West Bancorporation - 10-Q quarterly report FY

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

(Exact Name of Registrant as Specified in its Charter)

1601 22ndStreet, West Des Moines, Iowa 50266

Telephone Number (515) 222-2300

Indicate by check mark whether the registrant (1) has filed all reports required to be filed 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.

Yes x    No¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

Yes ¨    Nox

As of April 28, 2009, there were 17,403,882 shares of common stock, no par value outstanding.

PART 1 – FINANCIAL INFORMATION

Item 1.  Financial Statements

West Bancorporation, Inc. and Subsidiaries

Consolidated Balance Sheets

(unaudited)

 

See accompanying Notes to Consolidated Financial Statements.

West Bancorporation, Inc. and Subsidiaries

Consolidated Statements of Income

(unaudited)

West Bancorporation, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity

(unaudited)

See accompanying Notes to Consolidated Financial Statements.

 

West Bancorporation, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(unaudited)

West Bancorporation, Inc. and Subsidiaries

Consolidated Statements of Cash Flows(continued)

(unaudited)

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, stockholders’ equity, and cash flows for the three months ended March 31, 2009 and 2008, and the consolidated balance sheets as of March 31, 2009 and December 31, 2008, include the accounts of West Bancorporation, Inc. (the Company), West Bank, West Bank’s wholly-owned subsidiary, WB Funding Corporation (which owns an interest in a partnership), West Bank’s 99.9 percent owned subsidiary, ICD IV, LLC (a community development partnership), and WB Capital Management Inc.  All significant intercompany transactions and balances have been eliminated in consolidation.  In accordance with Financial Accounting Standards Board (FASB) Interpretation No. 46, Consolidation of Variable Interest Entities, a subsidiary, West Bancorporation Capital Trust I (the Trust) is not consolidated with the Company.  The results of the Trust are recorded on the books of the Company using the equity method of accounting.

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 March 31, 2009, and the results of operations and cash flows for the three months ended March 31, 2009 and 2008.

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

Certain items in the financial statements as of March 31, 2008 were reclassified to be consistent with the classifications used in the March 31, 2009 financial statements.  The reclassification has no effect on net income or stockholders’ equity.

2.  Use of Estimates in the Preparation of Financial Statements

The consolidated financial statements have been prepared in conformity with generally accepted accounting principles.  In preparing the financial statements, management is required 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 for 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 (including the determination of the value of impaired loans), fair value of financial instruments, and the goodwill impairment assessment.

3.  Critical Accounting Policies

Management has identified its most critical accounting policies to be those related to asset impairment judgments, including fair value of available for sale investment securities and recoverability of goodwill, and the allowance for loan losses.

Securities available for sale are reported at fair value, with unrealized gains and losses reported as a separate component of accumulated other comprehensive income, net of deferred income taxes.  Declines in fair value of individual securities, below their amortized cost, are evaluated by management to determine whether the decline is temporary or other-than-temporary.  Declines in fair value of available for sale securities below their cost that are deemed other-than-temporary are reflected in earnings as impairment losses.  In estimating other-than-temporary impairment losses, management considers a number of factors including (1) the length of time and extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Goodwill is the excess of the cash paid over the net fair value of assets acquired and liabilities assumed in an acquisition, less the amount of identifiable intangible assets.  Goodwill is tested for impairment annually or on an interim basis if events or circumstances indicate a possible inability to realize the carrying amount.

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 collectability 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.

4.  Earnings per Common Share

Basic earnings per common share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period.  Income available to common stockholders is net income less preferred stock dividends and accretion of discount on preferred stock, treated as preferred stock dividends.  Diluted earnings per common share reflects the potential dilution that could occur if the Company’s outstanding stock warrant was exercised and converted into common stock.  The dilutive effect is computed using the treasury stock method, which assumes all outstanding warrants are exercised.  The incremental shares, to the extent they would have been dilutive, are included in the denominator of the diluted earnings per common share calculation.  The calculation of earnings per common share and diluted earnings per common share for the three months ended March 31, 2009 and 2008 is presented below.

*   Preferred stock and the common stock warrant were issued on December 31, 2008, and therefore had no effect in 2008.

** The average closing price of the Company’s common stock for the three months ended March 31, 2009, was $8.33.  This was less than the $11.39 exercise price of the common stock warrant to purchase 474,100 shares of common stock; therefore, the warrant was not dilutive.

