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 September 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
to be filed 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 November 1, 2006, there were 17,536,682 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,
2006 2005
-------------- --------------
Assets
Cash and due from banks $ 27,087,695 $ 39,424,270
Federal funds sold and other short-term investments 3,478,007 1,241,044
-------------- --------------
Cash and cash equivalents 30,565,702 40,665,314
-------------- --------------
Securities available for sale 267,647,396 270,333,846
Federal Home Loan Bank stock, at cost 3,952,000 4,384,400
-------------- --------------
Total securities 271,599,396 274,718,246
-------------- --------------
Loans 911,930,825 867,504,620
Allowance for loan losses (8,178,355) (7,615,188)
-------------- --------------
Loans, net 903,752,470 859,889,432
-------------- --------------
Premises and equipment, net 5,275,505 5,650,009
Accrued interest receivable 9,871,538 7,861,647
Goodwill and other intangible assets 26,453,204 27,116,287
Bank-owned life insurance 22,736,195 22,099,259
Other assets 11,365,046 6,380,103
-------------- --------------
Total assets $1,281,619,056 $1,244,380,297
============== ==============
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Non-interest bearing demand $ 196,541,479 $ 207,492,888
Interest-bearing demand 48,134,916 48,629,629
Savings 231,085,979 295,068,233
Time, in excess of $100,000 312,670,401 269,057,298
Other time 197,178,704 124,645,285
-------------- --------------
Total deposits 985,611,479 944,893,333
Federal funds purchased and securities sold under
agreements to repurchase 86,869,434 84,748,150
Other short-term borrowings 1,762,319 4,732,124
Accrued expenses and other liabilities 9,485,975 6,298,408
Subordinated notes 20,619,000 20,619,000
Long-term borrowings 66,265,018 78,568,766
-------------- --------------
Total liabilities 1,170,613,225 1,139,859,781
-------------- --------------
Stockholders' Equity
Common stock, no par value; authorized 50,000,000 shares;
17,536,682 and 17,536,935 shares issued and outstanding
at September 30, 2006 and December 31, 2005, respectively 3,000,000 3,000,000
Additional paid-in capital 32,000,000 32,000,000
Retained earnings 78,199,538 71,950,620
Accumulated other comprehensive income (loss) (2,193,707) (2,430,104)
-------------- --------------
Total stockholders' equity 111,005,831 104,520,516
-------------- --------------
Total liabilities and stockholders' equity $1,281,619,056 $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 Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
Interest income:
Loans, including fees $17,505,439 $12,980,293 $50,004,036 $35,796,213
Securities:
U.S. Treasury, government agencies and corporations 1,523,820 1,708,489 4,541,346 5,366,040
States and political subdivisions 1,043,803 1,080,120 3,116,080 3,063,788
Other 395,774 337,051 1,122,034 1,363,056
Federal funds sold and other short-term investments 287,503 45,675 632,504 304,712
----------- ----------- ----------- -----------
Total interest income 20,756,339 16,151,628 59,416,000 45,893,809
----------- ----------- ----------- -----------
Interest expense:
Demand deposits 128,061 56,511 263,948 126,679
Savings deposits 1,898,511 1,364,037 5,530,357 3,771,494
Time deposits 6,926,390 3,041,428 17,915,883 6,979,239
Federal funds purchased and securities sold under
agreements to repurchase 855,742 611,355 2,613,528 1,635,455
Other short-term borrowings 8,027 462,218 33,966 1,211,395
Subordinated notes 370,867 370,867 1,100,616 1,100,616
Long-term borrowings 846,616 883,328 2,855,774 2,635,906
----------- ----------- ----------- -----------
Total interest expense 11,034,214 6,789,744 30,314,072 17,460,784
----------- ----------- ----------- -----------
Net interest income 9,722,125 9,361,884 29,101,928 28,433,025
Provision for loan losses 450,000 450,000 1,350,000 1,325,000
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 9,272,125 8,911,884 27,751,928 27,108,025
----------- ----------- ----------- -----------
Noninterest income:
Service charges on deposit accounts 1,371,286 1,214,142 3,492,237 3,500,949
Trust services 207,785 202,475 571,003 531,300
Investment advisory fees 2,002,794 904,236 6,363,379 2,478,115
Increase in cash value of bank-owned life insurance 214,903 212,621 636,936 629,117
Net realized gains (losses) from sales of securities
available for sale (2,937) 158,377 (146,612) 201,565
Other income 355,881 340,732 1,073,997 1,226,266
----------- ----------- ----------- -----------
Total noninterest income 4,149,712 3,032,583 11,990,940 8,567,312
----------- ----------- ----------- -----------
Noninterest expense:
Salaries and employee benefits 3,322,926 2,579,400 10,490,303 7,743,658
Occupancy 825,613 624,168 2,547,443 1,817,057
Data processing 447,956 367,753 1,432,604 1,057,561
Other expenses 1,499,927 1,083,010 4,120,396 3,241,875
----------- ----------- ----------- -----------
Total noninterest expense 6,096,422 4,654,331 18,590,746 13,860,151
----------- ----------- ----------- -----------
Income before income taxes 7,325,415 7,290,136 21,152,122 21,815,186
