentration of the deposit increase, particularly balances from the identified corporate and public-entity customers.
- Future losses, recoveries and valuation changes in commercial real estate, construction loans and other real estate owned.
- Further impairment risk in the pooled and Heartland trust preferred securities.
- The recurring versus nonrecurring nature of the $841 bank-owned life insurance gain and securities gains included in 2012 results.
- The outcome and potential financial exposure of the nonsufficient-funds-fee class action.
- Compliance with evolving bank capital requirements and the impact of proposed regulatory capital rules.
