Back to GetFilings.com
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED COMMISSION FILE NUMBER
March 31, 2004 0-49677
WEST BANCORPORATION, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
IOWA 42-1230603
---- ----------
(State of Incorporation) (I.R.S. Employer Identification No.)
1601 22nd Street, West Des Moines, Iowa 50266
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.
Yes x No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes x No
--- ---
As of May 5, 2004, there were 16,060,271 shares of common stock, no par value
outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
West Bancorporation, Inc. and Subsidiaries
Consolidated Balance Sheets
(unaudited)
March 31, December 31,
2004 2003
--------------- ---------------
Assets
Cash and due from banks $ 25,298,601 $ 27,786,795
Federal funds sold and other short-term investments 34,566,347 54,287,004
--------------- ---------------
Cash and cash equivalents 59,864,948 82,073,799
--------------- ---------------
Securities available for sale 176,370,694 178,308,941
Securities held to maturity (approximate market value
of $88,290,000 and $93,477,000 at March 31, 2004
and December 31, 2003, respectively) 86,403,642 91,406,205
Federal Home Loan Bank stock, at cost 4,807,000 5,197,600
--------------- ---------------
Total securities 267,581,336 274,912,746
--------------- ---------------
Loans 601,809,968 599,355,407
Allowance for loan losses (5,955,308) (5,975,587)
--------------- ---------------
Loans, net 595,854,660 593,379,820
--------------- ---------------
Premises and equipment, net 3,674,571 3,683,020
Accrued interest receivable 5,676,265 5,878,880
Goodwill and other intangible assets 16,848,667 16,900,487
Bank-owned life insurance 20,609,940 20,386,714
Other assets 2,311,676 3,396,145
--------------- ---------------
Total assets $ 972,422,063 $ 1,000,611,611
=============== ===============
Liabilities and Stockholders' Equity
Deposits:
Noninterest bearing demand $ 170,934,228 $ 172,070,832
Savings and interest bearing demand 366,254,701 403,060,980
Time, in excess of $100,000 69,559,591 63,463,030
Other time 66,407,351 66,479,171
--------------- ---------------
Total deposits 673,155,871 705,074,013
Federal funds purchased and securities sold under agreements
to repurchase 96,181,639 85,442,675
Other short-term borrowings 2,182,965 9,141,973
Accrued expenses and other liabilities 3,299,120 2,032,291
Trust preferred securities - 20,000,000
Subordinated notes 20,619,000 -
Federal Home Loan Bank advances 82,045,168 86,024,315
--------------- ---------------
Total liabilities 877,483,763 907,715,267
--------------- ---------------
Stockholders' Equity
Common stock, no par value; authorized 50,000,000 shares;
shares issued and outstanding: 2004 and 2003, 16,060,271 3,000,000 3,000,000
Additional paid-in capital 32,000,000 32,000,000
Retained earnings 58,489,095 56,796,771
Accumulated other comprehensive income 1,449,205 1,099,573
--------------- ---------------
Total stockholders' equity 94,938,300 92,896,344
--------------- ---------------
Total liabilities and stockholders' equity $ 972,422,063 $ 1,000,611,611
=============== ===============
See accompanying notes to consolidated financial statements.
2
West Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Income
(unaudited)
Three Months Ended March 31,
2004 2003
----------- -----------
Interest income:
Loans $ 8,747,150 $ 7,701,836
Securities:
U.S Treasury, government agencies and corporations 1,287,877 1,175,048
States and political subdivisions 461,397 415,242
Other 748,980 641,989
Federal funds sold and other short-term investments 187,747 439,493
----------- -----------
Total interest income 11,433,151 10,373,608
----------- -----------
Interest expense:
Demand deposits 19,622 25,261
Savings deposits 728,718 768,697
Time deposits 595,166 816,060
Federal funds purchased and securities sold under
agreements to repurchase 195,834 396,157
Other short-term borrowings 24,798 1,575
Subordinated notes 366,872 -
Long-term borrowings 929,288 708,040
----------- -----------
Total interest expense 2,860,298 2,715,790
----------- -----------
Net interest income 8,572,853 7,657,818
Provision for loan losses 225,000 200,000
----------- -----------
Net interest income after provision for loan losses 8,347,853 7,457,818
----------- -----------
Noninterest income:
Service charges on deposit accounts 1,101,527 1,056,193
Trust services 126,000 132,000
Investment advisory fees 566,825 -
Increase in cash value of bank-owned life insurance 223,226 64,646
Net realized gains from sales of securities available for sale - 99,740
Other income 418,548 351,843
----------- -----------
Total noninterest income 2,436,126 1,704,422
----------- -----------
Noninterest expense:
Salaries and employee benefits 2,463,671 1,704,291
Occupancy 511,063 370,249
Data processing 337,011 243,285
Other expenses 983,782 588,280
----------- -----------
Total noninterest expense 4,295,527 2,906,105
----------- -----------
Income before income taxes 6,488,452 6,256,135
Income taxes 2,226,485 2,205,570
Net income $ 4,261,967 $ 4,050,565
=========== ===========
Earnings per share, basic $ 0.27 $ 0.25
=========== ===========
Cash dividends per share $ 0.16 $ 0.16
=========== ===========
See accompanying notes to consolidated financial statements.
