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
September 30, 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
----- -----
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No x
----- -----
As of November 2, 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)
September 30, December 31,
2005 2004
-------------- --------------
Assets
Cash and due from banks $ 36,352,953 $ 18,686,360
Federal funds sold and other short-term investments 6,550,686 11,193,099
-------------- --------------
Cash and cash equivalents 42,903,639 29,879,459
-------------- --------------
Securities available for sale 288,301,484 281,110,020
Securities held to maturity (approximate market value of $60,141,000
at December 31, 2004) -- 59,419,549
Federal Home Loan Bank stock, at cost 8,887,800 6,522,800
-------------- --------------
Total securities 297,189,284 347,052,369
-------------- --------------
Loans 830,131,517 725,845,003
Allowance for loan losses (7,305,814) (6,526,824)
-------------- --------------
Loans, net 822,825,703 719,318,179
-------------- --------------
Premises and equipment, net 4,700,735 4,309,597
Accrued interest receivable 7,740,989 6,505,047
Goodwill and other intangible assets 16,307,447 16,561,810
Bank-owned life insurance 21,885,254 21,256,138
Other assets 6,858,308 3,551,911
-------------- --------------
Total assets $1,220,411,359 $1,148,434,510
============== ==============
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Noninterest bearing demand $ 209,489,389 $ 186,710,245
Savings and interest bearing demand 306,115,707 422,560,048
Time, in excess of $100,000 284,164,042 193,716,248
Other time 73,187,964 62,945,833
-------------- --------------
Total deposits 872,957,102 865,932,374
Federal funds purchased and securities sold under agreements to repurchase 78,282,838 74,543,033
Other short-term borrowings 70,862,268 4,668,451
Accrued expenses and other liabilities 4,518,657 3,777,903
Subordinated notes 20,619,000 20,619,000
Federal Home Loan Bank advances and other long-term borrowings 69,645,018 81,273,773
-------------- --------------
Total liabilities 1,116,884,883 1,050,814,534
-------------- --------------
Stockholders' Equity
Common stock, no par value; authorized 50,000,000 shares; 16,701,843
shares issued and outstanding at September 30, 2005 and
December 31, 2004, respectively 3,000,000 3,000,000
Additional paid-in capital 32,000,000 32,000,000
Retained earnings 69,338,133 62,565,046
Accumulated other comprehensive income (loss) (811,657) 54,930
-------------- --------------
Total stockholders' equity 103,526,476 97,619,976
-------------- --------------
Total liabilities and stockholders' equity $1,220,411,359 $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 Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Interest income:
Loans $12,980,293 $ 9,457,232 $35,796,213 $27,036,739
Securities:
U.S. Treasury, government agencies and corporations 1,708,489 1,674,276 5,366,040 4,391,663
States and political subdivisions 1,080,120 613,557 3,063,788 1,581,676
Other 337,051 643,703 1,363,056 2,083,609
Federal funds sold and other short-term investments 45,675 183,265 304,712 550,411
----------- ----------- ----------- -----------
Total interest income 16,151,628 12,572,033 45,893,809 35,644,098
----------- ----------- ----------- -----------
Interest expense:
Demand deposits 56,511 21,711 126,679 61,515
Savings deposits 1,364,037 820,625 3,771,494 2,398,382
Time deposits 3,041,428 1,001,957 6,979,239 2,294,109
Federal funds purchased and securities sold under
agreements to repurchase 611,355 134,899 1,635,455 468,237
Other short-term borrowings 462,218 265,040 1,211,395 347,271
Subordinated notes 370,867 370,867 1,100,616 1,104,611
Long-term borrowings 883,328 938,424 2,635,906 2,795,297
----------- ----------- ----------- -----------
Total interest expense 6,789,744 3,553,523 17,460,784 9,469,422
----------- ----------- ----------- -----------
Net interest income 9,361,884 9,018,510 28,433,025 26,174,676
Provision for loan losses 450,000 325,000 1,325,000 775,000
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 8,911,884 8,693,510 27,108,025 25,399,676
----------- ----------- ----------- -----------
Noninterest income:
Service charges on deposit accounts 1,214,142 1,339,223 3,500,949 3,759,792
Trust services 202,475 157,000 531,300 415,500
Investment advisory fees 904,236 711,166 2,478,115 1,900,187
Increase in cash value of bank-owned life insurance 212,621 213,072 629,117 658,037
Net realized gains (losses) from sales of securities
available for sale 158,377 1,975 201,565 244,981
Other income 340,732 334,959 1,226,266 1,042,483
----------- ----------- ----------- -----------
Total noninterest income 3,032,583 2,757,395 8,567,312 8,020,980
----------- ----------- ----------- -----------
Noninterest expense:
Salaries and employee benefits 2,579,400 2,408,132 7,743,658 7,297,535
Occupancy 624,168 494,033 1,817,057 1,499,206
Data processing 367,753 338,189 1,057,561 1,027,348
Other expenses 1,083,010 918,084 3,241,875 2,880,750
----------- ----------- ----------- -----------
Total noninterest expense 4,654,331 4,158,438 13,860,151 12,704,839
----------- ----------- ----------- -----------
Income before income taxes 7,290,136 7,292,467 21,815,186 20,715,817
Income taxes 2,327,432 2,485,641 7,025,214 7,093,924
----------- ----------- ----------- -----------