Income taxes 2,348,750 2,327,432 6,748,350 7,025,214
----------- ----------- ----------- -----------
Net income $ 4,976,665 $ 4,962,704 $14,403,772 $14,789,972
=========== =========== =========== ===========
Earnings per share, basic $ 0.28 $ 0.28 $ 0.82 $ 0.84
=========== =========== =========== ===========
Cash dividends per share $ 0.160 $ 0.152 $ 0.465 $ 0.457
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
3
West Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(unaudited)
Nine Months Ended
September 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 14,403,772 14,789,972
Dividends on common stock (8,150,459) (8,016,885)
Purchase of fractional shares resulting from
stock dividend (4,395) --
------------ ------------
End of period balance 78,199,538 69,338,133
------------ ------------
Accumulated other comprehensive income (loss):
Beginning of year balance (2,430,104) 54,930
Unrealized gains (losses) on securities, net of tax 236,397 (866,587)
------------ ------------
End of period balance (2,193,707) (811,657)
------------ ------------
Total stockholders' equity $111,005,831 $103,526,476
============ ============
West Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(unaudited)
Nine Months Ended
September 30,
-------------------------
2006 2005
----------- -----------
Net Income $14,403,772 $14,789,972
Other comprehensive income (loss), unrealized
gains (losses) on securities, net of
reclassification adjustment, net of tax 236,397 (866,587)
----------- -----------
Comprehensive income $14,640,169 $13,923,385
=========== ===========
See accompanying notes to consolidated financial statements.
4
West Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
Nine Months Ended
September 30,
----------------------------
2006 2005
------------ -------------
Cash Flows from Operating Activities
Net income $ 14,403,772 $ 14,789,972
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 1,350,000 1,325,000
Net amortization and accretion 962,475 824,609
Loss on disposal of fixed assets 11,011 22,857
Net (gains) losses from sales of securities available for sale 146,612 (201,565)
Net gains from sales of loans held for sale (91,548) (137,610)
Proceeds from sales of loans held for sale 8,525,465 12,312,529
Originations of loans held for sale (8,733,917) (12,179,419)
Increase in value of bank-owned life insurance (636,936) (629,117)
Depreciation 674,718 390,785
Deferred income taxes (97,757) (172,532)
Change in assets and liabilities:
Increase in accrued interest receivable (2,009,891) (1,235,942)
Increase in accrued expenses and other liabilities 2,475,192 740,754
------------ -------------
Net cash provided by operating activities 16,979,196 15,850,321
------------ -------------
Cash Flows from Investing Activities
Proceeds from sales, calls, and maturities of securities available
for sale 22,122,561 72,458,156
Purchases of securities available for sale (20,548,130) (41,647,438)
Proceeds from maturities and calls of securities held to maturity -- 19,431,000
Acquisition of Federal Home Loan Bank stock (533,200) (14,198,400)
Proceeds from redemption of Federal Home Loan Bank stock 965,600 11,833,400
Net increase in loans (46,673,038) (104,828,024)
Proceeds from sales of premises and equipment 67,787 --
Purchases of premises and equipment (567,377) (804,780)
Change in other assets (1,627,782) (2,611,520)
------------ -------------
Net cash (used) in investing activities (46,793,579) (60,367,606)
------------ -------------
Cash Flows from Financing Activities
Net change in deposits 40,718,146 7,024,728
Net change in federal funds purchased and securities sold
under agreements to repurchase 2,121,284 3,739,805
Net change in other short-term borrowings (2,969,805) 65,693,817
Principal payments on long-term borrowings (12,000,000) (10,900,000)
Purchase of fractional shares resulting from stock dividend (4,395) --
Cash dividends (8,150,459) (8,016,885)
------------ -------------
Net cash provided by financing activities 19,714,771 57,541,465
------------ -------------
Net increase (decrease) in cash and cash equivalents (10,099,612) 13,024,180
Cash and Cash Equivalents
Beginning 40,665,314 29,879,459
------------ -------------
End $ 30,565,702 $ 42,903,639
============ =============
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 28,579,447 $ 16,527,967
Income taxes 7,323,629 7,224,763
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 nine months
ended September 30, 2006 and 2005, the consolidated statements of stockholders'
equity, comprehensive income, and cash flows for the nine months ended September
30, 2006 and 2005, and the consolidated balance sheets as of September 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 September 30, 2006, and the
results of operations and cash flows for the three and nine months ended
September 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 weighted average
number of shares outstanding for the three months ended September 30, 2006 and
2005 was 17,536,765 and 17,536,935, respectively, and the weighted average
number of shares outstanding for the nine months ended September 30, 2006 and
2005 was 17,536,878 and 17,536,935, respectively.
