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
- --------------------------------------------------------------------------------
June 30, 2002 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___
As of August 13, 2002, there were 16,060,271 shares of common stock, no par
value outstanding.
1
PART I -- Item 1. Financial Statements
West Bancorporation, Inc. and Subsidiary
Consolidated Balance Sheets
(unaudited)
June 30, December 31,
2002 2001
-----------------------------
Assets
Cash and due from banks ................................................... $ 29,178,395 $ 34,461,369
Federal funds sold and other short term investments ....................... 82,516,248 93,988,871
------------------------------
Cash and cash equivalents ............................................. 111,694,643 128,450,240
------------------------------
Securities available for sale ............................................. 48,380,812 32,959,504
Securities held to maturity (approximate market value of $169,250,000
and $153,892,000 at June 30, 2002 and December 31, 2001, respectively) 167,824,664 153,383,948
Federal Home Loan Bank stock, at cost ..................................... 3,129,700 3,129,700
------------------------------
Total securities ...................................................... 219,335,176 189,473,152
------------------------------
Loans ..................................................................... 480,210,690 493,398,442
Allowance for loan losses ............................................. (4,475,600) (4,239,990)
------------------------------
Loans, net ................................................................ 475,735,090 489,158,452
------------------------------
Premises and equipment, net ............................................... 1,305,012 1,147,150
Accrued interest receivable ............................................... 5,592,653 5,102,592
Other assets .............................................................. 2,275,120 2,638,656
------------------------------
Total assets .......................................................... $ 815,937,694 $ 815,970,242
==============================
Liabilities and Stockholders' Equity
Deposits:
Noninterest-bearing ................................................... $ 140,059,911 $ 144,512,495
Interest-bearing:
Demand ............................................................. 32,629,697 31,570,399
Savings ............................................................ 238,567,428 249,729,844
Time ............................................................... 159,252,442 145,917,552
------------------------------
Total deposits ........................................................ 570,509,478 571,730,290
Federal funds purchased and securities sold under agreements to repurchase 104,922,468 107,831,935
Other short-term borrowings ............................................... 4,588,709 6,000,000
Accrued expenses and other liabilities .................................... 2,109,824 3,395,756
Long-term borrowings ...................................................... 51,600,000 48,000,000
------------------------------
Total liabilities ..................................................... 733,730,479 736,957,981
------------------------------
Stockholders' Equity
Common stock, no par value; authorized 50,000,000 shares; shares issued and
outstanding: 2002 and 2001, 16,060,271 ................................ 3,000,000 3,000,000
Additional paid-in capital ................................................ 32,000,000 32,000,000
Retained earnings ......................................................... 46,384,427 43,374,281
Accumulated other comprehensive income .................................... 822,788 637,980
------------------------------
Total stockholders' equity ............................................ 82,207,215 79,012,261
------------------------------
Total liabilities and stockholders' equity ............................ $ 815,937,694 $ 815,970,242
==============================
See accompanying notes to consolidated financial statements ...............
2
PART I -- Item 1. Financial Statements, Continued
West Bancorporation, Inc. and Subsidiary
Consolidated Statements of Income
(unaudited)
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
------------------------------------------------------
Interest income:
Loans .................................................. $ 8,307,961 $9,974,466 $16,561,231 $20,449,672
Securities:
U.S Treasury, government agencies and corporations ... 1,907,876 2,593,195 3,489,564 6,208,656
States and political subdivisions .................... 408,968 378,089 840,114 724,877
Other ................................................ 279,884 200,528 541,016 355,370
Federal funds sold and other short-term investments .... 359,557 913,255 862,228 1,336,149
-----------------------------------------------------
Total interest income ............................. 11,264,246 14,059,533 22,294,153 29,074,724
-----------------------------------------------------
Interest expense:
Demand deposits ........................................ 34,336 57,730 67,583 146,940
Savings deposits ....................................... 932,876 1,811,148 1,931,710 3,752,021
Time deposits .......................................... 1,358,877 2,520,512 2,703,805 5,608,254
Federal funds purchased and securities sold under
agreements to repurchase ............................. 435,110 1,616,321 967,016 3,550,791
Other short-term borrowings ............................ 4,206 21,564 16,384 426,909
Long-term borrowings 715,907 726,131 1,403,661 1,394,482
-----------------------------------------------------
Total interest expense ............................ 3,481,312 6,753,406 7,090,159 14,879,397
-----------------------------------------------------
Net interest income ............................... 7,782,934 7,306,127 15,203,994 14,195,327
Provision for loan losses .................................. 230,000 270,000 460,000 462,500
-----------------------------------------------------
Net interest income after provision for loan losses 7,552,934 7,036,127 14,743,994 13,732,827
-----------------------------------------------------
Noninterest income:
Service charges on deposit accounts .................... 1,115,116 1,170,310 2,118,736 2,112,825
Trust services ......................................... 141,657 138,071 299,634 296,476
Other income ........................................... 318,008 333,772 642,227 608,310
-----------------------------------------------------
Total noninterest income .......................... 1,574,781 1,642,153 3,060,597 3,017,611
