UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2006
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number 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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer Accelerated filer X Non-accelerated filer
--- --- ---
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 August 4, 2006, 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)
June 30, December 31,
2006 2005
-------------- --------------
Assets
Cash and due from banks $ 33,946,346 $ 39,424,270
Federal funds sold and other short-term investments 31,765,900 1,241,044
-------------- --------------
Cash and cash equivalents 65,712,246 40,665,314
-------------- --------------
Securities available for sale 264,660,840 270,333,846
Federal Home Loan Bank stock, at cost 4,486,000 4,384,400
-------------- --------------
Total securities 269,146,840 274,718,246
-------------- --------------
Loans 948,589,581 867,504,620
Allowance for loan losses (8,439,708) (7,615,188)
-------------- --------------
Loans, net 940,149,873 859,889,432
-------------- --------------
Premises and equipment, net 5,454,045 5,650,009
Accrued interest receivable 8,497,308 7,861,647
Goodwill and other intangible assets 26,674,231 27,116,287
Bank-owned life insurance 22,521,292 22,099,259
Other assets 9,098,665 6,380,103
-------------- --------------
Total assets $1,347,254,500 $1,244,380,297
============== ==============
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Noninterest-bearing demand $ 192,909,447 $ 207,492,888
Interest-bearing demand 44,416,319 48,629,629
Savings 281,919,521 295,068,233
Time, in excess of $100,000 308,616,506 269,057,298
Other time 201,397,342 124,645,285
-------------- --------------
Total deposits 1,029,259,135 944,893,333
Federal funds purchased and securities sold under
agreements to repurchase 102,673,852 84,748,150
Other short-term borrowings 2,399,140 4,732,124
Accrued expenses and other liabilities 7,212,028 6,298,408
Subordinated notes 20,619,000 20,619,000
Long-term borrowings 78,411,310 78,568,766
-------------- --------------
Total liabilities 1,240,574,465 1,139,859,781
-------------- --------------
Stockholders' Equity
Common stock, no par value; 50,000,000 authorized shares;
16,701,843 shares issued and outstanding 3,000,000 3,000,000
Additional paid-in capital 32,000,000 32,000,000
Retained earnings 76,033,137 71,950,620
Accumulated other comprehensive (loss) (4,353,102) (2,430,104)
-------------- --------------
Total stockholders' equity 106,680,035 104,520,516
-------------- --------------
Total liabilities and stockholders' equity $1,347,254,500 $1,244,380,297
============== ==============
See accompanying notes to consolidated financial statements.
2
West Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Income
(unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
Interest income:
Loans, including fees $17,035,669 $11,930,863 $32,498,597 $22,815,920
Securities:
U.S. Treasury, government agencies and corporations 1,521,614 1,726,410 3,017,526 3,657,551
States and political subdivisions 1,029,141 1,025,574 2,072,277 1,983,668
Other 397,712 481,453 726,260 1,026,005
Federal funds sold and other short-term investments 218,972 120,637 345,001 259,037
----------- ----------- ----------- -----------
Total interest income 20,203,108 15,284,937 38,659,661 29,742,181
----------- ----------- ----------- -----------
Interest expense:
Demand deposits 76,772 43,406 135,887 70,168
Savings deposits 1,918,775 1,287,618 3,631,846 2,407,457
Time deposits 6,132,398 2,356,534 10,989,493 3,937,811
Federal funds purchased and securities sold under
agreements to repurchase 845,846 599,149 1,757,786 1,024,100
Other short-term borrowings 11,657 283,759 25,939 749,177
Subordinated notes 366,872 366,872 729,749 729,749
Long-term borrowings 1,014,438 873,060 2,009,158 1,752,578
----------- ----------- ----------- -----------
Total interest expense 10,366,758 5,810,398 19,279,858 10,671,040
----------- ----------- ----------- -----------
Net interest income 9,836,350 9,474,539 19,379,803 19,071,141
Provision for loan losses 450,000 500,000 900,000 875,000
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 9,386,350 8,974,539 18,479,803 18,196,141
----------- ----------- ----------- -----------
Noninterest income:
Service charges on deposit accounts 1,117,093 1,244,253 2,120,951 2,286,807
Trust services 195,168 188,825 363,218 328,825
Investment advisory fees 2,112,210 823,642 4,360,585 1,573,879
Increase in cash value of bank-owned life insurance 212,832 210,226 422,033 416,496
Net realized gains from sales of securities
available for sale (37,817) 44,377 (143,675) 43,188
Other income 360,860 496,700 718,116 885,534
----------- ----------- ----------- -----------
Total noninterest income 3,960,346 3,008,023 7,841,228 5,534,729
----------- ----------- ----------- -----------
Noninterest expense:
Salaries and employee benefits 3,492,227 2,585,938 7,167,377 5,164,258
Occupancy 865,910 603,240 1,721,830 1,192,889
Data processing 505,113 362,096 984,648 689,808
Other expenses 1,318,710 1,064,896 2,620,469 2,158,865
----------- ----------- ----------- -----------
Total noninterest expense 6,181,960 4,616,170 12,494,324 9,205,820
----------- ----------- ----------- -----------
Income before income taxes 7,164,736 7,366,392 13,826,707 14,525,050
Income taxes 2,282,850 2,381,605 4,399,600 4,697,782
----------- ----------- ----------- -----------
Net income $ 4,881,886 $ 4,984,787 $ 9,427,107 $ 9,827,268
=========== =========== =========== ===========
Earnings per share, basic $ 0.29 $ 0.30 $ 0.56 $ 0.59
=========== =========== =========== ===========
Cash dividends per share $ 0.16 $ 0.16 $ 0.32 $ 0.32
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
3
West Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(unaudited)
Six Months Ended June 30,
---------------------------
2006 2005
------------ ------------
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 71,950,620 62,565,046
Net income 9,427,107 9,827,268
Dividends on common stock; per share
amounts 2006 and 2005 - $.32 (5,344,590) (5,344,590)
------------ ------------
End of period balance 76,033,137 67,047,724
------------ ------------
Accumulated other comprehensive income (loss):
Beginning of year balance (2,430,104) 54,930
Unrealized gains (losses) on securities,
net of tax (1,922,998) (277,052)
------------ ------------
End of period balance (4,353,102) (222,122)
------------ ------------
Total stockholders' equity $106,680,035 $101,825,602
============ ============
West Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(unaudited)
Six Months Ended June 30,
-------------------------
2006 2005
----------- -----------
Net income $ 9,427,107 $ 9,827,268
Other comprehensive income (loss), unrealized
gains (losses) on securities, net of
reclassification adjustment, net of tax (1,922,998) (277,052)
------------ ------------
Comprehensive income $ 7,504,109 $ 9,550,216
============ ============
See accompanying notes to consolidated financial statements.
