FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED COMMISSION FILE NUMBER March 31, 2004 0-49677 WEST BANCORPORATION, INC. ------------------------------------------------------ (Exact Name of Registrant as Specified in its Charter) IOWA 42-1230603 ---- ---------- (State of Incorporation) (I.R.S. Employer Identification No.) 1601 22nd Street, West Des Moines, Iowa 50266 Telephone Number (515) 222-2300 Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No --- --- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No --- --- As of May 5, 2004, there were 16,060,271 shares of common stock, no par value outstanding.
PART I - FINANCIAL INFORMATION Item 1. Financial Statements West Bancorporation, Inc. and Subsidiaries Consolidated Balance Sheets (unaudited) <TABLE> <CAPTION> March 31, December 31, 2004 2003 --------------- --------------- <S> <C> <C> Assets Cash and due from banks $ 25,298,601 $ 27,786,795 Federal funds sold and other short-term investments 34,566,347 54,287,004 --------------- --------------- Cash and cash equivalents 59,864,948 82,073,799 --------------- --------------- Securities available for sale 176,370,694 178,308,941 Securities held to maturity (approximate market value of $88,290,000 and $93,477,000 at March 31, 2004 and December 31, 2003, respectively) 86,403,642 91,406,205 Federal Home Loan Bank stock, at cost 4,807,000 5,197,600 --------------- --------------- Total securities 267,581,336 274,912,746 --------------- --------------- Loans 601,809,968 599,355,407 Allowance for loan losses (5,955,308) (5,975,587) --------------- --------------- Loans, net 595,854,660 593,379,820 --------------- --------------- Premises and equipment, net 3,674,571 3,683,020 Accrued interest receivable 5,676,265 5,878,880 Goodwill and other intangible assets 16,848,667 16,900,487 Bank-owned life insurance 20,609,940 20,386,714 Other assets 2,311,676 3,396,145 --------------- --------------- Total assets $ 972,422,063 $ 1,000,611,611 =============== =============== Liabilities and Stockholders' Equity Deposits: Noninterest bearing demand $ 170,934,228 $ 172,070,832 Savings and interest bearing demand 366,254,701 403,060,980 Time, in excess of $100,000 69,559,591 63,463,030 Other time 66,407,351 66,479,171 --------------- --------------- Total deposits 673,155,871 705,074,013 Federal funds purchased and securities sold under agreements to repurchase 96,181,639 85,442,675 Other short-term borrowings 2,182,965 9,141,973 Accrued expenses and other liabilities 3,299,120 2,032,291 Trust preferred securities - 20,000,000 Subordinated notes 20,619,000 - Federal Home Loan Bank advances 82,045,168 86,024,315 --------------- --------------- Total liabilities 877,483,763 907,715,267 --------------- --------------- Stockholders' Equity Common stock, no par value; authorized 50,000,000 shares; shares issued and outstanding: 2004 and 2003, 16,060,271 3,000,000 3,000,000 Additional paid-in capital 32,000,000 32,000,000 Retained earnings 58,489,095 56,796,771 Accumulated other comprehensive income 1,449,205 1,099,573 --------------- --------------- Total stockholders' equity 94,938,300 92,896,344 --------------- --------------- Total liabilities and stockholders' equity $ 972,422,063 $ 1,000,611,611 =============== =============== </TABLE> See accompanying notes to consolidated financial statements. 2
West Bancorporation, Inc. and Subsidiaries Consolidated Statements of Income (unaudited) <TABLE> <CAPTION> Three Months Ended March 31, 2004 2003 ----------- ----------- <S> <C> <C> Interest income: Loans $ 8,747,150 $ 7,701,836 Securities: U.S Treasury, government agencies and corporations 1,287,877 1,175,048 States and political subdivisions 461,397 415,242 Other 748,980 641,989 Federal funds sold and other short-term investments 187,747 439,493 ----------- ----------- Total interest income 11,433,151 10,373,608 ----------- ----------- Interest expense: Demand deposits 19,622 25,261 Savings deposits 728,718 768,697 Time deposits 595,166 816,060 Federal funds purchased and securities sold under agreements to repurchase 195,834 396,157 Other short-term borrowings 24,798 1,575 Subordinated notes 366,872 - Long-term borrowings 929,288 708,040 ----------- ----------- Total interest expense 2,860,298 2,715,790 ----------- ----------- Net interest income 8,572,853 7,657,818 Provision for loan losses 225,000 200,000 ----------- ----------- Net interest income after provision for loan losses 8,347,853 7,457,818 ----------- ----------- Noninterest income: Service charges on deposit accounts 1,101,527 1,056,193 Trust services 126,000 132,000 Investment advisory fees 566,825 - Increase in cash value of bank-owned life insurance 223,226 64,646 Net realized gains from sales of securities available for sale - 99,740 Other income 418,548 351,843 ----------- ----------- Total noninterest income 2,436,126 1,704,422 ----------- ----------- Noninterest expense: Salaries and employee benefits 2,463,671 1,704,291 Occupancy 511,063 370,249 Data processing 337,011 243,285 Other expenses 983,782 588,280 ----------- ----------- Total noninterest expense 4,295,527 2,906,105 ----------- ----------- Income before income taxes 6,488,452 6,256,135 Income taxes 2,226,485 2,205,570 Net income $ 4,261,967 $ 4,050,565 =========== =========== Earnings per share, basic $ 0.27 $ 0.25 =========== =========== Cash dividends per share $ 0.16 $ 0.16 =========== =========== </TABLE> See accompanying notes to consolidated financial statements. 3
