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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, 2005 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, 2005, there were 16,701,843 shares of common stock, no par value
outstanding.
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
West Bancorporation, Inc. and Subsidiaries
Consolidated Balance Sheets
(unaudited)
March 31, December 31,
2005 2004
---- ----
Assets
Cash and due from banks $ 30,326,480 $ 18,686,360
Federal funds sold and other short-term investments 25,839,422 11,193,099
--------------- ---------------
Cash and cash equivalents 56,165,902 29,879,459
--------------- ---------------
Securities available for sale 259,663,890 281,110,020
Securities held to maturity (approximate market value of $53,272,000
and $60,141,000 at March 31, 2005 and December 31, 2004, respectively) 52,801,650 59,419,549
Federal Home Loan Bank stock, at cost 6,942,000 6,522,800
--------------- ---------------
Total securities 319,407,540 347,052,369
--------------- ---------------
Loans 741,832,299 725,845,003
Allowance for loan losses (6,901,667) (6,526,824)
--------------- ---------------
Loans, net 734,930,632 719,318,179
--------------- ---------------
Premises and equipment, net 4,459,512 4,309,597
Accrued interest receivable 7,404,111 6,505,047
Goodwill and other intangible assets 16,477,023 16,561,810
Bank-owned life insurance 21,462,408 21,256,138
Other assets 5,088,334 3,551,911
--------------- ---------------
Total assets $ 1,165,395,462 $ 1,148,434,510
=============== ===============
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Noninterest bearing demand $ 195,218,080 $ 186,710,245
Savings and interest bearing demand 359,743,182 422,560,048
Time, in excess of $100,000 250,103,360 193,716,248
Other time 65,156,605 62,945,833
--------------- ---------------
Total deposits 870,221,227 865,932,374
Federal funds purchased and securities sold under agreements to repurchase 99,764,469 74,543,033
Other short-term borrowings 1,598,886 4,668,451
Accrued expenses and other liabilities 5,660,426 3,777,903
Subordinated notes 20,619,000 20,619,000
Federal Home Loan Bank advances and other long-term borrowings 69,797,521 81,273,773
--------------- ---------------
Total liabilities 1,067,661,529 1,050,814,534
--------------- ---------------
Stockholders' Equity
Common stock, no par value; authorized 50,000,000 shares; shares issued
and outstanding: 2005 and 2004, 16,701,843 3,000,000 3,000,000
Additional paid-in capital 32,000,000 32,000,000
Retained earnings 64,735,232 62,565,046
Accumulated other comprehensive income (loss) (2,001,299) 54,930
--------------- ---------------
Total stockholders' equity 97,733,933 97,619,976
--------------- ---------------
Total liabilities and stockholders' equity $ 1,165,395,462 $ 1,148,434,510
=============== ===============
See accompanying notes to consolidated financial statements.
2
West Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Income
(unaudited)
Three Months Ended March 31,
2005 2004
---- ----
Interest income:
Loans $ 10,885,057 $ 8,747,150
Securities:
U.S Treasury, government agencies and corporations 1,931,141 1,287,877
States and political subdivisions 958,094 461,397
Other 544,552 748,980
Federal funds sold and other short-term investments 138,400 187,747
------------ -----------
Total interest income 14,457,244 11,433,151
------------ -----------
Interest expense:
Demand deposits 26,762 19,622
Savings deposits 1,119,839 728,718
Time deposits 1,581,277 595,166
Federal funds purchased and securities sold under
agreements to repurchase 424,951 195,834
Other short-term borrowings 465,418 24,798
Subordinated notes 362,877 366,872
Long-term borrowings 879,518 929,288
------------ -----------
Total interest expense 4,860,642 2,860,298
------------ -----------
Net interest income 9,596,602 8,572,853
Provision for loan losses 375,000 225,000
------------ -----------
Net interest income after provision for loan losses 9,221,602 8,347,853
------------ -----------
Noninterest income:
Service charges on deposit accounts 1,042,554 1,147,097
Trust services 140,000 126,000
Investment advisory fees 750,237 566,825
Increase in cash value of bank-owned life insurance 206,270 223,226
Net realized gains (losses) from sales of securities
available for sale (1,189) -
Other income 388,834 372,978
------------ -----------
Total noninterest income 2,526,706 2,436,126
------------ -----------
Noninterest expense:
Salaries and employee benefits 2,578,320 2,463,671
Occupancy 589,649 511,063
Data processing 327,712 337,011
Other expenses 1,093,969 983,782
------------ -----------
Total noninterest expense 4,589,650 4,295,527
------------ -----------
Income before income taxes 7,158,658 6,488,452
Income taxes 2,316,177 2,226,485
------------ -----------
Net income $ 4,842,481 $ 4,261,967
============ ===========
Earnings per share, basic and fully diluted $ 0.29 $ 0.25
============ ===========
Cash dividends per share $ 0.160 $ 0.152
============ ===========
See accompanying notes to consolidated financial statements.