-----------------------------------------------------
Noninterest expense:
Salaries and employee benefits ......................... 1,615,329 1,577,168 3,199,812 3,151,968
Occupancy expenses ..................................... 320,184 290,696 638,718 608,736
Data processing expenses ............................... 265,519 235,611 530,342 463,553
Other expenses ......................................... 700,457 561,650 1,306,851 1,084,335
-----------------------------------------------------
Total noninterest expense ......................... 2,901,489 2,665,125 5,675,723 5,308,592
-----------------------------------------------------
Income before income taxes ........................ 6,226,226 6,013,155 12,128,868 11,441,846
Income taxes ............................................... 2,217,299 2,141,750 4,300,640 4,075,253
-----------------------------------------------------
Net income ........................................ $ 4,008,927 $ 3,871,405 $ 7,828,228 $ 7,366,593
=====================================================
Basic earnings per share ................................... $ 0.25 $ 0.24 $ 0.49 $ 0.46
=====================================================
Cash dividends per share ................................... $ 0.15 $ 0.15 $ 0.30 $ 0.30
=====================================================
See accompanying notes to consolidated financial statements.
3
PART I -- Item 1. Financial Statements, Continued
West Bancorporation, Inc. and Subsidiary
Consolidated Statements of Stockholders' Equity
(unaudited)
Six Months Ended June 30,
2002 2001
----------------------------
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 .................. 43,374,281 37,274,004
Net income ................................. 7,828,228 7,366,593
Dividends on common stock .................. (4,818,082) (4,818,082)
----------------------------
End of period balance ...................... 46,384,427 39,822,515
----------------------------
Accumulated Other Comprehensive Income (Loss)
Beginning of year balance .................. 637,980 (1,428,660)
Unrealized gain on securities, net of tax .. 184,808 1,875,691
----------------------------
End of period balance ...................... 822,788 447,031
----------------------------
Total Stockholders' Equity ..................... $ 82,207,215 $ 75,269,546
============================
See accompanying notes to consolidated financial statements.
4
West Bancorporation, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
Six Months Ended June 30,
2002 2001
-------------------------
Net Income ......................................... $7,828,228 $7,366,593
Other comprehensive income, unrealized gains on
securities, net of reclassification adjustment,
net of tax ..................................... 184,808 1,875,691
-----------------------
Comprehensive income ............................... $8,013,036 $9,242,284
=======================
See accompanying notes to consolidated financial statements.
5
PART I -- Item 1. Financial Statements, Continued
West Bancorporation, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(unaudited)
Six Months Ended June 30,
-------------------------------
2002 2001
-------------------------------
Cash Flows from Operating Activities
Net income ................................................................ $ 7,828,228 $ 7,366,593
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses .............................................. 460,000 462,500
Net amortization ....................................................... 304,441 3,495
Loss on disposition of fixed assets .................................... 28,665 -
Proceeds from sales of loans held for sale ............................. 4,978,115 4,109,748
Originations of loans held for sale .................................... (4,767,670) (4,318,748)
Depreciation ........................................................... 72,785 71,101
Deferred income taxes .................................................. (113,285) (1,027,811)
Change in assets and liabilities:
Decrease (increase) in accrued interest receivable .................. (490,061) 2,489,995
(Decrease) in accrued expenses and other liabilities ................ (1,285,932) (1,289,661)
------------------------------
Net cash provided by operating activities ........................ 7,015,286 7,867,212
------------------------------
Cash Flows from Investing Activities
Proceeds from sales, calls, and maturities of securities available for sale 2,018,838 81,539,300
Purchase of securities available for sale ................................. (19,222,938) -
Proceeds from sales, calls, and maturities of securities held to maturity . 59,037,775 35,964,000
Purchase of securities held to maturity ................................... (71,685,691) (24,116,375)
Net decrease in loans ..................................................... 12,752,917 8,946,841
Purchases of bank premises and equipment .................................. (259,312) (28,060)
Change in other assets .................................................... 347,180 456,014
------------------------------
Net cash provided by (used in) investing activities .............. (17,011,231) 102,761,720
------------------------------
Cash Flows from Financing Activities
Net (decrease) in deposits ................................................ (1,220,812) (16,267,198)
Net (decrease) in federal funds purchased and securities sold
under agreements to repurchase ......................................... (2,909,467) (38,132,361)
Net increase (decrease) in other short-term borrowings .................... (1,411,291) 1,403,045
Proceeds from long-term borrowings ........................................ 3,600,000 10,000,000
Cash dividends ............................................................ (4,818,082) (4,818,082)
------------------------------
Net cash (used in) financing activities .......................... (6,759,652) (47,814,596)
------------------------------
Net increase (decrease) in cash and cash equivalents ............. (16,755,597) 62,814,336
Cash and Cash Equivalents
Beginning ................................................................. 128,450,240 26,510,756
------------------------------
End ....................................................................... $ 111,694,643 $ 89,325,092
==============================
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest ............................................................... $ 7,822,835 $ 16,614,234
Income taxes ........................................................... 4,692,710 3,945,652
See accompanying notes to consolidated financial statements.