Net income $ 4,962,704 $ 4,806,826 $14,789,972 $13,621,893
=========== =========== =========== ===========
Earnings per share, basic $ 0.30 $ 0.29 $ 0.89 $ 0.81
=========== =========== =========== ===========
Cash dividends per share $ 0.160 $ 0.160 $ 0.480 $ 0.464
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
3
West Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(unaudited)
Nine Months Ended
September 30,
--------------------------
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 14,789,972 13,621,893
Dividends on common stock (8,016,885) (7,811,582)
Purchase of fractional shares resulting from
stock dividend -- (2,090)
Shares reacquired under the common stock
repurchase plan -- (2,360,235)
------------ -----------
End of period balance 69,338,133 60,244,757
------------ -----------
Accumulated other comprehensive income (loss):
Beginning of year balance 54,930 1,099,573
Unrealized gains (losses) on securities, net of tax (866,587) (314,915)
------------ -----------
End of period balance (811,657) 784,658
------------ -----------
Total stockholders' equity $103,526,476 $96,029,415
============ ===========
West Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(unaudited)
Nine Months Ended
September 30,
--------------------------
2005 2004
----------- -----------
Net Income $14,789,972 $13,621,893
Other comprehensive income (loss), unrealized gains
(losses) on securities, net of reclassification
adjustment, net of tax (866,587) (314,915)
----------- -----------
Comprehensive income $13,923,385 $13,306,978
=========== ===========
See accompanying notes to consolidated financial statements.
4
West Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
Nine Months Ended
September 30,
-----------------------------
2005 2004
------------- -------------
Cash Flows from Operating Activities
Net income $ 14,789,972 $ 13,621,893
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 1,325,000 775,000
Net amortization and accretion 824,609 1,508,164
Loss on disposal of fixed assets 22,857 --
Net gains from sales of securities available for sale
and loans held for sale (339,175) (360,131)
Proceeds from sales of loans held for sale 12,312,529 9,612,269
Originations of loans held for sale (12,179,419) (9,537,119)
Depreciation 390,785 255,794
Deferred income taxes (172,532) 443,070
Change in assets and liabilities:
Increase in accrued interest receivable (1,235,942) (576,401)
Increase in accrued expenses and other liabilities 740,754 12,304,300
------------- -------------
Net cash provided by operating activities 16,479,438 28,046,839
------------- -------------
Cash Flows from Investing Activities
Proceeds from sales, calls, and maturities of securities available for sale 72,458,156 80,351,815
Purchases of securities available for sale (41,647,438) (163,774,781)
Proceeds from maturities and calls of securities held to maturity 19,431,000 36,445,000
Purchases of securities held to maturity -- (30,717,947)
Acquisition of Federal Home Loan Bank stock (14,198,400) (9,520,300)
Proceeds from redemption of Federal Home Loan Bank stock 11,833,400 5,595,700
Net increase in loans (104,828,024) (78,967,479)
Purchases of premises and equipment (804,780) (438,508)
Change in other assets (3,240,637) (428,739)
------------- -------------
Net cash (used) in investing activities (60,996,723) (161,455,239)
------------- -------------
Cash Flows from Financing Activities
Net change in deposits 7,024,728 88,071,342
Net change in federal funds purchased and securities sold
under agreements to repurchase 3,739,805 (41,216,858)
Net change in other short-term borrowings 65,693,817 85,847,217
Proceeds from long-term borrowings -- 10,619,000
Principal payments on long-term borrowings (10,900,000) (13,900,000)
Purchase of fractional shares resulting from stock dividend -- (2,090)
Payment for shares reacquired under common stock
repurchase plan -- (2,360,235)
Cash dividends (8,016,885) (7,811,582)
------------- -------------
Net cash provided by financing activities 57,541,465 119,246,794
------------- -------------
Net increase (decrease) in cash and cash equivalents 13,024,180 (14,161,606)
Cash and Cash Equivalents
Beginning 29,879,459 82,073,799
------------- -------------
End $ 42,903,639 $ 67,912,193
============= =============
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 16,527,967 $ 8,984,818
Income taxes 7,224,763 6,050,000
See accompanying notes to consolidated financial statements.
5
West Bancorporation, Inc.
Notes to Consolidated Financial Statements
(unaudited)
1. Basis of Presentation
The accompanying consolidated statements of income for the three and nine months
ended September 30, 2005 and 2004, the consolidated statements of stockholders'
equity, comprehensive income, and cash flows for the nine months ended September
30, 2005 and 2004, and the consolidated balance sheets as of September 30, 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 September 30, 2005, the results
of operations for the three and nine months ended September 30, 2005 and 2004,
and cash flows for the nine months ended September 30, 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 September 30, 2005 and 2004 was
16,701,843 and 16,701,890, respectively, and the average number of shares
outstanding for the nine months ended September 30, 2005 and 2004 was 16,701,843
and 16,781,235, respectively.