3
West Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(unaudited)
Three Months Ended March 31,
2005 2004
---- ----
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 62,565,046 56,796,771
Net income 4,842,481 4,261,967
Dividends on common stock; per share amounts
2005 $0.16; 2004 $0.152 (2,672,295) (2,569,643)
------------ ------------
End of period balance 64,735,232 58,489,095
------------ ------------
Accumulated other comprehensive income (loss):
Beginning of year balance 54,930 1,099,573
Unrealized gain (loss) on securities, net of tax (2,056,229) 349,632
------------ ------------
End of period balance (2,001,299) 1,449,205
------------ ------------
Total stockholders' equity $ 97,733,933 $ 94,938,300
============ ============
West Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(unaudited)
Three Months Ended March 31,
2005 2004
---- ----
Net income $ 4,842,481 $ 4,261,967
Other comprehensive income (loss), unrealized gains
(losses) on securities, net of reclassification adjustment,
net of tax (2,056,229) 349,632
----------- -----------
Comprehensive income $ 2,786,252 $ 4,611,599
=========== ===========
See accompanying notes to consolidated financial statements.
4
West Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
Three Months Ended March 31,
2005 2004
---- ----
Cash Flows from Operating Activities
Net income $ 4,842,481 $ 4,261,967
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 375,000 225,000
Net amortization and accretion 347,818 564,796
Loss on disposition of fixed assets 634 -
Net (gains) losses from sales of securities available for sale
and loans held for sale (62,981) (43,544)
Proceeds from sales of loans held for sale 3,753,456 3,141,998
Originations of loans held for sale (4,835,886) (3,465,204)
Depreciation 119,151 83,097
Deferred income taxes (97,396) 371,629
Change in assets and liabilities:
(Increase) decrease in accrued interest receivable (899,064) 202,615
Increase in accrued expenses and other liabilities 1,882,523 1,052,248
------------ ------------
Net cash provided by operating activites 5,425,736 6,394,602
------------ ------------
Cash Flows from Investing Activities
Proceeds from sales, calls, and maturities of securities available for sale 32,642,965 30,296,000
Purchases of securities available for sale (14,789,141) (28,260,236)
Proceeds from maturities and calls of securities held to maturity 6,561,000 4,923,000
Acquisition of Federal Home Loan Bank stock (4,894,700) (1,487,000)
Proceeds from redemption of Federal Home Loan Bank stock 4,475,500 1,877,600
Net increase in loans (14,840,853) (2,333,090)
Purchases of premises and equipment (269,700) (74,648)
Change in other assets (392,793) 443,750
------------ ------------
Net cash provided by investing activities 8,492,278 5,385,376
------------ ------------
Cash Flows from Financing Activities
Net change in deposits 4,288,853 (31,918,142)
Net change in federal funds purchased and securities sold under
agreements to repurchase 25,221,436 10,738,964
Net change in other short-term borrowings (3,569,565) (6,959,008)
Proceeds from long-term borrowings - 10,619,000
Principal payments on long-term borrowings (10,900,000) (13,900,000)
Cash dividends (2,672,295) (2,569,643)
------------ ------------
Net cash provided by (used in) financing activities 12,368,429 (33,988,829)
------------ ------------
Net increase (decrease) in cash and cash equivalents 26,286,443 (22,208,851)
Cash and Cash Equivalents
Beginning 29,879,459 82,073,799
------------ ------------
End $ 56,165,902 $ 59,864,948
============ ============
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 4,616,507 $ 2,767,715
Income taxes 78,763 -
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, 2005
and 2004, and the consolidated balance sheets as of March 31, 2005 and December
31, 2004 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, 2005, and the results
of operations and cash flows for the three months ended March 31, 2005 and 2004.