3
West Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(unaudited)
Three Months Ended March 31,
2004 2003
------------ ------------
Common Stock
Beginning of year balance $ 3,000,000 $ 3,000,000
------------ ------------
End of period balance 3,000,000 3,000,000
------------ ------------
Additional Paid-in Capital
Beginning of year balance 32,000,000 32,000,000
------------ ------------
End of period balance 32,000,000 32,000,000
------------ ------------
Retained Earnings
Beginning of year balance 56,796,771 49,792,716
Net income 4,261,967 4,050,565
Dividends on common stock; per share amounts
2004 $0.16; 2003 $0.16 (2,569,643) (2,569,643)
------------ ------------
End of period balance 58,489,095 51,273,638
------------ ------------
Accumulated Other Comprehensive Income (Loss)
Beginning of year balance 1,099,573 1,031,446
Unrealized gain (loss) on securities, net of tax 349,632 18,105
------------ ------------
End of period balance 1,449,205 1,049,551
------------ ------------
Total Stockholders' Equity $ 94,938,300 $ 87,323,189
============ ============
West Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(unaudited)
Three Months Ended March 31,
2004 2003
------------ ------------
Net Income $ 4,261,967 $ 4,050,565
Other comprehensive income, unrealized gains on
securities, net of reclassification adjustment,
net of tax 349,632 18,105
------------ ------------
Comprehensive income $ 4,611,599 $ 4,068,670
============ ============
See accompanying notes to consolidated financial statements.
4
West Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
Three Months Ended March 31,
2004 2003
------------- -------------
Cash Flows from Operating Activities
Net income $ 4,261,967 $ 4,050,565
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 225,000 200,000
Net amortization 564,796 229,954
Net gains from sales of securities available for sale and loans held for sale (43,544) (142,630)
Proceeds from sales of loans held for sale 3,141,998 2,546,140
Originations of loans held for sale (3,465,204) (2,344,400)
Depreciation 83,097 53,581
Deferred income taxes 371,629 (11,002)
Change in assets and liabilities:
Decrease (increase) in accrued interest receivable 202,615 (241,050)
Increase in accrued expenses and other liabilities 1,052,248 1,811,526
------------- -------------
Net cash provided by operating activities 6,394,602 6,152,684
------------- -------------
Cash Flows from Investing Activities
Proceeds from sales, calls, and maturities of securities available for sale 30,296,000 2,130,095
Purchases of securities available for sale (28,260,236) (34,659,792)
Proceeds from sales, calls, and maturities of securities held to maturity 4,923,000 25,232,034
Purchases of securities held to maturity - (6,969,238)
Acquisition of Federal Home Loan Bank stock (1,487,000) -
Proceeds from redemption of Federal Home Loan Bank stock 1,877,600 -
Net (increase) decrease in loans (2,333,090) 4,468,926
Purchases of premises and equipment (74,648) (71,030)
Purchase of bank-owned life insurance - (10,000,000)
Change in other assets 443,750 (99,199)
------------- -------------
Net cash provided by (used in) investing activities 5,385,376 (19,968,204)
------------- -------------
Cash Flows from Financing Activities
Net decrease in deposits (31,918,142) (50,221,501)
Net increase in federal funds purchased and securities sold under
agreements to repurchase 10,738,964 18,409,635
Net decrease in other short-term borrowings (6,959,008) (4,587,350)
Proceeds from long-term borrowings 10,619,000 -
Principal payments on long-term borrowings (13,900,000) -
Cash dividends (2,569,643) (2,569,643)
------------- -------------
Net cash used in financing activities (33,988,829) (38,968,859)
------------- -------------
Net increase (decrease) in cash and cash equivalents (22,208,851) (52,784,379)
Cash and Cash Equivalents
Beginning 82,073,799 181,214,068
------------- -------------
End $ 59,864,948 $ 128,429,689
============= =============
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 2,767,715 $ 2,603,824
Income taxes - 256,733
See accompanying notes to consolidated financial statements.
5
West Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
1. Basis of Presentation
The accompanying consolidated statements of income, stockholders' equity,
comprehensive income, and cash flows for the three months ended March 31, 2004
and 2003, and the consolidated balance sheets as of March 31, 2004 and December
31, 2003 include the accounts and transactions of the Company and its
wholly-owned subsidiaries, West Bank and WB Capital Management Inc. d/b/a VMF
Capital. 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 March 31, 2004, and the results
of operations and cash flows for the three months ended March 31, 2004 and 2003.