3. Transfer of Investment Securities Non-Cash Investing Activity
During the three months ended September 30, 2005, the Company transferred all
held to maturity investment securities to the available for sale category. The
net carrying amount of transferred securities was $39,848,000. The related
unrealized gains at the date of transfer were $413,000, and are included in
other comprehensive income. The decision to transfer all held to maturity
securities to the available for sale category was made to allow the entire
investment portfolio to be managed on a total return basis.
4. 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 September 30, 2005 and
December 31, 2004 are approximately as follows:
September 30, 2005 December 31, 2004
------------------ -----------------
Commitments to extend credit $252,848,000 $188,495,000
Standby letters of credit 23,584,000 22,181,000
------------ ------------
$276,432,000 $210,676,000
============ ============
6
5. Segment Information
An operating segment is generally defined as a component of a business for which
discrete financial information is available and whose operating results are
regularly reviewed by the chief operating decision-maker. The Company's primary
business 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 the three and nine months ended
September 30, 2005 and 2004 (dollars in thousands).
Three months ended September 30,
-----------------------------------------------------------------------
2005 Segments 2004 Segments
--------------------------------- ----------------------------------
Banking Other Consolidated Banking Other Consolidated
------- ----- ------------ ------- ----- ------------
Interest income $16,152 $ -- $16,152 $12,572 $ -- $12,572
Interest expense 6,775 15 6,790 3,530 23 3,553
------- ---- ------- ------- ---- -------
Net interest income 9,377 (15) 9,362 9,042 (23) 9,019
Provision for loan losses 450 -- 450 325 -- 325
------- ---- ------- ------- ---- -------
Net interest income after provision
for loan losses 8,927 (15) 8,912 8,717 (23) 8,694
Noninterest income 2,128 904 3,032 2,046 711 2,757
Noninterest expense 3,983 671 4,654 3,555 603 4,158
------- ---- ------- ------- ---- -------
Income before income taxes 7,072 218 7,290 7,208 85 7,293
Income taxes 2,237 90 2,327 2,456 30 2,486
------- ---- ------- ------- ---- -------
Net income $ 4,835 $128 $ 4,963 $ 4,752 $ 55 $ 4,807
======= ==== ======= ======= ==== =======
Depreciation and amortization $ 183 $ 41 $ 224 $ 129 $ 44 $ 173
======= ==== ======= ======= ==== =======
Nine months ended September 30,
-----------------------------------------------------------------------
2005 Segments 2004 Segments
---------------------------------- ----------------------------------
Banking Other Consolidated Banking Other Consolidated
---------- ------ ------------ ---------- ------ ------------
Interest income $ 45,894 $ -- $ 45,894 $ 35,644 $ -- $ 35,644
Interest expense 17,416 45 17,461 9,401 68 9,469
---------- ------ ---------- ---------- ------ ----------
Net interest income 28,478 (45) 28,433 26,243 (68) 26,175
Provision for loan losses 1,325 -- 1,325 775 -- 775
---------- ------ ---------- ---------- ------ ----------
Net interest income after provision
for loan losses 27,153 (45) 27,108 25,468 (68) 25,400
Noninterest income 6,089 2,478 8,567 6,121 1,900 8,021
Noninterest expense 11,892 1,968 13,860 10,826 1,879 12,705
---------- ------ ---------- ---------- ------ ----------
Income before income taxes 21,350 465 21,815 20,763 (47) 20,716
Income taxes 6,834 191 7,025 7,109 (15) 7,094
---------- ------ ---------- ---------- ------ ----------
Net income $ 14,516 $ 274 $ 14,790 $ 13,654 $ (32) $ 13,622
========== ====== ========== ========== ====== ==========
Depreciation and amortization $ 518 $ 127 $ 645 $ 395 $ 132 $ 527
========== ====== ========== ========== ====== ==========
Total assets $1,217,474 $2,937 $1,220,411 $1,185,165 $2,627 $1,187,792
========== ====== ========== ========== ====== ==========
7
6. 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.
7. 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.
8. Subsequent Event
On October 24, 2005, the Company announced a definitive agreement to acquire
Investors Management Group (IMG), a wholly-owned subsidiary of AMCORE Financial,
Inc. The acquisition is subject to customary conditions, including approvals or
consents from a requisite percentage of IMG's clients, and is expected to close
late in the fourth quarter of 2005. The Company expects the acquisition to be
neutral to earnings in 2006.
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 changes 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 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 AND NINE MONTHS ENDED SEPTEMBER 30, 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 and nine months ended September 30, 2005, compared to
the same periods in 2004 and on the consolidated financial condition of the
Company and its subsidiaries at September 30, 2005, compared to December 31,
2004.
Net income for the three months ended September 30, 2005 increased 3.2 percent
to $4,963,000 compared to $4,807,000 for the same period in 2004. The increase
was primarily due to a 3.8 percent increase in net interest income, a 27.1
percent increase in investment advisory fees and higher gains from sales of
securities. These improvements were somewhat offset by an 11.9 percent increase
in noninterest expense.
For the first nine months of 2005, net income was $14,790,000, or $.89 per
share, which is an 8.6 percent increase over last year. Net income for the first
nine months of 2005 is higher than the previous year primarily due to higher net
interest income which increased $2,258,000 due to significant loan growth. The
provision for loan losses was $550,000 higher than the same period last year.