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 months ended March 31, 2005 and 2004 was
16,701,843 and 16,863,285, 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 recorded on the balance sheet. For additional information on
credit extension commitments see Note 13 of the Company's 2004 consolidated
financial statements. The Company's commitments as of March 31, 2005 and
December 31, 2004 were approximately as follows:
March 31, 2005 December 31, 2004
-------------- -----------------
Commitments to extend credit $224,635,000 $188,495,000
Standby letters of credit 23,849,000 22,181,000
------------ ------------
$248,484,000 $210,676,000
------------ ------------
6
4. Segment Information
An operating segment is generally defined as a component of a business for which
discrete financial information is available, whose operating results are
regularly reviewed by the chief operating decision-maker and whose revenue
exceeds 10 percent of total revenue. The Company's primary business segment is
banking. 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, as the holding company's operation is similar to the bank. The "Other"
segment represents the Company's investment management subsidiary and
intercompany eliminations. Selected financial information on the Company's
segments is presented below for quarters ended March 31, 2005 and 2004.
Quarter ended March 31, 2005
Segments
-----------------------------------------------------
Banking Other Consolidated
------- ----- ------------
Interest income $ 14,457,244 $ - $ 14,457,244
Interest expense 4,845,642 15,000 4,860,642
-------------- -------------- --------------
Net interest income 9,611,602 (15,000) 9,596,602
Provision for loan losses 375,000 - 375,000
-------------- -------------- --------------
Net interest income after provision for loan losses 9,236,602 (15,000) 9,221,602
Noninterest income 1,776,469 750,237 2,526,706
Noninterest expense 3,962,855 626,795 4,589,650
-------------- -------------- --------------
Income before income taxes 7,050,216 108,442 7,158,658
Income taxes 2,273,577 42,600 2,316,177
-------------- -------------- --------------
Net income $ 4,776,639 $ 65,842 $ 4,842,481
============== ============== ==============
Total assets $1,162,729,467 $ 2,665,995 $1,165,395,462
============== ============== ==============
Quarter ended March 31, 2004
Segments
-----------------------------------------------
Banking Other Consolidated
------- ----- ------------
Interest income $ 11,433,151 $ - $ 11,433,151
Interest expense 2,837,798 22,500 2,860,298
------------ ------------ ------------
Net interest income 8,595,353 (22,500) 8,572,853
Provision for loan losses 225,000 - 225,000
------------ ------------ ------------
Net interest income after provision for loan losses 8,370,353 (22,500) 8,347,853
Noninterest income 1,869,301 566,825 2,436,126
Noninterest expense 3,669,416 626,111 4,295,527
------------ ------------ ------------
Income before income taxes 6,570,238 (81,786) 6,488,452
Income taxes 2,254,785 (28,300) 2,226,485
------------ ------------ ------------
Net income $ 4,315,453 $ (53,486) $ 4,261,967
============ ============ ============
Total assets $969,857,487 $ 2,564,576 $972,422,063
============ ============ ============
7
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. 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.
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 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.
7. Reclassifications
Minor reclassifications were made to certain prior year's noninterest income
categories to conform to the current year's presentation.
8. Adjustments Due to Stock Dividend
In July 2004, the Company's Board of Directors authorized a 5% common stock
dividend. Per share numbers in this report for 2004 have been adjusted for that
stock dividend.
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: 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
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, 2005
OVERVIEW
The following discussion is provided for the consolidated operations of the
Company, which includes its wholly-owned banking subsidiary, West Bank ("Bank")
and its wholly-owned investment advisory subsidiary, WB Capital Management Inc.
d/b/a VMF Capital ("VMF Capital"). It focuses on the consolidated results of
operations for the three months ended March 31, 2005, compared to the same
period in 2004 and on the consolidated financial condition of the Company and
its subsidiaries at March 31, 2005 and December 31, 2004.
Net income for the three months ended March 31, 2005 increased 13.6 percent to
$4,842,000 compared to $4,262,000 for the same period in 2004. The increase was
primarily due to higher net interest income which was largely the result of loan
growth.
The year-to-date net interest margin has declined 15 basis points from a year
ago.