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 represents 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 months ended March 31, 2004 and 2003 was
16,060,271.
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 recorded on the balance sheet. For additional information on
credit extension commitments see Note 13 of the Company's 2003 consolidated
financial statements. The Company's commitments as of March 31, 2004 and
December 31, 2003 are approximately as follows:
March 31, 2004 December 31, 2003
-------------- -----------------
Commitments to extend credit $ 153,646,000 $ 166,945,000
Standby letters of credit 24,098,000 19,974,000
------------- -------------
$ 177,744,000 $ 186,919,000
============= =============
6
4. Impact of New Financial Accounting Standards
FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an
interpretation of Accounting Research Bulletin No. 51, (FIN 46) establishes
accounting guidance for consolidation of variable interest entities (VIE) that
function to support the activities of the primary beneficiary. Prior to the
implementation of FIN 46, VIEs were generally consolidated by an enterprise when
the enterprise had a controlling financial interest through ownership of a
majority of voting interest in the entity. The provisions of FIN 46 were
effective immediately for all arrangements entered into after January 31, 2003.
In December 2003, the FASB issued a revision to FIN 46 (FIN 46R) which clarified
certain implementation issues and revised implementation dates for VIEs created
before January 31, 2003. Under the new guidance, special effective date
provisions apply to enterprises that have fully or partially applied FIN 46
prior to issuance of the revised Interpretation. Otherwise, application of FIN
46R (or FIN 46) is required in financial statements of public entities that have
interests in special-purpose entities for periods ending after December 15,
2003. Application by public entities, other than small business issuers, for all
other types of VIEs is required in financial statements for periods ending after
March 15, 2004.
The Company adopted FIN 46 in connection with its consolidated financial
statements for the year ending December 31, 2003. An unintended consequence of
this standard is requiring some companies to conclude deconsolidation is
necessary for certain transactions involving the issuance of trust preferred
securities. Based upon its interpretation of FIN 46, the Company continued to
consolidate its wholly-owned subsidiary trust entity involved with the issuance
of its trust preferred securities at December 31, 2003, but has deconsolidated
for the quarter ending March 31, 2004. Such deconsolidation had no effect on
reported earnings or stockholders' equity. These securities qualify for
treatment as Tier 1 capital for the Company. In July 2003, the Board of
Governors of the Federal Reserve System issued a supervisory letter instructing
bank holding companies to continue to include the trust preferred securities in
Tier 1 capital for regulatory capital purposes until notice is given to the
contrary. There can be no assurance that the Federal Reserve will continue to
permit institutions to include trust preferred securities in Tier 1 capital for
regulatory capital purposes. As of March 31, 2004, assuming the Company was not
permitted to include the $20 million in trust preferred securities issued by the
trust in its Tier 1 capital, the Company would still exceed the regulatory
required minimums for capital adequacy purposes. If the trust preferred
securities were no longer permitted to be included in Tier 1 capital, the
Company would also be permitted to redeem the capital securities without
penalty.
The interpretations of FIN 46 and its application to various transaction types
and structures are evolving. Management continuously monitors emerging issues
related to FIN 46, some of which could potentially impact the Company's
financial statements.
The Accounting Standards Executive Committee has issued Statement of Position
03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer.
This Statement applies to all loans acquired in a transfer, including those
acquired in the acquisition of a bank or a branch, and provides that such loans
be accounted for at fair value with no allowance for loan losses, or other
valuation allowance, permitted at the time of acquisition. The difference
between cash flows expected at the acquisition date and the investment in the
loan should be recognized as interest income over the life of the loan. If
contractually required payments for principal and interest are less than
expected cash flows, this amount should not be recognized as a yield adjustment,
a loss accrual, or a valuation allowance. For the Company, this Statement is
effective for calendar year 2005 and, early adoption, although permitted, is not
planned. No significant impact is expected on the consolidated financial
statements at the time of adoption.
5. 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. A significant estimate that is
particularly sensitive to change is the allowance for loan losses.
7
6. 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 area 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.
7. Reclassifications
In July, 2003, the Company formed West Bancorporation Capital Trust I (the
"Trust") for the purpose of issuing trust preferred securities. Following
generally accepted accounting principles in effect as of December 31, 2003, the
financial statements of the Trust were consolidated with the Company and any
intercompany transactions were eliminated. As of March 31, 2004, generally
accepted accounting principles have been modified to state that the financial
statements of the Trust should not be consolidated with the Company's and
intercompany transactions should not be eliminated. The result of this change is
that the balance of subordinated debt has increased by $619,000 which represents
debt issued by the Company to the Trust. In addition, other assets increased by
$619,000 which represents the Company's investment in the common stock of the
Trust. The results of the Trust are recorded on the books of the Company using
the equity method of accounting. There was no impact to net income as a result
of this change.