West Bancorporation, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity (unaudited) <TABLE> <CAPTION> Three Months Ended March 31, 2004 2003 ------------ ------------ <S> <C> <C> Common Stock Beginning of year balance $ 3,000,000 $ 3,000,000 ------------ ------------ End of period balance 3,000,000 3,000,000 ------------ ------------ Additional Paid-in Capital Beginning of year balance 32,000,000 32,000,000 ------------ ------------ End of period balance 32,000,000 32,000,000 ------------ ------------ Retained Earnings Beginning of year balance 56,796,771 49,792,716 Net income 4,261,967 4,050,565 Dividends on common stock; per share amounts 2004 $0.16; 2003 $0.16 (2,569,643) (2,569,643) ------------ ------------ End of period balance 58,489,095 51,273,638 ------------ ------------ Accumulated Other Comprehensive Income (Loss) Beginning of year balance 1,099,573 1,031,446 Unrealized gain (loss) on securities, net of tax 349,632 18,105 ------------ ------------ End of period balance 1,449,205 1,049,551 ------------ ------------ Total Stockholders' Equity $ 94,938,300 $ 87,323,189 ============ ============ </TABLE> West Bancorporation, Inc. and Subsidiaries Consolidated Statements of Comprehensive Income (Loss) (unaudited) <TABLE> <CAPTION> Three Months Ended March 31, 2004 2003 ------------ ------------ <S> <C> <C> Net Income $ 4,261,967 $ 4,050,565 Other comprehensive income, unrealized gains on securities, net of reclassification adjustment, net of tax 349,632 18,105 ------------ ------------ Comprehensive income $ 4,611,599 $ 4,068,670 ============ ============ </TABLE> See accompanying notes to consolidated financial statements. 4
West Bancorporation, Inc. and Subsidiaries Consolidated Statements of Cash Flows (unaudited) <TABLE> <CAPTION> Three Months Ended March 31, 2004 2003 ------------- ------------- <S> <C> <C> Cash Flows from Operating Activities Net income $ 4,261,967 $ 4,050,565 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 225,000 200,000 Net amortization 564,796 229,954 Net gains from sales of securities available for sale and loans held for sale (43,544) (142,630) Proceeds from sales of loans held for sale 3,141,998 2,546,140 Originations of loans held for sale (3,465,204) (2,344,400) Depreciation 83,097 53,581 Deferred income taxes 371,629 (11,002) Change in assets and liabilities: Decrease (increase) in accrued interest receivable 202,615 (241,050) Increase in accrued expenses and other liabilities 1,052,248 1,811,526 ------------- ------------- Net cash provided by operating activities 6,394,602 6,152,684 ------------- ------------- Cash Flows from Investing Activities Proceeds from sales, calls, and maturities of securities available for sale 30,296,000 2,130,095 Purchases of securities available for sale (28,260,236) (34,659,792) Proceeds from sales, calls, and maturities of securities held to maturity 4,923,000 25,232,034 Purchases of securities held to maturity - (6,969,238) Acquisition of Federal Home Loan Bank stock (1,487,000) - Proceeds from redemption of Federal Home Loan Bank stock 1,877,600 - Net (increase) decrease in loans (2,333,090) 4,468,926 Purchases of premises and equipment (74,648) (71,030) Purchase of bank-owned life insurance - (10,000,000) Change in other assets 443,750 (99,199) ------------- ------------- Net cash provided by (used in) investing activities 5,385,376 (19,968,204) ------------- ------------- Cash Flows from Financing Activities Net decrease in deposits (31,918,142) (50,221,501) Net increase in federal funds purchased and securities sold under agreements to repurchase 10,738,964 18,409,635 Net decrease in other short-term borrowings (6,959,008) (4,587,350) Proceeds from long-term borrowings 10,619,000 - Principal payments on long-term borrowings (13,900,000) - Cash dividends (2,569,643) (2,569,643) ------------- ------------- Net cash used in financing activities (33,988,829) (38,968,859) ------------- ------------- Net increase (decrease) in cash and cash equivalents (22,208,851) (52,784,379) Cash and Cash Equivalents Beginning 82,073,799 181,214,068 ------------- ------------- End $ 59,864,948 $ 128,429,689 ============= ============= Supplemental Disclosures of Cash Flow Information Cash payments for: Interest $ 2,767,715 $ 2,603,824 Income taxes - 256,733 </TABLE> See accompanying notes to consolidated financial statements. 5
West Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements (unaudited) 1. Basis of Presentation The accompanying consolidated statements of income, stockholders' equity, comprehensive income, and cash flows for the three months ended March 31, 2004 and 2003, and the consolidated balance sheets as of March 31, 2004 and December 31, 2003 include the accounts and transactions of the Company and its wholly-owned subsidiaries, West Bank and WB Capital Management Inc. d/b/a VMF Capital. All material intercompany balances and transactions have been eliminated in consolidation. The accompanying consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Although management believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these interim consolidated financial statements be read in conjunction with the company's most recent audited financial statements and notes thereto. In the opinion of management, the accompanying consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of March 31, 2004, and the results of operations and cash flows for the three months ended March 31, 2004 and 2003. The results for these interim periods may not be indicative of results for the entire year or for any other period. 2. Earnings Per Common Share Earnings per share represents income available to common shareholders divided by the weighted average number of shares outstanding during the period. The Company has no common equivalent shares that could cause dilution. The average number of shares outstanding for the three months ended March 31, 2004 and 2003 was 16,060,271. 3. Commitments In the normal course of business, the Company enters into commitments to extend credit such as loan commitments and standby letters of credit to meet the financing needs of its customers. These commitments expose the Company to varying degrees of credit and market risk and are subject to the same credit reviews as those recorded on the balance sheet. For additional information on credit extension commitments see Note 13 of the Company's 2003 consolidated financial statements. The Company's commitments as of March 31, 2004 and December 31, 2003 are approximately as follows: <TABLE> <CAPTION> March 31, 2004 December 31, 2003 -------------- ----------------- <S> <C> <C> Commitments to extend credit $ 153,646,000 $ 166,945,000 Standby letters of credit 24,098,000 19,974,000 ------------- ------------- $ 177,744,000 $ 186,919,000 ============= ============= </TABLE> 6