Year-to-date noninterest income was higher than last year due to an increase in
investment advisory fees earned by VMF Capital.
Year-to-date noninterest expense was 6.8 percent higher than a year ago due to
an increase in compensation related expenses, occupancy costs and marketing
expenses.
9
RESULTS OF OPERATIONS
The following table shows selected financial results and measures for the three
months ended March 31, 2005 compared with the same period in 2004.
Three months ended March 31,
2005 2004 Change Change-%
---- ---- ------ --------
Net income $ 4,842,481 $ 4,261,967 $ 580,514 13.6%
Average assets 1,172,331,734 985,882,486 186,449,248 18.9%
Average stockholders' equity 97,780,742 93,932,599 3,848,143 4.1%
Return on assets 1.68% 1.74% -0.06%
Return on equity 20.08% 18.25% 1.83%
Efficiency ratio 36.56% 39.66% -3.10%
Dividend payout ratio 55.18% 60.29% -5.11%
Equity to assets ratio 8.34% 9.53% -1.19%
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.
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
-------------------------------------------- ----------------------------------------- -----------------------
2005 2004 Change Change-% 2005 2004 Change Change-% 2005 2004 Change
---- ---- ------ -------- ---- ---- ------ -------- ---- ---- ------
Interest-earning
assets:
Loans:
Commercial $ 263,563 $315,017 $(51,454) -16.33% $ 3,849 $ 4,235 $ (386) -9.11% 5.92% 5.41% 0.51%
Real estate 439,473 251,646 187,827 74.64% 6,656 4,003 2,653 66.28% 6.14% 6.40% -0.26%
Consumer 10,859 18,903 (8,044) -42.55% 202 328 (126) -38.41% 7.55% 6.98% 0.57%
Other 17,679 16,638 1,041 6.26% 258 263 (5) -1.90% 5.92% 6.37% -0.45%
---------- -------- -------- -------- -------- -------- -------- ------ ---- ---- -----
Total Loans 731,574 602,204 129,370 21.48% 10,965 8,829 2,136 24.19% 6.08% 5.90% 0.18%
---------- -------- -------- -------- -------- -------- -------- ------ ---- ---- -----
Investment
securities:
Taxable 243,749 220,033 23,716 10.78% 2,564 2,122 442 20.83% 4.21% 3.86% 0.35%
Tax-exempt 98,170 47,616 50,554 106.17% 1,262 551 711 129.04% 5.14% 4.63% 0.51%
---------- -------- -------- -------- -------- -------- -------- ------ ---- ---- -----
Total investment
securities 341,919 267,649 74,270 27.75% 3,826 2,673 1,153 43.14% 4.48% 4.00% 0.48%
---------- -------- -------- -------- -------- -------- -------- ------ ---- ---- -----
Federal funds
sold and short-
term investments 19,439 46,928 (27,489) -58.58% 138 188 (50) -26.60% 2.89% 1.61% 1.28%
---------- -------- -------- -------- -------- -------- -------- ------ ---- ---- -----
Total interest-
earning assets $1,092,932 $916,781 $176,151 19.21% $ 14,929 $ 11,690 3,239 27.71% 5.52% 5.12% 0.40%
========== ======== ======== ======== -------- -------- -------- ------ ---- ---- -----
Interest-bearing
liabilities:
Deposits:
Checking with
interest,
savings and
money markets $ 375,601 $378,332 $ (2,731) - 0.72% $ 1,147 $ 748 399 53.34% 1.24% 0.80% 0.44%
Time deposits 263,733 136,052 127,681 93.85% 1,581 595 986 165.71% 2.43% 1.76% 0.67%
---------- -------- -------- -------- -------- -------- -------- ------ ---- ---- -----
Total deposits 639,334 514,384 124,950 24.29% 2,728 1,343 1,385 103.13% 1.73% 1.05% 0.68%
---------- -------- -------- -------- -------- -------- -------- ------ ---- ---- -----
Other borrowed
funds 242,193 205,476 36,717 17.87% 2,133 1,517 616 40.61% 3.57% 2.97% 0.60%
---------- -------- -------- -------- -------- -------- -------- ------ ---- ---- -----
Total interest-
bearing
liabilities $ 881,527 $719,860 $161,667 22.46% $ 4,861 $ 2,860 2,001 69.97% 2.24% 1.60% 0.64%
========== ======== ======== ======== -------- -------- -------- ------ ---- ---- -----
Tax-equivalent net
interest income $ 10,068 $ 8,830 $ 1,238 14.02%
======== ======== ======== ======
Net interest spread 3.28% 3.52% -0.24%
==== ==== =====
Net interest margin 3.72% 3.87% -0.15%
==== ==== =====
Fluctuations in net interest income can result from the combination of changes
in the volumes of asset and liability categories and changes in interest rates.