Noninterest income for the first nine months of 2005 increased by $546,000 while
noninterest expenses were $1,155,000 higher than in 2004.
The year-to-date net interest margin has declined 16 basis points from a year
ago. The decline is the result of the cost of short-term borrowings and jumbo
certificates of deposit rising more than the yields on the loan and investment
portfolios.
Year-to-date noninterest income was higher than last year due to investment
advisory fees earned by VMF Capital, increased trust fees and higher loan
related fees.
Year-to-date noninterest expense was 9.1 percent higher than a year ago due to
increases in compensation related expenses, occupancy costs and net other real
estate owned expenses.
9
RESULTS OF OPERATIONS
The following table shows selected financial results and measures for the three
and nine months ended September 30, 2005 compared with the same periods in 2004
(dollars in thousands).
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------------------- ---------------------------------------------
2005 2004 Change Change-% 2005 2004 Change Change-%
---------- ---------- -------- -------- ---------- ---------- -------- --------
Net income $ 4,963 $ 4,807 $ 156 3.2% $ 14,790 $ 13,622 $ 1,168 8.6%
Average assets 1,189,373 1,066,044 123,329 11.6% 1,181,382 1,023,855 157,527 15.4%
Average stockholders'
equity 101,875 93,290 8,585 9.2% 99,628 93,506 6,122 6.5%
Return on assets 1.66% 1.79% -0.13% 1.67% 1.78% -0.11%
Return on equity 19.33% 20.50% -1.17% 19.85% 19.46% 0.39%
Efficiency ratio 36.61% 34.38% 2.23% 36.27% 36.49% -0.22%
Dividend payout ratio 53.33% 55.17% -1.84% 53.93% 57.28% -3.35%
Equity to assets ratio 8.57% 8.75% -0.18% 8.43% 9.13% -0.70%
Definitions of ratios:
Return on assets - annualized net income divided by average assets.
Return on equity - annualized net income divided by average stockholders'
equity.
Efficiency ratio - noninterest expense divided by noninterest income (excluding
securities gains) plus taxable equivalent net interest income.
Dividend payout ratio - dividends per share divided by net income per share.
Equity to assets ratio - average equity divided by average assets.
Net Interest Income
The following tables show average balances and related interest income or
interest expense, with the resulting average yield or rate by category of
average 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 September 30 (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 $ 282,204 $262,528 $ 19,676 7.49% $ 4,693 $ 3,499 $1,194 34.12% 6.60% 5.30% 1.30%
Real estate 477,448 363,603 113,845 31.31% 7,886 5,559 2,327 41.86% 6.55% 6.08% 0.47%
Consumer 10,907 11,933 (1,026) -8.60% 221 216 5 2.31% 8.05% 7.21% 0.84%
Other 22,359 18,778 3,581 19.07% 253 266 (13) -4.89% 4.49% 5.63% -1.14%
---------- -------- -------- ------ ------- ------- ------ ------ ---- ---- -----
Total loans 792,918 656,842 136,076 20.72% 13,053 9,540 3,513 36.82% 6.53% 5.78% 0.75%
---------- -------- -------- ------ ------- ------- ------ ------ ---- ---- -----
Investment securities:
Taxable 203,444 245,860 (42,416) -17.25% 2,134 2,418 (284) -11.75% 4.20% 3.93% 0.27%
Tax-exempt 106,075 61,111 44,964 73.58% 1,396 762 634 83.20% 5.27% 4.99% 0.28%
---------- -------- -------- ------ ------- ------- ------ ------ ---- ---- -----
Total investment securities 309,519 306,971 2,548 0.83% 3,530 3,180 350 11.01% 4.57% 4.14% 0.43%
---------- -------- -------- ------ ------- ------- ------ ------ ---- ---- -----
Federal funds sold and
short-term investments 4,732 29,171 (24,439) -83.78% 46 171 (125) -73.10% 3.83% 2.34% 1.49%
---------- -------- -------- ------ ------- ------- ------ ------ ---- ---- -----
Total interest-earning assets $1,107,169 $992,984 $114,185 11.50% 16,629 12,891 3,738 29.00% 5.96% 5.17% 0.79%
========== ======== ======== ====== ------- ------- ------ ------ ---- ---- -----
Interest-bearing liabilities:
Deposits:
Checking with interest, savings
and money markets $ 307,970 $372,708 $(64,738) -17.37% 1,421 842 579 68.76% 1.83% 0.90% 0.93%
Time deposits 366,023 207,069 158,954 76.76% 3,041 1,002 2,039 203.49% 3.30% 1.92% 1.38%
---------- -------- -------- ------ ------- ------- ------ ------ ---- ---- -----
Total deposits 673,993 579,777 94,216 16.25% 4,462 1,844 2,618 141.97% 2.63% 1.27% 1.36%
---------- -------- -------- ------ ------- ------- ------ ------ ---- ---- -----
Other borrowed funds 213,808 213,289 519 0.24% 2,328 1,709 619 36.22% 4.32% 3.19% 1.13%
---------- -------- -------- ------ ------- ------- ------ ------ ---- ---- -----
Total interest-bearing