4. Impact of New Financial Accounting Standards FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51, (FIN 46) establishes accounting guidance for consolidation of variable interest entities (VIE) that function to support the activities of the primary beneficiary. Prior to the implementation of FIN 46, VIEs were generally consolidated by an enterprise when the enterprise had a controlling financial interest through ownership of a majority of voting interest in the entity. The provisions of FIN 46 were effective immediately for all arrangements entered into after January 31, 2003. In December 2003, the FASB issued a revision to FIN 46 (FIN 46R) which clarified certain implementation issues and revised implementation dates for VIEs created before January 31, 2003. Under the new guidance, special effective date provisions apply to enterprises that have fully or partially applied FIN 46 prior to issuance of the revised Interpretation. Otherwise, application of FIN 46R (or FIN 46) is required in financial statements of public entities that have interests in special-purpose entities for periods ending after December 15, 2003. Application by public entities, other than small business issuers, for all other types of VIEs is required in financial statements for periods ending after March 15, 2004. The Company adopted FIN 46 in connection with its consolidated financial statements for the year ending December 31, 2003. An unintended consequence of this standard is requiring some companies to conclude deconsolidation is necessary for certain transactions involving the issuance of trust preferred securities. Based upon its interpretation of FIN 46, the Company continued to consolidate its wholly-owned subsidiary trust entity involved with the issuance of its trust preferred securities at December 31, 2003, but has deconsolidated for the quarter ending March 31, 2004. Such deconsolidation had no effect on reported earnings or stockholders' equity. These securities qualify for treatment as Tier 1 capital for the Company. In July 2003, the Board of Governors of the Federal Reserve System issued a supervisory letter instructing bank holding companies to continue to include the trust preferred securities in Tier 1 capital for regulatory capital purposes until notice is given to the contrary. There can be no assurance that the Federal Reserve will continue to permit institutions to include trust preferred securities in Tier 1 capital for regulatory capital purposes. As of March 31, 2004, assuming the Company was not permitted to include the $20 million in trust preferred securities issued by the trust in its Tier 1 capital, the Company would still exceed the regulatory required minimums for capital adequacy purposes. If the trust preferred securities were no longer permitted to be included in Tier 1 capital, the Company would also be permitted to redeem the capital securities without penalty. The interpretations of FIN 46 and its application to various transaction types and structures are evolving. Management continuously monitors emerging issues related to FIN 46, some of which could potentially impact the Company's financial statements. The Accounting Standards Executive Committee has issued Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer. This Statement applies to all loans acquired in a transfer, including those acquired in the acquisition of a bank or a branch, and provides that such loans be accounted for at fair value with no allowance for loan losses, or other valuation allowance, permitted at the time of acquisition. The difference between cash flows expected at the acquisition date and the investment in the loan should be recognized as interest income over the life of the loan. If contractually required payments for principal and interest are less than expected cash flows, this amount should not be recognized as a yield adjustment, a loss accrual, or a valuation allowance. For the Company, this Statement is effective for calendar year 2005 and, early adoption, although permitted, is not planned. No significant impact is expected on the consolidated financial statements at the time of adoption. 5. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. A significant estimate that is particularly sensitive to change is the allowance for loan losses. 7
