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 <TABLE> <S> <C> FOR QUARTER ENDED COMMISSION FILE NUMBER September 30, 2005 0-49677 </TABLE> WEST BANCORPORATION, INC. (Exact Name of Registrant as Specified in its Charter) <TABLE> <S> <C> IOWA 42-1230603 (State of Incorporation) (I.R.S. Employer Identification No.) </TABLE> 1601 22nd Street, West Des Moines, Iowa 50266 Telephone Number (515) 222-2300 Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ----- ----- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ----- ----- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No x ----- ----- As of November 2, 2005, there were 16,701,843 shares of common stock, no par value outstanding. 1
PART I - FINANCIAL INFORMATION Item 1. Financial Statements West Bancorporation, Inc. and Subsidiaries Consolidated Balance Sheets (unaudited) <TABLE> <CAPTION> September 30, December 31, 2005 2004 -------------- -------------- <S> <C> <C> Assets Cash and due from banks $ 36,352,953 $ 18,686,360 Federal funds sold and other short-term investments 6,550,686 11,193,099 -------------- -------------- Cash and cash equivalents 42,903,639 29,879,459 -------------- -------------- Securities available for sale 288,301,484 281,110,020 Securities held to maturity (approximate market value of $60,141,000 at December 31, 2004) -- 59,419,549 Federal Home Loan Bank stock, at cost 8,887,800 6,522,800 -------------- -------------- Total securities 297,189,284 347,052,369 -------------- -------------- Loans 830,131,517 725,845,003 Allowance for loan losses (7,305,814) (6,526,824) -------------- -------------- Loans, net 822,825,703 719,318,179 -------------- -------------- Premises and equipment, net 4,700,735 4,309,597 Accrued interest receivable 7,740,989 6,505,047 Goodwill and other intangible assets 16,307,447 16,561,810 Bank-owned life insurance 21,885,254 21,256,138 Other assets 6,858,308 3,551,911 -------------- -------------- Total assets $1,220,411,359 $1,148,434,510 ============== ============== Liabilities and Stockholders' Equity Liabilities Deposits: Noninterest bearing demand $ 209,489,389 $ 186,710,245 Savings and interest bearing demand 306,115,707 422,560,048 Time, in excess of $100,000 284,164,042 193,716,248 Other time 73,187,964 62,945,833 -------------- -------------- Total deposits 872,957,102 865,932,374 Federal funds purchased and securities sold under agreements to repurchase 78,282,838 74,543,033 Other short-term borrowings 70,862,268 4,668,451 Accrued expenses and other liabilities 4,518,657 3,777,903 Subordinated notes 20,619,000 20,619,000 Federal Home Loan Bank advances and other long-term borrowings 69,645,018 81,273,773 -------------- -------------- Total liabilities 1,116,884,883 1,050,814,534 -------------- -------------- Stockholders' Equity Common stock, no par value; authorized 50,000,000 shares; 16,701,843 shares issued and outstanding at September 30, 2005 and December 31, 2004, respectively 3,000,000 3,000,000 Additional paid-in capital 32,000,000 32,000,000 Retained earnings 69,338,133 62,565,046 Accumulated other comprehensive income (loss) (811,657) 54,930 -------------- -------------- Total stockholders' equity 103,526,476 97,619,976 -------------- -------------- Total liabilities and stockholders' equity $1,220,411,359 $1,148,434,510 ============== ============== </TABLE> See accompanying notes to consolidated financial statements. 2
West Bancorporation, Inc. and Subsidiaries Consolidated Statements of Income (unaudited) <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, ------------------------- ------------------------- 2005 2004 2005 2004 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Interest income: Loans $12,980,293 $ 9,457,232 $35,796,213 $27,036,739 Securities: U.S. Treasury, government agencies and corporations 1,708,489 1,674,276 5,366,040 4,391,663 States and political subdivisions 1,080,120 613,557 3,063,788 1,581,676 Other 337,051 643,703 1,363,056 2,083,609 Federal funds sold and other short-term investments 45,675 183,265 304,712 550,411 ----------- ----------- ----------- ----------- Total interest income 16,151,628 12,572,033 45,893,809 35,644,098 ----------- ----------- ----------- ----------- Interest expense: Demand deposits 56,511 21,711 126,679 61,515 Savings deposits 1,364,037 820,625 3,771,494 2,398,382 Time deposits 3,041,428 1,001,957 6,979,239 2,294,109 Federal funds purchased and securities sold under agreements to repurchase 611,355 134,899 1,635,455 468,237 Other short-term borrowings 462,218 265,040 1,211,395 347,271 Subordinated notes 370,867 370,867 1,100,616 1,104,611 Long-term borrowings 883,328 938,424 2,635,906 2,795,297 ----------- ----------- ----------- ----------- Total interest expense 6,789,744 3,553,523 17,460,784 9,469,422 ----------- ----------- ----------- ----------- Net interest income 9,361,884 9,018,510 28,433,025 26,174,676 Provision for loan losses 450,000 325,000 1,325,000 775,000 ----------- ----------- ----------- ----------- Net interest income after provision for loan losses 8,911,884 8,693,510 27,108,025 25,399,676 ----------- ----------- ----------- ----------- Noninterest income: Service charges on deposit accounts 1,214,142 1,339,223 3,500,949 3,759,792 Trust services 202,475 157,000 531,300 415,500 Investment advisory fees 904,236 711,166 2,478,115 1,900,187 Increase in cash value of bank-owned life insurance 212,621 213,072 629,117 658,037 Net realized gains (losses) from sales of securities available for sale 158,377 1,975 201,565 244,981 Other income 340,732 334,959 1,226,266 1,042,483 ----------- ----------- ----------- ----------- Total noninterest income 3,032,583 2,757,395 8,567,312 8,020,980 ----------- ----------- ----------- ----------- Noninterest expense: Salaries and employee benefits 2,579,400 2,408,132 7,743,658 7,297,535 Occupancy 624,168 494,033 1,817,057 1,499,206 Data processing 367,753 338,189 1,057,561 1,027,348 Other expenses 1,083,010 918,084 3,241,875 2,880,750 ----------- ----------- ----------- ----------- Total noninterest expense 4,654,331 4,158,438 13,860,151 12,704,839 ----------- ----------- ----------- ----------- Income before income taxes 7,290,136 7,292,467 21,815,186 20,715,817 Income taxes 2,327,432 2,485,641 7,025,214 7,093,924 ----------- ----------- ----------- ----------- Net income $ 4,962,704 $ 4,806,826 $14,789,972 $13,621,893 =========== =========== =========== =========== Earnings per share, basic $ 0.30 $ 0.29 $ 0.89 $ 0.81 =========== =========== =========== =========== Cash dividends per share $ 0.160 $ 0.160 $ 0.480 $ 0.464 =========== =========== =========== =========== </TABLE> See accompanying notes to consolidated financial statements. 3