6
PART I - Item 1. Financial Statements, Continued
West Bancorporation, Inc.
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 and six months ended June 30,
2002 and 2001, and the consolidated balance sheets as of June 30, 2002 and
December 31, 2001 include the accounts and transactions of the Company and its
wholly-owned subsidiary, West Des Moines State Bank. All material intercompany
balances and transactions have been eliminated in consolidation.
The accompanying consolidated financial statements have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. Although management believes that the disclosures are adequate to
make the information presented not misleading, it is suggested that these
interim consolidated financial statements be read in conjunction with the
company's most recent audited financial statements and notes thereto. In the
opinion of management, the accompanying consolidated financial statements
contain all adjustments (consisting of only normal recurring accruals) necessary
to present fairly the financial position as of June 30, 2002, and the results of
operations and cash flows for the three and six months ended June 30, 2002 and
2001.
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 and six months ended June 30, 2002 and 2001 was
16,060,271.
3. Impact of New Financial Accounting Standards
In July 2001, the FASB issued Statement No. 141, "Business Combinations," and
Statement No. 142, "Goodwill and Other Intangible Assets." Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. Statement 142 requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of Statement 142. Statement 142 also requires that
intangible assets with estimable useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The adoption of these Statements does not impact the Company.
The FASB has also issued Statement 143, "Accounting for Asset Retirement
Obligations" and Statement 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" relating to long-lived assets. The adoption of these
Statements does not impact the Company.
4. 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
PART I -- Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
THREE AND SIX MONTHS ENDED JUNE 30, 2002
SELECTED FINANCIAL RESULTS
The following table shows selected financial results and measures for the three
and six months ended June 30, 2002 compared with the same periods in 2001.
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------------ -----------------------------------------
2002 2001 Change Change-% 2002 2001 Change Change-%
----------------------------------------------------------------------------------------------------------
Net income ........... $ 4,008,927 $ 3,871,405 $ 137,522 3.6% $ 7,828,228 $ 7,366,593 $ 461,635 6.3%
Average assets ....... 817,776,423 832,023,014 (14,246,591) -1.7% 821,292,898 833,591,165 (12,298,267) -1.5%
Average equity ....... 80,734,858 74,127,286 6,607,572 8.9% 80,132,153 72,928,272 7,203,881 9.9%
Return on assets ..... 1.97% 1.86% 0.11% 6.0% 1.92% 1.78% 0.15% 7.9%
Return on equity ..... 19.92% 20.89% -0.97% -4.6% 19.70% 20.37% -0.67% -3.3%
Efficiency ratio ..... 30.23% 29.12% 1.11% 3.8% 30.26% 30.17% 0.09% 0.3%
Dividend payout ratio 60.00% 62.50% -2.50% -4.0% 61.22% 65.22% -3.99% -6.1%
Equity to assets ratio 9.87% 8.91% 0.96% 10.8% 9.76% 8.75% 1.01% 11.5%
Definitions of ratios:
o Return on assets - annualized net income divided by average assets.
o Return on equity - annualized net income divided by average stockholders'
equity.
o Efficiency ratio - noninterest expense divided by noninterest income plus
taxable equivalent net interest income.
o Dividend payout ratio - dividends per share divided by net income per
share.
o Equity to assets ratio - average equity divided by average assets.
Net income is higher than the previous year for the two periods shown above
primarily because of increased net interest income (see discussion of net
interest income below). Return on average 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. Return on average assets is higher than last
year for both periods because net income is higher and average assets are
slightly lower. Average assets are lower because funds from maturing investment
securities were used to reduce short-term borrowings.
RESULTS OF OPERATIONS
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.
8
Data for the three months ended June 30 (dollars in thousands).