6. Critical Accounting Policies Management has identified its most critical accounting policy to be that related to the allowance for loan losses. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that collectibility of the principal is unlikely. The Company has policies and procedures for evaluating the overall credit quality of its loan portfolio including timely identification of potential problem credits. On a quarterly basis, management reviews the appropriate level for the allowance for loan losses incorporating a variety of risk considerations, both quantitative and qualitative. Quantitative factors include the Company's historical loss experience, delinquency and charge-off trends, collateral values, known information about individual loans and other factors. Qualitative factors include the general economic environment in the Company's market area and the expected trend of those economic conditions. To the extent actual results differ from forecasts and management's judgment, the allowance for loan losses may be greater or less than future charge-offs. 7. Reclassifications In July, 2003, the Company formed West Bancorporation Capital Trust I (the "Trust") for the purpose of issuing trust preferred securities. Following generally accepted accounting principles in effect as of December 31, 2003, the financial statements of the Trust were consolidated with the Company and any intercompany transactions were eliminated. As of March 31, 2004, generally accepted accounting principles have been modified to state that the financial statements of the Trust should not be consolidated with the Company's and intercompany transactions should not be eliminated. The result of this change is that the balance of subordinated debt has increased by $619,000 which represents debt issued by the Company to the Trust. In addition, other assets increased by $619,000 which represents the Company's investment in the common stock of the Trust. The results of the Trust are recorded on the books of the Company using the equity method of accounting. There was no impact to net income as a result of this change. Other minor reclassifications were made to certain prior year's expense categories to conform to the current year's presentation. 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT The information contained in this report may contain forward-looking statements about the Company's growth and acquisition strategies, new products and services, and future financial performance, including earnings and dividends per share, return on average assets, return on average equity, efficiency ratio and capital ratio. Certain statements in this report constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking information is based upon certain underlying assumptions, risks and uncertainties. Because of the possibility of change in the underlying assumptions, actual results could differ materially from these forward-looking statements. Risks and uncertainties that may affect future results include: competitive pressures, pricing pressures on loans and deposits, actions of bank and non-bank competitors, changes in local and national economic conditions, changes in regulatory requirements, actions of the Securities and Exchange Commission and/or the Federal Reserve Board, and customer acceptance of the Company's products and services. The Company undertakes no obligation to revise or update such forward-looking statements to reflect current events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. THREE MONTHS ENDED MARCH 31, 2004 SELECTED FINANCIAL RESULTS The following table shows selected financial results and measures for the three months ended March 31, 2004 compared with the same period in 2003. <TABLE> <CAPTION> Three months ended March 31, 2004 2003 Change Change-% ----------- ----------- --------- -------- <S> <C> <C> <C> <C> Net income $ 4,261,967 $ 4,050,565 $ 211,402 5.2% Average assets 985,882,486 867,385,825 118,496,661 13.7% Average stockholders' equity 93,932,599 86,395,979 7,536,620 8.7% Return on assets 1.74% 1.89% -0.15% Return on equity 18.25% 19.01% -0.76% Efficiency ratio 39.66% 30.57% 9.09% Dividend payout ratio 60.29% 63.44% -3.15% Equity to assets ratio 9.53% 9.96% -0.43% </TABLE> Definition of ratios: Return on assets - annualized net income divided by average assets. Return on equity - annualized net income divided by average stockholders' equity. Efficiency ratio - noninterest expense divided by noninterest income (excluding securities gains) plus taxable equivalent net interest income. Dividend payout ratio - dividends per share divided by net income per share. Equity to assets ratio - average equity divided by average assets. 9
RESULTS OF OPERATIONS Net income for the first quarter of 2004 is higher than the previous year primarily because of increased net interest income as a result of higher levels of earning assets that were acquired in the Hawkeye State Bank transaction in July, 2003. Return on equity has declined slightly even though net income has increased because growth in equity has been at a higher rate than the growth in net income. Consolidated net income for the first quarter of 2004 also includes the results of VMF Capital. For the first quarter of 2004, VMF Capital had a net loss of $53,000. This was in line with internal projections. It is expected that VMF Capital will be near a breakeven level for the entire year of 2004, however that is dependent upon significant growth in assets under management, which is difficult to project with any degree of certainty. During the first quarter of 2004, assets under management at VMF Capital increased approximately $263 million to $725 million. Net Interest Income The following table shows average balances and related interest income or interest expense, with the resulting average yield or rate by category of interest earning assets or interest bearing liabilities. Interest income and the resulting net interest income are shown on a fully taxable basis. 10