5.  Commitments

In the normal course of business, the Company enters into commitments to extend credit in the form of 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 policies as are loans recorded on the balance sheet.  For additional information on credit extension commitments and the characteristics of these obligations, see Note 13 of the Company’s 2008 consolidated financial statements (pages 54-56 of Appendix to Proxy Statement).  The Company’s commitments as of the dates shown are approximately as follows:

6.  Other-Than-Temporary Impairment on Securities

In March 2009, the Company recognized an other-than-temporary impairment of $1,380 on two trust preferred securities.  The carrying values of these investment securities were written down to $120 as of March 31, 2009.  The Company also recognized an additional other-than-temporary impairment of $35 on an investment in a trust that holds common stock of community bank holding companies.  This security was deemed impaired in the fourth quarter of 2008 and the carrying value of this investment was written down to $145 as of March 31, 2009.  Income accruals on these securities have been suspended.  No change in fair value was recognized on two other investment securities which were deemed impaired during 2008.

7.  Impaired Loans and Allowance for Loan Losses

A loan is impaired when it is probable that West Bank will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement.  Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or at the fair value of the collateral if the loan is collateral dependent.  The amount of the impairment is included in the allowance for loan losses.  The following is a recap of impaired loans at the dates shown:

The following table reconciles the balance of non-accrual loans with impaired loans carried at fair value as of the dates shown below.

Changes in the allowance for loan losses were as follows for the periods shown below:

8.  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, interest on investment securities, service charges on deposit accounts, gains and fees on sale of residential mortgages, and fees for trust services.  The banking segment includes West Bank, the Company, and related elimination entries between the two, as the Company’s operation is similar to that of West Bank.  The investment advisory segment generates revenue by providing investment portfolio management services to individuals, retirement plans, corporations, foundations, endowments, and public entities.  The investment advisory segment consists of WB Capital Management Inc.  The “Other” column represents the elimination of intercompany balances.  Selected financial information on the Company’s segments is presented below for the three months ended March 31, 2009 and 2008.

9.  Fair Value Measurements

Statement of Financial Accounting Standard (SFAS) No. 157, Fair Value Measurements,requires disclosure for those assets and liabilities carried in the balance sheet on a fair value basis.  In October 2008, the FASB issued Staff Position (FSP) No. 157-3, Determining the Fair Value of a Financial Asset in a Market that is not Active, which amended SFAS No. 157.  The FSP clarified how the fair value of a financial instrument is determined when the market for that financial asset is inactive.  Effective January 1, 2009, the Company adopted the nonfinancial assets and liabilities portion of SFAS No. 157 which requires recognition at fair value of nonfinancial assets and liablities on a nonrecurring basis.  See Footnote 10 for details on additional changes to required disclosures which will be effective as of June 30, 2009.

The Company’s balance sheet contains securities available for sale that are recorded at fair value on a recurring basis.  SFAS No. 157 requires that assets and liabilities carried at fair value be classified and disclosed according to the process for determining fair value.  There are three levels of determining fair value.

Level 1 uses quoted market prices in active markets for identical assets or liabilities.

Level 2 uses observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3 uses unobservable inputs that are not corroborated by market data.

When available, quoted market prices are used to determine the fair value of investment securities and such items are classified within Level 1 of the fair value hierarchy.  An example is U.S. Treasury securities.  For other securities, the Company determines fair value based on various sources and may apply matrix pricing with observable prices for similar bonds where a price for the identical bond is not observable.  Securities measured at fair value by such methods are classified as Level 2.  Certain securities are not valued based on observable transactions and are, therefore, classified as Level 3.  The fair value of these securities is based on management’s best estimates.

The following table presents the balances of assets and liabilities measured at fair value on a recurring basis by level as of March 31, 2009:

The following table presents changes in securities available for sale with significant unobservable inputs (Level 3) for the three months ended March 31, 2009:

Certain assets are measured at fair value on a nonrecurring basis; that is, they are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).  The following table presents the assets carried on the balance sheet by caption and by level within the SFAS No. 157 valuation hierarchy as of March 31, 2009:

Loans in the table above consist of impaired loans held for investment less the portion of the allowance for loan losses related to these loans. Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or fair value and are classified at a Level 3 in the fair value hierarchy.  Fair value is measured based on the value of the collateral securing these loans.  Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable and is determined based on appraisals by qualified licensed appraisers hired by the Company.  Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business.  Other real estate owned in the table above consists of property acquired through foreclosures and settlements of loans.  Property acquired is carried at the lower of the principal amount of loans outstanding, or the estimated fair value of the property, less disposal costs, and is classified at a Level 3 in the fair value hierarchy.