Average Balance Interest Income/Expense Yield/Rate
-------------------------------------- ------------------------------------ -----------------------
2002 2001 Change Change-% 2002 2001 Change Change-% 2002 2001 Change
-----------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans:
Commercial ................. $247,430 $249,452 $ (2,022) -0.81% $ 3,835 $ 4,963 $(1,128) -22.72% 6.22% 7.98% -1.76%
Real estate ................ 193,602 207,059 (13,457) -6.50% 3,828 4,287 (459) -10.71% 7.93% 8.30% -0.37%
Consumer ................... 21,853 20,794 1,059 5.09% 431 479 (48) -10.02% 7.92% 9.23% -1.31%
Other ...................... 15,866 17,479 (1,613) -9.23% 308 338 (30) -8.88% 7.80% 7.75% 0.05%
-----------------------------------------------------------------------------------------------------
Total Loans ................ 478,751 494,784 (16,033) -3.24% 8,402 10,067 (1,665) -16.54% 7.04% 8.16% -1.12%
-----------------------------------------------------------------------------------------------------
Investment securities:
Taxable .................... 196,560 185,983 10,577 5.69% 2,272 2,864 (592) -20.66% 4.64% 6.18% -1.54%
Tax-exempt ................. 28,236 24,196 4,040 16.70% 469 422 47 11.18% 6.67% 7.00% -0.33%
-----------------------------------------------------------------------------------------------------
Total investment
securities ................. 224,796 210,179 14,617 6.95% 2,741 3,286 (545) -16.57% 4.89% 6.27% -1.38%
-----------------------------------------------------------------------------------------------------
Federal funds sold and
short-term investments ... 80,390 85,438 (5,048) -5.91% 360 913 (553) -60.57% 1.79% 4.29% -2.50%
-----------------------------------------------------------------------------------------------------
Total interest-earning
assets ..................... $783,937 $790,401 $ (6,464) -0.82% 11,503 14,266 (2,763) -19.37% 5.89% 7.24% -1.35%
=======================================--------------------------------------------------------------
Interest-bearing
liabilities:
Deposits:
Checking with interest,
savings and money
markets .................. $279,699 $234,178 $ 45,521 19.44% 967 1,869 (902) -48.26% 1.39% 3.20% -1.81%
Time deposits .............. 149,442 175,102 (25,660) -14.65% 1,359 2,520 (1,122) -44.52% 3.65% 5.77% -2.12%
-----------------------------------------------------------------------------------------------------
Total deposits ............. 429,141 409,280 19,861 4.85% 2,326 4,389 (2,064) -47.03% 2.17% 4.30% -2.13%
-----------------------------------------------------------------------------------------------------
Other borrowed funds ....... 164,093 208,706 (44,613) -21.38% 1,155 2,364 (1,209) -51.13% 2.82% 4.54% -1.72%
-----------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities .............. $593,234 $617,986 $(24,752) -4.01% $3,481 $ 6,753 $(3,272) -48.45% 2.35% 4.38% -2.03%
====================================-----------------------------------------------------------------
Tax-equivalent net
interest income ............ $8,022 $ 7,513 $ 511 6.80%
===================================
Net interest spread ........ 3.53% 2.86% 0.67%
======================
Net interest margin ........ 4.10% 3.81% 0.29%
=======================
9
Data for the six months ended June 30 (dollars in thousands).
Average Balance Interest Income/Expense Yield/Rate
------------------------------------------------------------------------------------------------------
2002 2001 Change Change-% 2002 2001 Change Change-% 2002 2001 Change
------------------------------------------------------------------------------------------------------
Interest-earning
Loans:
Commercial ................ $248,815 $249,449 $ (634) -0.25% $7,582 $10,389 $(2,807) -27.01% 6.15% 8.40% -2.25%
Real estate ............... 195,751 208,302 (12,551) -6.03% 7,703 8,555 (852) -9.95% 7.94% 8.28% -0.34%
Consumer .................. 20,679 21,666 (987) -4.55% 846 1,010 (164) -16.24% 8.25% 9.40% -1.15%
Other ..................... 15,968 17,730 (1,762) -9.94% 621 671 (50) -7.45% 7.84% 7.64% 0.20%
------------------------------------------------------------------------------------------------------
Total Loans ............... 481,213 497,147 (15,934) -3.21% 16,752 20,625 (3,873) -18.78% 7.02% 8.37% -1.35%
------------------------------------------------------------------------------------------------------
Investment securities:
Taxable ................... 179,770 214,741 (34,971) -16.29% 4,199 6,704 (2,505) -37.36% 4.71% 6.30% -1.59%
Tax-exempt ................ 28,895 23,078 5,817 25.21% 970 792 178 22.47% 6.77% 6.92% -0.15%
------------------------------------------------------------------------------------------------------
Total investment
securities ................ 208,665 237,819 (29,154) -12.26% 5,169 7,496 (2,327) -31.03% 5.00% 6.36% -1.36%
------------------------------------------------------------------------------------------------------