liabilities $ 887,801 $793,066 $ 94,735 11.95% 6,790 3,553 3,237 91.11% 3.03% 1.78% 1.25%
========== ======== ======== ====== ------- ------- ------ ------ ---- ---- -----
Tax-equivalent net interest
income $ 9,839 $ 9,338 $ 501 5.37%
======= ======= ====== ======
Net interest spread 2.93% 3.39% -0.46%
==== ==== =====
Net interest margin 3.53% 3.74% -0.21%
==== ==== =====
Data for the nine months ended September 30 (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 $ 273,130 $283,333 $(10,203) -3.60% $12,841 $11,270 $ 1,571 13.94% 6.29% 5.31% 0.98%
Real estate 460,289 311,473 148,816 47.78% 21,821 14,409 7,412 51.44% 6.34% 6.18% 0.16%
Consumer 10,812 14,642 (3,830) -26.16% 617 778 (161) -20.69% 7.63% 7.10% 0.53%
Other 20,273 18,673 1,600 8.57% 735 842 (107) -12.71% 4.85% 6.02% -1.17%
---------- -------- -------- ------ ------- ------- ------- ------ ---- ---- ----
Total loans 764,504 628,121 136,383 21.71% 36,014 27,299 8,715 31.92% 6.30% 5.81% 0.49%
---------- -------- -------- ------ ------- ------- ------- ------ ---- ---- ----
Investment securities:
Taxable 220,566 233,155 (12,589) -5.40% 6,995 6,755 240 3.55% 4.23% 3.86% 0.37%
Tax-exempt 102,506 53,400 49,106 91.96% 3,995 1,914 2,081 108.73% 5.20% 4.78% 0.42%
---------- -------- -------- ------ ------- ------- ------- ------ ---- ---- ----
Total investment securities 323,072 286,555 36,517 12.74% 10,990 8,669 2,321 26.77% 4.54% 4.03% 0.51%
---------- -------- -------- ------ ------- ------- ------- ------ ---- ---- ----
Federal funds sold and
short-term investments 12,817 38,164 (25,347) -66.42% 305 539 (234) -43.41% 3.18% 1.89% 1.29%
---------- -------- -------- ------ ------- ------- ------- ------ ---- ---- ----
Total interest-earning assets $1,100,393 $952,840 $147,553 15.49% 47,309 36,507 10,802 29.59% 5.75% 5.12% 0.63%
---------- -------- -------- ------ ------- ------- ------- ------ ---- ---- ----
Interest-bearing liabilities:
Deposits:
Checking with interest, savings
and money markets $ 340,335 $385,256 $(44,921) -11.66% $ 3,898 $ 2,460 1,438 58.46% 1.53% 0.85% 0.68%
Time deposits 320,894 167,823 153,071 91.21% 6,979 2,294 4,685 204.23% 2.91% 1.83% 1.08%
---------- -------- -------- ------ ------- ------- ------- ------ ---- ---- ----
Total deposits 661,229 553,079 108,150 19.55% 10,877 4,754 6,123 128.80% 2.20% 1.15% 1.05%
---------- -------- -------- ------ ------- ------- ------- ------ ---- ---- ----
Other borrowed funds 222,509 201,875 20,634 10.22% 6,584 4,715 1,869 39.64% 3.96% 3.12% 0.84%
---------- -------- -------- ------ ------- ------- ------- ------ ---- ---- ----
Total interest-bearing
liabilities $ 883,738 $754,954 $128,784 17.06% 17,461 9,469 7,992 84.40% 2.64% 1.68% 0.96%
========== ======== ======== ====== ------- ------- ------- ------ ---- ---- ----
Tax-equivalent net interest
income $29,848 $27,038 $ 2,810 10.39%
======= ======= ======= ======
Net interest spread 3.11% 3.44% -0.33%
==== ==== ====
Net interest margin 3.63% 3.79% -0.16%
==== ==== ====
11
Fluctuations in net interest income can result from the combination of changes
in the volumes of asset and liability categories 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 tax-equivalent interest income
by the average of total interest-earning assets for the period. The net interest
margin for the third quarter was 3.53 percent, which was 21 basis points lower
than the same quarter last year and 9 basis points less than the second quarter
of 2005. The decline from the prior quarter was due to continued increases in
market rates on deposits and borrowings which have increased faster than the
yields on earning assets. The Company's tax-equivalent net interest income for
the nine months ended September 30, 2005 increased $2,810,000 compared to the
nine months ended September 30, 2004. The increase was primarily attributable to
a higher level of earning assets.
Taxable-equivalent interest income and fees on loans increased $8,715,000 in the
first nine months of 2005 compared to the same period in 2004, due to a higher
volume of outstanding loans. Average loans were $136.4 million higher than the
first nine months of last year. The average yield on loans increased to 6.30
percent for the first nine months of 2005, compared to 5.81 percent for the same
period in 2004. The yield on the Company's loan portfolio is affected by the
amount of non-accrual 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. At September 30, 2005, approximately 54 percent of the
Company's loan portfolio consisted of variable rate loans. Competition for loans
in the market areas served by the Company remains strong.