Other minor reclassifications were made to certain prior year's expense
categories to conform to the current year's presentation.
8
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 information is 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: 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 customer 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, 2004
SELECTED FINANCIAL RESULTS
The following table shows selected financial results and measures for the three
months ended March 31, 2004 compared with the same period in 2003.
Three months ended March 31,
2004 2003 Change Change-%
----------- ----------- --------- --------
Net income $ 4,261,967 $ 4,050,565 $ 211,402 5.2%
Average assets 985,882,486 867,385,825 118,496,661 13.7%
Average stockholders' equity 93,932,599 86,395,979 7,536,620 8.7%
Return on assets 1.74% 1.89% -0.15%
Return on equity 18.25% 19.01% -0.76%
Efficiency ratio 39.66% 30.57% 9.09%
Dividend payout ratio 60.29% 63.44% -3.15%
Equity to assets ratio 9.53% 9.96% -0.43%
Definition 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 per share divided by net income per share.
Equity to assets ratio - average equity divided by average assets.
9
RESULTS OF OPERATIONS
Net income for the first quarter of 2004 is higher than the previous year
primarily because of increased net interest income as a result of higher levels
of earning assets that were acquired in the Hawkeye State Bank transaction in
July, 2003. Return on equity has declined slightly even though net income has
increased because growth in equity has been at a higher rate than the growth in
net income.
Consolidated net income for the first quarter of 2004 also includes the results
of VMF Capital. For the first quarter of 2004, VMF Capital had a net loss of
$53,000. This was in line with internal projections. It is expected that VMF
Capital will be near a breakeven level for the entire year of 2004, however that
is dependent upon significant growth in assets under management, which is
difficult to project with any degree of certainty. During the first quarter of
2004, assets under management at VMF Capital increased approximately $263
million to $725 million.
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.
10
Data for the three months ended March 31 (dollars in thousands).
Average Balance Interest Income/Expense Yield/Rate
--------------------------------------- ----------------------------------- ----------------------
2004 2003 Change Change-% 2004 2003 Change Change-% 2004 2003 Change
Interest-earning assets:
Loans:
Commercial $315,017 $251,021 $ 63,996 25.49% $ 4,235 $ 3,552 $ 683 19.23% 5.41% 5.74% -0.33%
Real estate 251,646 197,543 54,103 27.39% 4,003 3,595 408 11.35% 6.40% 7.38% -0.98%
Consumer 18,903 19,574 (671) -3.43% 328 361 (33) -9.14% 6.98% 7.48% -0.50%
Other 16,638 14,431 2,207 15.29% 263 284 (21) -7.39% 6.37% 7.99% -1.62%
------------------------------------- --------------------------------- ---------------------
Total Loans 602,204 482,569 119,635 24.79% 8,829 7,792 1,037 13.31% 5.90% 6.55% -0.65%
------------------------------------- ---------------------------------- ---------------------
Investment securities:
Taxable 220,033 176,860 43,173 24.41% 2,122 1,901 221 11.63% 3.86% 4.30% -0.44%
Tax-exempt 47,616 32,667 14,949 45.76% 551 485 66 13.61% 4.63% 5.94% -1.31%
------------------------------------- --------------------------------- ---------------------
Total investment securities 267,649 209,527 58,122 27.74% 2,673 2,386 287 12.03% 4.00% 4.56% -0.56%
------------------------------------- --------------------------------- ---------------------
Federal funds sold and
short-term investments 46,928 142,724 (95,796) -67.12% 188 439 (251) -57.18% 1.61% 1.25% 0.36%
------------------------------------- --------------------------------- ---------------------
Total interest-earning assets $916,781 $834,820 $ 81,961 9.82% $11,690 $10,617 1,073 10.11% 5.12% 5.14% -0.02%
===================================== --------------------------------- ---------------------
Interest-bearing liabilities:
Deposits:
Checking with interest,
savings and money markets $378,332 328,517 $ 49,815 15.16% $ 748 $ 794 (46) -5.79% 0.80% 0.98% -0.18%
Time deposits 136,052 116,211 19,841 17.07% 595 816 (221) -27.08% 1.76% 2.85% -1.09%
------------------------------------- --------------------------------- ---------------------
Total deposits 514,384 444,728 69,656 15.66% 1,343 1,610 (267) -16.58% 1.05% 1.47% -0.42%
------------------------------------- --------------------------------- ---------------------
Other borrowed funds 205,476 199,347 6,129 3.07% 1,517 1,106 411 37.16% 2.97% 2.25% 0.72%
------------------------------------- --------------------------------- ---------------------
Total interest-bearing
liabilities $719,860 $644,075 $ 75,785 11.77% $ 2,860 $ 2,716 144 5.30% 1.60% 1.71% -0.11%
===================================== --------------------------------- ---------------------
Tax-equivalent net interest ---------------------------------
income $ 8,830 $ 7,901 $ 929 11.76%
=================================
Net interest spread 3.52% 3.43% 0.09%
====================
Net interest margin 3.87% 3.82% 0.05%
====================
Net interest income is computed by subtracting total interest expense from total
interest income. Fluctuations in net interest income can result from the changes
in the volumes of assets and liabilities as well as changes in interest rates.