4
West Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
Six Months Ended June 30,
---------------------------
2006 2005
------------ ------------
Cash Flows from Operating Activities
Net income $ 9,427,107 $ 9,827,268
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 900,000 875,000
Net amortization and accretion 685,152 616,626
Loss on disposition of fixed assets 8,954 635
Net (gains) losses from sales of securities available for sale 143,675 (43,188)
Net gains from sales of loans held for sale (62,718) (98,927)
Proceeds from sales of loans held for sale 4,673,330 7,796,951
Originations of loans held for sale (4,743,612) (8,164,049)
Increase in value of bank-owned life insurance (422,033) (416,496)
Depreciation 449,748 250,985
Deferred income taxes (294,492) (135,440)
Change in assets and liabilities:
Increase in accrued interest receivable (635,661) (168,778)
Increase in accrued expenses and other liabilities 913,620 1,151,065
------------ ------------
Net cash provided by operating activities 11,043,070 11,491,652
------------ ------------
Cash Flows from Investing Activities
Proceeds from sales, calls, and maturities
of securities available for sale 20,299,239 47,796,744
Purchases of securities available for sale (18,273,371) (35,584,912)
Proceeds from maturities and calls of securities held to maturity -- 19,006,000
Acquisition of Federal Home Loan Bank stock (533,200) (8,528,500)
Proceeds from redemption of Federal Home Loan Bank stock 431,600 7,239,400
Net increase in loans (81,027,441) (63,203,334)
Proceeds from sale of premises and equipment 16,151 --
Purchases of premises and equipment (278,889) (622,907)
Change in other assets (1,244,157) (93,317)
------------ ------------
Net cash (used) in investing activities (80,610,068) (33,990,826)
------------ ------------
Cash Flows from Financing Activities
Net change in deposits 84,365,802 47,268,555
Net change in federal funds purchased and securities sold
under agreements to repurchase 17,925,702 84,673
Net change in other short-term borrowings (2,332,984) (2,299,470)
Principal payments on long-term borrowings -- (10,900,000)
Cash dividends (5,344,590) (5,344,590)
------------ ------------
Net cash provided by financing activities 94,613,930 28,809,168
------------ ------------
Net increase in cash and cash equivalents 25,046,932 6,309,994
Cash and Cash Equivalents
Beginning 40,665,314 29,879,459
------------ ------------
End $ 65,712,246 $ 36,189,453
============ ============
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 18,305,777 $ 10,352,710
Income taxes 4,721,879 4,830,763
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 six months
ended June 30, 2006 and 2005, and the consolidated statements of stockholders'
equity, comprehensive income (loss), and cash flows for the six months ended
June 30, 2006 and 2005, and the consolidated balance sheets as of June 30, 2006
and December 31, 2005, include the accounts and transactions of the Company and
its wholly-owned subsidiaries, West Bank, WB Capital Management Inc. (d/b/a VMF
Capital) and Investors Management Group, Ltd. (IMG). 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 June 30, 2006, and the results of
operations and cash flows for the three and six months ended June 30, 2006 and
2005.
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 and six months ended June 30, 2006 and 2005 was
16,701,843.
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 loans recorded on the balance sheet. For additional information
on credit extension commitments see Note 13 of the Company's 2005 consolidated
financial statements. The Company's commitments as of June 30, 2006 and December
31, 2005 are approximately as follows:
June 30, 2006 December 31, 2005
------------- -----------------
Commitments to extend credit $232,721,000 $247,849,000
Standby letters of credit 25,424,000 23,230,000
------------ ------------
$258,145,000 $271,079,000
============ ============
6
4. Segment Information
An operating segment is generally defined as a component of a business for which
discrete financial information is available and whose operating results are
regularly reviewed by the chief operating decision-maker. The Company's primary
business segments are banking and investment advisory services. The banking
segment generates revenue through interest and fees on loans, 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 investment advisory segment generates
revenue by providing investment portfolio management services to individuals,
retirement plans, corporations, foundations, endowments and public entities. The
investment advisory segment includes VMF Capital and IMG. The "Other" column
represents the elimination of intercompany balances. The acquisition of IMG on
December 30, 2005 is the reason for the significant increase in investment
advisory fees. In prior year reporting periods the investment advisory segment
was included in the "Other" column. Selected financial information on the
Company's segments is presented below for the three and six months ended June
30, 2006 and 2005 (dollars in thousands).