Federal funds sold and
short-term investments .. 97,638 58,511 39,127 66.87% 862 1,336 (474) -35.47% 1.78% 4.61% -2.83%
------------------------------------------------------------------------------------------------------
Total interest-earning
assets .................... $787,516 $793,477 $ (5,961) -0.75% 22,783 29,457 (6,674) -22.65% 5.83% 7.49% -1.65%
=======================================---------------------------------------------------------------
Interest-bearing
liabilities:
Deposits:
Checking with interest,
savings and
money markets ......... $276,750 $225,927 $ 50,823 22.50% 2,000 3,900 (1,900) -48.72% 1.46% 3.48% -2.02%
Time deposits ............. 142,488 187,619 (45,131) -24.05% 2,704 5,608 (2,904) -51.79% 3.83% 6.03% -2.20%
------------------------------------------------------------------------------------------------------
Total deposits ............ 419,238 413,546 5,692 1.38% 4,704 9,508 (4,804) -50.53% 2.26% 4.64% -2.38%
------------------------------------------------------------------------------------------------------
Other borrowed funds ...... 178,452 213,999 (35,547) -16.61% 2,387 5,372 (2,985) -55.57% 2.70% 5.06% -2.36%
------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities ............... $597,690 $627,545 $(29,855) -4.76% 7,091 14,880 (7,789) -52.35% 2.39% 4.78% -2.39%
=======================================---------------------------------------------------------------
Tax-equivalent net interest
income .................. $15,692 $14,577 $ 1,115 7.66%
=======================================
Net interest spread .............. 3.44% 2.70% 0.74%
=====================
Net interest margin .............. 4.01% 3.69% 0.32%
=====================
Net interest income is computed by subtracting total interest expense from total
interest income. Net interest spread is calculated by subtracting the average
rate paid on interest bearing liabilities from the average yield on interest
earning assets. 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.
Fluctuations in net interest income can result from the changes in the volumes
of assets and liabilities as well as changes in interest rates. Interest rates
moved down throughout the year 2001. Through the first six months of 2002, the
Federal Reserve has not changed the target rate for Federal funds.
10
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 as customers seek to refinance loans to obtain lower interest rates. Most
of the decline in loans, compared to a year ago, came in residential real estate
loans as the Company sold lower, fixed rate, long-term loans originated during
2001 and 2002 in the secondary market, to avoid the interest rate risk
associated with holding such loans in the portfolio. The yield on loans has been
fairly constant during the first six months of 2002, with the exception of
consumer loans. The yield on consumer loans should continue to decline somewhat
because new loan rates are lower than the rates on maturing loans and for the
most part, the Company has discontinued the purchase of dealer paper.
In 2001, the average balance of investment securities was declining as maturity
proceeds were used to pay off short-term debt. So far in 2002, the average
balance of investment securities has been increasing which is the result of
slightly declining loan balances and the investment of some funds that had been
in Federal funds sold and other short-term investments.
The average rate paid on deposits is lower than last year and has continued to
decline this year. As discussed elsewhere in this report, some maturing time
deposits are being invested upon maturity in money market savings accounts. This
accounts for an increase in the money market category and lowers the overall
cost of deposits since the rate on money market accounts is lower than time
deposits. Competition for deposits remains intense in the market area served by
the Company.
During the first quarter of 2001, the Company was borrowing on a short-term
basis from the Federal Home Loan Bank. Those borrowings were paid off in the
second quarter of 2001 resulting in a decrease in average borrowings for the
first six months of 2002 of $12 million. The remaining decline in average
borrowings for the first six months of this year compared to last year is due to
Federal funds purchased, down $10 million, and securities sold under agreement
to repurchase, down $13 million. The decline in average borrowings for the
second quarter of 2002 compared to 2001 is due to Federal funds purchased, lower
by $27 million, and securities sold under agreement to repurchase, lower by $15
million.
Provision for Loan Losses and the Related Allowance for Loan Losses
The following table sets forth the activity in the Allowance for Loan Losses for
the three and six months ended June 30, 2002 and the same respective periods for
2001 as well as common ratios related to the allowance for loan losses.