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 Company's
tax-equivalent net interest income for the quarter ended March 31, 2005
increased $1,238,000 compared to the three months ended March 31, 2004. The
increase is primarily attributable to a higher level of earning assets. For the
first quarter of 2005, earning assets averaged $176.1 million higher than the
same period last year.
Taxable-equivalent interest income and fees on loans increased $2,136,000 in the
first quarter of 2005 compared to the same period in 2004, mainly due to a
higher volume of outstanding loans. Average loans were $129.4 million higher
than the first quarter of last year. The average yield on loans increased to
6.08 percent for the first quarter of 2005, compared to 5.90 percent in the
first quarter of 2004. 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 areas served by the
Company remains strong.
The average balance of investment securities was $74.3 million higher than last
year while the yield has increased 48 basis points. Most purchases of investment
securities during the first quarter of 2005 have been callable agency bonds and
tax-exempt municipal bonds with a maturity of ten years or less.
The average rate on deposits increased to 1.73 percent from 1.05 percent for the
first quarter of last year. This increase is primarily the result of an increase
in market interest rates. The mix of interest-bearing deposits during the first
quarter of 2005 consisted of more jumbo certificates of deposit than a year ago.
Jumbo certificates of deposit generally bear higher interest rates than the
other deposit categories.
11
The average balance of borrowings for the first quarter of 2005 was $36.7
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 downstream correspondent banks averaged $16.5 million less than
the first quarter of last year. Long-term fixed borrowings averaged $8.6 million
less, consisting of $74.1 million in fixed-rate Federal Home Loan Bank (FHLB)
advances and $20.6 million of subordinated notes. The decline in the previously
mentioned categories of borrowings was offset by a $63.2 million increase in
average short term borrowings. The short term borrowings were primarily through
the Federal Home Loan Bank of Des Moines.
Provision for Loan Losses
The following table sets forth the activity in the Allowance for Loan Losses for
the three months ended March 31, 2005 and 2004, as well as common ratios related
to the allowance for loan losses.
Three months ended March 31,
2005 2004 Change
---- ---- ------
Balance at beginning of period $ 6,526,824 $ 5,975,587
Charge-offs (33,390) (262,619) $ (229,229)
Recoveries 33,233 17,340 15,893
------------- -------------
Net charge-offs (157) (245,279) (245,122)
Provision charged to operations 375,000 225,000 150,000
------------- -------------
Balance at end of period $ 6,901,667 $ 5,955,308
============= =============
Average loans outstanding $ 731,574,575 $ 602,203,822
Ratio of net charge-offs during the
period to average loans outstanding 0.00% 0.04%
Ratio of allowance for loan losses
to average loans outstanding 0.94% 0.99%
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 the Bank's 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 when the loan has other special or unusual characteristics which
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 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,
2005 2004 Change Change-%
---- ---- ------ --------
Noninterest income
Service charges on deposit accounts $ 1,042,554 $ 1,147,097 $ (104,543) -9.1%
Trust services 140,000 126,000 14,000 11.1%
Investment advisory fees 750,237 566,825 183,412 32.4%
Increase in cash value of bank-owned
life insurance 206,270 223,226 (16,956) -7.6%
Other:
VISA/Mastercard income 38,330 49,135 (10,805) -22.0%
Debit card usage fees 49,273 28,472 20,801 73.1%
ATM card usage fees 19,457 26,389 (6,932) -26.3%
Gain on sale of residential mortgages 21,184 43,544 (22,360) -51.4%
Gain on sale of commercial loans 42,985 - 42,985 100.0%
All other 217,605 225,438 (7,833) -3.5%
----------- ----------- ----------- -----
Total other 388,834 372,978 15,856 4.3%
----------- ----------- ----------- -----
Gain (loss) on sale of securities (1,189) - (1,189) -
----------- ----------- ----------- -----
Total noninterest income $ 2,526,706 $ 2,436,126 $ 90,580 3.7%
=========== =========== =========== =====
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 declined for
two reasons: 1) higher interest rates resulted in a higher earnings credit on
commercial checking accounts which results in lower service charges; and 2)
return check charges have been declining the past few months due to fewer
customers overdrawing their accounts. Investment advisory fees are fees earned
by VMF Capital. The increase in fees was the result of sales efforts throughout
the past 12 months. The decrease in VISA/MasterCard income was due to a decrease
in the number of merchant customers and lower sales activity at certain
merchants. The increase in debit card usage fees was the result of higher usage.