Three months ended June 30,
-----------------------------------------------------------------------------------------
2006 2005
Segments Segments
------------------------------------------- -----------------------------------------
Investment Investment
Banking Advisory Other Consolidated Banking Advisory Other Consolidated
------- ---------- ----- ------------ ------- ---------- ----- ------------
Interest income $20,192 $ -- $ 12 $20,204 $15,285 $ -- $ -- $15,285
Interest expense 10,359 (4) 12 10,367 5,795 15 -- 5,810
------- ------ ---- ------- ------- ---- ---- -------
Net interest income 9,833 4 -- 9,837 9,490 (15) -- 9,475
Provision for loan losses 450 -- -- 450 500 -- -- 500
------- ------ ---- ------- ------- ---- ---- -------
Net interest income after
provision for loan losses 9,383 4 -- 9,387 8,990 (15) -- 8,975
Noninterest income 1,846 2,169 (55) 3,960 2,184 878 (54) 3,008
Noninterest expense 4,292 1,945 (55) 6,182 3,946 724 (54) 4,616
------- ------ ---- ------- ------- ---- ---- -------
Income before income taxes 6,937 228 -- 7,165 7,228 139 -- 7,367
Income taxes 2,191 92 -- 2,283 2,324 58 -- 2,382
------- ------ ---- ------- ------- ---- ---- -------
Net income $ 4,746 $ 136 $ -- $ 4,882 $ 4,904 $ 81 -- $ 4,985
======= ====== ==== ======= ======= ==== ==== =======
Depreciation and amortization $ 196 $ 250 $ -- $ 446 $ 173 $ 44 $ -- $ 217
======= ====== ==== ======= ======= ==== ==== =======
Six months ended June 30,
-----------------------------------------------------------------------------------------------
2006 2005
Segments Segments
---------------------------------------------- ----------------------------------------------
Investment Investment
Banking Advisory Other Consolidated Banking Advisory Other Consolidated
---------- ---------- ----- ------------ ---------- ---------- ----- ------------
Interest income $ 38,662 $ -- $ (2) $ 38,660 $ 29,742 $ -- $ -- $ 29,742
Interest expense 19,265 17 (2) 19,280 10,641 30 -- 10,671
---------- ------- ----- ---------- ---------- ------ ---- ----------
Net interest income 19,397 (17) -- 19,380 19,101 (30) -- 19,071
Provision for loan losses 900 -- -- 900 875 -- -- 875
---------- ------- ----- ---------- ---------- ------ ---- ----------
Net interest income after
provision for loan losses 18,497 (17) -- 18,480 18,226 (30) -- 18,196
Noninterest income 3,479 4,466 (104) 7,841 3,961 1,670 (96) 5,535
Noninterest expense 8,662 3,936 (104) 12,494 7,909 1,393 (96) 9,206
---------- ------- ----- ---------- ---------- ------ ---- ----------
Income before income taxes 13,314 513 -- 13,827 14,278 247 -- 14,525
Income taxes 4,189 211 -- 4,400 4,597 101 -- 4,698
---------- ------- ----- ---------- ---------- ------ ---- ----------
Net income $ 9,125 $ 302 $ -- $ 9,427 $ 9,681 $ 146 $ -- $ 9,827
========== ======= ===== ========== ========== ====== ==== ==========
Depreciation and amortization $ 395 $ 497 $ -- $ 892 $ 335 $ 86 $ -- $ 421
========== ======= ===== ========== ========== ====== ==== ==========
Goodwill $ 13,376 $ 9,869 $ -- $ 23,245 $ 13,376 $1,162 $ -- $ 14,538
========== ======= ===== ========== ========== ====== ==== ==========
Total assets $1,333,501 $13,947 $(193) $1,347,255 $1,185,053 $2,855 $(16) $1,187,892
========== ======= ===== ========== ========== ====== ==== ==========
7
5. Impact of New Financial Accounting Standards
In February 2006, the Financial Accounting Standards Board (FASB) issued SFAS
No. 155, Accounting for Certain Hybrid Financial Instruments. SFAS No. 155 is an
amendment of SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, and SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. This Statement eliminates
the exemption from applying Statement 133 to interests in securitized financial
assets so that similar instruments are accounted for similarly regardless of the
form of the instruments. The Statement also allows an entity to elect fair value
measurement at acquisition, at issuance, or when a previously recognized
financial instrument is subject to a remeasurement event, on an
instrument-by-instrument basis. This Statement is effective for the Company
beginning on January 1, 2007. The Company does not expect this Statement to have
a material effect on its financial condition or results of operations.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets. SFAS No. 156 is an amendment of SFAS No. 140. SFAS No. 156
requires an entity to recognize a servicing asset or liability each time it
undertakes an obligation to service a financial asset and requires each
servicing asset or liability to be initially measured at fair value. Entities
are permitted to choose the fair value measurement method or the amortization
method for subsequent reporting periods. This Statement is effective for the
Company beginning on January 1, 2007. The Company does not expect this statement
to have a material effect on its financial condition or results of operations.
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. Reclassifications
Minor reclassifications were made to certain prior year's statement of cash
flows categories to conform to the current year's presentation.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
The information contained in this report may contain forward-looking statements
about the Company's growth and acquisition strategies, new products and
services, and future financial performance, including earnings and dividends per
share, return on average assets, return on average equity, efficiency ratio and
capital ratio. Certain statements in this report constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements are based upon certain underlying
assumptions, risks and uncertainties. Because of the possibility of change in
the underlying assumptions, actual results could differ materially from these
forward-looking statements. Risks and uncertainties that may affect future
results include: interest rate risk, competitive pressures, pricing pressures on
loans and deposits, 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
customers' acceptance of the Company's products and services. The Company
undertakes no obligation to revise or update such forward-looking statements to
reflect current events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
THREE AND SIX MONTHS ENDED JUNE 30, 2006
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 subsidiaries, WB Capital Management
Inc. d/b/a VMF Capital (VMF Capital) and Investors Management Group, Ltd. (IMG).
It focuses on the consolidated results of operations for the three and six
months ended June 30, 2006, compared to the same periods in 2005 and on the
consolidated financial condition of the Company and its subsidiaries at June 30,
2006, compared to December 31, 2005.
Net income for the three months ended June 30, 2006 was $4,882,000 compared to
$4,985,000 for the same period in 2005, a decline of 2.1 percent.
For the first six months of 2006, net income was $9,427,000, or $.56 per share,
which was a 4.1 percent decline from last year. Net interest income for the
first six months of 2006 was $309,000 higher than the previous year, primarily
because of the $126 million increase in average earning assets. Like the three
months ended June 30, 2006, the increases in net interest income and investment
advisory fees were more than offset by increases in noninterest expense. Current
year results included the operations of IMG, which was acquired on December 30,
2005.
The net interest margin for the three months and six months ended June 30, 2006
declined 27 and 29 basis points, respectively, compared to the same periods one
year ago. The cost of funds (deposits and borrowings) has increased faster than
the yield on earning assets (loans and investments).