Three months ended June 30, Six months ended June 30,
---------------------------------------- -----------------------------------------
2002 2001 Change 2002 2001 Change
-------------------------------------------------------------------------------------
Balance at beginning of period ....... $ 4,339,811 $ 4,100,613 $ 4,239,990 $ 4,194,498
Charge-offs .......................... (251,819) (440,868) $189,049 (392,294) (741,515) $349,221
Recoveries ........................... 157,608 7,080 150,528 167,904 21,342 146,562
--------------------------- -----------------------------
Net charge-offs ...................... (94,211) (433,788) 339,577 (224,390) (720,173) 495,783
Provision charged to operations ...... 230,000 270,000 (40,000) 460,000 462,500 (2,500)
--------------------------- -----------------------------
Balance at end of period ............. $ 4,475,600 $ 3,936,825 $ 4,475,600 $ 3,936,825
=========================== =============================
Average loans outstanding ............ $478,750,719 $494,783,851 $481,212,854 $497,146,871
Ratio of net charge-offs during the
period to average loans outstanding 0.02% 0.09% 0.05% 0.14%
Ratio of allowance for loan losses
to average loans outstanding ...... 0.93% 0.80% 0.93% 0.79%
Charge-offs have been lower during the second quarter and first half of 2002
compared to the same periods last year. Conversely, recoveries on loans
previously charged-off have been higher in 2002 than 2001. The net effect of
these trends is that net charge-offs, as shown above, are significantly lower
this year than the prior year. The positive trends in charge-offs and recoveries
coupled with the analysis of the adequacy of the allowance for loan losses
resulted in a provision for loan losses for the second quarter and first half of
2002 that was slightly lower than last year.
11
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 and industry trends in
addition to the actual loss experience. 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.
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.
Three months ended June 30, Six months ended June 30,
-------------------------------------------- ----------------------------------------------
2002 2001 Change Change-% 2002 2001 Change Change-%
---------------------------------------------------------------------------------------------
Service charges on deposit
accounts ...................... $1,115,116 $1,170,310 $(55,194) -4.72% $2,118,736 $2,112,825 $ 5,911 0.28%
Trust services .................. 141,657 138,071 3,586 2.60% 299,634 296,476 3,158 1.07%
Other:
Letter of credit fees ..... 11,012 15,712 (4,700) -29.91% 42,996 17,847 25,149 140.91%
VISA/Mastercard income .... 51,632 41,500 10,132 24.41% 101,032 82,450 18,582 22.54%
Gain on sale of real estate 28,440 50,552 (22,112) -43.74% 63,341 81,112 (17,771) -21.91%
Income from check sales ... 39,500 33,000 6,500 19.70% 77,800 65,200 12,600 19.33%
All other ................. 187,424 193,008 (5,584) -2.89% 357,058 361,701 (4,643) -1.28%
---------------------------------------------------------------------------------------------
Total other ............... 318,008 333,772 (15,764) -4.72% 642,227 608,310 33,917 5.58%
---------------------------------------------------------------------------------------------
Total noninterest income .. $1,574,781 $1,642,153 $(67,372) -4.10% $3,060,597 $3,017,611 $42,986 1.42%
=============================================================================================
Noninterest income results from the charges and fees collected by the Company
from its customers for various services performed and miscellaneous other
income. The decline in service charges on deposit accounts is due to a lower
number of overdrafts and return checks. The Company is seeing a decline in the
number of customers writing checks that would cause an overdrawn account
balance. VISA/Mastercard income is up because the Bank converted to a lower cost
processor that is also within the Bank's market area and results in improved
service for the Bank and its merchant customers. The gain on the sale of real
estate loans is lower this year because of more competitive pricing in the
marketplace. The volume of loans sold is actually slightly higher than last
year, but the amount of fees collected have been lower which then results in
lower gains from the sale of those loans. Income from check sales is higher this
year because of more favorable pricing terms negotiated in the contract that was
renewed in the second half of 2001.
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.
Three months ended June 30, Six months ended June 30,
------------------------------------------ -------------------------------------------
2002 2001 Change Change-% 2002 2001 Change Change-%
---------------------------------------------------------------------------------------
Salaries and employee benefits .......... $1,615,329 $1,577,168 $ 38,161 2.42% $3,199,812 $3,151,968 $ 47,844 1.52%
Occupancy expenses ...................... 320,184 290,696 29,488 10.14% 638,718 608,736 29,982 4.93%
Data processing expenses ................ 265,519 235,611 29,908 12.69% 530,342 463,553 66,789 14.41%
Other:
Miscellaneous losses .................. 51,289 21,799 29,490 135.28% 118,425 49,282 69,143 140.30%
Advertising ........................... 67,900 47,501 20,399 42.94% 108,005 89,424 18,581 20.78%
Nasdaq filing fee and related
professional fees ................... 125,591 -- 125,591 -- 155,487 -- 155,487 --
All other ............................. 455,677 492,350 (36,673) -7.45% 924,934 945,629 (20,695) -2.19%
---------------------------------------------------------------------------------------
Total other ...................... 700,457 561,650 138,807 24.71% 1,306,851 1,084,335 222,516 20.52%
---------------------------------------------------------------------------------------
Total noninterest expense ........ $2,901,489 $2,665,125 $236,364 8.87% $5,675,723 $5,308,592 $367,131 6.92%
=======================================================================================
12
Noninterest expense includes all the costs incurred to operate the Company
except for interest expense, the provision for loan losses, and income tax
expense. The increase in Occupancy expenses, particularly in the second quarter
is a combination of increases in property taxes, maintenance and repairs, and
lease payments. Data processing expenses are higher than last year because
certain item processing functions were outsourced during the third quarter of
2001. That also contributes to the low increases in the Salaries and Employee
Benefits category. The increase in miscellaneous losses is due to losses
involving forged and fraudulently deposited checks the Company experienced in
early 2002, and during the second quarter of 2002, a loss of approximately
$29,000 on the disposition of personal computers that were replaced in order to
run updated software programs. Advertising expense has increased due to specific
marketing programs that have been implemented. The Company paid Nasdaq an
initial listing fee of $100,000 during the second quarter of 2002. The remaining
costs relate to legal and accounting services associated with registering the
Company's common stock with the Securities and Exchange Commission. These are
one-time costs, however, legal and accounting fees will be somewhat higher on an
ongoing basis due to the SEC reports the Company is now required to file.