Data for the three months ended March 31 (dollars in thousands). <TABLE> <CAPTION> Average Balance Interest Income/Expense Yield/Rate --------------------------------------- ----------------------------------- ---------------------- 2004 2003 Change Change-% 2004 2003 Change Change-% 2004 2003 Change <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Interest-earning assets: Loans: Commercial $315,017 $251,021 $ 63,996 25.49% $ 4,235 $ 3,552 $ 683 19.23% 5.41% 5.74% -0.33% Real estate 251,646 197,543 54,103 27.39% 4,003 3,595 408 11.35% 6.40% 7.38% -0.98% Consumer 18,903 19,574 (671) -3.43% 328 361 (33) -9.14% 6.98% 7.48% -0.50% Other 16,638 14,431 2,207 15.29% 263 284 (21) -7.39% 6.37% 7.99% -1.62% ------------------------------------- --------------------------------- --------------------- Total Loans 602,204 482,569 119,635 24.79% 8,829 7,792 1,037 13.31% 5.90% 6.55% -0.65% ------------------------------------- ---------------------------------- --------------------- Investment securities: Taxable 220,033 176,860 43,173 24.41% 2,122 1,901 221 11.63% 3.86% 4.30% -0.44% Tax-exempt 47,616 32,667 14,949 45.76% 551 485 66 13.61% 4.63% 5.94% -1.31% ------------------------------------- --------------------------------- --------------------- Total investment securities 267,649 209,527 58,122 27.74% 2,673 2,386 287 12.03% 4.00% 4.56% -0.56% ------------------------------------- --------------------------------- --------------------- Federal funds sold and short-term investments 46,928 142,724 (95,796) -67.12% 188 439 (251) -57.18% 1.61% 1.25% 0.36% ------------------------------------- --------------------------------- --------------------- Total interest-earning assets $916,781 $834,820 $ 81,961 9.82% $11,690 $10,617 1,073 10.11% 5.12% 5.14% -0.02% ===================================== --------------------------------- --------------------- Interest-bearing liabilities: Deposits: Checking with interest, savings and money markets $378,332 328,517 $ 49,815 15.16% $ 748 $ 794 (46) -5.79% 0.80% 0.98% -0.18% Time deposits 136,052 116,211 19,841 17.07% 595 816 (221) -27.08% 1.76% 2.85% -1.09% ------------------------------------- --------------------------------- --------------------- Total deposits 514,384 444,728 69,656 15.66% 1,343 1,610 (267) -16.58% 1.05% 1.47% -0.42% ------------------------------------- --------------------------------- --------------------- Other borrowed funds 205,476 199,347 6,129 3.07% 1,517 1,106 411 37.16% 2.97% 2.25% 0.72% ------------------------------------- --------------------------------- --------------------- Total interest-bearing liabilities $719,860 $644,075 $ 75,785 11.77% $ 2,860 $ 2,716 144 5.30% 1.60% 1.71% -0.11% ===================================== --------------------------------- --------------------- Tax-equivalent net interest --------------------------------- income $ 8,830 $ 7,901 $ 929 11.76% ================================= Net interest spread 3.52% 3.43% 0.09% ==================== Net interest margin 3.87% 3.82% 0.05% ==================== </TABLE> Net interest income is computed by subtracting total interest expense from total interest income. Fluctuations in net interest income can result from the changes in the volumes of assets and liabilities as well as changes in interest rates. Net interest margin is a measure of the net return on interest-earning assets and is computed by dividing annualized net interest income by the average of total interest-earning assets for the period. The Federal Reserve lowered the targeted fed funds rate by 25 basis points in June 2003. As a result, the prime rate and fed funds rate are 25 basis points lower than they were in the first quarter of last year. The Company's tax-equivalent net interest income for the quarter ended March 31, 2004 increased $929,000 compared to the three months ended March 31, 2003. The increase is primarily attributable to a higher level of earning assets. For the first quarter of 2004, earning assets averaged $82 million higher than the same period last year. Taxable-equivalent interest income and fees on loans increased $1,037,000 in the first quarter of 2004 compared to the same period in 2003, mainly due to a higher volume of outstanding loans. Average loans were $120 million higher than the first quarter of last year. Loans acquired in the Hawkeye State Bank transaction account for $63 million of that increase. The average yield on loans declined to 5.90 percent for the first quarter of 2004, compared to 6.55 percent in the first quarter of 2003. The yield on the Company's loan portfolio is affected by the amount of nonaccrual loans, the mix of the portfolio, the effects of competition, and the interest rate environment. The interest rate environment can influence the volume of new loan originations and the mix of variable rate versus fixed rate loans. Competition for loans in the market area served by the Company remains strong. The average balance of investment securities is $58.1 million higher than last year while the yield has declined 56 basis points. Most purchases of investment securities during the first quarter of 2004 have been callable agency bonds and tax-exempt municipal bonds with a maturity of five years or less. The average rate on deposits declined to 1.05 percent from 1.47 percent for the first quarter of last year. This decline is primarily the result of a decrease in market interest rates. The mix of interest-bearing deposits during the first quarter of 2004 is very similar to the mix a year ago. 11
