West Bancorporation - 10-Q quarterly report FY

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

(Mark One)

 

For the quarterly period ended June 30, 2007

or

 

Commission File Number 0-49677

 

(Exact Name of Registrant as Specified in its Charter)

Telephone Number (515) 222-2300

 

Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

As of August 3, 2007, there were 17,536,682 shares of common stock, no par value outstanding.

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

 

 

 

See accompanying notes to consolidated financial statements.

See accompanying notes to consolidated financial statements.

 

 

See accompanying notes to consolidated financial statements.

West Bancorporation, Inc.

Notes to Consolidated Financial Statements

(unaudited)

(in thousands, except per share information)

1. Basis of Presentation

The accompanying consolidated statements of income for the three and six months ended June 30, 2007 and 2006, and the consolidated statements of stockholders’ equity, comprehensive income (loss), and cash flows for the six months ended June 30, 2007 and 2006, and the consolidated balance sheets as of June 30, 2007 and December 31, 2006, include the accounts and transactions of the Company and its wholly-owned subsidiaries, West Bank and WB Capital Management Inc. All material intercompany balances and transactions have been eliminated in consolidation.

The accompanying consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Although management believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these interim consolidated financial statements be read in conjunction with the Company's most recent audited financial statements and notes thereto. In the opinion of management, the accompanying consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of June 30, 2007, and the results of operations and cash flows for the three and six months ended June 30, 2007 and 2006.

The results for these interim periods may not be indicative of results for the entire year or for any other period.

2. Earnings per Common Share

Earnings per share represent income available to common shareholders divided by the weighted average number of shares outstanding during the period. The Company has no common equivalent shares that could cause dilution. The average number of shares outstanding for the three and six months ended June 30, 2007 and 2006 was 17,536,682 and 17,536,935, respectively.

3. Commitments

In the normal course of business, the Company enters into commitments to extend credit such as loan commitments and standby letters of credit to meet the financing needs of its customers. These commitments expose the Company to varying degrees of credit and market risk and are subject to the same credit reviews as those loans recorded on the balance sheet. For additional information on credit extension commitments see Note 13 of the Company’s 2006 consolidated financial statements. The Company’s commitments as of June 30, 2007 and December 31, 2006, are approximately as follows:

 

 

4. Segment Information

An operating segment is generally defined as a component of a business for which discrete financial information is available and whose operating results are regularly reviewed by the chief operating decision-maker. The Company’s primary business segments are banking and investment advisory services. The banking segment generates revenue through interest and fees on loans, service charges on deposit accounts, interest on investment securities and fees for trust services. The banking segment includes West Bank and the Company and related elimination entries between the two, as the holding company’s operation is similar to the bank. The investment advisory segment consists of WB Capital Management Inc., and generates revenue by providing investment portfolio management services to individuals, retirement plans, corporations, foundations, endowments and public entities. Selected financial information on the Company’s segments is presented below for the three and six months ended June 30, 2007 and 2006.

 

 

5. Income Taxes

6. Impact of New Financial Accounting Standards

7. Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term are the allowance for loan losses and fair value of financial instruments.

8. Critical Accounting Policies

Management has identified its most critical accounting policy to be that related to the allowance for loan losses. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that collectibility of the principal is unlikely. The Company has policies and procedures for evaluating the overall credit quality of its loan portfolio, including timely identification of potential problem credits. On a quarterly basis, management reviews the appropriate level for the allowance for loan losses incorporating a variety of risk considerations, both quantitative and qualitative. Quantitative factors include the Company’s historical loss experience, delinquency and charge-off trends, collateral values, known information about individual loans and other factors. Qualitative factors include the general economic environment in the Company’s market areas and the expected trend of those economic conditions. To the extent actual results differ from forecasts and management’s judgment, the allowance for loan losses may be greater or less than future charge-offs.