The decline in the ATM card usage fees was due to changes in customer behavior
as customers seek to avoid surcharges when using an ATM. Gains from the sale of
residential mortgages in the secondary market are down because origination
volume is lower. The gains from the sale of commercial loans resulted from the
sale of the SBA (Small Business Administration) guaranteed portion of two
commercial loans.
13
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,
2005 2004 Change Change-%
---- ---- ------ --------
Noninterest expense:
Salaries and employee benefits $2,578,320 $ 2,463,671 $114,649 4.7%
Occupancy 589,649 511,063 78,586 15.4%
Data processing 327,712 337,011 (9,299) -2.8%
Other:
Insurance and surety bond 38,237 23,252 14,985 64.4%
Supplies 97,025 72,229 24,796 34.3%
Marketing 101,298 44,751 56,547 126.4%
Postage and courier 102,396 87,226 15,170 17.4%
Consulting fees 41,230 7,265 33,965 467.5%
All other 713,783 749,059 (35,276) -4.7%
---------- ----------- --------- -----
Total other 1,093,969 983,782 110,187 11.2%
---------- ----------- --------- -----
Total noninterest expense $4,589,650 $ 4,295,527 $ 294,123 6.8%
========== =========== ========= =====
The increase in salaries and benefits was the result of annual compensation
adjustments and certain benefit costs, primarily medical insurance. Occupancy
expenses were higher this year due to one additional location (Coralville, Iowa)
and increased depreciation expense related to furniture and equipment additions
throughout the Company. Insurance expense is higher because the Company's
director's and officer's policy renewed in the third quarter of 2004 at premiums
that were significantly higher. That policy had been in force since the summer
of 2001. Supplies were up because additional brochures were printed as a result
of product and pricing changes. Postage expense is higher because many of those
brochures were mailed to clients during the first quarter. It had been two years
since the Company had extensively reviewed its product line. The Company
developed a targeted marketing campaign during the first quarter which explains
the increase in marketing costs. The increase in consulting fees is not due to
new expenditures but rather a change in the contract with the Bank's former
chairman from that of an employment agreement to a consulting agreement.
Income Tax Expense
The Company incurred income tax expense of $2,316,000 for the three months ended
March 31, 2005 compared with $2,226,000 for the three months ended March 31,
2004. The effective income tax rate as a percent of income before taxes for the
three months ended March 31, 2005 and 2004 was 32.4 percent and 34.3 percent,
respectively. The effective income tax rate was slightly lower in 2005 because
of a higher level of income that is exempt from Federal income taxes.
FINANCIAL CONDITION
Total assets as of March 31, 2005 were $1,165,395,000, a slight increase from
$1,148,435,000 at December 31, 2004. The increase was primarily the result of
loan growth. The loan growth was funded primarily by an increase in time
deposits in excess of $100,000.
Investment Securities
Investment securities available for sale decreased $21,446,000 from December 31,
2004 to $259,664,000 on March 31, 2005. From December 31, 2004, investment
securities classified as held to maturity declined $6,618,000 to $52,802,000 as
of March 31, 2005. Proceeds from the decline in the investment portfolio were
mostly retained in short term investments as of March 31, 2005.
14
Loans
Loans outstanding increased $15,987,000 from December 31, 2004 to March 31,
2005. Construction loans were up $10,367,000 and commercial loans were
$4,072,000 higher. Residential real estate loans and consumer loans were flat
during the quarter. It is expected that loan demand in the commercial,
construction and commercial real estate categories will remain good for the next
couple of quarters. It is difficult to foresee beyond two or three quarters due
to the expected continued increases in interest rates by the Federal Reserve and
the unknown impact on the economy of higher oil prices.