The average balance of borrowings for the first quarter of 2004 was $6.1 million higher than a year ago. However, the mix of borrowings has changed significantly since last year. Overnight borrowings in the form of Federal funds purchased from downstream correspondent banks averaged $55 million less than the first quarter of last year. Long-term fixed borrowings averaged $52 million more, consisting of $20.6 million in subordinated notes and $31.1 million in fixed-rate Federal Home Loan Bank (FHLB) advances. The FHLB advances were assumed in the Hawkeye State Bank transaction. This change in mix caused the overall cost of borrowings to increase by 72 basis points, but should provide favorable results when market interest rates rise. Provision for Loan Losses The following table sets forth the activity in the Allowance for Loan Losses for the three months ended March 31, 2004 and 2003, as well as common ratios related to the allowance for loan losses. <TABLE> <CAPTION> Three months ended March 31, 2004 2003 Change ------------- ------------- --------- <S> <C> <C> <C> Balance at beginning of period $ 5,975,587 $ 4,493,583 Charge-offs (262,619) (122,953) $139,666 Recoveries 17,340 44,618 (27,278) ------------- ------------- Net charge-offs (245,279) (78,335) 166,944 Provision charged to operations 225,000 200,000 25,000 ------------- ------------- Balance at end of period $ 5,955,308 $ 4,615,248 ============= ============= Average loans outstanding $ 602,203,822 $ 482,569,447 Ratio of net charge-offs during the period to average loans outstanding 0.04% 0.02% Ratio of allowance for loan losses to average loans outstanding 0.99% 0.96% </TABLE> Management determines an appropriate provision based on its evaluation of the adequacy of the allowance for loan losses in relationship to a continuing review of problem loans, the current economic conditions, actual loss experience and industry trends. The allowance for loan losses is management's best estimate of probable losses inherent in the loan portfolio as of the balance sheet date; however, changes in the loan portfolio and the uncertainty of the general economy require that management continue to evaluate the adequacy of the allowance for loan losses and make additional provisions in future periods as deemed necessary. See also the discussion of nonperforming assets later in this report. 12
Noninterest Income The following table shows the variance from the prior year period in the noninterest income categories shown in the Consolidated Statements of Income. In addition, accounts within the Other Income category that represent significant variances are shown. <TABLE> <CAPTION> Three months ended March 31, 2004 2003 Change Change-% ---------- ---------- -------- -------- <S> <C> <C> <C> <C> Noninterest income Service charges on deposit accounts $1,101,527 $1,056,193 $ 45,334 4.3% Trust services 126,000 132,000 (6,000) -4.5% Investment advisory fees 566,825 - 566,825 - Increase in cash value of bank-owned life insurance 223,226 64,646 158,580 245.3% Other: Letter of credit fees 36,623 14,579 22,044 151.2% VISA/Mastercard income 49,135 38,248 10,887 28.5% Safe deposit box rent 56,263 34,605 21,658 62.6% All other 276,527 264,411 12,116 4.6% -------------------------------------------------- Total other 418,548 351,843 66,705 19.0% -------------------------------------------------- Gain on sale of securities - 99,740 (99,740) - -------------------------------------------------- Total noninterest income $2,436,126 $1,704,422 $731,704 42.9% ================================================== </TABLE> Noninterest income results from the charges and fees collected by the Company from its customers for various services performed and miscellaneous other income and gains (or losses) from the sale of investment securities held in the available for sale category. Service charges on deposit accounts grew primarily due to higher volumes. There were minor pricing changes in the second quarter of last year. Investment advisory fees are fees earned by VMF Capital, which commenced operations on October 1, 2003. Letter of credit fees are higher due to volume. The increase in VISA/Mastercard income was due to an increase in the number of merchant customers. Bank-owned life insurance was purchased during the first and third quarters of last year. The increase in safe deposit box rent is attributable to the Iowa City offices. Most customers in Iowa City are billed for their safe deposit box rent in January of each year. Therefore, the magnitude of the variance for the first quarter cannot be annualized. Noninterest Expense The following table shows the variance from the prior year in the noninterest expense categories shown in the Consolidated Statements of Income. In addition, accounts within the Other Expense category that represent significant variances are shown. <TABLE> <CAPTION> Three months ended March 31, 2004 2003 Change Change-% ---------- ---------- --------- ------- <S> <C> <C> <C> <C> Noninterest expense: Salaries and employee benefits $2,463,671 $1,704,291 $ 759,380 44.6% Occupancy 511,063 370,249 140,814 38.0% Data processing 337,011 243,285 93,726 38.5% Other: Intangible amortization 94,351 7,955 86,396 1086.1% Supplies 72,166 40,080 32,086 80.1% Business development 88,878 12,729 76,149 598.2% Charitable contributions 62,807 40,513 22,294 55.0% Professional fees 132,324 90,276 42,048 46.6% All other 533,256 396,727 136,529 34.4% ---------------------------------------------------- Total other 983,782 588,280 395,502 67.2% ---------------------------------------------------- Total noninterest expense $4,295,527 $2,906,105 $1,389,422 47.8% ==================================================== </TABLE> 13
The increase in salaries and benefits includes compensation related expenses for approximately 40 more employees than a year ago due to the acquisitions in the last half of 2003. Occupancy expenses likewise were higher this year due to four additional locations: two banking locations in Iowa City and two VMF Capital offices. The increase in intangible asset amortization relates to the 2003 acquisitions. The increase in professional fees were the result of more legal services associated with complying with the Sarbanes-Oxley Act of 2002 and the decision to outsource the Company's internal audit services. Supplies are higher because of the acquisitions and the implementation of a new corporate logo. The increase in business development costs is mostly attributable to VMF Capital. Charitable contributions are higher because of the timing of certain payments. Income Tax Expense The Company incurred income tax expense of $2,226,485 for