Monday, October 28, 2013

A Speculative Investment -- The Other Bank

Another investment lesson case study here. Buy low and sell high. We naturally look to diversify our investments across economic sectors. Within sector and across risk levels, we seek to diversify as well, which is the subject of this post.

Glacier Bancorp wasn't the only bank we invested in during 2009 when the outcome of the financial crisis remained in doubt. It was the secure bank -- the safe bet. We also put money into a small bank whose chance for survival was precariously hanging in the balance, filling a slot at the high risk end of our portfolio. That investment was in the stock of West Bancorporation (WTBA), located in central Iowa.
West Bancorporation, Inc. offers its products and services to individuals, and small to medium-sized businesses through 8 full-service offices in the Des Moines metropolitan area, 2 full-service offices in Iowa city, and 1 full-service office in Coralville. The company was founded in 1893 and is headquartered in West Des Moines, Iowa.
West Bank hit the skids big time during the financial meltdown. It knocked its quarterly dividend down from 10 cents, to 8 cents, and then to a penny before being entirely eliminated. Its stock price peaked at $18.98 a share in the Spring of 2006 and pancaked to a low of $4.40 in October 2009. 

West Bancorporation took a big bath on Glen Oaks.
West Bancorporation accepted $36 million in funding from TARP. It booked a similarly large provision for loan losses. The bank got caught underwater, big time, on a golf course. Losses mounted to the point where the price of the stock dropped below book value, requiring West Bancorporation to take a large goodwill impairment charge, further depleting its capital reserves. Ominously, the CEO resigned (going on to a higher calling as a corporate banking lobbyist), in what was described as an involuntary departure. 

On the other hand, we had noticed during our cross country trip in 2009 that the economy appeared to get better as we moved through the middle of Iowa and points further west.  We also couldn't help but note that FDIC had not shown up at the doors of West Bank asking for the keys. It appeared that the insurer/regulator, at least, looking through its insider lens view, thought the bank positioned for recovery if left to operate as a going concern. You don't buy high risk just because there is a lot of bad news. There has to be some reason to believe there is good among the bad.

We happened across West Bank when we were doing the industry scan described in our post on Glacier Bancorp. My first reaction, was "Oh, not so West Bank."  But that didn't stop me from taking a second look. The economic base in West Bank's service area was more rust belt and less agricultural and tourism centered than Glacier, giving us less confidence in the bank's growth potential, but the economic base was pretty well diversified. West Bank's market was experiencing less population growth, but it was growing (i.e., it was not Detroit).
Corn prices were dropping as we bought in to West Bank.
Further, the corn belt had benefited hugely from a government subsidized ethanol bubble. Subsequently, corn prices declined almost 40 percent from their 2008 peak, but would likely pick up with a recovering economy, new EPA regulations and Federal Reserve cash infusions driving up commodity prices. Institutional ownership was much less than Glacier but it was not non-existent.

Given all the above, I thought the stock price had been excessively pummeled. If the bank were to survive and pay off the TARP infusion, the stock price would come back at least double. Or, if I was wrong, and the bank continued to lose money, its insolvent corpus would fall into the hands of the FDIC and the stock would become worthless.

Since this was a speculative buy we only put about 15 percent as much money into WTBA as we had invested in GBCI. Speculative investments should be limited to amounts that you are willing to write off, which we've usually defined as somewhere between 10 and 20 percent of our investment portfolio. We bought our position in WTBA late in 2009 very near the bottom, priced with 4 and 5 handles.
The hoped for turn around came about.
West Bancorp Redeems $36 Million Of Preferred Stock, Exits TARP 
DOW JONES NEWSWIRES West Bancorporation Inc. (WTBA) said Wednesday it redeemed all $36 million of preferred stock issued to the U.S. Treasury Department, ending the bank's participation in the Troubled Asset Relief Program, or TARP. President and Chief Executive David Nelson said the news was "very good" for the company and its shareholders, as West Bancorp is relieved of some additional regulatory burdens and will no longer be required to pay preferred stock dividends. Since the end of 2008, the company has paid about $4.5 million in dividends to the Treasury. Looking forward, Nelson said the Iowa-based bank could now use the company's improved earnings to compensate shareholders and retain capital for future growth. The news wasn't entirely a surprise, as Nelson had hinted the company's strong performance during the first quarter would likely allow it to finalize the TARP repayment plan. In late April, West Bancorp reported its first-quarter profit jumped 36% on fewer loan loss provisions. 
West Bancorporation had found a new highly qualified CEO
TARP-recipient West Bancorporation, Inc. has hired a new chief executive after an eight-month search. West Bancorporation, parent company of Iowa-based West Bank, appointed David D. Nelson, former president of Southeast Minnesota business banking for Wells Fargo Bank Minnesota. SEC filings show that Nelson's salary will be 10 percent higher than that of his predecessor, Thomas E. Stanberry, who resigned just before the company announced a loss of $5.3 million for the second quarter of 2009.

Dividend payments were sharply ramped up. West Bank paid a 5 cent dividend in the final quarter of 2010, boosted the dividend to 8 cents in 2011, and then 10 and 11 cents in 2012, and knocked it up to 13 cents this year.  The bank has gone beyond the mend to ring up a string of solid successes. At Friday October 25th's closing price of $14.16 a share, we have about tripled our investment.  We are very fortunate.

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