On July 19, 2006, the Board of Directors of the Company declared a 5 percent
common stock dividend which was paid on August 14, 2006 to shareholders of
record on July 31, 2006. Fractional shares resulting from the stock dividend
were paid in cash. The number of outstanding common shares and earnings per
common share in the accompanying financial statements and footnotes reflect the
5 percent common stock dividend.
3. Commitments
In the normal course of business, the Company enters into commitments to extend
credit such as loan commitments and standby letters of credit to meet the
financing needs of its customers. These commitments expose the Company to
varying degrees of credit and market risk and are subject to the same credit
reviews as those recorded on the balance sheet. For additional information on
credit extension commitments see Note 13 of the Company's 2005 consolidated
financial statements. The Company's commitments as of September 30, 2006 and
December 31, 2005, are approximately as follows:
September 30, 2006 December 31, 2005
------------------ -----------------
Commitments to extend credit $238,747,000 $247,849,000
Standby letters of credit 21,854,000 23,230,000
------------ ------------
$260,601,000 $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 that of 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 nine months ended September 30, 2006 and 2005 (dollars in thousands).
Three months ended September 30,
-----------------------------------------------------------------------------------------
2006 2005
Segments Segments
------------------------------------------- -------------------------------------------
Investment Investment
Banking Advisory Other Consolidated Banking Advisory Other Consolidated
------- ---------- ----- ------------ ------- ---------- ----- ------------
Interest income $20,756 $ -- $ -- $20,756 $16,152 $ -- $ -- $16,152
Interest expense 11,026 8 -- 11,034 6,775 15 -- 6,790
------- ------ ---- ------- ------- ---- ---- -------
Net interest income 9,730 (8) -- 9,722 9,377 (15) -- 9,362
Provision for loan losses 450 -- -- 450 450 -- -- 450
------- ------ ---- ------- ------- ---- ---- -------
Net interest income after
provision for loan losses 9,280 (8) -- 9,272 8,927 (15) -- 8,912
Noninterest income 2,148 2,061 (59) 4,150 2,128 955 (51) 3,032
Noninterest expense 4,278 1,878 (59) 6,097 3,983 722 (51) 4,654
------- ------ ---- ------- ------- ---- ---- -------
Income before income taxes 7,150 175 -- 7,325 7,072 218 -- 7,290
Income taxes 2,275 73 -- 2,348 2,237 90 -- 2,327
------- ------ ---- ------- ------- ---- ---- -------
Net income $ 4,875 $ 102 $ -- $ 4,977 $ 4,835 $128 $ -- $ 4,963
======= ====== ==== ======= ======= ==== ==== =======
Depreciation and amortization $ 200 $ 246 $ -- $ 446 $ 183 $ 41 $ -- $ 224
======= ====== ==== ======= ======= ==== ==== =======
Nine months ended September 30,
-----------------------------------------------------------------------------------------------
2006 2005
Segments Segments
---------------------------------------------- ----------------------------------------------
Investment Investment
Banking Advisory Other Consolidated Banking Advisory Other Consolidated
---------- ---------- ----- ------------ ---------- ---------- ----- ------------
Interest income $ 59,418 $ -- $ (2) $ 59,416 $ 45,894 $ -- $ -- $ 45,894
Interest expense 30,291 25 (2) 30,314 17,416 45 -- 17,461
---------- ------- ----- ---------- ---------- ------ ----- ----------
Net interest income 29,127 (25) -- 29,102 28,478 (45) -- 28,433
Provision for loan losses 1,350 -- -- 1,350 1,325 -- -- 1,325
---------- ------- ----- ---------- ---------- ------ ----- ----------
Net interest income after
provision for loan losses 27,777 (25) -- 27,752 27,153 (45) -- 27,108
Noninterest income 5,627 6,527 (163) 11,991 6,089 2,625 (147) 8,567
Noninterest expense 12,940 5,814 (163) 18,591 11,892 2,115 (147) 13,860
---------- ------- ----- ---------- ---------- ------ ----- ----------
Income before income taxes 20,464 688 -- 21,152 21,350 465 -- 21,815
Income taxes 6,464 284 -- 6,748 6,834 191 -- 7,025
---------- ------- ----- ---------- ---------- ------ ----- ----------
Net income $ 14,000 $ 404 $ -- $ 14,404 $ 14,516 $ 274 $ -- $ 14,790
========== ======= ===== ========== ========== ====== ===== ==========
Depreciation and amortization $ 595 $ 743 $ -- $ 1,338 $ 518 $ 127 $ -- $ 645
========== ======= ===== ========== ========== ====== ===== ==========
Goodwill $ 13,376 $ 9,869 $ -- $ 23,245 $ 13,376 $1,162 $ -- $ 14,538
========== ======= ===== ========== ========== ====== ===== ==========
Total assets $1,268,060 $14,241 $(682) $1,281,619 $1,217,474 $3,048 $(111) $1,220,411
========== ======= ===== ========== ========== ====== ===== ==========
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.