West Bancorporation, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity (unaudited) <TABLE> <CAPTION> Nine Months Ended September 30, -------------------------- 2005 2004 ------------ ----------- <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 62,565,046 56,796,771 Net income 14,789,972 13,621,893 Dividends on common stock (8,016,885) (7,811,582) Purchase of fractional shares resulting from stock dividend -- (2,090) Shares reacquired under the common stock repurchase plan -- (2,360,235) ------------ ----------- End of period balance 69,338,133 60,244,757 ------------ ----------- Accumulated other comprehensive income (loss): Beginning of year balance 54,930 1,099,573 Unrealized gains (losses) on securities, net of tax (866,587) (314,915) ------------ ----------- End of period balance (811,657) 784,658 ------------ ----------- Total stockholders' equity $103,526,476 $96,029,415 ============ =========== </TABLE> West Bancorporation, Inc. and Subsidiaries Consolidated Statements of Comprehensive Income (Loss) (unaudited) <TABLE> <CAPTION> Nine Months Ended September 30, -------------------------- 2005 2004 ----------- ----------- <S> <C> <C> Net Income $14,789,972 $13,621,893 Other comprehensive income (loss), unrealized gains (losses) on securities, net of reclassification adjustment, net of tax (866,587) (314,915) ----------- ----------- Comprehensive income $13,923,385 $13,306,978 =========== =========== </TABLE> See accompanying notes to consolidated financial statements. 4
West Bancorporation, Inc. and Subsidiaries Consolidated Statements of Cash Flows (unaudited) <TABLE> <CAPTION> Nine Months Ended September 30, ----------------------------- 2005 2004 ------------- ------------- <S> <C> <C> Cash Flows from Operating Activities Net income $ 14,789,972 $ 13,621,893 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,325,000 775,000 Net amortization and accretion 824,609 1,508,164 Loss on disposal of fixed assets 22,857 -- Net gains from sales of securities available for sale and loans held for sale (339,175) (360,131) Proceeds from sales of loans held for sale 12,312,529 9,612,269 Originations of loans held for sale (12,179,419) (9,537,119) Depreciation 390,785 255,794 Deferred income taxes (172,532) 443,070 Change in assets and liabilities: Increase in accrued interest receivable (1,235,942) (576,401) Increase in accrued expenses and other liabilities 740,754 12,304,300 ------------- ------------- Net cash provided by operating activities 16,479,438 28,046,839 ------------- ------------- Cash Flows from Investing Activities Proceeds from sales, calls, and maturities of securities available for sale 72,458,156 80,351,815 Purchases of securities available for sale (41,647,438) (163,774,781) Proceeds from maturities and calls of securities held to maturity 19,431,000 36,445,000 Purchases of securities held to maturity -- (30,717,947) Acquisition of Federal Home Loan Bank stock (14,198,400) (9,520,300) Proceeds from redemption of Federal Home Loan Bank stock 11,833,400 5,595,700 Net increase in loans (104,828,024) (78,967,479) Purchases of premises and equipment (804,780) (438,508) Change in other assets (3,240,637) (428,739) ------------- ------------- Net cash (used) in investing activities (60,996,723) (161,455,239) ------------- ------------- Cash Flows from Financing Activities Net change in deposits 7,024,728 88,071,342 Net change in federal funds purchased and securities sold under agreements to repurchase 3,739,805 (41,216,858) Net change in other short-term borrowings 65,693,817 85,847,217 Proceeds from long-term borrowings -- 10,619,000 Principal payments on long-term borrowings (10,900,000) (13,900,000) Purchase of fractional shares resulting from stock dividend -- (2,090) Payment for shares reacquired under common stock repurchase plan -- (2,360,235) Cash dividends (8,016,885) (7,811,582) ------------- ------------- Net cash provided by financing activities 57,541,465 119,246,794 ------------- ------------- Net increase (decrease) in cash and cash equivalents 13,024,180 (14,161,606) Cash and Cash Equivalents Beginning 29,879,459 82,073,799 ------------- ------------- End $ 42,903,639 $ 67,912,193 ============= ============= Supplemental Disclosures of Cash Flow Information Cash payments for: Interest $ 16,527,967 $ 8,984,818 Income taxes 7,224,763 6,050,000 </TABLE> See accompanying notes to consolidated financial statements. 5
West Bancorporation, Inc. Notes to Consolidated Financial Statements (unaudited) 1. Basis of Presentation The accompanying consolidated statements of income for the three and nine months ended September 30, 2005 and 2004, the consolidated statements of stockholders' equity, comprehensive income, and cash flows for the nine months ended September 30, 2005 and 2004, and the consolidated balance sheets as of September 30, 2005 and December 31, 2004 include the accounts and transactions of the Company and its wholly-owned subsidiaries, West Bank and WB Capital Management Inc. d/b/a VMF Capital. All material intercompany balances and transactions have been eliminated in consolidation. The accompanying consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Although management believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these interim consolidated financial statements be read in conjunction with the Company's most recent audited financial statements and notes thereto. In the opinion of management, the accompanying consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of September 30, 2005, the results of operations for the three and nine months ended September 30, 2005 and 2004, and cash flows for the nine months ended September 30, 2005 and 2004. The results for these interim periods may not be indicative of results for the entire year or for any other period. 2. Earnings Per Common Share Earnings per share represent income available to common shareholders divided by the weighted average number of shares outstanding during the period. The Company has no common equivalent shares that could cause dilution. The average number of shares outstanding for the three months ended September 30, 2005 and 2004 was 16,701,843 and 16,701,890, respectively, and the average number of shares outstanding for the nine months ended September 30, 2005 and 2004 was 16,701,843 and 16,781,235, respectively. 3. Transfer of Investment Securities Non-Cash Investing Activity During the three months ended September 30, 2005, the Company transferred all held to maturity investment securities to the available for sale category. The net carrying amount of transferred securities was $39,848,000. The related unrealized gains at the date of transfer were $413,000, and are included in other comprehensive income. The decision to transfer all held to maturity securities to the available for sale category was made to allow the entire investment portfolio to be managed on a total return basis. 4. Commitments In the normal course of business, the Company enters into commitments to extend credit such as loan commitments and standby letters of credit to meet the financing needs of its customers. These commitments expose the Company to varying degrees of credit and market risk and are subject to the same credit reviews as those recorded on the balance sheet. For additional information on credit extension commitments see Note 13 of the Company's 2004 consolidated financial statements. The Company's commitments as of September 30, 2005 and December 31, 2004 are approximately as follows: <TABLE> <CAPTION> September 30, 2005 December 31, 2004 ------------------ ----------------- <S> <C> <C> Commitments to extend credit $252,848,000 $188,495,000 Standby letters of credit 23,584,000 22,181,000 ------------ ------------ $276,432,000 $210,676,000 ============ ============ </TABLE> 6