Year-to-date noninterest income was 41.7 percent higher than last year due to an
increase in investment advisory fees earned by VMF Capital and fees earned by
IMG. Year-to-date net income from the investment advisory segment of the company
totaled $136,000 for the second quarter, compared to $81,000 for the second
quarter of 2005. Year-to-date net income from this segment totaled $302,000
compared to $146,000 for the same period in 2005.
Year-to-date noninterest expense was 35.7 percent higher than a year ago,
primarily due to the acquisition of IMG, increases in compensation and related
benefit expenses and occupancy costs.
9
RESULTS OF OPERATIONS
The following table shows selected financial results and measures for the three
and six months ended June 30, 2006 compared with the same periods in 2005
(dollars in thousands):
Three months ended June 30, Six months ended June 30,
--------------------------------------------- ---------------------------------------------
2006 2005 Change Change-% 2006 2005 Change Change-%
---------- ---------- -------- -------- ---------- ---------- -------- --------
Net income $ 4,882 $ 4,985 $ (103) -2.1% $ 9,427 $ 9,827 $ (400) -4.1%
Average assets 1,317,852 1,182,254 135,598 11.5% 1,294,836 1,177,320 117,516 10.0%
Average stockholders'
equity 105,488 99,184 6,304 6.4% 105,102 98,486 6,616 6.7%
Return on assets 1.49% 1.69% -0.20% 1.47% 1.68% -0.21%
Return on equity 18.56% 20.16% -1.60% 18.09% 20.12% -2.03%
Efficiency ratio 43.35% 35.77% 7.58% 44.25% 36.10% 8.15%
Dividend payout ratio 54.74% 53.61% 1.13% 56.69% 54.39% 2.30%
Equity to assets ratio 8.00% 8.39% -0.39% 8.12% 8.37% -0.25%
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 paid divided by net income.
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 June 30 (dollars in thousands):
Average Balance Interest Income/Expense Yield/Rate
------------------------------------------- ---------------------------------- ------------------
2006 2005 Change Change-% 2006 2005 Change Change-% 2006 2005 Change
---------- ---------- --------- -------- ------- ------- ------ -------- ---- ---- ------
Interest-earning assets:
Loans:
Commercial $ 353,662 $ 273,418 $ 80,244 29.35% $ 6,774 $ 4,299 $2,475 57.57% 7.68% 6.31% 1.37%
Real estate 546,487 463,530 82,957 17.90% 9,782 7,280 2,502 34.37% 7.18% 6.30% 0.88%
Consumer 12,173 10,668 1,505 14.11% 242 194 48 24.74% 7.96% 7.30% 0.66%
Other 24,988 20,729 4,259 20.55% 323 224 99 44.20% 5.18% 4.34% 0.84%
---------- ---------- --------- ------ ------- ------- ------ ------ ---- ---- -----
Total loans 937,310 768,345 168,965 21.99% 17,121 11,997 5,124 42.71% 7.33% 6.26% 1.07%
---------- ---------- --------- ------ ------- ------- ------ ------ ---- ---- -----
Investment securities:
Taxable 174,075 214,949 (40,874) -19.02% 2,008 2,296 (288) -12.54% 4.61% 4.27% 0.34%
Tax-exempt 98,326 103,185 (4,859) -4.71% 1,282 1,337 (55) -4.11% 5.21% 5.18% 0.03%
---------- ---------- --------- ------ ------- ------- ------ ------ ---- ---- -----
Total investment securities 272,401 318,134 (45,733) -14.38% 3,290 3,633 (343) -9.44% 4.83% 4.57% 0.26%
---------- ---------- --------- ------ ------- ------- ------ ------ ---- ---- -----
Federal funds sold and
short-term investments 17,228 14,443 2,785 19.28% 219 121 98 80.99% 5.10% 3.35% 1.75%
---------- ---------- --------- ------ ------- ------- ------ ------ ---- ---- -----
Total interest-earning
assets $1,226,939 $1,100,922 $ 126,017 11.45% 20,630 15,751 4,879 30.98% 6.74% 5.74% 1.00%
========== ========== ========= ====== ------- ------- ------ ------ ---- ---- -----
Interest-bearing liabilities:
Deposits:
Checking with interest,
savings and money markets $ 311,362 $ 338,177 $ (26,815) -7.93% 1,996 1,331 665 49.96% 2.57% 1.58% 0.99%
Time deposits 530,675 331,802 198,873 59.94% 6,132 2,356 3,776 160.27% 4.64% 2.85% 1.79%
---------- ---------- --------- ------ ------- ------- ------ ------ ---- ---- -----
Total deposits 842,037 669,979 172,058 25.68% 8,128 3,687 4,441 120.45% 3.87% 2.21% 1.66%
---------- ---------- --------- ------ ------- ------- ------ ------ ---- ---- -----
Other borrowed funds 174,862 211,837 (36,975) -17.45% 2,239 2,123 116 5.46% 5.14% 4.02% 1.12%
---------- ---------- --------- ------ ------- ------- ------ ------ ---- ---- -----
Total interest-bearing
liabilities $1,016,899 $ 881,816 $ 135,083 15.32% 10,367 5,810 4,557 78.43% 4.09% 2.64% 1.45%
========== ========== ========= ====== ------- ------- ------ ------ ---- ---- -----
Tax-equivalent net interest
income $10,263 $ 9,941 $ 322 3.24%
======= ======= ====== ======
Net interest spread 2.65% 3.10% -0.45%
==== ==== =====
Net interest margin 3.35% 3.62% -0.27%
==== ==== =====
Data for the six months ended June 30 (dollars in thousands):
Average Balance Interest Income/Expense Yield/Rate
------------------------------------------- ---------------------------------- ------------------
2006 2005 Change Change-% 2006 2005 Change Change-% 2006 2005 Change
---------- ---------- --------- -------- ------- ------- ------ -------- ---- ---- ------
Interest-earning assets:
Loans:
Commercial $ 339,438 $ 268,518 $ 70,920 26.41% $12,629 $ 8,148 $4,481 55.00% 7.50% 6.12% 1.38%
Real estate 539,756 451,568 88,188 19.53% 18,947 13,935 5,012 35.97% 7.08% 6.22% 0.86%
Consumer 11,903 10,763 1,140 10.59% 461 396 65 16.41% 7.81% 7.42% 0.39%
Other 24,495 19,213 5,282 27.49% 629 482 147 30.50% 5.18% 5.06% 0.12%