Income Tax Expense
There has been no change in strategy concerning income taxes. The effective
income tax rate as a percent of income before taxes for the three and six months
ended June 30, 2002 was 35.6 percent and 35.5 percent, respectively, compared to
35.8 percent and 35.7 percent respectively for the same periods last year.
Included in the effective rate is the State of Iowa franchise tax payable by the
Bank. The franchise tax is 5% of income before taxes and is deductible for
Federal income tax purposes.
FINANCIAL CONDITION
Total assets as of June 30, 2002 were $815,938,000, a very slight decrease from
$815,970,000 at December 31, 2001.
Investment Securities
Investment securities available for sale as of June 30, 2002 have increased
$15,421,000 from December 31, 2001. Since December 31, 2001, investment
securities classified as held to maturity have increased $14,441,000. Investment
securities have increased as a result of a decline in loans and by the
investment of funds that had been in Federal funds sold.
Loans
Loans outstanding declined $13,188,000 from December 31, 2001 to June 30, 2002.
The category with the largest decline is 1-4 family residential real estate
loans, which are down $6,500,000. In this low interest rate environment, the
Company has not been adding to its portfolio. Most new loans are sold in the
secondary market to avoid the interest rate risk associated with holding
long-term, lower interest rate loans. The next largest decline is in the
construction loan category, which declined $6,082,000 from December 31, 2001.
Because of the mild winter, construction projects continued and some were
completed ahead of schedule. Loans are expected to increase when economic
conditions improve.
Deposits
Total deposits as of June 30, 2002 were $570,509,000 compared with $571,730,000
as of December 31, 2001. Deposits as of these two points in time have not
substantially changed. However, with deposits, it is sometimes more appropriate
to look at average balances because the balances on any given day, particularly
quarter ends, can fluctuate significantly. (Please refer to the average balances
shown in the table under Net Interest Income.) Time deposits are lower than last
year and transaction accounts are higher. Generally, customers have been less
inclined to lock in low rate certificates of deposit and have kept their funds
in money market or savings accounts waiting for interest rates to move higher.
For the first six months of 2002, non-interest-bearing checking accounts
averaged $140,000,000 compared to $128,000,000 for the first six months of 2001.
13
Borrowings
During the first quarter of 2002, the Company borrowed an additional $3,600,000
from the Federal Home Loan Bank (FHLB), bringing the total FHLB advances to
$51,600,000. The new advances had a weighted average maturity of 4.11 years and
a weighted average rate of 4.76%. There have been no other changes in long-term
borrowings during 2002. The balance of Federal funds purchased and securities
sold under agreement to repurchase was $104,922,000 at June 30, 2002, down from
$107,832,000 at December 31, 2001. The decline is attributable to customer
repurchase agreements. This category is used by commercial customers as a
short-term interest earning investment and can fluctuate significantly at any
given time. The balance of other short-term borrowings consisted entirely of
Treasury, Tax and Loan option notes at June 30, 2002 and December 31, 2001.
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.
December 31,
June 30, 2002 2001 Change
-----------------------------------------
Nonaccrual loans .................... $ 1,376,361 $ 878,009 $498,352
Other real estate owned ............. 800,366 1,089,346 (288,980)
----------------------------------------
Total non-performing assets ......... $ 2,176,727 $ 1,967,355 $209,372
========================================
Non-performing assets to total loans 0.45% 0.40% 0.05%
Non-performing assets to total assets 0.27% 0.24% 0.03%
Loans past due 90 days and still
accruing interest ................ $ 599,373 $ 395,431 $203,942
The increase in non-accrual loans relates to one commercial relationship, which
as of June 30, 2002 accounts for $1,269,000 of total non-accrual loans. The
relationship includes loans secured by real estate and operating loans.