5. Segment Information An operating segment is generally defined as a component of a business for which discrete financial information is available and whose operating results are regularly reviewed by the chief operating decision-maker. The Company's primary business segment is banking. The banking segment generates revenue through interest and fees on loans, service charges on deposit accounts, interest on investment securities and fees for trust services. The banking segment includes West Bank and the Company, as the holding company's operation is similar to the bank. The "Other" segment represents the Company's investment management subsidiary and intercompany eliminations. Selected financial information on the Company's segments is presented below for the three and nine months ended September 30, 2005 and 2004 (dollars in thousands). <TABLE> <CAPTION> Three months ended September 30, ----------------------------------------------------------------------- 2005 Segments 2004 Segments --------------------------------- ---------------------------------- Banking Other Consolidated Banking Other Consolidated ------- ----- ------------ ------- ----- ------------ <S> <C> <C> <C> <C> <C> <C> Interest income $16,152 $ -- $16,152 $12,572 $ -- $12,572 Interest expense 6,775 15 6,790 3,530 23 3,553 ------- ---- ------- ------- ---- ------- Net interest income 9,377 (15) 9,362 9,042 (23) 9,019 Provision for loan losses 450 -- 450 325 -- 325 ------- ---- ------- ------- ---- ------- Net interest income after provision for loan losses 8,927 (15) 8,912 8,717 (23) 8,694 Noninterest income 2,128 904 3,032 2,046 711 2,757 Noninterest expense 3,983 671 4,654 3,555 603 4,158 ------- ---- ------- ------- ---- ------- Income before income taxes 7,072 218 7,290 7,208 85 7,293 Income taxes 2,237 90 2,327 2,456 30 2,486 ------- ---- ------- ------- ---- ------- Net income $ 4,835 $128 $ 4,963 $ 4,752 $ 55 $ 4,807 ======= ==== ======= ======= ==== ======= Depreciation and amortization $ 183 $ 41 $ 224 $ 129 $ 44 $ 173 ======= ==== ======= ======= ==== ======= </TABLE> <TABLE> <CAPTION> Nine months ended September 30, ----------------------------------------------------------------------- 2005 Segments 2004 Segments ---------------------------------- ---------------------------------- Banking Other Consolidated Banking Other Consolidated ---------- ------ ------------ ---------- ------ ------------ <S> <C> <C> <C> <C> <C> <C> Interest income $ 45,894 $ -- $ 45,894 $ 35,644 $ -- $ 35,644 Interest expense 17,416 45 17,461 9,401 68 9,469 ---------- ------ ---------- ---------- ------ ---------- Net interest income 28,478 (45) 28,433 26,243 (68) 26,175 Provision for loan losses 1,325 -- 1,325 775 -- 775 ---------- ------ ---------- ---------- ------ ---------- Net interest income after provision for loan losses 27,153 (45) 27,108 25,468 (68) 25,400 Noninterest income 6,089 2,478 8,567 6,121 1,900 8,021 Noninterest expense 11,892 1,968 13,860 10,826 1,879 12,705 ---------- ------ ---------- ---------- ------ ---------- Income before income taxes 21,350 465 21,815 20,763 (47) 20,716 Income taxes 6,834 191 7,025 7,109 (15) 7,094 ---------- ------ ---------- ---------- ------ ---------- Net income $ 14,516 $ 274 $ 14,790 $ 13,654 $ (32) $ 13,622 ========== ====== ========== ========== ====== ========== Depreciation and amortization $ 518 $ 127 $ 645 $ 395 $ 132 $ 527 ========== ====== ========== ========== ====== ========== Total assets $1,217,474 $2,937 $1,220,411 $1,185,165 $2,627 $1,187,792 ========== ====== ========== ========== ====== ========== </TABLE> 7
6. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term are the allowance for loan losses and fair value of financial instruments. 7. Critical Accounting Policies Management has identified its most critical accounting policy to be that related to the allowance for loan losses. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that collectibility of the principal is unlikely. The Company has policies and procedures for evaluating the overall credit quality of its loan portfolio including timely identification of potential problem credits. On a quarterly basis, management reviews the appropriate level for the allowance for loan losses incorporating a variety of risk considerations, both quantitative and qualitative. Quantitative factors include the Company's historical loss experience, delinquency and charge-off trends, collateral values, known information about individual loans and other factors. Qualitative factors include the general economic environment in the Company's market area and the expected trend of those economic conditions. To the extent actual results differ from forecasts and management's judgment, the allowance for loan losses may be greater or less than future charge-offs. 8. Subsequent Event On October 24, 2005, the Company announced a definitive agreement to acquire Investors Management Group (IMG), a wholly-owned subsidiary of AMCORE Financial, Inc. The acquisition is subject to customary conditions, including approvals or consents from a requisite percentage of IMG's clients, and is expected to close late in the fourth quarter of 2005. The Company expects the acquisition to be neutral to earnings in 2006. 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT The information contained in this report may contain forward-looking statements about the Company's growth and acquisition strategies, new products and services, and future financial performance, including earnings and dividends per share, return on average assets, return on average equity, efficiency ratio and capital ratio. Certain statements in this report constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking information is based upon certain underlying assumptions, risks and uncertainties. Because of the possibility of changes in the underlying assumptions, actual results could differ materially from these forward-looking statements. Risks and uncertainties that may affect future results include: interest rate risk, competitive pressures, pricing pressures on loans and deposits, actions of bank and non-bank competitors, changes in local and national economic conditions, changes in regulatory requirements, actions of the Securities and Exchange Commission and the Federal Reserve Board, and customer acceptance of the Company's products and services. The Company undertakes no obligation to revise or update such forward-looking statements to reflect current events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 OVERVIEW The following discussion is provided for the consolidated operations of the Company, which includes its wholly-owned banking subsidiary, West Bank ("Bank") and its wholly-owned investment advisory subsidiary, WB Capital Management Inc. d/b/a VMF Capital ("VMF Capital"). It focuses on the consolidated results of operations for the three and nine months ended September 30, 2005, compared to the same periods in 2004 and on the consolidated financial condition of the Company and its subsidiaries at September 30, 2005, compared to December 31, 2004. Net income for the three months ended September 30, 2005 increased 3.2 percent to $4,963,000 compared to $4,807,000 for the same period in 2004. The increase was primarily due to a 3.8 percent increase in net interest income, a 27.1 percent increase in investment advisory fees and higher gains from sales of securities. These improvements were somewhat offset by an 11.9 percent increase in noninterest expense. For the first nine months of 2005, net income was $14,790,000, or $.89 per share, which is an 8.6 percent increase over last year. Net income for the first nine months of 2005 is higher than the previous year primarily due to higher net interest income which increased $2,258,000 due to significant loan growth. The provision for loan losses was $550,000 higher than the same period last year. Noninterest income for the first nine months of 2005 increased by $546,000 while noninterest expenses were $1,155,000 higher than in 2004. The year-to-date net interest margin has declined 16 basis points from a year ago. The decline is the result of the cost of short-term borrowings and jumbo certificates of deposit rising more than the yields on the loan and investment portfolios. Year-to-date noninterest income was higher than last year due to investment advisory fees earned by VMF Capital, increased trust fees and higher loan related fees. Year-to-date noninterest expense was 9.1 percent higher than a year ago due to increases in compensation related expenses, occupancy costs and net other real estate owned expenses. 9