---------- ---------- --------- ------ ------- ------- ------ ------ ---- ---- -----
Total loans 915,592 750,062 165,530 22.07% 32,666 22,961 9,705 42.27% 7.19% 6.17% 1.02%
---------- ---------- --------- ------ ------- ------- ------ ------ ---- ---- -----
Investment securities:
Taxable 173,620 229,269 (55,649) -24.27% 3,921 4,861 (940) -19.34% 4.52% 4.24% 0.28%
Tax-exempt 99,640 100,691 (1,051) -1.04% 2,597 2,599 (2) -0.08% 5.21% 5.16% 0.05%
---------- ---------- --------- ------ ------- ------- ------ ------ ---- ---- -----
Total investment securities 273,260 329,960 (56,700) -17.18% 6,518 7,460 (942) -12.63% 4.77% 4.52% 0.25%
---------- ---------- --------- ------ ------- ------- ------ ------ ---- ---- -----
Federal funds sold and
short-term investments 14,248 16,927 (2,679) -15.83% 345 259 86 33.20% 4.88% 3.09% 1.79%
---------- ---------- --------- ------ ------- ------- ------ ------ ---- ---- -----
Total interest-earning
assets $1,203,100 $1,096,949 $ 106,151 9.68% 39,529 30,680 8,849 28.84% 6.63% 5.64% 0.99%
========== ========== ========= ====== ------- ------- ------ ------ ---- ---- -----
Interest-bearing liabilities:
Deposits:
Checking with interest,
savings and money markets $ 314,021 $ 356,785 $ (42,764) -11.99% $ 3,768 $ 2,477 1,291 52.12% 2.42% 1.40% 1.02%
Time deposits 496,187 297,956 198,231 66.53% 10,989 3,938 7,051 179.05% 4.47% 2.67% 1.80%
---------- ---------- --------- ------ ------- ------- ------ ------ ---- ---- -----
Total deposits 810,208 654,741 155,467 23.74% 14,757 6,415 8,342 130.04% 3.67% 1.98% 1.69%
---------- ---------- --------- ------ ------- ------- ------ ------ ---- ---- -----
Other borrowed funds 181,707 226,931 (45,224) -19.93% 4,523 4,256 267 6.27% 5.02% 3.78% 1.24%
---------- ---------- --------- ------ ------- ------- ------ ------ ---- ---- -----
Total interest-bearing
liabilities $ 991,915 $ 881,672 $ 110,243 12.50% 19,280 10,671 8,609 80.68% 3.92% 2.44% 1.48%
========== ========== ========= ====== ------- ------- ------ ------ ---- ---- -----
Tax-equivalent net interest
income $20,249 $20,009 $ 240 1.20%
======= ======= ====== ======
Net interest spread 2.71% 3.20% -0.49%
==== ==== =====
Net interest margin 3.39% 3.68% -0.29%
==== ==== =====
11
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 net interest margin
for the second quarter was 3.35 percent, which was 27 basis points lower than
the same quarter last year and 7 basis points lower than the first quarter of
2006. 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 six months ended June 30, 2006 increased $240,000 compared to the six months
ended June 30, 2005.
Taxable-equivalent interest income and fees on loans increased $5.1 million in
the first six months of 2006 compared to the same period in 2005, due to the
combination of a higher volume of outstanding loans and increasing yields.
Average loans were $165.5 million higher than the first six months of last year
and the average yield on loans increased to 7.19 percent for the first six
months of 2006, compared to 6.17 percent for the same period in 2005. The yield
on the Company's loan portfolio is affected by the mix of the portfolio, the
effects of competition, the interest rate environment and the amount of
non-accrual loans. 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 $56.7 million lower than last
year for the first six months, while the yield has increased 25 basis points.
Most purchases of investment securities during the first six months of 2006 have
been callable agency bonds with maturities less than ten years or municipal
bonds with maturities less than twenty years.
The average rate paid on deposits for the first six months of 2006 increased to
3.67 percent from 1.98 percent for the same period last year. This increase is
primarily the result of an increase in market interest rates and the shift in
funds from money market and savings accounts to certificates of deposit.
Customers have made such transfers to maximize their earnings. Compared to the
first six months of last year, the average balance of higher rate certificates
of deposit was up $198.2 million. The increase consisted of jumbo certificates
of deposit, which generally bear higher interest rates than the other deposit
categories and wholesale certificates of deposit, which have been used as an
alternative to short-term borrowings. The average balance of money market and
savings accounts, which typically have lower rates, were $28.5 million and $11.5
million lower, respectively.
The average balance of borrowings for the first six months of 2006 was $45.2
million lower than a year ago. Average short-term borrowings, which consisted
primarily of borrowings from the Federal Home Loan Bank of Des Moines (FHLB),
averaged $52 million less than in the first six months of 2005 due to utilizing
wholesale time deposits. Long-term borrowings averaged $7.2 million more than in
the first six months of 2006, due to borrowing funds to finance the acquisition
of IMG in December 2005. The Company has minimized its use of FHLB short-term
advances because rates associated with wholesale deposits have been slightly
lower and wholesale deposits do not require collateral.
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 six months ended June 30, 2006 and 2005 as well as common ratios
related to the allowance for loan losses (dollars in thousands).