 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT

The information contained in this report may contain forward-looking statements about the Company’s growth and acquisition strategies, new products and services, and future financial performance, including earnings and dividends per share, return on average assets, return on average equity, efficiency ratio and capital ratio. Certain statements in this report constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based upon certain underlying assumptions, risks and uncertainties. Because of the possibility of change in the underlying assumptions, actual results could differ materially from these forward-looking statements. Risks and uncertainties that may affect future results include: interest rate risk, competitive pressures, pricing pressures on loans and deposits, actions of bank and non-bank competitors, changes in local and national economic conditions, changes in regulatory requirements, actions of the Securities and Exchange Commission and/or the Federal Reserve Board, and customers’ acceptance of the Company’s products and services. The Company undertakes no obligation to revise or update such forward-looking statements to reflect current events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

THREE AND SIX MONTHS ENDED JUNE 30, 2007

(dollars in thousands)

OVERVIEW

The following discussion describes the consolidated operations of the Company, including its wholly-owned subsidiaries, West Bank and WB Capital Management Inc. (“WB Capital”). Consolidated results of operations for the three and six months ended June 30, 2007, are compared to the results for the same periods in 2006 and the consolidated financial condition of the Company at June 30, 2007, is compared to the December 31, 2006 position.

Net income for the three months ended June 30, 2007, was $5,127 compared to $4,882 for the same period in 2006, an increase of 5.0 percent.

For the first six months of 2007, net income increased 1.5 percent to $9,571, or $0.55 per share, compared to $9,427 for the first six months of 2006. The annualized return on average assets was 1.47 percent for both periods. Net interest income for the first six months of 2007 was $281 lower than during the first half of 2006, primarily because of a 10 basis point decline in the net interest margin to 3.29 percent. This decline was offset by a $250 decrease in the provision for loan losses compared to the first half of 2006.

Year-to-date noninterest income was 0.8 percent higher than last year as an increase in service charges and lower realized losses from sales of securities were offset by a decline in revenue from investment advisory fees. Realized losses on the sale of investment securities totaled $9 in the first six months of 2007 compared to $144 in the same period of 2006.

WB capital year-to-date net income was $195 for the six months ended June 30, 2007 compared to $302 for the same period in 2006. Revenues were lower than a year ago because of a decision to reduce the fees on the Vintage mutual funds. Operating expenses at WB Capital were $142 lower during the first half of 2007 compared to the same 2006 period.

 

RESULTS OF OPERATIONS

The following table shows selected financial results and measures for the three and six months ended June 30, 2007 compared with the same periods in 2006:

 

 

Definitions of ratios:

Return on assets - annualized net income divided by average assets.

 

Return on equity - annualized net income divided by average stockholders’ equity.

 

Efficiency ratio - noninterest expense divided by noninterest income (excluding securities gains) plus taxable equivalent net interest income.

 

Dividend payout ratio - dividends paid divided by net income.

 

Equity to assets ratio - average equity divided by average assets.

 

Net Interest Income

The following tables show average balances and related interest income or interest expense, with the resulting average yield or rate by category of interest-earning assets or interest-bearing liabilities. Interest income and the resulting net interest income are shown on a fully taxable basis.

Data for the three months ended June 30:

 

 

Data for the six months ended June 30:

 

For the six months ended June 30, 2007, the net interest margin declined to 3.29 percent. This was a 10 basis point reduction compared to the six months ended June 30, 2006. The relatively flat yield curve, where short-term interest rates are not significantly lower than long-term rates, continued to negatively impact the net interest margin. The Company’s tax-equivalent net interest income for the six months ended June 30, 2007 declined $360 compared to the six months ended June 30, 2006.

Taxable-equivalent interest income and fees on loans increased $2.5 million in the first six months of 2007 compared to the same period in 2006, due to the combination of a higher volume of outstanding loans and increasing yields. Average loans were $21.5 million higher than the first six months of 2006 and the average yield on loans increased to 7.58 percent for the first six months of 2007, compared to 7.19 percent for the same period in 2006. The yield on the Company’s loan portfolio is affected by the mix of the portfolio, the effects of competition, the interest rate environment and the amount of non-accrual loans. The interest rate environment can influence the volume of new loan originations and the mix of variable rate versus fixed rate loans. Loan pricing in the Company’s market areas remains very competitive.