RESULTS OF OPERATIONS The following table shows selected financial results and measures for the three and nine months ended September 30, 2005 compared with the same periods in 2004 (dollars in thousands). <TABLE> <CAPTION> Three Months Ended September 30, Nine Months Ended September 30, --------------------------------------------- --------------------------------------------- 2005 2004 Change Change-% 2005 2004 Change Change-% ---------- ---------- -------- -------- ---------- ---------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Net income $ 4,963 $ 4,807 $ 156 3.2% $ 14,790 $ 13,622 $ 1,168 8.6% Average assets 1,189,373 1,066,044 123,329 11.6% 1,181,382 1,023,855 157,527 15.4% Average stockholders' equity 101,875 93,290 8,585 9.2% 99,628 93,506 6,122 6.5% Return on assets 1.66% 1.79% -0.13% 1.67% 1.78% -0.11% Return on equity 19.33% 20.50% -1.17% 19.85% 19.46% 0.39% Efficiency ratio 36.61% 34.38% 2.23% 36.27% 36.49% -0.22% Dividend payout ratio 53.33% 55.17% -1.84% 53.93% 57.28% -3.35% Equity to assets ratio 8.57% 8.75% -0.18% 8.43% 9.13% -0.70% </TABLE> Definitions of ratios: Return on assets - annualized net income divided by average assets. Return on equity - annualized net income divided by average stockholders' equity. Efficiency ratio - noninterest expense divided by noninterest income (excluding securities gains) plus taxable equivalent net interest income. Dividend payout ratio - dividends per share divided by net income per share. Equity to assets ratio - average equity divided by average assets. Net Interest Income The following tables show average balances and related interest income or interest expense, with the resulting average yield or rate by category of average earning assets or interest bearing liabilities. Interest income and the resulting net interest income are shown on a fully taxable basis. 10
Data for the three months ended September 30 (dollars in thousands): <TABLE> <CAPTION> Average Balance Interest Income/Expense Yield/Rate ---------------------------------------- ---------------------------------- ------------------ 2005 2004 Change Change-% 2005 2004 Change Change-% 2005 2004 Change ---------- -------- -------- -------- ------- ------- ------ -------- ---- ---- ------ <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Interest-earning assets: Loans: Commercial $ 282,204 $262,528 $ 19,676 7.49% $ 4,693 $ 3,499 $1,194 34.12% 6.60% 5.30% 1.30% Real estate 477,448 363,603 113,845 31.31% 7,886 5,559 2,327 41.86% 6.55% 6.08% 0.47% Consumer 10,907 11,933 (1,026) -8.60% 221 216 5 2.31% 8.05% 7.21% 0.84% Other 22,359 18,778 3,581 19.07% 253 266 (13) -4.89% 4.49% 5.63% -1.14% ---------- -------- -------- ------ ------- ------- ------ ------ ---- ---- ----- Total loans 792,918 656,842 136,076 20.72% 13,053 9,540 3,513 36.82% 6.53% 5.78% 0.75% ---------- -------- -------- ------ ------- ------- ------ ------ ---- ---- ----- Investment securities: Taxable 203,444 245,860 (42,416) -17.25% 2,134 2,418 (284) -11.75% 4.20% 3.93% 0.27% Tax-exempt 106,075 61,111 44,964 73.58% 1,396 762 634 83.20% 5.27% 4.99% 0.28% ---------- -------- -------- ------ ------- ------- ------ ------ ---- ---- ----- Total investment securities 309,519 306,971 2,548 0.83% 3,530 3,180 350 11.01% 4.57% 4.14% 0.43% ---------- -------- -------- ------ ------- ------- ------ ------ ---- ---- ----- Federal funds sold and short-term investments 4,732 29,171 (24,439) -83.78% 46 171 (125) -73.10% 3.83% 2.34% 1.49% ---------- -------- -------- ------ ------- ------- ------ ------ ---- ---- ----- Total interest-earning assets $1,107,169 $992,984 $114,185 11.50% 16,629 12,891 3,738 29.00% 5.96% 5.17% 0.79% ========== ======== ======== ====== ------- ------- ------ ------ ---- ---- ----- Interest-bearing liabilities: Deposits: Checking with interest, savings and money markets $ 307,970 $372,708 $(64,738) -17.37% 1,421 842 579 68.76% 1.83% 0.90% 0.93% Time deposits 366,023 207,069 158,954 76.76% 3,041 1,002 2,039 203.49% 3.30% 1.92% 1.38% ---------- -------- -------- ------ ------- ------- ------ ------ ---- ---- ----- Total deposits 673,993 579,777 94,216 16.25% 4,462 1,844 2,618 141.97% 2.63% 1.27% 1.36% ---------- -------- -------- ------ ------- ------- ------ ------ ---- ---- ----- Other borrowed funds 213,808 213,289 519 0.24% 2,328 1,709 619 36.22% 4.32% 3.19% 1.13% ---------- -------- -------- ------ ------- ------- ------ ------ ---- ---- ----- Total interest-bearing liabilities $ 887,801 $793,066 $ 94,735 11.95% 6,790 3,553 3,237 91.11% 3.03% 1.78% 1.25% ========== ======== ======== ====== ------- ------- ------ ------ ---- ---- ----- Tax-equivalent net interest income $ 9,839 $ 9,338 $ 501 5.37% ======= ======= ====== ====== Net interest spread 2.93% 3.39% -0.46% ==== ==== ===== Net interest margin 3.53% 3.74% -0.21% ==== ==== ===== </TABLE> Data for the nine months ended September 30 (dollars in thousands): <TABLE> <CAPTION> Average Balance Interest Income/Expense Yield/Rate ---------------------------------------- ----------------------------------- ------------------ 2005 2004 Change Change-% 2005 2004 Change Change-% 2005 2004 Change ---------- -------- -------- -------- ------- ------- ------- -------- ---- ---- ------ <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Interest-earning assets: Loans: Commercial $ 273,130 $283,333 $(10,203) -3.60% $12,841 $11,270 $ 1,571 13.94% 6.29% 5.31% 0.98% Real estate 460,289 311,473 148,816 47.78% 21,821 14,409 7,412 51.44% 6.34% 6.18% 0.16% Consumer 10,812 14,642 (3,830) -26.16% 617 778 (161) -20.69% 7.63% 7.10% 0.53% Other 20,273 18,673 1,600 8.57% 735 842 (107) -12.71% 4.85% 6.02% -1.17% ---------- -------- -------- ------ ------- ------- ------- ------ ---- ---- ---- Total loans 764,504 628,121 136,383 21.71% 36,014 27,299 8,715 31.92% 6.30% 5.81% 0.49% ---------- -------- -------- ------ ------- ------- ------- ------ ---- ---- ---- Investment securities: Taxable 220,566 233,155 (12,589) -5.40% 6,995 6,755 240 3.55% 4.23% 3.86% 0.37% Tax-exempt 102,506 53,400 49,106 91.96% 3,995 1,914 2,081 108.73% 5.20% 4.78% 0.42% ---------- -------- -------- ------ ------- ------- ------- ------ ---- ---- ---- Total investment securities 323,072 286,555 36,517 12.74% 10,990 8,669 2,321 26.77% 4.54% 4.03% 0.51% ---------- -------- -------- ------ ------- ------- ------- ------ ---- ---- ---- Federal funds sold and short-term investments 12,817 38,164 (25,347) -66.42% 305 539 (234) -43.41% 3.18% 1.89% 