12
Three months ended June 30, Six months ended June 30,
---------------------------- ----------------------------
2006 2005 Change 2006 2005 Change
-------- -------- ------ -------- -------- ------
Balance at beginning of period $ 8,049 $ 6,902 $1,147 $ 7,615 $ 6,527 $1,088
Charge-offs (66) (354) 288 (100) (387) 287
Recoveries 7 32 (25) 25 65 (40)
-------- -------- ------ -------- -------- ------
Net charge-offs (59) (322) 263 (75) (322) 247
Provision charged to operations 450 500 (50) 900 875 25
-------- -------- ------ -------- -------- ------
Balance at end of period $ 8,440 $ 7,080 $1,360 $ 8,440 $ 7,080 $1,360
======== ======== ====== ======== ======== ======
Average loans outstanding $937,310 $768,345 $915,592 $750,062
======== ======== ======== ========
Ratio of net charge-offs during the
period to average loans outstanding 0.01% 0.04% 0.01% 0.04%
Ratio of allowance for loan losses
to average loans outstanding 0.90% 0.92% 0.92% 0.94%
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 whether the loan has other special or unusual characteristics that
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 non-performing 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 June 30,
-----------------------------------
2006 2005 Change Change-%
------ ------ ------ --------
Noninterest income
Service charges on deposit accounts $1,117 $1,244 $ (127) -10.2%
Trust services 195 189 6 3.2%
Investment advisory fees 2,112 824 1,288 156.3%
Increase in cash value of bank-owned
life insurance 213 210 3 1.4%
Net realized gains (losses) from
sales of securities (38) 44 (82) -186.4%
Other:
Debit card usage fees 58 53 5 9.4%
Check printing fees 36 35 1 2.9%
Gain on sale of residential mortgages 17 38 (21) -55.3%
Gain on sale of commercial loans 34 8 26 325.0%
Other loan fees 10 162 (152) -93.8%
All other 206 201 5 2.5%
------ ------ ------ ------
Total other 361 497 (136) -27.4%
------ ------ ------ ------
Total noninterest income $3,960 $3,008 $ 952 31.6%
====== ====== ====== ======
Six months ended June 30,
-----------------------------------
2006 2005 Change Change-%
------ ------ ------ --------
Noninterest income
Service charges on deposit accounts $2,121 $2,287 $ (166) -7.3%
Trust services 363 329 34 10.3%
Investment advisory fees 4,361 1,574 2,787 177.1%
Increase in cash value of bank-owned
life insurance 422 416 6 1.4%
Net realized gains (losses) from
sales of securities (144) 43 (187) -434.9%
Other:
Debit card usage fees 112 102 10 9.8%
Check printing fees 83 71 12 16.9%
Gain on sale of residential mortgages 29 59 (30) -50.8%
Gain on sale of commercial loans 34 51 (17) -33.3%
Other loan fees 45 162 (117) -72.2%
All other 415 441 (26) -5.9%
------ ------ ------ ------
Total other 718 886 (168) -19.0%
------ ------ ------ ------
Total noninterest income $7,841 $5,535 $2,306 41.7%
====== ====== ====== ======
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. 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 during the past
year due to fewer customers overdrawing their accounts. Trust fees increased
10.3 percent in the first six months of 2006 compared to the prior year as a
result of the combination of new business and revised fee schedules.
Investment advisory fees are fees earned by VMF Capital and IMG. The significant
increase in investment advisory fees in the current quarter was due to the
acquisition of IMG on the last day of 2005. Revenue declined slightly in the
second quarter compared to the first quarter because fees for administering the
Vintage Mutual Funds were reduced to be more competitive in the marketplace.
14
The Company recognized losses from the sale of investment securities in the
first six months of 2006 as lower yielding investments were sold with the
proceeds being reinvested at higher yields. By the end of the year, the
additional income earned on the purchased investments will more than make up for
the losses recognized in the first half of the year. Debit card usage fees
continued to increase as customers continued to expand utilization of this
convenient payment method. Check printing income increased due to new contract
terms with the vendor. Gains from the sale of residential mortgages in the
secondary market were down because increases in market interest rates have
reduced the volume of originations. Gains from the sale of commercial loans
result from the occasional sale of the United States Department of Agriculture
(USDA) guaranteed portion of commercial loans. Noninterest related loan fees in
2005 included the recognition of a one-time fee for a loan commitment that was
terminated by a customer.
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 June 30,
-----------------------------------
2006 2005 Change Change-%
------ ------ ------ --------
Noninterest expense:
Salaries and employee benefits $3,492 $2,586 $ 906 35.0%
Occupancy 866 603 263 43.6%
Data processing 506 362 144 39.8%
Other:
Insurance 57 40 17 42.5%
Supplies 73 82 (9) -11.0%
Marketing 108 64 44 68.8%
Business development 81 82 (1) -1.2%
Professional fees 175 124 51 41.1%
Consulting fees 46 68 (22) -32.4%
Intangible amortization 221 85 136 160.0%
All other 557 520 37 7.1%
------ ------ ------ -----
Total other 1,318 1,065 253 23.8%
------ ------ ------ -----
Total noninterest expense $6,182 $4,616 $1,566 33.9%
====== ====== ====== =====
Six months ended June 30,
------------------------------------
2006 2005 Change Change-%
------- ------ ------ --------
Noninterest expense:
Salaries and employee benefits $ 7,167 $5,164 $2,003 38.8%
Occupancy 1,722 1,193 529 44.3%
Data processing 985 690 295 42.8%
Other:
Insurance 121 78 43 55.1%
Supplies 141 179 (38) -21.2%
Marketing 206 165 41 24.8%
Business development 161 125 36 28.8%
Professional fees 339 254 85 33.5%
Consulting fees 104 109 (5) -4.6%
Intangible amortization 442 170 272 160.0%
All other 1,106 1,079 27 2.5%
------- ------ ------ -----
Total other 2,620 2,159 461 21.4%
------- ------ ------ -----
Total noninterest expense $12,494 $9,206 $3,288 35.7%
======= ====== ====== =====
15
The increase in salaries and benefits included compensation and benefits for
approximately 24 employees related to the acquisition of IMG, approximately 15
more employees at West Bank in 2006 than a year ago due to growth of the bank,
annual compensation adjustments and higher medical insurance premiums. Occupancy
expenses were higher this year due to one additional location for IMG and
increased depreciation expense related to furniture and equipment additions
throughout the Company. Early in the year the Clive office of VMF Capital was
relocated to the same facility as IMG and is using space that was already
leased. A new tenant has agreed to utilize the former VMF Capital space and the
landlord is canceling VMF Capital's remaining lease. A charge of $32,000 was
recorded to occupancy expense in the second quarter as a result of terminating
that lease.