For the first six months of 2007, the average balance of investment securities was $14.2 million lower than in the first six months of 2006, while the yield has increased 8 basis points. There have been minimal purchases of investment securities during the first six months of 2007 as yields on short-term investments have approximated those of longer-term investment securities and are generally lower than the marginal cost of funds.

The average rate paid on deposits for the first six months of 2007 increased to 4.21 percent from 3.67 percent for the same period last year. This increase is primarily the result of an increase in market interest rates and the shift in funds from money market and savings accounts to a new market rate interest-bearing checking account and certificates of deposits. Clients have made these transfers to maximize their earnings. The reduction in time deposits in the first six months of 2007 compared to the same time period in 2006 was due to using fewer wholesale certificates of deposit as a source of funding loan growth.

The average balance of borrowings for the first six months of 2007 was $92.0 million higher than a year ago and the mix of borrowings has changed significantly since last year. Overnight borrowings in the form of Federal funds purchased from correspondent banks averaged $43.4 million more than the first six months of last year. Because these funds are short-term, the amount that is not needed for funding loans is invested overnight and earns only slightly more than the rate the Bank is paying. Average securities sold under agreements to repurchase increased $14.4 million compared to the prior year. Average long-term borrowings increased $32.7 million. Lower rates paid on those additional borrowings resulted in a 37 basis point decline in the rate compared to 2006.

 

Provision for Loan Losses and the Related Allowance for Loan Losses

The following table sets forth the activity in the Allowance for Loan Losses for the three and six months ended June 30, 2007 and 2006, as well as common ratios related to the allowance for loan losses.

 

The provision for loan losses represents charges made to earnings to maintain an adequate allowance for loan losses. The allowance for loan losses is management’s best estimate of probable losses inherent in the loan portfolio as of the balance sheet date. Factors considered in establishing an appropriate allowance include: an assessment of the financial condition of the borrower; a realistic determination of value and adequacy of underlying collateral; the condition of the local economy and the condition of the specific industry of the borrower; an analysis of the levels and trends of loan categories; and a review of delinquent and classified loans.

Net charge-offs during the first six months of 2007 were $290 higher than in the same period in 2006. The majority of the charge-offs were for 1-4 family real estate and commercial loans. The net charge-off ratio for the six months ended June 30, 2007, was 0.04 percent compared to 0.01 percent for the six months ended June 30, 2006. While the level of net charge-offs increased over the prior year, this level of charge-offs is considered good when compared to the Bank’s peers which had net charge-offs averaging 0.11 percent for the first quarter of 2007 (latest information available). Significant efforts continue to be made to maximize recoveries.

The allowance for loan losses represented 1,380 percent of non-accrual loans and loans past due more than 90 days at June 30, 2007, compared to 1,307 percent at December 31, 2006.

The adequacy of the allowance for loan losses is evaluated quarterly by management and reviewed by the West Bank Board of Directors. This evaluation focuses on specific loan reviews, changes in the type and volume of the loan portfolio given the current and forecasted economic conditions, and historical loss experience. Any one of the following conditions may result in the review of a specific loan: concern about whether the customer’s cash flow or net worth is sufficient to repay the loan; delinquency status; criticism of the loan in a regulatory examination; the suspension of interest accrual; or other reasons including whether the loan has other special or unusual characteristics that suggest special monitoring is warranted.

While management uses available information to recognize losses on loans, further reduction in the carrying amounts of loans may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the Company to recognize additional losses based on their judgment about information available to them at the time of their examination. See also the discussion of non-performing assets later in this report.

 

Noninterest Income

The following table shows the variance from the prior year in the noninterest income categories shown in the Consolidated Statements of Income. In addition, accounts within the Other Income category that represent significant variances are shown.