Deposits
Total deposits as of March 31, 2005 were $870,221,000 compared with $865,932,000
as of December 31, 2004. While total deposits did not change significantly,
there was a change in the mix of deposits. Money market accounts, which are
liquid accounts and therefore earn relatively lower interest rates, declined
approximately $74,000,000. A significant portion of those funds moved into the
time certificates of deposit in excess of $100,000 category. That category
increased approximately $56,500,000. Other changes included the super saver
category increasing $13,000,000 and non-interest bearing demand accounts rising
$8,500,000. The shift in the deposit mix during the first quarter can be
described as movements between categories in an attempt by customers to maximize
the interest rate earned on those funds. It is expected that this trend will
continue.
Borrowings
The balance of Federal funds purchased and securities sold under agreements to
repurchase was $99,764,000 at March 31, 2005, up from $74,543,000 at December
31, 2004. Most of this increase relates to Federal funds purchased, which are
Federal funds sold to West Bank by approximately 25 banks throughout Iowa. This
is a correspondent bank service provided by West Bank. The balance of Federal
funds purchased from correspondent banks will fluctuate depending upon the loan
demand and investment strategy of those banks. The Company uses short term
advances from the Federal Home Loan Bank to counteract changes in Federal funds
purchased outstanding. The balance of other short-term borrowings consisted of
Treasury, Tax and Loan option notes and an installment note payable to VMF
Capital, L.L.C. at March 31, 2005. Fixed rate Federal Home Loan Bank advances
totaling $10,900,000 were paid off at maturity during the first quarter of 2005.
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, 2005 December 31, 2004 Change
-------------- ----------------- ------
Nonaccrual loans $ 2,940 $ 785 $ 2,155
Loans past due 90 days and still
accruing interest 339 75 264
------- ------- -------
Total non-performing loans 3,279 860 2,419
Other real estate owned 149 175 (26)
------- ------- -------
Total non-performing assets $ 3,428 $ 1,035 $ 2,393
======= ======= =======
Non-performing assets to total loans 0.46% 0.14% 0.32%
Non-performing assets to total assets 0.29% 0.09% 0.20%
The increase in nonaccrual loans is primarily the result of a commercial real
estate loan totaling approximately $2,200,000. Proceeds from the sale of a small
commercial building 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.
15
Reference is also made to the information and discussion earlier in this report
under the heading "Provision for Loan Losses".
Liquidity and Capital Resources
The objective of liquidity management is to insure the availability of
sufficient cash flows to meet the requirements of depositors and borrowers, all
corporate financial commitments and to capitalize on opportunities for
profitable business expansion. The Company's principal source of funds is
deposits including demand, money market, savings and certificates of deposit.
Other sources include principal repayments on loans, proceeds from the maturity
and sale of investment securities, federal funds purchased, repurchase
agreements, advances from the Federal Home Loan Bank and funds provided by
operations. 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 $56,166,000 as of March 31, 2005, compared
with $29,879,000 as of December 31, 2004. 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. The Company had additional
borrowing capacity available from the Federal Home Loan Bank ("FHLB") of
approximately $94 million at March 31, 2005 and has a $5 million unsecured line
of credit through a large regional correspondent bank. In addition, the Bank has
$100 million in borrowing capacity available through unsecured federal funds
lines of credit with correspondent banks. Management believes the combination of
high levels of potentially liquid assets, cash flows from operations and
additional borrowing capacity provided strong liquidity for the Company at March
31, 2005 to meet the needs of borrowers and depositors.
The Company's total stockholders' equity increased to $97,734,000 at March 31,
2005 from $97,620,000 at December 31, 2004. The increase was minimal because the
decline in the market value of the available for sale investment portfolio
offset net income remaining after the quarterly dividend. Total shareholders'
equity was 8.4 percent of total assets as of March 31, 2005 and 8.5 percent on
December 31, 2004. No material capital expenditures or material changes in the
capital resource mix are anticipated at this time.
In April 2004, the Company's Board of Directors authorized the buy-back of the
Company's common stock for a period of twelve months, in an amount not to exceed
$5 million. Since the authorization, 161,312 shares at a cost of $2,360,235 have
been purchased. These purchases took place in the second quarter of 2004. No
repurchases took place during the three months ended March 31, 2005. On April
13, 2005, the Company's Board of Directors authorized another $5 million to be
used for the buy-back of company common stock over the next 12 months. No shares
have been purchased under the most recent authorization.