1.29% ---------- -------- -------- ------ ------- ------- ------- ------ ---- ---- ---- Total interest-earning assets $1,100,393 $952,840 $147,553 15.49% 47,309 36,507 10,802 29.59% 5.75% 5.12% 0.63% ---------- -------- -------- ------ ------- ------- ------- ------ ---- ---- ---- Interest-bearing liabilities: Deposits: Checking with interest, savings and money markets $ 340,335 $385,256 $(44,921) -11.66% $ 3,898 $ 2,460 1,438 58.46% 1.53% 0.85% 0.68% Time deposits 320,894 167,823 153,071 91.21% 6,979 2,294 4,685 204.23% 2.91% 1.83% 1.08% ---------- -------- -------- ------ ------- ------- ------- ------ ---- ---- ---- Total deposits 661,229 553,079 108,150 19.55% 10,877 4,754 6,123 128.80% 2.20% 1.15% 1.05% ---------- -------- -------- ------ ------- ------- ------- ------ ---- ---- ---- Other borrowed funds 222,509 201,875 20,634 10.22% 6,584 4,715 1,869 39.64% 3.96% 3.12% 0.84% ---------- -------- -------- ------ ------- ------- ------- ------ ---- ---- ---- Total interest-bearing liabilities $ 883,738 $754,954 $128,784 17.06% 17,461 9,469 7,992 84.40% 2.64% 1.68% 0.96% ========== ======== ======== ====== ------- ------- ------- ------ ---- ---- ---- Tax-equivalent net interest income $29,848 $27,038 $ 2,810 10.39% ======= ======= ======= ====== Net interest spread 3.11% 3.44% -0.33% ==== ==== ==== Net interest margin 3.63% 3.79% -0.16% ==== ==== ==== </TABLE> 11
Fluctuations in net interest income can result from the combination of changes in the volumes of asset and liability categories as well as changes in interest rates. Net interest margin is a measure of the net return on interest-earning assets and is computed by dividing annualized net tax-equivalent interest income by the average of total interest-earning assets for the period. The net interest margin for the third quarter was 3.53 percent, which was 21 basis points lower than the same quarter last year and 9 basis points less than the second quarter of 2005. The decline from the prior quarter was due to continued increases in market rates on deposits and borrowings which have increased faster than the yields on earning assets. The Company's tax-equivalent net interest income for the nine months ended September 30, 2005 increased $2,810,000 compared to the nine months ended September 30, 2004. The increase was primarily attributable to a higher level of earning assets. Taxable-equivalent interest income and fees on loans increased $8,715,000 in the first nine months of 2005 compared to the same period in 2004, due to a higher volume of outstanding loans. Average loans were $136.4 million higher than the first nine months of last year. The average yield on loans increased to 6.30 percent for the first nine months of 2005, compared to 5.81 percent for the same period in 2004. The yield on the Company's loan portfolio is affected by the amount of non-accrual loans, the mix of the portfolio, the effects of competition and the interest rate environment. The interest rate environment can influence the volume of new loan originations and the mix of variable rate versus fixed rate loans. At September 30, 2005, approximately 54 percent of the Company's loan portfolio consisted of variable rate loans. Competition for loans in the market areas served by the Company remains strong. The average balance of investment securities was $36.5 million higher than last year while the yield has increased 51 basis points. Most purchases of investment securities during the first nine months of 2005 have been agency bonds and tax-exempt municipal bonds with a maturity of five years or less. During the third quarter the Federal Home Loan Bank of Des Moines significantly reduced the amount of their quarterly dividend which lowered third quarter dividend income on this investment by $69,000. The likelihood and amount of future FHLB dividends is unknown at this time. The average rate paid on deposits for the first nine months of 2005 increased to 2.20 percent from 1.15 percent for the same period last year. This increase was primarily the result of responding to increases in market interest rates. During the first nine months of 2005 the Federal Reserve raised short-term rates by 25 basis points five times. Compared to the first nine months of last year, the average balance of certificates of deposit was up $153.0 million, while the average balance of money market and savings accounts, which typically have lower rates, were $21.8 million and $26.6 million lower, respectively. The average balance of borrowings for the first nine months of 2005 was $20.6 million higher than a year ago. Average short-term borrowings, which consisted primarily of federal funds purchased and borrowings from the Federal Home Loan Bank of Des Moines (FHLB), increased by $31.3 million. Long-term borrowings which include fixed-rate FHLB advances, subordinated notes and a note payable related to the acquisition of VMF Capital in 2003 averaged $10.7 million less than a year ago. The decline was due to a maturity of an FHLB advance in the first quarter. The change in mix and market rate increases caused the overall cost of borrowings to increase by 84 basis points compared to the prior year. 12
Provision for Loan Losses and the Related Allowance for Loan Losses The following table sets forth the activity in the Allowance for Loan Losses for the three and nine months ended September 30, 2005 and 2004 as well as common ratios related to the allowance for loan losses (dollars in thousands). <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, ------------------------------ ------------------------------ 2005 2004 Change 2005 2004 Change -------- -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> Balance at beginning of period $ 7,080 $ 6,032 $ 1,048 $ 6,527 $ 5,976 $ 551 Charge-offs (284) (260) (24) (671) (728) 57 Recoveries 60 43 17 125 117 8 -------- -------- -------- -------- -------- -------- Net charge-offs (224) (217) (7) (546) (611) 65 Provision charged to operations 450 325 125 1,325 775 550 -------- -------- -------- -------- -------- -------- Balance at end of period $ 7,306 $ 6,140 $ 1,166 $ 7,306 $ 6,140 $ 1,166 ======== ======== ======== ======== ======== ======== Average loans outstanding $792,918 $656,842 $136,076 $764,504 $628,121 $136,383 Ratio of net charge-offs during the period to average loans outstanding 0.03% 0.03% 0.07% 0.10% Ratio of allowance for loan losses to average loans outstanding 0.92% 0.93% 0.96% 0.98% </TABLE> The provision for loan losses represents charges made to earnings to maintain an adequate allowance for loan losses. The allowance for loan losses is management's best estimate of probable losses inherent in the loan portfolio as of the balance sheet date. Factors considered in establishing an appropriate allowance include: an assessment of the financial condition of the borrower; a realistic determination of value and adequacy of underlying collateral; the condition of the local economy and the condition of the specific industry of the borrower; an analysis of the levels and trends of loan categories; and a review of delinquent and classified loans. The adequacy of the allowance for loan losses is evaluated quarterly by management and reviewed by the Bank's Board of Directors. This evaluation focuses on specific loan reviews, changes in the type and volume of the loan portfolio given the current and forecasted economic conditions and