Net interest margin is a measure of the net return on interest-earning assets
and is computed by dividing annualized net interest income by the average of
total interest-earning assets for the period. The Federal Reserve lowered the
targeted fed funds rate by 25 basis points in June 2003. As a result, the prime
rate and fed funds rate are 25 basis points lower than they were in the first
quarter of last year. The Company's tax-equivalent net interest income for the
quarter ended March 31, 2004 increased $929,000 compared to the three months
ended March 31, 2003. The increase is primarily attributable to a higher level
of earning assets. For the first quarter of 2004, earning assets averaged $82
million higher than the same period last year.
Taxable-equivalent interest income and fees on loans increased $1,037,000 in the
first quarter of 2004 compared to the same period in 2003, mainly due to a
higher volume of outstanding loans. Average loans were $120 million higher than
the first quarter of last year. Loans acquired in the Hawkeye State Bank
transaction account for $63 million of that increase. The average yield on loans
declined to 5.90 percent for the first quarter of 2004, compared to 6.55 percent
in the first quarter of 2003. The yield on the Company's loan portfolio is
affected by the amount of nonaccrual loans, the mix of the portfolio, the
effects of competition, and the interest rate environment. The interest rate
environment can influence the volume of new loan originations and the mix of
variable rate versus fixed rate loans. Competition for loans in the market area
served by the Company remains strong.
The average balance of investment securities is $58.1 million higher than last
year while the yield has declined 56 basis points. Most purchases of investment
securities during the first quarter of 2004 have been callable agency bonds and
tax-exempt municipal bonds with a maturity of five years or less.
The average rate on deposits declined to 1.05 percent from 1.47 percent for the
first quarter of last year. This decline is primarily the result of a decrease
in market interest rates. The mix of interest-bearing deposits during the first
quarter of 2004 is very similar to the mix a year ago.
11
The average balance of borrowings for the first quarter of 2004 was $6.1 million
higher than a year ago. However, the mix of borrowings has changed significantly
since last year. Overnight borrowings in the form of Federal funds purchased
from downstream correspondent banks averaged $55 million less than the first
quarter of last year. Long-term fixed borrowings averaged $52 million more,
consisting of $20.6 million in subordinated notes and $31.1 million in
fixed-rate Federal Home Loan Bank (FHLB) advances. The FHLB advances were
assumed in the Hawkeye State Bank transaction. This change in mix caused the
overall cost of borrowings to increase by 72 basis points, but should provide
favorable results when market interest rates rise.
Provision for Loan Losses
The following table sets forth the activity in the Allowance for Loan Losses for
the three months ended March 31, 2004 and 2003, as well as common ratios related
to the allowance for loan losses.
Three months ended March 31,
2004 2003 Change
------------- ------------- ---------
Balance at beginning of period $ 5,975,587 $ 4,493,583
Charge-offs (262,619) (122,953) $139,666
Recoveries 17,340 44,618 (27,278)
------------- -------------
Net charge-offs (245,279) (78,335) 166,944
Provision charged to operations 225,000 200,000 25,000
------------- -------------
Balance at end of period $ 5,955,308 $ 4,615,248
============= =============
Average loans outstanding $ 602,203,822 $ 482,569,447
Ratio of net charge-offs during the
period to average loans outstanding 0.04% 0.02%
Ratio of allowance for loan losses
to average loans outstanding 0.99% 0.96%
Management determines an appropriate provision based on its evaluation of the
adequacy of the allowance for loan losses in relationship to a continuing review
of problem loans, the current economic conditions, actual loss experience and
industry trends. The allowance for loan losses is management's best estimate of
probable losses inherent in the loan portfolio as of the balance sheet date;
however, changes in the loan portfolio and the uncertainty of the general
economy require that management continue to evaluate the adequacy of the
allowance for loan losses and make additional provisions in future periods as
deemed necessary. See also the discussion of nonperforming assets later in this
report.
12
Noninterest Income
The following table shows the variance from the prior year period 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.