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty
in Income Taxes. Interpretation No. 48 provides clarification on accounting for
uncertainty in income taxes recognized in an enterprise's financial statements
in accordance with FASB No. 109, Accounting for Income Taxes. The Interpretation
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return, and provides for additional financial statement footnote
disclosure. Interpretation No. 48 is effective for the Company beginning on
January 1, 2007. The Company is currently evaluating the potential impact this
Interpretation could have on its financial condition or results of operations.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS
No. 157 establishes a framework for measuring fair value in generally accepted
accounting principles, expands disclosures about fair value measurements and
applies whenever other standards require or permit assets or liabilities to be
measured at fair value. It does not expand the use of fair value in any new
circumstances. This Statement is effective for the Company beginning on January
1, 2008. The Company does not expect this Statement to have a material effect on
its financial condition.
In September 2006, the FASB issued SFAS No. 158, Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans. SFAS No. 158 is an
amendment of SFAS Nos. 87, 88, 106 and 132R. This Statement requires employers
to fully recognize the overfunded or underfunded status of a defined benefit
retirement plan, retiree healthcare and other postretirement plans as an asset
or liability in their financial statements as of the end of the fiscal year.
This Statement is effective for the Company for 2006. 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.
8
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 categories in the prior year's
statement of cash flows to conform to the current year's presentation.
9
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 NINE MONTHS ENDED SEPTEMBER 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
nine months ended September 30, 2006, compared to the same periods in 2005, and
on the consolidated financial condition of the Company and its subsidiaries at
September 30, 2006, compared to December 31, 2005.
Net income for the three months ended September 30, 2006, was $4,977,000, which
was virtually the same as the $4,963,000 reported for the same period in 2005.
Increases in net interest income, service charges on deposit accounts and
investment advisory fees were offset by increases in operating expenses.
For the first nine months of 2006, net income declined 2.6 percent from the
prior year to $14,404,000, or $.82 per share. Net interest income for the first
nine months of 2006 was $669,000 higher than the previous year primarily because
of the $110 million increase in average earning assets. Compared to the prior
year, the increases in net interest income and investment advisory fees were
more than offset by increases in noninterest expense. The nine months ended
September 30, 2006 also included net realized losses on the sale of investment
securities of $147,000 compared to net gains of $202,000 for the same period in
2005. Current year results include the operations of IMG, which was acquired on
December 30, 2005.
The net interest margin for the three and nine months ended September 30, 2006,
declined 24 and 27 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 40.0 percent higher than last year due the
increase in investment advisory fees earned by IMG. Net income from the
investment advisory segment of the company totaled $102,000 for the third
quarter of 2006, compared to $128,000 for the third quarter of 2005.
Year-to-date net income from this segment totaled $404,000, compared to $274,000
for the same period in 2005.
Year-to-date noninterest expense was 34.1 percent higher than a year ago,
primarily due to the acquisition of IMG, increases in compensation and related
benefit expenses, occupancy costs and intangible amortization.
10
RESULTS OF OPERATIONS
The following table shows selected financial results and measures for the three
and nine months ended September 30, 2006, compared with the same periods in 2005
(dollars in thousands).
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------------------- ---------------------------------------------
2006 2005 Change Change-% 2006 2005 Change Change-%
---------- ---------- -------- -------- ---------- ---------- -------- --------
Net income $ 4,977 $ 4,963 $ 14 0.3% $ 14,404 $ 14,790 $ (386) -2.6%
Average assets 1,315,308 1,189,373 125,935 10.6% 1,301,735 1,181,382 120,353 10.2%
Average stockholders'
equity 107,893 101,875 6,018 5.9% 106,042 99,628 6,414 6.4%
Return on assets 1.50% 1.66% -0.16% 1.48% 1.67% -0.19%
Return on equity 18.30% 19.33% -1.03% 18.16% 19.85% -1.69%
Efficiency ratio 42.60% 36.61% 5.99% 43.70% 36.27% 7.43%
Dividend payout ratio 57.14% 53.33% 3.81% 56.71% 53.93% 2.78%
Equity to assets ratio 8.20% 8.57% -0.37% 8.15% 8.43% -0.28%
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
net securities gains (losses)) 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.