historical loss experience. Any one of the following conditions may result in the review of a specific loan: concern about whether the customer's cash flow or net worth is sufficient to repay the loan; delinquency status; criticism of the loan in a regulatory examination; the suspension of interest accrual; or other reasons including when the loan has other special or unusual characteristics which suggest special monitoring is warranted. While management uses available information to recognize losses on loans, further reduction in the carrying amounts of loans may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the Company to recognize additional losses based on their judgment about information available to them at the time of their examinations. See also the discussion of nonperforming assets later in this report. Noninterest Income The following table shows the variance from the prior year in the noninterest income categories shown in the Consolidated Statements of Income. In addition, accounts within the other income category that represent significant variances are shown (dollars in thousands). 13
<TABLE> <CAPTION> Three Months Ended September 30, ----------------------------------- 2005 2004 Change Change-% ------ ------ ------ -------- <S> <C> <C> <C> <C> Noninterest income: Service charges on deposit accounts $1,214 $1,340 $(126) -9.40% Trust services 202 157 45 28.66% Investment advisory fees 904 711 193 27.14% Increase in cash value of bank-owned life insurance 213 213 -- 0.00% Other: VISA/Mastercard income 28 43 (15) -34.88% Debit card usage fees 45 44 1 2.27% ATM card usage fees 22 24 (2) -8.33% Gain on sale of residential mortgages 28 36 (8) -22.22% Gain on sale of commercial loans -- -- -- 0.00% Other loan fees 8 -- 8 100.00% All other 209 187 22 11.76% ------ ------ ----- ------- Total other 340 334 6 1.80% ------ ------ ----- ------- Gain on sale of securities 159 2 157 7850.00% ------ ------ ----- ------- Total noninterest income $3,032 $2,757 $ 275 9.97% ====== ====== ===== ======= </TABLE> <TABLE> <CAPTION> Nine Months Ended September 30, ----------------------------------- 2005 2004 Change Change-% ------ ------ ------ -------- <S> <C> <C> <C> <C> Noninterest income: Service charges on deposit accounts $3,501 $3,760 $(259) -6.89% Trust services 531 416 115 27.64% Investment advisory fees 2,478 1,900 578 30.42% Increase in cash value of bank-owned life insurance 629 658 (29) -4.41% Other: VISA/Mastercard income 104 131 (27) -20.61% Debit card usage fees 147 111 36 32.43% ATM card usage fees 64 76 (12) -15.79% Gain on sale of residential mortgages 87 115 (28) -24.35% Gain on sale of commercial loans 51 -- 51 100.00% Other loan fees 170 -- 170 100.00% All other 603 609 (6) -0.99% ------ ------ ----- ------ Total other 1,226 1,042 184 17.66% ------ ------ ----- ------ Gain on sale of securities 202 245 (43) -17.55% ------ ------ ----- ------ Total noninterest income $8,567 $8,021 $ 546 6.81% ====== ====== ===== ====== </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 declined for two reasons: 1) higher interest rates resulted in a higher earnings credit on commercial checking accounts which results in lower service charges; and 2) return check charges have been declining in 2005 due to fewer customers overdrawing their accounts. Investment advisory fees are fees earned by VMF Capital. The increase in fees was due to sales efforts throughout the past year which has resulted in total assets under management increasing from $725 million at September 30, 2004 to $825 million at September 30, 2005. The decrease in VISA/MasterCard income is due to a decline in the number of merchant customers and lower sales activity at certain merchants. The increase in debit card usage fees was the result of higher usage as customers continue to expand utilization of this convenient payment method. The decline in the ATM card usage fees was due to changes in behavior as non-customers seek to avoid surcharges when using an ATM. Gains from sale of residential mortgages originated for sale in the secondary market declined because of rising interest rates and increased pricing competition. The gains from the sale of commercial loans resulted from the sale of the SBA (Small Business Administration) guaranteed portion of commercial loans in the first half of the year. Noninterest related loan fees included the recognition of a fee for a loan commitment which was terminated by a customer in the second quarter. 14
Noninterest Expense The following table shows the variance from the prior year in the noninterest expense categories shown in the Consolidated Statements of Income. In addition, accounts within the other expense category that represent significant variances are shown (dollars in thousands). <TABLE> <CAPTION> Three Months Ended September 30, ----------------------------------- 2005 2004 Change Change-% ------ ------ ------ -------- <S> <C> <C> <C> <C> Noninterest expense: Salaries and employee benefits $2,580 $2,408 $172 7.14% Occupancy 624 494 130 26.32% Data processing 367 338 29 8.58% Other: Insurance 40 36 4 11.11% Supplies 60 65 (5) -7.69% Marketing 114 82 32 39.02% Postage and courier 96 100 (4) -4.00% Consulting fees 90 30 60 200.00% OREO expense 16 (71) 87 122.54% All other 667 676 (9) -1.33% ------ ------ ---- ------ Total other 1,083 918 165 17.97% ------ ------ ---- ------ Total noninterest expense $4,654 $4,158 $496 11.93% ====== ====== ==== ====== </TABLE> <TABLE> <CAPTION> Nine Months Ended September 30, ------------------------------------- 2005 2004 Change Change-% ------- ------- ------ -------- <S> <C> <C> <C> <C> Noninterest expense: Salaries and employee benefits $ 7,744 $ 7,298 $ 446 6.11% Occupancy 1,817 1,499 318 21.21% Data processing 1,057 1,027 30 2.92% Other: Insurance 118 87 31 35.63% Supplies 239 196 43 21.94% Marketing 279 275 4 1.45% Postage and courier 298 276 22 7.97% Consulting fees 199 56 143 255.36% OREO expense 22 (172) 194 112.79% All other 2,087 2,163 (76) -3.51% ------- ------- ------ ------ Total other 3,242 2,881 361 12.53% ------- ------- ------ ------ Total noninterest expense $13,860 $12,705 $1,155 9.09% ======= ======= ====== ====== </TABLE> The increase in salaries and benefits was the result of staff additions, annual compensation adjustments and certain benefit costs, primarily medical insurance. Occupancy expenses were higher this year due to one additional location (Coralville, Iowa) and increased depreciation expense related to furniture and equipment upgrades throughout the Company. Insurance expense is higher because the Company's director's and officer's policy renewed in the third quarter of 2004 at premiums that were significantly higher. Supplies are higher because additional brochures were printed in the first quarter of 2005 as a result of product and pricing changes. Postage expense is higher because many of those brochures were mailed to clients. Marketing expenses on a year-to-date basis are virtually the same as in the prior year. Third quarter 2005 marketing expenses increased due to an upgrade of the website and branding work. The increase in consulting fees is due to a change in the contract with the Company's former chairman from that of an employment agreement to a consulting agreement and the hiring of an outside consultant to help with the implementation of software programs to assist with asset-liability management and profitability measurement. The net expense for other real estate owned increased from the prior year as 2004 included gains from the sale of several other real estate properties. 15