Data processing expense and insurance expense were higher primarily due to the
acquisition of IMG. Supplies declined as the first quarter of 2005 included
reprinting many brochures due to product and pricing changes. Marketing and
business development related costs increased due to significant efforts to
increase and expand current and new customer relationships at the Bank and the
investment advisory subsidiaries. Consulting fees have held steady as 2005
expense included fees for implementation of software programs to assist with
asset-liability management and 2006 expense includes expenses incurred by IMG.
Income Tax Expense
The Company incurred income tax expense of $4.4 million for the six months ended
June 30, 2006 compared to $4.7 million for the six months ended June 30, 2005.
The effective income tax rates as a percent of income before taxes for the three
and six months ended June 30, 2006 were 31.9 percent and 31.8 percent, compared
to 32.3 percent for the same periods last year. The effective income tax rate is
slightly lower in 2006 because of a slightly higher level of income that is
exempt from Federal income taxes.
FINANCIAL CONDITION
Total assets as of June 30, 2006 were $1.3 billion, which was an 8.3 percent
increase from $1.2 billion at December 31, 2005. The increase is primarily due
to increased loan volumes, which were funded primarily by wholesale certificates
of deposit.
Investment Securities
Investment securities available for sale declined approximately $5.7 million
from December 31, 2005 to $264.7 million. During the six months ended June 30,
2006, $15.4 million of lower yielding securities were sold with the majority of
the proceeds reinvested in higher yielding securities. On a quarterly basis, the
investment securities portfolio is reviewed for other-than-temporary impairment.
As of June 30, 2006, existing unrealized losses are considered to be temporary
in nature due to market interest rate fluctuations and accordingly, no
impairment adjustment has been recorded.
Loans and Non-performing Assets
Loans outstanding increased approximately $81.1 million from December 31, 2005
to June 30, 2006. The increase was primarily attributable to growth in real
estate construction, commercial real estate and commercial loans.
16
The following table sets forth the amount of non-performing loans and assets
held by the Company and common ratio measurements of those items (dollars in
thousands).
June 30, 2006 December 31, 2005 Change
------------- ----------------- ------
Non-accrual loans $4,336 $4,145 $ 191
Loans past due 90 days and still
accruing interest 54 767 (713)
------ ------ -----
Total non-performing loans 4,390 4,912 (522)
Other real estate owned 252 497 (245)
------ ------ -----
Total non-performing assets $4,642 $5,409 $(767)
====== ====== =====
Non-performing assets to total loans 0.49% 0.62% -0.13%
Non-performing assets to total assets 0.34% 0.43% -0.09%
One loan accounted for $3.8 million of the total non-accrual loans. As
previously reported, this loan is a commercial loan secured by commercial real
estate used in the operation of the customer's business and by farmland. The
loan was placed on non-accrual status during the fourth quarter of 2005 due to
the time period that it could take to resolve the situation involving this loan.
Payments totaling $56,000 were applied to the principal balance of this loan
during the first six months of 2006. Beginning in July 2006, approximately
$20,000 per month for the remainder of 2006 will be applied to the carrying
value of this loan. These funds will come from a short-term rental agreement
with a third party. It will be necessary for the real estate collateral to be
sold to fully liquidate this loan. The remaining balance of loans in non-accrual
status was $526,000 and consisted of loans to four different borrowers. The
amount of loans past due 90 days and still accruing interest declined to $54,000
from $767,000 at December 31, 2005, due to a concerted effort to collect
delinquent payments.
Reference is also made to the information and discussion earlier in this report
under the heading of "Provision for Loan Losses and the Related Allowance for
Loan Losses."
Deposits
Total deposits as of June 30, 2006 were $1.0 billion compared with $945 million
as of December 31, 2005, an increase of 8.9 percent. The savings category of
deposits which includes money market accounts, which are liquid accounts and
therefore pay relatively lower interest rates, declined approximately $13.1
million. A portion of those funds moved into the time certificates of deposit in
excess of $100,000 category as customers attempted to maximize the interest
earned on those funds. It is expected that this trend will continue. Time
deposits increased a total of $116.3 million. In addition to the movement of
money market balances, the Bank utilized wholesale certificates of deposit as a
lower cost alternative source of funds compared to borrowing from the FHLB or
federal funds.
Borrowings
The balance of Federal funds purchased and securities sold under agreements to
repurchase was $102.7 million at June 30, 2006, up from $84.7 million at
December 31, 2005. Most of this increase relates to Federal funds purchased.
Federal funds purchased include funds sold to West Bank by approximately 25
banks throughout Iowa as part of the correspondent bank services 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 Bank also purchases federal funds from regional and national correspondent
banks as necessary for short-term liquidity needs. The balance of other
short-term borrowings consisted of Treasury, Tax and Loan option notes and the
short-term portion of an installment note payable to a regional correspondent
bank. The note was obtained in December 2005 to fund the acquisition of IMG.
17
Liquidity and Capital Resources
The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all corporate financial commitments and to
capitalize on opportunities for profitable business expansion. The Company's
principal source of funds is deposits, which include 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
("FHLB") 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 $65.7 million as of
June 30, 2006, compared with $40.7 million as of December 31, 2005. 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 of approximately $83 million at June 30, 2006 and has a
$2.5 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 June 30, 2006. The combination of high
levels of potentially liquid assets, cash flows from operations and additional
borrowing capacity provided strong liquidity for the Company at June 30, 2006.