11
Data for the three months ended September 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 $ 356,528 $ 282,204 $ 74,324 26.34% $ 7,080 $ 4,693 $2,387 50.86% 7.88% 6.60% 1.28%
Real estate 537,696 477,448 60,248 12.62% 9,907 7,886 2,021 25.63% 7.31% 6.55% 0.76%
Consumer 12,986 10,907 2,079 19.06% 265 221 44 19.91% 8.11% 8.05% 0.06%
Other 25,770 22,359 3,411 15.26% 343 253 90 35.57% 5.28% 4.49% 0.79%
---------- ---------- -------- ------ ------- ------- ------ ------ ---- ---- -----
Total loans 932,980 792,918 140,062 17.66% 17,595 13,053 4,542 34.80% 7.48% 6.53% 0.95%
---------- ---------- -------- ------ ------- ------- ------ ------ ---- ---- -----
Investment securities:
Taxable 171,401 203,444 (32,043) -15.75% 2,008 2,134 (126) -5.90% 4.69% 4.20% 0.49%
Tax-exempt 98,891 106,075 (7,184) -6.77% 1,302 1,396 (94) -6.73% 5.26% 5.27% -0.01%
---------- ---------- -------- ------ ------- ------- ------ ------ ---- ---- -----
Total investment
securities 270,292 309,519 (39,227) -12.67% 3,310 3,530 (220) -6.23% 4.90% 4.57% 0.33%
---------- ---------- -------- ------ ------- ------- ------ ------ ---- ---- -----
Federal funds sold and
short-term investments 21,006 4,732 16,274 343.91% 288 46 242 526.09% 5.43% 3.83% 1.60%
---------- ---------- -------- ------ ------- ------- ------ ------ ---- ---- -----
Total interest-earning
assets $1,224,278 $1,107,169 $117,109 10.58% 21,193 16,629 4,564 27.45% 6.87% 5.96% 0.91%
========== ========== ======== ====== ------- ------- ------ ------ ---- ---- -----
Interest-bearing
liabilities:
Deposits:
Checking with interest,
savings and money
markets $ 299,936 $ 307,970 $ (8,034) -2.61% 2,027 1,421 606 42.65% 2.68% 1.83% 0.85%
Time deposits 553,475 366,023 187,452 51.21% 6,926 3,041 3,885 127.75% 4.96% 3.30% 1.66%
---------- ---------- -------- ------ ------- ------- ------ ------ ---- ---- -----
Total deposits 853,411 673,993 179,418 26.62% 8,953 4,462 4,491 100.65% 4.16% 2.63% 1.53%
---------- ---------- -------- ------ ------- ------- ------ ------ ---- ---- -----
Other borrowed funds 160,559 213,808 (53,249) -24.91% 2,081 2,328 (247) -10.61% 5.14% 4.32% 0.82%
---------- ---------- -------- ------ ------- ------- ------ ------ ---- ---- -----
Total interest-bearing
liabilities $1,013,970 $ 887,801 $126,169 14.21% 11,034 6,790 4,244 62.50% 4.32% 3.03% 1.29%
========== ========== ======== ====== ------- ------- ------ ------ ---- ---- -----
Tax-equivalent net
interest income $10,159 $ 9,839 $ 320 3.25%
======= ======= ====== ======
Net interest spread 2.55% 2.93% -0.38%
==== ==== =====
Net interest margin 3.29% 3.53% -0.24%
==== ==== =====
Data for the nine months ended September 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 $ 345,197 $ 273,130 $ 72,067 26.39% $19,709 $12,841 $ 6,868 53.48% 7.63% 6.29% 1.34%
Real estate 539,062 460,289 78,773 17.11% 28,854 21,821 7,033 32.23% 7.16% 6.34% 0.82%
Consumer 12,268 10,812 1,456 13.47% 726 617 109 17.67% 7.91% 7.63% 0.28%
Other 24,925 20,273 4,652 22.95% 973 735 238 32.38% 5.22% 4.85% 0.37%
---------- ---------- -------- ------ ------- ------- ------- ------ ---- ---- -----
Total loans 921,452 764,504 156,948 20.53% 50,262 36,014 14,248 39.56% 7.29% 6.30% 0.99%
---------- ---------- -------- ------ ------- ------- ------- ------ ---- ---- -----
Investment securities:
Taxable 172,872 220,566 (47,694) -21.62% 5,929 6,995 (1,066) -15.24% 4.57% 4.23% 0.34%
Tax-exempt 99,388 102,506 (3,118) -3.04% 3,899 3,995 (96) -2.40% 5.23% 5.20% 0.03%
---------- ---------- -------- ------ ------- ------- ------- ------ ---- ---- -----
Total investment
securities 272,260 323,072 (50,812) -15.73% 9,828 10,990 (1,162) -10.57% 4.81% 4.54% 0.27%
---------- ---------- -------- ------ ------- ------- ------- ------ ---- ---- -----
Federal funds sold and
short-term
investments 16,525 12,817 3,708 28.93% 632 305 327 107.21% 5.12% 3.18% 1.94%
---------- ---------- -------- ------ ------- ------- ------- ------ ---- ---- -----
Total interest-earning
assets $1,210,237 $1,100,393 $109,844 9.98% 60,722 47,309 13,413 28.35% 6.71% 5.75% 0.96%
========== ========== ======== ====== ------- ------- ------- ------ ---- ---- -----
Interest-bearing
liabilities:
Deposits:
Checking with interest,
savings and money
markets $ 309,274 $ 340,335 $(31,061) -9.13% $ 5,794 $ 3,898 1,896 48.64% 2.50% 1.53% 0.97%
Time deposits 515,493 320,894 194,599 60.64% 17,916 6,979 10,937 156.71% 4.65% 2.91% 1.74%
---------- ---------- -------- ------ ------- ------- ------- ------ ---- ---- -----
Total deposits 824,767 661,229 163,538 24.73% 23,710 10,877 12,833 117.98% 3.84% 2.20% 1.64%
---------- ---------- -------- ------ ------- ------- ------- ------ ---- ---- -----
Other borrowed funds 174,581 222,509 (47,928) -21.54% 6,604 6,584 20 0.30% 5.06% 3.96% 1.10%
---------- ---------- -------- ------ ------- ------- ------- ------ ---- ---- -----
Total interest-bearing
liabilities $ 999,348 $ 883,738 $115,610 13.08% 30,314 17,461 12,853 73.61% 4.06% 2.64% 1.42%
========== ========== ======== ====== ------- ------- ------- ------ ---- ---- -----
Tax-equivalent net
interest income $30,408 $29,848 $ 560 1.88%
======= ======= ======= ======
Net interest spread 2.65% 3.11% -0.46%
==== ==== =====
Net interest margin 3.36% 3.63% -0.27%
==== ==== =====
12
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 third quarter was 3.29 percent, which was 24 basis points lower than the
same quarter last year and 6 basis points lower than the second quarter of 2006.