Operating loans totaling $100,000 were charged off during the second quarter and
are therefore not included in the previously referenced balance. The decline in
Other Real Estate Owned relates to the sale of lots associated with a
development project that accounts for $630,000 of this category. The remaining
balance in Other Real Estate Owned consists of one single-family house and one
residential lot. 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 of "Provision for Loan Losses and the Related Allowance for
Loan Losses".
Based on the inherent risk in the loan portfolio, management believes that as of
June 30, 2002, the allowance for loan losses provides for probable losses in the
loan portfolio.
Capital Resources
Total shareholders' equity was 10.1 percent of total assets as of June 30, 2002
and 9.7 percent on December 31, 2001.
The table below shows the various measures of regulatory capital and related
ratios.
December 31,
June 30, 2002 2001
-----------------------------
Total shareholders' equity ..................... $ 82,207,215 $ 79,012,261
Less: net unrealized gains on available for
sale securities .............................. (822,788) (637,980)
Less: intangible assets ........................ (63,641) (79,551)
-----------------------------
Tier 1 capital ................................. 81,320,786 78,294,730
Plus: allowance for loan losses ................ 4,475,600 4,239,990
-----------------------------
Total risk-based capital ....................... $ 85,796,386 $ 82,534,720
=============================
14
Regulatory requirements
to be:
------------------------ Actual Regulatory Capital Ratios as of:
Adequately Well- -----------------------------------------
Capitalized Capitalized June 30, 2002 December 31, 2001
-------------------------------------------------------------------
Total risk-based capital as % of
risk-weighted assets ........................ 8.0% 10.0% 14.6% 13.6%
Tier 1 capital as % of risk-weighted assets ... 4.0% 6.0% 13.9% 12.9%
Tier 1 capital as % average assets ............ 4.0% 5.0% 9.9% 9.3%
Risk-based capital guidelines require the classification of assets and some
off-balance items in terms of credit-risk exposure and the measuring of capital
as a percentage of the risk adjusted assets totals. Management believes, and
data in the above table show that, as of June 30, 2002 and December 31, 2001,
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 $111,695,000 as of June 30, 2002, compared
with $128,450,000 as of December 31, 2001. 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 $59 million and has
collateral at the Federal Home Loan Bank that would allow it to borrow an
additional $65 million, if necessary. Management believes that the Company has
sufficient liquidity and sources of funds as of June 30, 2002 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
Company uses an in-house computer software simulation-modeling program to
measure its exposure to potential interest rate changes. For various assumed
hypothetical changes in market interest rates, numerous other assumptions are
made such as prepayment speeds on loans backed by mortgages, the slope of the
Treasury yield curve, the rates and volumes of the Company's deposits and the
rates and volumes of the Company's loans. This analysis measures the estimated
change in net interest income in the event of hypothetical changes in interest
rates. The analysis of the Company's interest rate risk was presented in the
Form 10 filed by the Company on March 11, 2002. Management does not believe the
Company's primary market risk exposures and how those exposures were managed in
the first six months of 2002 changed when compared to 2001.
Commitments and Contingencies
In the ordinary course of business, the Company is engaged in various issues
involving litigation. Management believes that none of this litigation is
material to the Company's results of operations.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
With the exception of the historical information contained in this report, the
matters described herein contain forward-looking statements that involve risk
and uncertainties that individually or mutually impact the matters herein
described, including but not limited to financial projections, product demand
and market acceptance, the effect of economic conditions, the impact of
competitive products and pricing, governmental regulations, results of
litigation, technological difficulties and/or other factors outside the control
of the Company, which are detailed from time to time in the Company's SEC
reports. The Company disclaims any intent or obligation to update these
forward-looking statements.
Part I - Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The information appearing above under the heading "Market Risk Management" is
incorporated herein by reference.
15
Part II - 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 *
10.2 Supplemental *
10.3 Short-term Lease *
10.4 Assignment *
10.5 Lease Modification Agreement No. 1 *
10.6 Memorandum of Real estate contract *
10.7 Affidavit *
10.8 Addendum to Lease *
10.9 Data Processing Contract *
10.10 Employment Contract *
10.11 Consulting Contract *
99.1 Certification 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.
(b) Reports on Form 8-K: During the three months ended June 30, 2002, the
Company filed a Form 8-K on June 13, 2002 which contained a presentation
made by Company executives at an investment banking conference.
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)
August 13, 2002 By: /s/ David L. Miller
- --------------- --------------------------------------------
Dated David L. Miller
Chairman, President, Chief Executive Officer
August 13, 2002 By: /s/ Douglas R. Gulling
- --------------- ---------------------------------------------
Dated Douglas R. Gulling
Chief Financial Officer
(Principal Accounting Officer)
16