16
The table below shows the various measures of regulatory capital and related
ratios.
Regulatory capital:
March 31, 2005 December 31, 2004
-------------- -----------------
Total shareholders' equity $ 97,733,933 $ 97,619,976
Plus: net unrealized losses on available for sale securities 2,001,299 -
Less: net unrealized gains on available for sale securities - (54,930)
Less: intangible assets (16,477,023) (16,561,810)
Plus: subordinated notes 20,000,000 20,000,000
-------------- ----------------
Tier 1 capital 103,258,209 101,003,236
Plus: allowance for loan losses 6,901,667 6,526,824
-------------- ----------------
Total risk-based capital $ 110,159,876 $ 107,530,060
============== ===============
Regulatory
requirements to be: Actual Regulatory
Adequately Well- Capital Ratios as of:
Capitalized Capitalized March 31, 2005 December 31, 2004
----------- ----------- -------------- -----------------
Total risk-based capital
as % of risk-weighted assets 8.0% 10.0% 12.1% 12.3%
Tier 1 capital as % of risk-weighted assets 4.0% 6.0% 11.4% 11.6%
Tier 1 capital as % average assets 4.0% 5.0% 8.9% 8.6%
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. As of March 31, 2005,
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.
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 3, 2005. The Company
has not experienced any material changes to its market risk position since
December 31, 2004. Management does not believe the Company's primary market risk
exposures and how those exposures were managed in the first three months of 2005
changed when compared to 2004.
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.
17
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 have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
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 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no purchases during the first quarter of 2005 of the Company's common
shares under the $5 million stock buy-back plan approved by the Board of
Directors on April 15, 2004. This resolution expired on April 14, 2005. On April
13, 2005, the Company's Board of Directors authorized another $5 million to be
used for the buy-back of company stock over the next 12 months.
18
Item 6. Exhibits
The following exhibits are filed as part of this report:
Exhibits
3.1 Restated Articles of Incorporation of the Company(1)
3.2 By-laws of the Company(1)
10.1 Lease for Main Bank Facility(1)
10.2 Supplemental Agreement to Lease for Main Bank Facility(1)
10.3 Short-term Lease related to Main Bank facility(1)
10.4 Assignment(1)
10.5 Lease Modification Agreement No. 1 for Main Bank Facility(1)
10.6 Memorandum of Real Estate Contract(1)
10.7 Affidavit(1)
10.8 Addendum to Lease for Main Bank Facility(1)
10.9 Data Processing Contract(1)
10.10 Employment Contract(1)
10.12 Data Processing Contract Amendment(2)
10.13 Purchase and Assumption Agreement between West Des Moines
State Bank and Hawkeye State Bank(3)
10.14 Employment Agreement effective March 1, 2003, which was
consummated in the first quarter of 2004(4)
10.15 The Employee Savings and Stock Ownership Plan, as amended(5)
10.16 Amendment to Lease Agreement(6)
10.17 Employment Agreement(6)
10.18 Consulting Agreement
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
(1) Incorporated herein by reference to the related exhibit filed with
the Form 10 on March 11, 2002.
(2) Incorporated herein by reference to the related exhibit filed with
the Form 10-K on March 26, 2003.
(3) Incorporated herein by reference to the related exhibit filed with
the Form 10-Q on May 15, 2003.
(4) Incorporated herein by reference to the related exhibit filed with
the Form 10-K on February 26, 2004.
(5) Incorporated herein by reference to the related exhibit filed with
the Form S-8 on October 29, 2004.
(6) Incorporated herein by reference to the related exhibit filed with
the Form 10-K on March 3, 2005.
19
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 6, 2005 By: /s/ Thomas E. Stanberry
-----------------------
Dated Thomas E. Stanberry
Chairman, President and Chief Executive
Officer
May 6, 2005 By: /s/ Douglas R. Gulling
----------------------
Dated Douglas R. Gulling
Executive Vice President and Chief Financial
Officer
(Principal Accounting Officer)
20
EXHIBIT INDEX
The following exhibits are filed herewith:
Exhibit No. Description
10.18 Consulting Agreement
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