Three months ended March 31,
2004 2003 Change Change-%
---------- ---------- -------- --------
Noninterest income
Service charges on deposit accounts $1,101,527 $1,056,193 $ 45,334 4.3%
Trust services 126,000 132,000 (6,000) -4.5%
Investment advisory fees 566,825 - 566,825 -
Increase in cash value of bank-owned
life insurance 223,226 64,646 158,580 245.3%
Other:
Letter of credit fees 36,623 14,579 22,044 151.2%
VISA/Mastercard income 49,135 38,248 10,887 28.5%
Safe deposit box rent 56,263 34,605 21,658 62.6%
All other 276,527 264,411 12,116 4.6%
--------------------------------------------------
Total other 418,548 351,843 66,705 19.0%
--------------------------------------------------
Gain on sale of securities - 99,740 (99,740) -
--------------------------------------------------
Total noninterest income $2,436,126 $1,704,422 $731,704 42.9%
==================================================
Noninterest income results from the charges and fees collected by the Company
from its customers for various services performed and miscellaneous other income
and gains (or losses) from the sale of investment securities held in the
available for sale category. Service charges on deposit accounts grew primarily
due to higher volumes. There were minor pricing changes in the second quarter of
last year. Investment advisory fees are fees earned by VMF Capital, which
commenced operations on October 1, 2003. Letter of credit fees are higher due to
volume. The increase in VISA/Mastercard income was due to an increase in the
number of merchant customers. Bank-owned life insurance was purchased during the
first and third quarters of last year. The increase in safe deposit box rent is
attributable to the Iowa City offices. Most customers in Iowa City are billed
for their safe deposit box rent in January of each year. Therefore, the
magnitude of the variance for the first quarter cannot be annualized.
Noninterest Expense
The following table shows the variance from the prior year in the noninterest
expense categories shown in the Consolidated Statements of Income. In addition,
accounts within the Other Expense category that represent significant variances
are shown.
Three months ended March 31,
2004 2003 Change Change-%
---------- ---------- --------- -------
Noninterest expense:
Salaries and employee benefits $2,463,671 $1,704,291 $ 759,380 44.6%
Occupancy 511,063 370,249 140,814 38.0%
Data processing 337,011 243,285 93,726 38.5%
Other:
Intangible amortization 94,351 7,955 86,396 1086.1%
Supplies 72,166 40,080 32,086 80.1%
Business development 88,878 12,729 76,149 598.2%
Charitable contributions 62,807 40,513 22,294 55.0%
Professional fees 132,324 90,276 42,048 46.6%
All other 533,256 396,727 136,529 34.4%
----------------------------------------------------
Total other 983,782 588,280 395,502 67.2%
----------------------------------------------------
Total noninterest expense $4,295,527 $2,906,105 $1,389,422 47.8%
====================================================
13
The increase in salaries and benefits includes compensation related expenses for
approximately 40 more employees than a year ago due to the acquisitions in the
last half of 2003. Occupancy expenses likewise were higher this year due to four
additional locations: two banking locations in Iowa City and two VMF Capital
offices. The increase in intangible asset amortization relates to the 2003
acquisitions. The increase in professional fees were the result of more legal
services associated with complying with the Sarbanes-Oxley Act of 2002 and the
decision to outsource the Company's internal audit services. Supplies are higher
because of the acquisitions and the implementation of a new corporate logo. The
increase in business development costs is mostly attributable to VMF Capital.
Charitable contributions are higher because of the timing of certain payments.
Income Tax Expense
The Company incurred income tax expense of $2,226,485 for the three months ended
March 31, 2004 compared with $2,205,570 for the three months ended March 31,
2003. The effective income tax rate as a percent of income before taxes for the
three months ended March 31, 2004 and 2003 was 34.3 percent and 35.3 percent,
respectively. The effective income tax rate is slightly lower in 2004 because of
a higher level of income that is exempt from Federal income taxes.
FINANCIAL CONDITION
Total assets as of March 31, 2004 were $972,422,000, a slight decrease from
$1,000,612,000 at December 31, 2003. The decrease is primarily in Federal funds
sold and other short-term investments which is lower because of a decline in
deposits.
Investment Securities
Investment securities available for sale decreased $1,938,000 from December 31,
2003 to $176,371,000 on March 31, 2004. From December 31, 2003, investment
securities classified as held to maturity declined $5,002,000 to $86,404,000 as
of March 31, 2004. The slight decline in the size of the investment portfolio
was the result of a decrease in deposits from year end 2003.
Loans
Loans outstanding declined $2,455,000 from December 31, 2003 to March 31, 2004.
The decline occurred in the Iowa City market where there continues to be some
attrition. While it is difficult to predict, it is believed the loan portfolio
in the Iowa City market should begin to grow.