Income Tax Expense The Company incurred income tax expense of $7,025,000 for the nine months ended September 30, 2005 compared to $7,094,000 for the nine months ended September 30, 2004. The effective income tax rate as a percent of income before taxes for the three and nine months ended September 30, 2005 was 31.9 percent and 32.2 percent, compared to 34.1 percent and 34.2 percent, respectively, for the same periods last year. The effective income tax rate is lower in 2005 because of a significantly higher level of income that is exempt from Federal income taxes. The average balance of tax-exempt municipal securities has nearly doubled compared to the prior year. FINANCIAL CONDITION Total assets as of September 30, 2005 were $1.2 billion, a slight increase from $1.1 billion at December 31, 2004. The increase is primarily due to increased loan volumes. The loan growth was funded by an increase in short-term borrowings and a decrease in the investment securities portfolio. Investment Securities Investment securities available for sale increased $7.2 million from December 31, 2004 to $288.3 million. During the three months ended September 30, 2005 all held to maturity securities were reclassified to the available for sale category. This decision was made so the entire portfolio could be managed on a total return basis. Loans and Non-performing Assets Loans outstanding increased $104.3 million from December 31, 2004 to September 30, 2005. The increase was primarily attributable to growth in commercial real estate, construction and commercial loans. The following table sets forth the amount of non-performing loans and assets carried by the Company and common ratio measurements of those items (dollars in thousands). <TABLE> <CAPTION> September 30, 2005 December 31, 2004 Change ------------------ ----------------- ------ <S> <C> <C> <C> Non-accrual loans $ 697 $ 785 $ (88) Loans past due 90 days and still accruing interest 524 75 449 ------ ------ ------ Total non-performing loans 1,221 860 361 Other real estate owned 1,840 175 1,665 ------ ------ ------ Total non-performing assets $3,061 $1,035 $2,026 ====== ====== ====== Non-performing assets to total loans 0.37% 0.14% 0.23% Non-performing assets to total assets 0.25% 0.09% 0.16% </TABLE> At September 30, 2005, non-accrual loans consist of eight loan relationships. Over half of the amount in this category was collateralized by 1 - 4 family real estate. In the opinion of management, loans past due 90 days and still accruing interest are adequately collateralized to cover any unpaid interest. Included in this category was one commercial real estate loan totaling approximately $450,000 that is fully collateralized by a first mortgage on the property. The increase in total non-performing assets primarily relates to one project. In the first quarter of 2005, a commercial real estate loan totaling approximately $2,200,000 was placed on non-accrual status. During the second quarter of 2005, a partial charge-off of $300,000 was recorded against this loan. The Bank obtained the deed to this property during the third quarter of 2005 in lieu of foreclosure. An additional charge-off of approximately $155,000 was recorded in the third quarter when the property was transferred to other real estate owned. The Bank estimated the net realizable value of the property to be $1,750,000, which was the carrying value at September 30, 2005. 16
Reference is also made to the information and discussion earlier in this report under the heading "Provision for Loan Losses and the Related Allowance for Loan Losses". Deposits Total deposits as of September 30, 2005 were $873 million compared with $866 million as of December 31, 2004. While total deposits did not change significantly, there was a change in the mix of deposits. Money market accounts, which are liquid accounts and therefore pay relatively lower interest rates, declined approximately $104 million. Offsetting this decline was an increase in time certificates of deposit in excess of $100,000 category. That category increased approximately $90 million and primarily consisted of public unit deposits. Public unit deposits are generally obtained through a bidding process. Other changes included the super saver category decreasing approximately $4 million and non-interest bearing demand accounts rising approximately $23 million. The shift in the deposit mix was movements between categories in an attempt by customers to maximize the interest rate earned on those funds. It is expected that this trend will continue. Borrowings The balance of federal funds purchased and securities sold under agreement to repurchase was $78.3 million at September 30, 2005, up from $74.5 million at December 31, 2004. Other short-term borrowings, consisting of Treasury, Tax and Loan option notes, short-term FHLB borrowings and a note payable related to the acquisition of VMF Capital, increased $66.2 million since December 31, 2004 with virtually all of this increase attributable to short-term FHLB borrowings. Long-term borrowings consisted of fixed rate FHLB advance, subordinated notes and a note payable related to the acquisition of VMF Capital. Advances totaling $10.9 million were paid off at maturity during the first quarter of 2005. Liquidity and Capital Resources The objective of liquidity management is to ensure the availability of sufficient cash flows to meet the requirements of depositors and borrowers, all corporate financial commitments and to capitalize on opportunities for profitable business expansion. The Company's principal source of funds is deposits including demand, money market, savings and certificates of deposit. Other sources include principal repayments on loans, proceeds from the maturity and sale of investment securities, federal funds purchased, repurchase agreements, advances from the Federal Home Loan Bank and funds provided by operations. Liquidity management is conducted on both a daily and a long-term basis. Investments in liquid assets are adjusted based on expected loan demand, projected loan maturities and payments, expected deposit flows, and the objectives set by the Company's asset-liability management policy. The Company had liquid assets (cash and cash equivalents) of $42.9 million as of September 30, 2005, compared with $29.9 million as of December 31, 2004. Securities available for sale may be sold prior to maturity to meet liquidity needs, to respond to market changes or to adjust the Company's interest rate risk position. The Company had additional borrowing capacity available from the FHLB of approximately $33.7 million at September 30, 2005 and has a $5 million unsecured line of credit through a large regional correspondent bank. In addition, the Bank has $100 million available through unsecured federal funds lines of credit with correspondent banks. The Bank was utilizing $30 million of those lines of credit at September 30, 2005. Management believes the combination of high levels of potentially liquid assets, positive cash flows from operations and additional borrowing capacity provided strong liquidity for the Company at September 30, 2005 to meet the needs of borrowers and depositors. The Company's total stockholders' equity increased to $103.5 million at September 30, 2005, from $97.6 million at December 31, 2004. Total stockholders' equity was 8.5 percent of total assets as of September 30, 2005 and December 31, 2004. The Bank is currently undergoing various remodeling projects and is implementing platform banking. The total estimated cost for both projects is $.4 million. In April 2005, the Company's Board of Directors authorized the buy-back of the Company's common stock for a period of twelve months, in an amount not to exceed $5 million. No repurchases have taken place under this authorization. 17