The average balance of investment securities was $36.5 million higher than last
year while the yield has increased 51 basis points. Most purchases of investment
securities during the first nine months of 2005 have been agency bonds and
tax-exempt municipal bonds with a maturity of five years or less. During the
third quarter the Federal Home Loan Bank of Des Moines significantly reduced the
amount of their quarterly dividend which lowered third quarter dividend income
on this investment by $69,000. The likelihood and amount of future FHLB
dividends is unknown at this time.
The average rate paid on deposits for the first nine months of 2005 increased to
2.20 percent from 1.15 percent for the same period last year. This increase was
primarily the result of responding to increases in market interest rates. During
the first nine months of 2005 the Federal Reserve raised short-term rates by 25
basis points five times. Compared to the first nine months of last year, the
average balance of certificates of deposit was up $153.0 million, while the
average balance of money market and savings accounts, which typically have lower
rates, were $21.8 million and $26.6 million lower, respectively.
The average balance of borrowings for the first nine months of 2005 was $20.6
million higher than a year ago. Average short-term borrowings, which consisted
primarily of federal funds purchased and borrowings from the Federal Home Loan
Bank of Des Moines (FHLB), increased by $31.3 million. Long-term borrowings
which include fixed-rate FHLB advances, subordinated notes and a note payable
related to the acquisition of VMF Capital in 2003 averaged $10.7 million less
than a year ago. The decline was due to a maturity of an FHLB advance in the
first quarter. The change in mix and market rate increases caused the overall
cost of borrowings to increase by 84 basis points compared to the prior year.
12
Provision for Loan Losses and the Related Allowance for Loan Losses
The following table sets forth the activity in the Allowance for Loan Losses for
the three and nine months ended September 30, 2005 and 2004 as well as common
ratios related to the allowance for loan losses (dollars in thousands).
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2005 2004 Change 2005 2004 Change
-------- -------- -------- -------- -------- --------
Balance at beginning of period $ 7,080 $ 6,032 $ 1,048 $ 6,527 $ 5,976 $ 551
Charge-offs (284) (260) (24) (671) (728) 57
Recoveries 60 43 17 125 117 8
-------- -------- -------- -------- -------- --------
Net charge-offs (224) (217) (7) (546) (611) 65
Provision charged to operations 450 325 125 1,325 775 550
-------- -------- -------- -------- -------- --------
Balance at end of period $ 7,306 $ 6,140 $ 1,166 $ 7,306 $ 6,140 $ 1,166
======== ======== ======== ======== ======== ========
Average loans outstanding $792,918 $656,842 $136,076 $764,504 $628,121 $136,383
Ratio of net charge-offs during the
period to average loans outstanding 0.03% 0.03% 0.07% 0.10%
Ratio of allowance for loan losses
to average loans outstanding 0.92% 0.93% 0.96% 0.98%
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 examinations. See also the discussion of nonperforming assets later in
this report.
Noninterest Income
The following table shows the variance from the prior year in the noninterest
income categories shown in the Consolidated Statements of Income. In addition,
accounts within the other income category that represent significant variances
are shown (dollars in thousands).
13
Three Months Ended September 30,
-----------------------------------
2005 2004 Change Change-%
------ ------ ------ --------
Noninterest income:
Service charges on deposit accounts $1,214 $1,340 $(126) -9.40%
Trust services 202 157 45 28.66%
Investment advisory fees 904 711 193 27.14%
Increase in cash value of bank-owned
life insurance 213 213 -- 0.00%
Other:
VISA/Mastercard income 28 43 (15) -34.88%
Debit card usage fees 45 44 1 2.27%
ATM card usage fees 22 24 (2) -8.33%
Gain on sale of residential mortgages 28 36 (8) -22.22%
Gain on sale of commercial loans -- -- -- 0.00%
Other loan fees 8 -- 8 100.00%
All other 209 187 22 11.76%
------ ------ ----- -------
Total other 340 334 6 1.80%
------ ------ ----- -------
Gain on sale of securities 159 2 157 7850.00%
------ ------ ----- -------
Total noninterest income $3,032 $2,757 $ 275 9.97%
====== ====== ===== =======
Nine Months Ended September 30,
-----------------------------------
2005 2004 Change Change-%
------ ------ ------ --------
Noninterest income:
Service charges on deposit accounts $3,501 $3,760 $(259) -6.89%
Trust services 531 416 115 27.64%
Investment advisory fees 2,478 1,900 578 30.42%
Increase in cash value of bank-owned
life insurance 629 658 (29) -4.41%
Other:
VISA/Mastercard income 104 131 (27) -20.61%
Debit card usage fees 147 111 36 32.43%
ATM card usage fees 64 76 (12) -15.79%
Gain on sale of residential mortgages 87 115 (28) -24.35%
Gain on sale of commercial loans 51 -- 51 100.00%
Other loan fees 170 -- 170 100.00%
All other 603 609 (6) -0.99%
------ ------ ----- ------
Total other 1,226 1,042 184 17.66%
------ ------ ----- ------
Gain on sale of securities 202 245 (43) -17.55%
------ ------ ----- ------
Total noninterest income $8,567 $8,021 $ 546 6.81%
====== ====== ===== ======
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 in 2005 due to fewer customers
overdrawing their accounts. Investment advisory fees are fees earned by VMF
Capital. The increase in fees was due to sales efforts throughout the past year
which has resulted in total assets under management increasing from $725 million
at September 30, 2004 to $825 million at September 30, 2005. The decrease in
VISA/MasterCard income is due to a decline 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 as customers continue to expand utilization
of this convenient payment method. The decline in the ATM card usage fees was
due to changes in behavior as non-customers seek to avoid surcharges when using
an ATM. Gains from sale of residential mortgages originated for sale in the
secondary market declined because of rising interest rates and increased pricing
competition. The gains from the sale of commercial loans resulted from the sale
of the SBA (Small Business Administration) guaranteed portion of commercial
loans in the first half of the year. Noninterest related loan fees included the
recognition of a fee for a loan commitment which was terminated by a customer in
the second quarter.