the three months ended March 31, 2004 compared with $2,205,570 for the three months ended March 31, 2003. The effective income tax rate as a percent of income before taxes for the three months ended March 31, 2004 and 2003 was 34.3 percent and 35.3 percent, respectively. The effective income tax rate is slightly lower in 2004 because of a higher level of income that is exempt from Federal income taxes. FINANCIAL CONDITION Total assets as of March 31, 2004 were $972,422,000, a slight decrease from $1,000,612,000 at December 31, 2003. The decrease is primarily in Federal funds sold and other short-term investments which is lower because of a decline in deposits. Investment Securities Investment securities available for sale decreased $1,938,000 from December 31, 2003 to $176,371,000 on March 31, 2004. From December 31, 2003, investment securities classified as held to maturity declined $5,002,000 to $86,404,000 as of March 31, 2004. The slight decline in the size of the investment portfolio was the result of a decrease in deposits from year end 2003. Loans Loans outstanding declined $2,455,000 from December 31, 2003 to March 31, 2004. The decline occurred in the Iowa City market where there continues to be some attrition. While it is difficult to predict, it is believed the loan portfolio in the Iowa City market should begin to grow. Deposits Total deposits as of March 31, 2004 were $673,156,000 compared with $705,074,000 as of December 31, 2003. Savings and interest bearing demand accounts, which includes money market accounts were $36,806,000 lower at March 31, 2004 than at December 31, 2003. Noninterest bearing deposits at March 31, 2004 were $1,137,000 lower than at December 31, 2003. It is not unusual to see this kind of fluctuation at any given point in time. Certificates of deposit as of March 31, 2004 were $135,967,000, up $6,025,000 from December 31, 2003. The increase is primarily due to time certificates of $100,000 and over. Borrowings The balance of Federal funds purchased and securities sold under agreements to repurchase was $96,182,000 at March 31, 2004, up from $85,443,000 at December 31, 2003. Most of this increase relates to Federal funds purchased, which are Federal funds sold to West Bank by approximately 40 banks throughout Iowa. This is a correspondent bank service provided by West Bank. Federal funds sold to West Bank by these downstream correspondent banks are invested in Federal funds sold to upstream correspondent banks or other short-term investments. The balance of other short-term borrowings consisted entirely of Treasury, Tax and Loan option notes at March 31, 2004 and also included an FHLB overnight advance at December 31, 2003. 14
Nonperforming Assets The following table sets forth the amount of non-performing loans and assets carried by the Company and common ratio measurements of those items (dollars in thousands). <TABLE> <CAPTION> March 31, 2004 December 31, 2003 Change -------------- ----------------- ------ <S> <C> <C> <C> Nonaccrual loans $ 2,400 $ 1,668 $ 732 Loans past due 90 days and still accruing interest 192 125 67 ------- ------- ----- Total non-performing loans 2,592 1,793 799 Other real estate owned 248 441 (193) ------- ------- ----- Total non-performing assets $ 2,840 $ 2,234 $ 606 ======= ======= ===== Non-performing assets to total loans 0.47% 0.37% 0.10% Non-performing assets to total assets 0.29% 0.22% 0.07% </TABLE> The increase in nonaccrual loans is primarily the result of a commercial loan and a single family residential loan. The sale of a single family residential property accounted for the decline in other real estate owned. In the opinion of management, loans past due 90 days and still accruing interest are adequately collateralized to cover any unpaid interest. Reference is also made to the information and discussion earlier in this report under the heading "Provision for Loan Losses". Capital Resources Total shareholders' equity was 9.8 percent of total assets as of March 31, 2004 and 9.3 percent on December 31, 2003. The table below shows the various measures of regulatory capital and related ratios. Regulatory capital: <TABLE> <CAPTION> March 31, 2004 December 31, 2003 -------------- ----------------- <S> <C> <C> Total shareholders' equity $ 94,938,300 $ 92,896,344 Less: net unrealized gains on available for sale securities (1,449,205) (1,099,573) Less: net unrealized loss on available for sale equity securities (11,023) (3,500) Less: intangible assets (16,848,667) (16,900,487) Plus: subordinated notes/trust preferred securities 20,000,000 20,000,000 ------------- ------------- Tier 1 capital 96,629,405 94,892,784 Plus: allowance for loan losses 5,955,308 5,975,587 ------------- ------------- Total risk-based capital $ 102,584,713 $ 100,868,371 ============= ============= </TABLE> <TABLE> <CAPTION> Regulatory requirements to be: Actual Regulatory Adequately Well- Capital Ratios as of: Capitalized Capitalized March 31, 2004 December 31, 2003 ----------- ----------- -------------- --------------------- <S> <C> <C> <C> <C> Total risk-based capital as % of risk-weighted assets 8.0% 10.0% 13.2% 13.1% Tier 1 capital as % of risk-weighted assets 4.0% 6.0% 12.4% 12.3% Tier 1 capital as % average assets 4.0% 5.0% 10.0% 9.6% </TABLE> 15