Deposits
Total deposits as of March 31, 2004 were $673,156,000 compared with $705,074,000
as of December 31, 2003. Savings and interest bearing demand accounts, which
includes money market accounts were $36,806,000 lower at March 31, 2004 than at
December 31, 2003. Noninterest bearing deposits at March 31, 2004 were
$1,137,000 lower than at December 31, 2003. It is not unusual to see this kind
of fluctuation at any given point in time. Certificates of deposit as of March
31, 2004 were $135,967,000, up $6,025,000 from December 31, 2003. The increase
is primarily due to time certificates of $100,000 and over.
Borrowings
The balance of Federal funds purchased and securities sold under agreements to
repurchase was $96,182,000 at March 31, 2004, up from $85,443,000 at December
31, 2003. Most of this increase relates to Federal funds purchased, which are
Federal funds sold to West Bank by approximately 40 banks throughout Iowa. This
is a correspondent bank service provided by West Bank. Federal funds sold to
West Bank by these downstream correspondent banks are invested in Federal funds
sold to upstream correspondent banks or other short-term investments. The
balance of other short-term borrowings consisted entirely of Treasury, Tax and
Loan option notes at March 31, 2004 and also included an FHLB overnight advance
at December 31, 2003.
14
Nonperforming Assets
The following table sets forth the amount of non-performing loans and assets
carried by the Company and common ratio measurements of those items (dollars in
thousands).
March 31, 2004 December 31, 2003 Change
-------------- ----------------- ------
Nonaccrual loans $ 2,400 $ 1,668 $ 732
Loans past due 90 days and still
accruing interest 192 125 67
------- ------- -----
Total non-performing loans 2,592 1,793 799
Other real estate owned 248 441 (193)
------- ------- -----
Total non-performing assets $ 2,840 $ 2,234 $ 606
======= ======= =====
Non-performing assets to total loans 0.47% 0.37% 0.10%
Non-performing assets to total assets 0.29% 0.22% 0.07%
The increase in nonaccrual loans is primarily the result of a commercial loan
and a single family residential loan. The sale of a single family residential
property accounted for the decline in other real estate owned. In the opinion of
management, loans past due 90 days and still accruing interest are adequately
collateralized to cover any unpaid interest.
Reference is also made to the information and discussion earlier in this report
under the heading "Provision for Loan Losses".
Capital Resources
Total shareholders' equity was 9.8 percent of total assets as of March 31, 2004
and 9.3 percent on December 31, 2003.
The table below shows the various measures of regulatory capital and related
ratios.
Regulatory capital:
March 31, 2004 December 31, 2003
-------------- -----------------
Total shareholders' equity $ 94,938,300 $ 92,896,344
Less: net unrealized gains on
available for sale securities (1,449,205) (1,099,573)
Less: net unrealized loss on
available for sale equity securities (11,023) (3,500)
Less: intangible assets (16,848,667) (16,900,487)
Plus: subordinated notes/trust preferred securities 20,000,000 20,000,000
------------- -------------
Tier 1 capital 96,629,405 94,892,784
Plus: allowance for loan losses 5,955,308 5,975,587
------------- -------------
Total risk-based capital $ 102,584,713 $ 100,868,371
============= =============
Regulatory
requirements to be: Actual Regulatory
Adequately Well- Capital Ratios as of:
Capitalized Capitalized March 31, 2004 December 31, 2003
----------- ----------- -------------- ---------------------
Total risk-based capital
as % of risk-weighted assets 8.0% 10.0% 13.2% 13.1%
Tier 1 capital as % of risk-weighted assets 4.0% 6.0% 12.4% 12.3%
Tier 1 capital as % average assets 4.0% 5.0% 10.0% 9.6%
15
Risk-based capital guidelines require the classification of assets and some
off-balance sheet items in terms of credit-risk exposure and the measuring of
capital as a percentage of the risk adjusted asset totals. Management believes,
and data in the above table supports that, as of March 31, 2004 and December 31,
2003, the Company met all capital adequacy requirements to which it is subject.
As of those dates, West Bank was "well capitalized" under regulatory prompt
corrective action provisions.
Liquidity
Liquidity management involves meeting the cash flow requirements of depositors
and borrowers. Liquidity management is conducted on both a daily and a long-term
basis. Investments in liquid assets are adjusted based on expected loan demand,
projected loan maturities and payments, expected deposit flows, and the
objectives set by the Company's funds management policy. The Company had liquid
assets (cash and cash equivalents) of $59,865,000 as of March 31, 2004, compared
with $82,074,000 as of December 31, 2003. Securities available for sale may be
sold prior to maturity to meet liquidity needs, to respond to market changes or
to adjust the Company's interest rate risk position. In addition, the Bank
maintains lines of credit with correspondent banks totaling $80 million that
would allow it to borrow Federal funds on a short-term basis, if necessary and
has additional borrowing capacity of $32 million at the Federal Home Loan Bank.