The decline from the prior quarter was due to continued increases in market
rates on deposits 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, 2006, increased $560,000 compared to the nine months ended
September 30, 2005.
Taxable-equivalent interest income and fees on loans increased $14.2 million in
the first nine 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 $157 million higher than the first nine months of last year.
The average yield on loans increased to 7.29 percent for the first nine months
of 2006, compared to 6.30 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 $50.8 million lower than last
year while the yield has increased 27 basis points. Most purchases of investment
securities during the first nine 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 nine months of 2006 increased to
3.84 percent from 2.20 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 nine months of last year, the average balance of higher rate certificates
of deposit was up $194.6 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 balances of money market and
savings accounts, which typically have lower rates, were $17.9 million and $12.4
million lower, respectively.
The average balance of borrowings for the first nine months of 2006 was $47.9
million lower than a year ago. Short-term borrowings, which consisted primarily
of federal funds purchased and borrowings from the Federal Home Loan Bank of Des
Moines (FHLB), averaged $52.6 million less than in the first nine months of
2005, due to utilizing wholesale time deposits. Long-term borrowings averaged
$4.7 million more than in the first nine months of 2005, 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.
13
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, 2006 and 2005 as well as common
ratios related to the allowance for loan losses (dollars in thousands).
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2006 2005 Change 2006 2005 Change
-------- -------- -------- -------- -------- --------
Balance at beginning of period $ 8,440 $ 7,080 $ 1,360 $ 7,615 $ 6,527 $ 1,088
Charge-offs (721) (284) (437) (821) (671) (150)
Recoveries 9 60 (51) 34 125 (91)
-------- -------- -------- -------- -------- --------
Net charge-offs (712) (224) (488) (787) (546) (241)
Provision charged to operations 450 450 -- 1,350 1,325 25
-------- -------- -------- -------- -------- --------
Balance at end of period $ 8,178 $ 7,306 $ 872 $ 8,178 $ 7,306 $ 872
======== ======== ======== ======== ======== ========
Average loans outstanding $932,980 $792,918 $140,062 $921,452 $764,504 $156,948
Ratio of net charge-offs during the
period to average loans outstanding 0.08% 0.03% 0.09% 0.07%
Ratio of allowance for loan losses
to average loans outstanding 0.88% 0.92% 0.89% 0.96%
Charge-offs in the three months ended September 30, 2006, increased
significantly compared to the prior year. Three loans that had been classified
as non-accrual accounted for $586,000 of the total charge-offs. The three loans
met the criteria for an in-substance foreclosure, which occurs when the borrower
has little or no equity in the collateral securing a loan. Charge-offs were
incurred for the difference between the carrying value and the net realizable
value of the properties securing the loans. A total of $1,730,000 was
transferred into other real estate owned.
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 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 examinations. See also the discussion of nonperforming assets later in
this report.
14
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).