Risk-based capital guidelines require the classification of assets and some off-balance sheet items in terms of credit-risk exposure and the measuring of capital as a percentage of the risk adjusted asset totals. Management believes, and data in the above table supports that, as of March 31, 2004 and December 31, 2003, the Company met all capital adequacy requirements to which it is subject. As of those dates, West Bank was "well capitalized" under regulatory prompt corrective action provisions. Liquidity Liquidity management involves meeting the cash flow requirements of depositors and borrowers. Liquidity management is conducted on both a daily and a long-term basis. Investments in liquid assets are adjusted based on expected loan demand, projected loan maturities and payments, expected deposit flows, and the objectives set by the Company's funds management policy. The Company had liquid assets (cash and cash equivalents) of $59,865,000 as of March 31, 2004, compared with $82,074,000 as of December 31, 2003. Securities available for sale may be sold prior to maturity to meet liquidity needs, to respond to market changes or to adjust the Company's interest rate risk position. In addition, the Bank maintains lines of credit with correspondent banks totaling $80 million that would allow it to borrow Federal funds on a short-term basis, if necessary and has additional borrowing capacity of $32 million at the Federal Home Loan Bank. Management believes that the Company has sufficient liquidity as of March 31, 2004 to meet the needs of borrowers and depositors. Market Risk Management Market risk is the risk of earnings volatility that results from adverse changes in interest rates and market prices. The Company's market risk is primarily interest rate risk arising from its core banking activities of lending and deposit taking. Interest rate risk is the risk that changes in market interest rates may adversely affect the Company's net interest income. Management continually develops and implements strategies to mitigate this risk. The analysis of the Company's interest rate risk was presented in the Form 10-K filed with the Securities and Exchange Commission on March 4, 2004. The Company has not experienced any material changes to its market risk position since December 31, 2003. Management does not believe the Company's primary market risk exposures and how those exposures were managed in the first three months of 2004 changed when compared to 2003. Item 3. Quantitative and Qualitative Disclosures about Market Risk. The information appearing above under the heading "Market Risk Management" is incorporated herein by reference. Item 4. Controls and Procedures a. Evaluation of disclosure controls and procedures. As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer of the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rule 240.13a-15(e)) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company's current disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. b. Changes in internal controls over financial reporting. There were no changes in the Company's internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 16
Part II - OTHER INFORMATION Item 1. Legal Proceedings The Company and its subsidiaries from time to time are party to various legal actions arising in the normal course of business. Management believes, as of the date of this Form 10-Q, that there is no threatened or pending proceeding against the Company, West Bank or VMF Capital, which, if determined adversely, would have a material adverse effect on the business or financial position of the Company, West Bank or VMF Capital. Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are filed as part of this report: Exhibits -------- 3.1 Restated Articles of Incorporation of the Company* 3.2 By-laws of the Company* 10.1 Lease for Main Bank Facility* 10.2 Supplemental Agreement to Lease for Main Bank Facility* 10.3 Short-term Lease related to Main Bank facility* 10.4 Assignment* 10.5 Lease Modification Agreement No. 1 for Main Bank Facility* 10.6 Memorandum of Real Estate Contract* 10.7 Affidavit* 10.8 Addendum to Lease for Main Bank Facility* 10.9 Data Processing Contract* 10.10 Employment Contract* 10.11 Consulting Contract* 10.12 Data Processing Contract Amendment** 10.13 Purchase and Assumption Agreement between West Des Moines State Bank and Hawkeye State Bank*** 10.14 Employment Agreement effective March 1, 2003, which was consummated in the first of 2004**** 31.1 Certification of Chief Executive Officer under Section 302 of the Sarbanes Oxley Act of 2002 31.2 Certification of Chief Financial Officer under Section 302 of the Sarbanes Oxley Act of 2002 32.1 Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002 * Incorporated herein by reference to the related exhibit filed with the Form 10 on March 11, 2002. ** Incorporated herein by reference to the related exhibit filed with the Form 10-K on March 26, 2003. *** Incorporated herein by reference to the related exhibit filed with the Form 10-Q on May 15, 2003. **** Incorporated herein by reference to the related exhibit filed with the Form 10-K on March 4, 2004. (b) Reports on Form 8-K: During the three months ended March 31, 2004, the Company filed a Form 8-K on January 15, 2004 which contained a press release announcing the quarterly dividend, a Form 8-K on January 20, 2004 which contained a press release announcing earnings for the three and twelve months ended December 31, 2003 and the retirement of two directors. 17
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. West Bancorporation, Inc. - ------------------------- (Registrant) May 5, 2004 By: /s/ Thomas E. Stanberry - ----------- ------------------------------ Dated Thomas E. Stanberry Chairman, President and Chief Executive Officer May 5, 2004 By: /s/ Douglas R. Gulling - ----------- ------------------------------ Dated Douglas R. Gulling Chief Financial Officer (Principal Accounting Officer) 18
EXHIBIT INDEX The following exhibits are filed herewith: Exhibit No. Description - ----------- ----------- 31.1 Certification of Chief Executive Officer under Section 302 of the Sarbanes Oxley Act of 2002 31.2 Certification of Chief Financial Officer under Section 302 of the Sarbanes Oxley Act of 2002 32.1 Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002 19