Management believes that the Company has sufficient liquidity as of March 31,
2004 to meet the needs of borrowers and depositors.
Market Risk Management
Market risk is the risk of earnings volatility that results from adverse changes
in interest rates and market prices. The Company's market risk is primarily
interest rate risk arising from its core banking activities of lending and
deposit taking. Interest rate risk is the risk that changes in market interest
rates may adversely affect the Company's net interest income. Management
continually develops and implements strategies to mitigate this risk. The
analysis of the Company's interest rate risk was presented in the Form 10-K
filed with the Securities and Exchange Commission on March 4, 2004. The Company
has not experienced any material changes to its market risk position since
December 31, 2003. Management does not believe the Company's primary market risk
exposures and how those exposures were managed in the first three months of 2004
changed when compared to 2003.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The information appearing above under the heading "Market Risk Management" is
incorporated herein by reference.
Item 4. Controls and Procedures
a. Evaluation of disclosure controls and procedures. As of the end of the period
covered by this report, an evaluation was performed under the supervision and
with the participation of the Company's Chief Executive Officer and Chief
Financial Officer of the effectiveness of the Company's disclosure controls and
procedures (as defined in Exchange Act Rule 240.13a-15(e)) as of the end of the
period covered by this report. Based on that evaluation, the Chief Executive
Officer and the Chief Financial Officer have concluded that the Company's
current disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms.
b. Changes in internal controls over financial reporting. There were no changes
in the Company's internal control over financial reporting that occurred during
the period covered by this report that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
16
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its subsidiaries from time to time are party to various legal
actions arising in the normal course of business. Management believes, as of the
date of this Form 10-Q, that there is no threatened or pending proceeding
against the Company, West Bank or VMF Capital, which, if determined adversely,
would have a material adverse effect on the business or financial position of
the Company, West Bank or VMF Capital.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
Exhibits
--------
3.1 Restated Articles of Incorporation of the Company*
3.2 By-laws of the Company*
10.1 Lease for Main Bank Facility*
10.2 Supplemental Agreement to Lease for Main Bank Facility*
10.3 Short-term Lease related to Main Bank facility*
10.4 Assignment*
10.5 Lease Modification Agreement No. 1 for Main Bank Facility*
10.6 Memorandum of Real Estate Contract*
10.7 Affidavit*
10.8 Addendum to Lease for Main Bank Facility*
10.9 Data Processing Contract*
10.10 Employment Contract*
10.11 Consulting Contract*
10.12 Data Processing Contract Amendment**
10.13 Purchase and Assumption Agreement between West Des Moines State
Bank and Hawkeye State Bank***
10.14 Employment Agreement effective March 1, 2003, which was
consummated in the first of 2004****
31.1 Certification of Chief Executive Officer under Section 302 of
the Sarbanes Oxley Act of 2002
31.2 Certification of Chief Financial Officer under Section 302 of
the Sarbanes Oxley Act of 2002
32.1 Certification of Chief Executive Officer under Section 906 of
the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer under Section 906 of
the Sarbanes-Oxley Act of 2002
* Incorporated herein by reference to the related exhibit filed
with the Form 10 on March 11, 2002.
** Incorporated herein by reference to the related exhibit filed
with the Form 10-K on March 26, 2003.
*** Incorporated herein by reference to the related exhibit filed
with the Form 10-Q on May 15, 2003.
**** Incorporated herein by reference to the related exhibit filed
with the Form 10-K on March 4, 2004.
(b) Reports on Form 8-K: During the three months ended March 31, 2004, the
Company filed a Form 8-K on January 15, 2004 which contained a press release
announcing the quarterly dividend, a Form 8-K on January 20, 2004 which
contained a press release announcing earnings for the three and twelve months
ended December 31, 2003 and the retirement of two directors.
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
West Bancorporation, Inc.
- -------------------------
(Registrant)
May 5, 2004 By: /s/ Thomas E. Stanberry
- ----------- ------------------------------
Dated Thomas E. Stanberry
Chairman, President and
Chief Executive Officer
May 5, 2004 By: /s/ Douglas R. Gulling
- ----------- ------------------------------
Dated Douglas R. Gulling
Chief Financial Officer
(Principal Accounting Officer)
18
EXHIBIT INDEX
The following exhibits are filed herewith:
Exhibit No. Description
- ----------- -----------
31.1 Certification of Chief Executive Officer under Section 302 of the
Sarbanes Oxley Act of 2002
31.2 Certification of Chief Financial Officer under Section 302 of the
Sarbanes Oxley Act of 2002
32.1 Certification of Chief Executive Officer under Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer under Section 906 of the
Sarbanes-Oxley Act of 2002
19