10.  Current Accounting Developments

In April 2009, the FASB issued the following new accounting standards:

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 ratios.  Certain statements in this report constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including statements preceded by, followed by or that include the words “believes,” “expects,” “intends,” “should,” or “anticipates,” or similar references or references to estimates or similar expressions.  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; changes in credit and other risks posed by the Company’s loan and investment portfolios, including declines in commercial or residential real estate values or changes in the allowance for loan losses dictated by new market conditions or regulatory requirements; actions of bank and non-bank competitors; changes in local and national economic conditions; changes in regulatory requirements, including actions of the Securities and Exchange Commission and/or the Federal Reserve Board; changes in the Treasury’s Capital Purchase Program; 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 MONTHS ENDED MARCH 31, 2009

(dollars in thousands, except per share amounts)

OVERVIEW

The following discussion describes the consolidated operations of the Company, including West Bank, West Bank’s wholly-owned subsidiary, WB Funding Corporation, West Bank’s 99.9 percent owned subsidiary, ICD IV, LLC, and WB Capital Management Inc. (WB Capital).  Consolidated results of operations for the quarter ended March 31, 2009, are compared to the results for the same period in 2008, and the consolidated financial condition of the Company at March 31, 2009, is compared to the December 31, 2008, position.

Net income for the quarter ended March 31, 2009, was $2,941 compared to $1,374 for the quarter ended March 31, 2008.  Basic and diluted earnings per common share were $0.14 and $0.08, respectively, for the same periods.  The Company’s annualized return on average equity and return on average assets for the first quarter of 2009 were 7.84 percent and 0.75 percent, respectively, and 4.54 percent and 0.42 percent, respectively, for the first quarter of 2008.

Net income for the first quarter of 2009 increased $1,567 compared to the first quarter of 2008 due in large part to a lower provision for loan losses.  The provision was $3,500 in the quarter ended March 31, 2009, compared to $5,600 in the first quarter of 2008.  The 2009 provision was significantly higher than historical levels due to the prolonged economic downturn and its effect on West Bank customers.  The 2008 first quarter provision included $5,000 related to a large homebuilder and developer that failed.

First quarter 2009 noninterest income included investment security gains of $1,453 compared to only $5 in 2008, $840 of proceeds from a bank-owned life insurance policy due to the death of a West Bank officer, and an increase of $213 in gains and fees on the sale of residential mortgages.  Offsetting these improvements were the recognition of investment security impairment losses of $1,415 and a $522 reduction in investment advisory fees.

Year-to-date noninterest expense was $738 higher in the first quarter of 2009 than a year ago.  The increase included significantly higher FDIC insurance expense and increased contribution expense as a portion of the bank-owned life insurance proceeds were donated to the West Bancorporation Foundation.

WB Capital’s first quarter 2009 net income declined to $4 compared to $135 for the same period in 2008.  Revenues were lower than a year ago because of a severe decline in stock values and lower levels of assets under management.  Operating expenses declined $304 during the first quarter of 2009 compared to the same 2008 period due to lower salaries and benefits and intangible amortization.

RESULTS OF OPERATIONS

The following table shows selected financial results and measures for the three months ended March 31, 2009, compared with the same periods in 2008:

Definitions of ratios:

Net Interest Income

The following table shows 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 March 31, 2009 and 2008:

Fluctuations in net interest income can result from the combination of changes in the balances of asset and liability categories and changes in interest rates.  Interest rates earned and paid are also affected by general economic conditions, particularly changes in market interest rates, and by competitive factors, government policies, and the action of regulatory authorities.  Net interest margin is a measure of the net return on interest-earning assets and is computed by dividing annualized tax-equivalent net interest income by the average of total interest-earning assets for the period.  The net interest margin for the first quarter of 2009 was 2.87 percent, a 51 basis point decline compared to the same quarter last year.

The Company’s tax-equivalent net interest income for the quarter ended March 31, 2009, increased $230 compared to the quarter ended March 31, 2008.  The high level of competition in the local markets and the December 2008 drop in the targeted federal funds rate by the Federal Reserve to a range of zero to 25 basis points are expected to continue to put pressure on the net interest margin of the Company.