Three Months Ended September 30,
-----------------------------------
2006 2005 Change Change-%
------ ------ ------ --------
Noninterest income:
Service charges on deposit accounts $1,371 $1,214 $ 157 12.93%
Trust services 208 202 6 2.97%
Investment advisory fees 2,003 904 1,099 121.57%
Increase in cash value of bank-owned
life insurance 215 213 2 0.94%
Net realized gains (losses) from
sales of securities (3) 159 (162) -101.89%
Other:
Debit card usage fees 55 45 10 22.22%
Check printing fees 33 39 (6) -15.38%
Visa/Mastercard income 46 28 18 64.29%
Gain on sale of residential mortgages 28 28 -- 0.00%
Other loan fees 10 8 2 25.00%
All other 184 192 (8) -4.17%
------ ------ ------ -------
Total other 356 340 16 4.71%
------ ------ ------ -------
Total noninterest income $4,150 $3,032 $1,118 36.87%
====== ====== ====== =======
Nine Months Ended September 30,
------------------------------------
2006 2005 Change Change-%
------- ------ ------ --------
Noninterest income:
Service charges on deposit accounts $ 3,492 $3,501 $ (9) -0.26%
Trust services 571 531 40 7.53%
Investment advisory fees 6,364 2,478 3,886 156.82%
Increase in cash value of bank-owned
life insurance 637 629 8 1.27%
Net realized gains (losses) from
sales of securities (147) 202 (349) -172.77%
Other:
Debit card usage fees 167 147 20 13.61%
Check printing fees 116 110 6 5.45%
Visa/Mastercard income 121 104 17 16.35%
Gain on sale of residential mortgages 57 87 (30) -34.48%
Other loan fees 55 170 (115) -67.65%
All other 558 608 (50) -8.22%
------- ------ ------ -------
Total other 1,074 1,226 (152) -12.40%
------- ------ ------ -------
Total noninterest income $11,991 $8,567 $3,424 39.97%
======= ====== ====== =======
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 slightly on a year-to-date basis, while implementation
of pricing changes in the third quarter of 2006 caused an increase in return
check charges compared to the same quarter in 2005. Trust fees increased 7.5
percent in the first nine months of 2006 compared to the prior year as a result
of the combination of new business and revised fee schedules.
15
Investment advisory fees are fees earned by VMF Capital and IMG. The significant
increase in investment advisory fees in the current quarter and year-to-date was
due to the acquisition of IMG on the last day of 2005. Revenue declined slightly
in the third quarter of 2006 compared to the second quarter because of the loss
of a customer. New business development efforts were hampered somewhat due to
the significant amount of time and effort spent on planning for the merger.
Effective October 1, 2006, VMF Capital and IMG have merged and will operate as
WB Capital Management Inc. Combining the two companies will allow for more
effective client service.
The Company recognized losses from the sale of investment securities in the
first nine 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 nine months 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. 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 September 30,
-----------------------------------
2006 2005 Change Change-%
------ ------ ------ --------
Noninterest expense:
Salaries and employee benefits $3,323 $2,580 $ 743 28.80%
Occupancy 826 624 202 32.37%
Data processing 448 367 81 22.07%
Other:
Insurance 64 40 24 60.00%
Supplies 74 60 14 23.33%
Marketing 164 114 50 43.86%
Business development 75 73 2 2.74%
Professional fees 257 141 116 82.27%
Consulting fees 55 90 (35) -38.89%
Intangible amortization 221 84 137 163.10%
All other 590 481 109 22.66%
------ ------ ------ ------
Total other 1,500 1,083 417 38.50%
------ ------ ------ ------
Total noninterest expense $6,097 $4,654 $1,443 31.01%
------ ------ ------ ------
Nine Months Ended September 30,
-------------------------------------
2006 2005 Change Change-%
------- ------- ------ --------
Noninterest expense:
Salaries and employee benefits $10,490 $ 7,744 $2,746 35.46%
Occupancy 2,548 1,817 731 40.23%
Data processing 1,433 1,057 376 35.57%
Other:
Insurance 185 118 67 56.78%
Supplies 215 239 (24) -10.04%
Marketing 370 279 91 32.62%
Business development 236 198 38 19.19%
Professional fees 596 395 201 50.89%
Consulting fees 159 199 (40) -20.10%
Intangible amortization 663 254 409 161.02%
All other 1,696 1,560 136 8.72%
------- ------- ------ ------
Total other 4,120 3,242 878 27.08%
------- ------- ------ ------
Total noninterest expense $18,591 $13,860 $4,731 34.13%
------- ------- ------ ------
16
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 because of one additional location
related to 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 canceled 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. In the third quarter, one of the Des Moines metropolitan
branches was relocated to a higher traffic location. An agreement to sell the
former branch is in place and is expected to result in a gain on sale of
approximately $112,000 in the fourth quarter of 2006.
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 as a result of significant efforts
to increase and expand current and new customer relationships at the Bank and
the investment advisory subsidiaries.
Professional fees increased due to the acquisition of IMG, higher audit fees and
higher legal fees. Legal fees increased because of fees associated with one
non-accrual loan and the cost of defending a lawsuit filed on June 20, 2006,
which was reported on a Form 8-K filed on June 26, 2006.
Consulting fees for 2006 included expenses incurred by IMG, but have declined as
2005 expense included fees for implementation of software programs to assist
with asset-liability management. Intangible amortization increased as the result
of recording client base and employment/noncompete intangibles in the
acquisition of IMG.
Income Tax Expense
The Company incurred income tax expense of $6.7 million for the nine months
ended September 30, 2006 compared to $7.0 million for the nine months ended
September 30, 2005. The effective income tax rate as a percent of income before
taxes for the three and nine months ended September 30, 2006 and 2005 held
steady at approximately 32 percent.
FINANCIAL CONDITION
Total assets as of September 30, 2006, were $1.3 billion, a slight 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 $2.7 million
from December 31, 2005, to $267.6 million. During the nine months ended
September 30, 2006, $16.2 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 September 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 $44.4 million from December 31, 2005,
to September 30, 2006. The increase was primarily attributable to growth in real
estate construction and commercial loans.