The Company's total stockholders' equity increased to $106.7 million at June 30,
2006, from $104.5 million at December 31, 2005. The growth in equity was less
than would result from net income less cash dividends paid due to the continued
increase in the accumulated comprehensive loss. The $1.9 million increase in
accumulated comprehensive loss since December 31, 2005, was the result of a
reduction in the market value of investment securities available for sale due to
increasing interest rates. Total stockholders' equity was 7.9 percent of total
assets as of June 30, 2006 and 8.4 percent on December 31, 2005. No material
capital expenditures or material changes in the capital resource mix are
anticipated at this time.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the following table) of total and Tier 1 capital to risk-weighted
assets and of Tier 1 capital to average assets. Management believes the capital
levels of the Company and the Bank met all capital adequacy requirements to
which they were subject at June 30, 2006.
Regulatory
requirements to be: Actual Regulatory
------------------------- Capital Ratios as of:
Adequately Well- ---------------------------------
Capitalized Capitalized June 30, 2006 December 31, 2005
----------- ----------- ------------- -----------------
Total risk-based capital as % of risk-weighted assets
Consolidated 8.0% 10.0% 10.4% 10.8%
West Bank 8.0% 10.0% 10.8% 11.3%
Tier 1 capital as % of risk-weighted assets:
Consolidated 4.0% 6.0% 9.6% 10.1%
West Bank 4.0% 6.0% 8.1% 8.5%
Tier 1 capital as % average assets
Consolidated 4.0% 5.0% 8.1% 8.3%
West Bank 4.0% 5.0% 6.8% 7.0%
On April 19, 2006, the Company's Board of Directors authorized $5 million to be
used for the buy-back of Company common stock for a period of 12 months. No
repurchases took place during the six months ended June 30, 2006.
18
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 8, 2006 and is
incorporated herein by reference. The Company has not experienced any material
changes to its market risk position since December 31, 2005. Management does not
believe the Company's primary market risk exposures and how those exposures were
managed in the first six months of 2006 changed when compared to 2005.
Subsequent Stock and Regular Dividends
On July 19, 2006, the Board of Directors of the Company declared a 5 percent
common stock dividend to be paid on August 14, 2006 to shareholders of record on
July 31, 2006. Any fractional shares resulting from the stock dividend will be
paid in cash. The Board of Directors also declared a quarterly cash dividend of
$0.16 per common share of outstanding stock after the stock dividend is paid.
The cash dividend is payable on August 25, 2006 to shareholders of record on
August 18, 2006. The number of common shares outstanding and earnings per common
share in the accompanying financial statements and footnotes have not been
adjusted to reflect the 5 percent common stock dividend.
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 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 was performed under the supervision and with the participation of the
Company's Chief Executive Officer and Chief Financial Officer. Based on that
evaluation, the Chief Executive Officer and the Chief Financial Officer have
concluded that the Company's current disclosure controls and procedures are
effective to ensure that information required to be disclosed by the Company in
the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms.
b. Changes in internal controls over financial reporting.
There were no changes in the Company's internal control over financial reporting
that occurred during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
19
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. On June 26, 2006, the Company
filed a Form 8-K reporting West Bank was named as a defendant in a lawsuit filed
June 20, 2006. The lawsuit claims a breach of a credit agreement arising out of
a commercial loan transaction in which West Bank attempted to purchase a note of
Iowa Wireless Services, LLC from First American Bank. The plaintiffs, D.B. Zwirn
Special Opportunities Fund, L.P., et al, are seeking monetary damages of not
less than $16,700,000 from the defendants, which include Iowa Network Services,
Inc., INS Wireless, Inc. and First American Bank, in addition to West Bank. West
Bank intends to vigorously defend the action and believes it has substantial
defenses. West Bank also believes that Iowa Network Services, Inc. agreed to
protect it from losses caused by the ownership of the Iowa Wireless Services,
LLC note.
Item 1A. Risk Factors
Management of the Company does not believe there have been any material changes
in the risk factors that were disclosed in the Form 10-K filed with the
Securities and Exchange Commission on March 8, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the first six months of 2006, there were no purchases of the Company's
common shares under the $5 million stock buy-back plan approved by the Board of
Directors on April 19, 2006 or the previous stock buy-back plan approved in
April 2005.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of shareholders was held on April 20, 2006. The
record date for determination of shareholders entitled to vote at the meeting
was February 16, 2006. There were 16,701,843 shares outstanding as of that date,
each such share being entitled to one vote. At the shareholders' meeting the
holders of 13,307,756 shares or 79.7 percent of the outstanding shares, were
represented in person or by proxy, which constituted a quorum. The following
proposal was voted on at the meeting:
Proposal I - Election of Directors
Nine directors were elected to serve for a one year term or until their
successors shall have been elected and qualified. At the shareholders' meeting,
the individuals received the number of votes set opposite their names:
Vote
For Withheld
---------- ---------
Frank W. Berlin 13,304,952 2,804
Steven G. Chapman 13,166,732 141,024
Michael A. Coppola 12,228,449 1,079,307
Orville E. Crowley 13,303,237 4,519
George D. Milligan 12,846,384 461,372
Robert G. Pulver 13,303,997 3,759
Thomas E. Stanberry 13,304,735 3,021
Jack G. Wahlig 13,279,590 28,166
Connie Wimer 13,268,495 39,261
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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)
10.11 No document
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(8)
10.19 West Bancorporation, Inc. Restricted Stock Compensation Plan(7)
10.20 Employment Agreement between Investors Management Group Ltd. and Jeff
Lorenzen(9)
10.21 Assignment and Assumption of Lease and Consent to Assignment(10)
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 Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to 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 definitive proxy statement 14A
filed on March 10, 2005.
(8) Incorporated herein by reference to the related exhibit filed with the Form
10-Q on May 6, 2005.
(9) Incorporated herein by reference to the related exhibit filed with the Form
8-K on February 22, 2006.
(10) Incorporated herein by reference to the related exhibit filed with the Form
10-K on March 8, 2006.
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SIGNATURES
Pursuant to the requirements 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)
August 4, 2006 By: /s/ Thomas E. Stanberry
Dated ------------------------------------
Thomas E. Stanberry
Chairman, President and Chief
Executive Officer
August 4, 2006 By: /s/ Douglas R. Gulling
Dated ------------------------------------
Douglas R. Gulling
Executive Vice President and Chief
Financial Officer
(Principal Accounting Officer)
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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 Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002