The table below shows the various measures of regulatory capital and related ratios (dollars in thousands). Regulatory capital: <TABLE> <CAPTION> September 30, 2005 December 31, 2004 ------------------ ----------------- <S> <C> <C> Total shareholders' equity $103,526 $ 97,620 Plus: net unrealized losses on available for sale securities 812 -- Less: net unrealized gains on available for sale securities -- (55) Less: intangible assets (16,308) (16,562) Plus: subordinated notes 20,000 20,000 -------- -------- Tier 1 capital 108,030 101,003 Plus: allowance for loan losses 7,306 6,527 -------- -------- Total risk-based capital $115,336 $107,530 ======== ======== </TABLE> <TABLE> <CAPTION> Regulatory requirements to be: Actual Regulatory ------------------------- Capital Ratios as of: Adequately Well- -------------------------------------- Capitalized Capitalized September 30, 2005 December 31, 2004 ----------- ----------- ------------------ ----------------- <S> <C> <C> <C> <C> Total risk-based capital as % of risk-weighted assets 8.0% 10.0% 12.0% 12.3% Tier 1 capital as % of risk-weighted assets 4.0% 6.0% 11.3% 11.6% Tier 1 capital as % average assets 4.0% 5.0% 9.2% 8.6% </TABLE> Risk-based capital guidelines require the classification of assets and some off-balance sheet items in terms of credit-risk exposure and the measuring of capital as a percentage of the risk adjusted asset totals. Management believes, and data in the above table show that, as of September 30, 2005 and December 31, 2004, the Company met all capital adequacy requirements to which it is subject. As of those same dates, West Bank was "well capitalized" under regulatory prompt corrective action provisions. Market Risk Management Market risk is the risk of earnings volatility that results from adverse changes in interest rates and market prices. The Company's market risk is primarily interest rate risk arising from its core banking activities of lending and deposit taking. Interest rate risk is the risk that changes in market interest rates may adversely affect the Company's net interest income. Management continually develops and implements strategies to mitigate this risk. The analysis of the Company's interest rate risk was presented in the Form 10-K filed with the Securities and Exchange Commission on March 3, 2005 and is incorporated herein by reference. The Company has not experienced any material changes to its market risk position since December 31, 2004. Management does not believe the Company's primary market risk exposures and how those exposures were managed in the first nine months of 2005 changed when compared to 2004. Item 3. Quantitative and Qualitative Disclosures about Market Risk. The information appearing above under the heading "Market Risk Management" is incorporated herein by reference. Item 4. Controls and Procedures a. Evaluation of disclosure controls and procedures. As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer of the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rule 240.13a-15(e)) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company's current disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. 18
b. Changes in internal controls over financial reporting. There were no changes in the Company's internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Part II - OTHER INFORMATION Item 1. Legal Proceedings The Company and its subsidiaries from time to time are party to various legal actions arising in the normal course of business. Management believes, as of the date of this Form 10-Q, that there is no threatened or pending proceeding against the Company, West Bank or VMF Capital, which, if determined adversely, would have a material adverse effect on the business or financial position of the Company, West Bank or VMF Capital. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no purchases during the nine months ended September 30, 2005 of the Company's common shares under the $5 million stock buy-back plan approved by the Board of Directors on April 13, 2005 or the previous stock buy-back plan approved in April of 2004. Item 6. Exhibits (a) The following exhibits are filed as part of this report: <TABLE> <CAPTION> Exhibits - -------- <S> <C> 3.1 Restated Articles of Incorporation of the Company(1) 3.2 By-laws of the Company(1) 10.1 Lease for Main Bank Facility(1) 10.2 Supplemental Agreement to Lease for Main Bank Facility(1) 10.3 Short-term Lease related to Main Bank Facility(1) 10.4 Assignment(1) 10.5 Lease Modification Agreement No. 1 for Main Bank Facility(1) 10.6 Memorandum of Real estate contract(1) 10.7 Affidavit(1) 10.8 Addendum to Lease for Main Bank Facility(1) 10.9 Data Processing Contract(1) 10.10 Employment Contract(1) 10.12 Data Processing Contract Amendment(2) 10.13 Purchase and Assumption Agreement between West Des Moines State Bank and Hawkeye State Bank(3) 10.14 Employment Agreement effective March 1, 2003, which was consummated in the first quarter of 2004(4) 10.15 The Employee Savings and Stock Ownership Plan, as amended(5) 10.16 Amendment to Lease Agreement(6) 10.17 Employment Agreement(6) 10.18 Consulting Agreement(7) 31.1 Certification of Chief Executive Officer under Section 302 of the Sarbanes Oxley Act of 2002 31.2 Certification of Chief Financial Officer under Section 302 of the Sarbanes Oxley Act of 2002 32.1 Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002 </TABLE> (1) Incorporated herein by reference to the related exhibit filed with the Form 10 on March 11, 2002. (2) Incorporated herein by reference to the related exhibit filed with the Form 10-K on March 26, 2003. (3) Incorporated herein by reference to the related exhibit filed with the Form 10-Q on May 15, 2003. (4) Incorporated herein by reference to the related exhibit filed with the Form 10-K on February 26, 2004. (5) Incorporated herein by reference to the related exhibit filed with the Form S-8 on October 29, 2004. (6) Incorporated herein by reference to the related exhibit filed with the Form 10-K on March 3, 2005. (7) Incorporated herein by reference to the related exhibit filed with the Form 10-Q on May 6, 2005. 19
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. West Bancorporation, Inc. (Registrant) November 3, 2005 By: /s/ Thomas E. Stanberry Dated ------------------------------------ Thomas E. Stanberry Chairman, President and Chief Executive Officer November 3, 2005 By: /s/ Douglas R. Gulling Dated ------------------------------------ Douglas R. Gulling Executive Vice President and Chief Financial Officer (Principal Accounting Officer) 20
EXHIBIT INDEX The following exhibits are filed herewith: <TABLE> <CAPTION> Exhibit No. Description - ----------- ----------- <S> <C> 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 </TABLE> 21