17
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, 2006 December 31, 2005 Change
------------------ ----------------- ------
Non-accrual loans $4,269 $4,145 $ 124
Loans past due 90 days and still
accruing interest -- 767 (767)
------ ------ ------
Total non-performing loans 4,269 4,912 (643)
Other real estate owned 2,012 497 1,515
------ ------ ------
Total non-performing assets $6,281 $5,409 $ 872
====== ====== ======
Non-performing assets to total loans 0.69% 0.62% 0.07%
Non-performing assets to total assets 0.49% 0.43% 0.06%
Two loans accounted for $3.7 million of the total non-accrual loans. As
previously reported, one commercial loan totaling $3.8 million secured by
commercial real estate used in the operation of the customer's business and
farmland was placed on non-accrual status in the fourth quarter of 2005. As
negotiations for a resolution have progressed, the farmland portion of this
relationship was moved to other real estate owned at an estimated net realizable
value of $1.6 million. The remaining portion of the loan was written down by
$292,000 to reflect the value that management anticipates will be realized from
the remaining collateral. Payments totaling $115,000 were applied to the
principal balance of this loan during the first nine 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. The second loan was associated
with the lawsuit disclosed in last quarter's report and was placed on
non-accrual status in August 2006. The amount of the loan is $1.9 million. The
funds to pay off this loan are currently being held at the co-defendant bank.
Management believes this loan will be paid in full from these funds. The
remaining balance of loans in non-accrual status was $544,000, and consisted of
loans to 16 different borrowers. The amount of loans past due 90 days and still
accruing interest declined to zero from $767,000 at December 31, 2005, due to a
concerted effort to collect delinquent payments. Finally, two construction loans
totaling $425,000 were written down by $295,000, and the remaining balance of
$130,000 was transferred to other real estate owned during the third quarter of
2006.
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, 2006, were $986 million compared with $945
million as of December 31, 2005. The savings category of deposits, which
includes money market accounts that are liquid accounts and therefore pay
relatively lower interest rates, declined approximately $64 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 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.
18
Borrowings
The balance of federal funds purchased and securities sold under agreement to
repurchase was approximately the same as the end of 2005. 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 throughout Iowa 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.
Long-term borrowings declined $12.3 million due to FHLB advances being called in
the third quarter of 2006. In early October 2006, the decision was made to
replace $50 million of wholesale deposits with two $25 million ten-year callable
FHLB advances. One of the advances is callable in one year and the other is
callable at the end of three years. The weighted average rate on the new
callable FHLB advances is 4.12 percent, which is significantly less than the
cost of wholesale certificates of deposit at this time.
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 $30.6 million as of September
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 of approximately $103
million available from the FHLB at September 30, 2006, and has a $2.5 million
unsecured line of credit through a large regional correspondent bank. In
addition, the Bank has $85 million available through unsecured federal funds
lines of credit with correspondent banks. The Bank was utilizing $16.8 million
of those lines of credit at September 30, 2006. 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, 2006.
The Company's total stockholders' equity increased to $111.0 million at
September 30, 2006, from $104.5 million at December 31, 2005. Total
stockholders' equity was 8.7 percent of total assets as of September 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.
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 nine months ended September 30, 2006.
On July 19, 2006, the Board of Directors of the Company declared a 5 percent
common stock dividend which was paid on August 14, 2006 to shareholders of
record on July 31, 2006. Fractional shares resulting from the stock dividend
were paid in cash. The number of outstanding common shares and earnings per
common share in the accompanying financial statements and footnotes reflect the
5 percent common stock dividend.
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 September 30, 2006.
19
Regulatory
requirements to be: Actual Regulatory
------------------------- Capital Ratios as of:
Adequately Well- --------------------------------------
Capitalized Capitalized September 30, 2006 December 31, 2005
----------- ----------- ------------------ -----------------
Total risk-based capital
as % of risk-weighted assets
Consolidated 8.0% 10.0% 11.0% 10.8%
West Bank 8.0% 10.0% 11.4% 11.3%
Tier 1 capital as % of risk-weighted assets:
Consolidated 4.0% 6.0% 10.3% 10.1%
West Bank 4.0% 6.0% 8.7% 8.5%
Tier 1 capital as % average assets
Consolidated 4.0% 5.0% 8.2% 8.3%
West Bank 4.0% 5.0% 7.0% 7.0%
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 nine months of 2006 changed when compared to 2005.
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.
20
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 underlying transactions.
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 nine 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, which has expired.
21
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)
10.11 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.
22
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 2, 2006 By: /s/ Thomas E. Stanberry
Date ------------------------------------
Thomas E. Stanberry
Chairman, President and Chief
Executive Officer
November 2, 2006 By: /s/ Douglas R. Gulling
Date ------------------------------------
Douglas R. Gulling
Executive Vice President and Chief
Financial Officer
(Principal Accounting Officer)
23
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
24