14
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 (dollars in thousands).
Three Months Ended September 30,
-----------------------------------
2005 2004 Change Change-%
------ ------ ------ --------
Noninterest expense:
Salaries and employee benefits $2,580 $2,408 $172 7.14%
Occupancy 624 494 130 26.32%
Data processing 367 338 29 8.58%
Other:
Insurance 40 36 4 11.11%
Supplies 60 65 (5) -7.69%
Marketing 114 82 32 39.02%
Postage and courier 96 100 (4) -4.00%
Consulting fees 90 30 60 200.00%
OREO expense 16 (71) 87 122.54%
All other 667 676 (9) -1.33%
------ ------ ---- ------
Total other 1,083 918 165 17.97%
------ ------ ---- ------
Total noninterest expense $4,654 $4,158 $496 11.93%
====== ====== ==== ======
Nine Months Ended September 30,
-------------------------------------
2005 2004 Change Change-%
------- ------- ------ --------
Noninterest expense:
Salaries and employee benefits $ 7,744 $ 7,298 $ 446 6.11%
Occupancy 1,817 1,499 318 21.21%
Data processing 1,057 1,027 30 2.92%
Other:
Insurance 118 87 31 35.63%
Supplies 239 196 43 21.94%
Marketing 279 275 4 1.45%
Postage and courier 298 276 22 7.97%
Consulting fees 199 56 143 255.36%
OREO expense 22 (172) 194 112.79%
All other 2,087 2,163 (76) -3.51%
------- ------- ------ ------
Total other 3,242 2,881 361 12.53%
------- ------- ------ ------
Total noninterest expense $13,860 $12,705 $1,155 9.09%
======= ======= ====== ======
The increase in salaries and benefits was the result of staff additions, 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 upgrades 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. Supplies are higher because
additional brochures were printed in the first quarter of 2005 as a result of
product and pricing changes. Postage expense is higher because many of those
brochures were mailed to clients. Marketing expenses on a year-to-date basis are
virtually the same as in the prior year. Third quarter 2005 marketing expenses
increased due to an upgrade of the website and branding work. The increase in
consulting fees is due to a change in the contract with the Company's former
chairman from that of an employment agreement to a consulting agreement and the
hiring of an outside consultant to help with the implementation of software
programs to assist with asset-liability management and profitability
measurement. The net expense for other real estate owned increased from the
prior year as 2004 included gains from the sale of several other real estate
properties.
15
Income Tax Expense
The Company incurred income tax expense of $7,025,000 for the nine months ended
September 30, 2005 compared to $7,094,000 for the nine months ended September
30, 2004. The effective income tax rate as a percent of income before taxes for
the three and nine months ended September 30, 2005 was 31.9 percent and 32.2
percent, compared to 34.1 percent and 34.2 percent, respectively, for the same
periods last year. The effective income tax rate is lower in 2005 because of a
significantly higher level of income that is exempt from Federal income taxes.
The average balance of tax-exempt municipal securities has nearly doubled
compared to the prior year.
FINANCIAL CONDITION
Total assets as of September 30, 2005 were $1.2 billion, a slight increase from
$1.1 billion at December 31, 2004. The increase is primarily due to increased
loan volumes. The loan growth was funded by an increase in short-term borrowings
and a decrease in the investment securities portfolio.
Investment Securities
Investment securities available for sale increased $7.2 million from December
31, 2004 to $288.3 million. During the three months ended September 30, 2005 all
held to maturity securities were reclassified to the available for sale
category. This decision was made so the entire portfolio could be managed on a
total return basis.
Loans and Non-performing Assets
Loans outstanding increased $104.3 million from December 31, 2004 to September
30, 2005. The increase was primarily attributable to growth in commercial real
estate, construction and commercial loans.
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).
September 30, 2005 December 31, 2004 Change
------------------ ----------------- ------
Non-accrual loans $ 697 $ 785 $ (88)
Loans past due 90 days and still
accruing interest 524 75 449
------ ------ ------
Total non-performing loans 1,221 860 361
Other real estate owned 1,840 175 1,665
------ ------ ------
Total non-performing assets $3,061 $1,035 $2,026
====== ====== ======
Non-performing assets to total loans 0.37% 0.14% 0.23%
Non-performing assets to total assets 0.25% 0.09% 0.16%
At September 30, 2005, non-accrual loans consist of eight loan relationships.