Tax-equivalent interest income and fees on loans declined $1,300 in the first quarter of 2009 compared to the same period in 2008, as the combination of lower rates, and a higher volume of non-accrual loans exceeded the positive impact of the $116 million increase in the average volume of outstanding loans.  The average yield on loans declined to 5.52 percent for the first quarter of 2009, compared to 6.63 percent for the same period in 2008.  The yield on the Company’s loan portfolio is affected by the mix of the portfolio, the effects of competition, the interest rate environment, the amount of non-accrual loans, and reversals of previously accrued interest on charged-off 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 competitive, while the level of demand for new loans has declined as business customers assess the long-term effects of the recession.

The average balance of investment securities was $23.8 million lower than last year, and the yield declined 14 basis points.  The decline in yield was caused by reversing $117 of interest on securities deemed impaired during the first quarter of 2009.  Investment securities totaling approximately $66.0 million were sold, called, or matured in the first three months of 2009 and approximately $59.8 million of investment securities were purchased during the same period.

The average balance of federal funds sold and short-term investments increased over $170 million as management maintained a high level of liquidity during these tumultuous economic times.  Unfortunately, despite the significant increase in volume, net interest income on these assets declined due to the 255 basis point drop in rates.  Management is planning to invest approximately $100 million of these funds in agency and municipal securities during the second quarter of 2009 in order to maintain the net interest margin at or above its current level.

Market interest rates on deposits fell considerably and the average rate paid on deposits declined to 2.15 percent from 3.41 percent for the first quarter of last year.  The result was a reduction in interest expense of $707 despite a sizable increase in average balances.  The average balance of time deposits increased $277 million in the first quarter of 2009 compared to the same time period in 2008 with all of that increase in brokered time deposits.  The balance is expected to stay higher as more customers are participating in the Certificate of Deposit Account Registry Service (CDARS) program to ensure the safety of their deposits.  CDARS is a program that coordinates a network of banks to spread deposits exceeding the FDIC insurance coverage limits out to numerous institutions in order to provide insurance coverage for all participating deposits.

The average rate paid on other borrowings declined by 101 basis points compared to the first quarter of 2008.  The average balance of borrowings for the first quarter of 2009 was $64.1 million lower than a year ago.  Overnight borrowings in the form of federal funds purchased from correspondent banks and securities sold under agreements to repurchase averaged $54.4 million less than in the first quarter of last year.  The average rate paid on overnight borrowings declined 299 basis points compared to the first quarter of 2008.  Average long-term borrowings declined $6.8 million, while the rates paid on borrowings increased 11 basis points compared to 2008.

Provision for Loan Losses and the Related 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.

The adequacy of the allowance for loan losses is evaluated quarterly by management and reviewed by West Bank’s Board of Directors.  This evaluation focuses on factors such as 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 potential losses on loans, further reduction in the carrying amounts of loans may be necessary based on changes in circumstances or later acquired information.  Furthermore, changes in future economic activity are always uncertain.  Identifiable sectors within the general economy are subject to additional volatility, which at any time may have a substantial impact on the loan portfolio.  In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans.  Such agencies may require West Bank to recognize additional losses based on their judgment about information available to them at the time of their examination.

West Bank’s policy is to charge off loans when, in management’s opinion, the loan is deemed uncollectible, although concerted efforts are made to maximize future recoveries.  The following table summarizes the activity in the allowance for loan losses for the three months ended March 31, 2009 and 2008, as well as common ratios related to the allowance for loan losses.

The provision for loan losses was reduced $2,100 for the first quarter of 2009 compared to a year ago.  The first quarter 2008 provision included $5,000 related to a large homebuilder and developer that failed.  The 2009 provision remained higher than historic levels as the economy remained in a recession with significant difficulty being experienced in the construction and real estate development areas.

Net charge-offs during the first three months of 2009 were $651 higher than in the same period in 2008.  The majority of the 2009 year-to-date charge-offs were related to two customers.  In the first instance, declining collateral values for a customer that had been the victim of a substantial fraud identified in 2008 caused a partial charge-off of $600.  In the second instance, the value of repossessed development property transferred to other real estate owned was less than the loan balance resulting in a charge-off of $200.

The allowance for loan losses represented 47.4 percent of non-performing loans at March 31, 2009, compared to 53.5 percent at December 31, 2008.  The ratio has declined primarily due to the increase in non-accrual loans.

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.