Over half of the amount in this category was collateralized by 1 - 4 family real
estate. In the opinion of management, loans past due 90 days and still accruing
interest are adequately collateralized to cover any unpaid interest. Included in
this category was one commercial real estate loan totaling approximately
$450,000 that is fully collateralized by a first mortgage on the property.
The increase in total non-performing assets primarily relates to one project. In
the first quarter of 2005, a commercial real estate loan totaling approximately
$2,200,000 was placed on non-accrual status. During the second quarter of 2005,
a partial charge-off of $300,000 was recorded against this loan. The Bank
obtained the deed to this property during the third quarter of 2005 in lieu of
foreclosure. An additional charge-off of approximately $155,000 was recorded in
the third quarter when the property was transferred to other real estate owned.
The Bank estimated the net realizable value of the property to be $1,750,000,
which was the carrying value at September 30, 2005.
16
Reference is also made to the information and discussion earlier in this report
under the heading "Provision for Loan Losses and the Related Allowance for Loan
Losses".
Deposits
Total deposits as of September 30, 2005 were $873 million compared with $866
million 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 pay relatively lower interest rates,
declined approximately $104 million. Offsetting this decline was an increase in
time certificates of deposit in excess of $100,000 category. That category
increased approximately $90 million and primarily consisted of public unit
deposits. Public unit deposits are generally obtained through a bidding process.
Other changes included the super saver category decreasing approximately $4
million and non-interest bearing demand accounts rising approximately $23
million. The shift in the deposit mix was 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 agreement to
repurchase was $78.3 million at September 30, 2005, up from $74.5 million at
December 31, 2004. Other short-term borrowings, consisting of Treasury, Tax and
Loan option notes, short-term FHLB borrowings and a note payable related to the
acquisition of VMF Capital, increased $66.2 million since December 31, 2004 with
virtually all of this increase attributable to short-term FHLB borrowings.
Long-term borrowings consisted of fixed rate FHLB advance, subordinated notes
and a note payable related to the acquisition of VMF Capital. Advances totaling
$10.9 million were paid off at maturity during the first quarter of 2005.
Liquidity and Capital Resources
The objective of liquidity management is to ensure 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 asset-liability management policy. The Company
had liquid assets (cash and cash equivalents) of $42.9 million as of September
30, 2005, compared with $29.9 million 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 FHLB
of approximately $33.7 million at September 30, 2005 and has a $5 million
unsecured line of credit through a large regional correspondent bank. In
addition, the Bank has $100 million available through unsecured federal funds
lines of credit with correspondent banks. The Bank was utilizing $30 million of
those lines of credit at September 30, 2005. Management believes the combination
of high levels of potentially liquid assets, positive cash flows from operations
and additional borrowing capacity provided strong liquidity for the Company at
September 30, 2005 to meet the needs of borrowers and depositors.
The Company's total stockholders' equity increased to $103.5 million at
September 30, 2005, from $97.6 million at December 31, 2004. Total stockholders'
equity was 8.5 percent of total assets as of September 30, 2005 and December 31,
2004. The Bank is currently undergoing various remodeling projects and is
implementing platform banking. The total estimated cost for both projects is $.4
million.
In April 2005, 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. No repurchases have taken place under this authorization.
17
The table below shows the various measures of regulatory capital and related
ratios (dollars in thousands).
Regulatory capital:
September 30, 2005 December 31, 2004
------------------ -----------------
Total shareholders' equity $103,526 $ 97,620
Plus: net unrealized losses on available for sale securities 812 --
Less: net unrealized gains on available for sale securities -- (55)
Less: intangible assets (16,308) (16,562)
Plus: subordinated notes 20,000 20,000
-------- --------
Tier 1 capital 108,030 101,003
Plus: allowance for loan losses 7,306 6,527
-------- --------
Total risk-based capital $115,336 $107,530
======== ========
Regulatory
requirements to be: Actual Regulatory
------------------------- Capital Ratios as of:
Adequately Well- --------------------------------------
Capitalized Capitalized September 30, 2005 December 31, 2004
----------- ----------- ------------------ -----------------
Total risk-based capital
as % of risk-weighted assets 8.0% 10.0% 12.0% 12.3%
Tier 1 capital as % of risk-weighted assets 4.0% 6.0% 11.3% 11.6%
Tier 1 capital as % average assets 4.0% 5.0% 9.2% 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. Management believes,
and data in the above table show that, as of September 30, 2005 and December 31,
2004, the Company met all capital adequacy requirements to which it is subject.
As of those same 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 and is
incorporated herein by reference. 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 nine 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.
18
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.
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 nine months ended September 30, 2005 of the
Company's common shares under the $5 million stock buy-back plan approved by the
Board of Directors on April 13, 2005 or the previous stock buy-back plan
approved in April of 2004.
Item 6. Exhibits
(a) 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(7)
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.
(7) Incorporated herein by reference to the related exhibit filed with the Form
10-Q on May 6, 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)
November 3, 2005 By: /s/ Thomas E. Stanberry
Dated ------------------------------------
Thomas E. Stanberry
Chairman, President and Chief
Executive Officer
November 3, 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
- ----------- -----------
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
21