Unassociated Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2007

or

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                                                               to                                                              

Commission File Number 0-49677
 
WEST BANCORPORATION, INC.
(Exact Name of Registrant as Specified in its Charter)

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 o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o Accelerated filer x  Non-accelerated filer o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes o No x

As of August 3, 2007, there were 17,536,682 shares of common stock, no par value outstanding.
 

 

PART I - FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
West Bancorporation, Inc. and Subsidiaries
 
Consolidated Balance Sheets
 
(unaudited)
 
           
   
June 30,
 
December 31,
 
   
2007
 
2006
 
(in thousands, except per share data)
         
Assets
         
Cash and due from banks
 
$
27,329
 
$
35,063
 
Federal funds sold and other short-term investments
   
9,555
   
615
 
Cash and cash equivalents
   
36,884
   
35,678
 
Securities available for sale
   
245,645
   
256,731
 
Federal Home Loan Bank stock, at cost
   
7,731
   
4,847
 
Total securities
   
253,376
   
261,578
 
Loans
   
937,257
   
904,422
 
Allowance for loan losses
   
(8,779
)
 
(8,494
)
Loans, net
   
928,478
   
895,928
 
Premises and equipment, net
   
5,212
   
5,375
 
Accrued interest receivable
   
8,964
   
8,587
 
Goodwill
   
24,930
   
24,930
 
Other intangible assets
   
2,559
   
2,987
 
Bank-owned life insurance
   
23,391
   
22,956
 
Other assets
   
10,940
   
10,517
 
Total assets
 
$
1,294,734
 
$
1,268,536
 
               
Liabilities and Stockholders' Equity
             
Liabilities
             
               
Deposits:
             
Noninterest-bearing demand
 
$
187,575
 
$
203,964
 
Interest-bearing demand
   
69,401
   
57,605
 
Savings
   
216,376
   
234,240
 
Time, in excess of $100,000
   
220,414
   
256,105
 
Other time
   
163,938
   
173,420
 
Total deposits
   
857,704
   
925,334
 
Federal funds purchased and securities sold under agreements to repurchase
   
144,060
   
109,346
 
Other short-term borrowings
   
40,860
   
1,929
 
Accrued expenses and other liabilities
   
11,637
   
12,096
 
Subordinated notes
   
20,619
   
20,619
 
Long-term borrowings
   
103,500
   
85,400
 
Total liabilities
   
1,178,380
   
1,154,724
 
               
Stockholders' Equity
             
               
Common stock, no par value; authorized 50,000,000 shares;
             
17,536,682 shares issued and outstanding
   
3,000
   
3,000
 
Additional paid-in capital
   
32,000
   
32,000
 
Retained earnings
   
84,357
   
80,397
 
Accumulated other comprehensive loss
   
(3,003
)
 
(1,585
)
Total stockholders' equity
   
116,354
   
113,812
 
Total liabilities and stockholders' equity
 
$
1,294,734
 
$
1,268,536
 
 
See accompanying notes to consolidated financial statements.
 
2

 
 
West Bancorporation, Inc. and Subsidiaries
 
Consolidated Statements of Income
 
(unaudited)
 
   
   
Three Months Ended June 30,
 
Six Months Ended June 30,
 
(in thousands, except per share data)
 
2007
 
2006
 
2007
 
2006
 
Interest income:
                 
Loans, including fees
 
$
17,932
 
$
17,036
 
$
35,036
 
$
32,499
 
Securities:
                         
Government agencies and corporations
   
1,491
   
1,522
   
2,987
   
3,018
 
States and political subdivisions
   
936
   
1,029
   
1,906
   
2,072
 
Other
   
388
   
398
   
777
   
726
 
Federal funds sold and other short-term investments
   
271
   
219
   
560
   
345
 
Total interest income
   
21,018
   
20,204
   
41,266
   
38,660
 
Interest expense:
                         
Demand deposits
   
452
   
77
   
777
   
136
 
Savings deposits
   
1,841
   
1,919
   
3,556
   
3,632
 
Time deposits
   
5,390
   
6,132
   
10,922
   
10,989
 
Federal funds purchased and securities sold under
                         
agreements to repurchase
   
1,780
   
846
   
3,455
   
1,758
 
Other short-term borrowings
   
63
   
12
   
71
   
26
 
Subordinated notes
   
367
   
367
   
730
   
730
 
Long-term borrowings
   
1,337
   
1,014
   
2,656
   
2,009
 
Total interest expense
   
11,230
   
10,367
   
22,167
   
19,280
 
Net interest income
   
9,788
   
9,837
   
19,099
   
19,380
 
Provision for loan losses
   
350
   
450
   
650
   
900
 
Net interest income after provision for loan losses
   
9,438
   
9,387
   
18,449
   
18,480
 
Noninterest income:
                         
Service charges on deposit accounts
   
1,211
   
1,117
   
2,339
   
2,121
 
Trust services
   
188
   
195
   
369
   
363
 
Investment advisory fees
   
2,043
   
2,112
   
4,002
   
4,361
 
Increase in cash value of bank-owned life insurance
   
219
   
213
   
435
   
422
 
Net realized losses from sales of securities
                         
available for sale
   
(13
)
 
(38
)
 
(9
)
 
(144
)
Other income
   
387
   
361
   
769
   
718
 
Total noninterest income
   
4,035
   
3,960
   
7,905
   
7,841
 
Noninterest expense:
                         
Salaries and employee benefits
   
3,355
   
3,492
   
6,971
   
7,167
 
Occupancy
   
897
   
866
   
1,831
   
1,722
 
Data processing
   
473
   
506
   
940
   
985
 
Other expenses
   
1,183
   
1,318
   
2,620
   
2,620
 
Total noninterest expense
   
5,908
   
6,182
   
12,362
   
12,494
 
Income before income taxes
   
7,565
   
7,165
   
13,992
   
13,827
 
Income taxes
   
2,438
   
2,283
   
4,421
   
4,400
 
Net income
 
$
5,127
 
$
4,882
 
$
9,571
 
$
9,427
 
Earnings per share, basic
 
$
0.29
 
$
0.28
 
$
0.55
 
$
0.54
 
Cash dividends per share
 
$
0.16
 
$
0.152
 
$
0.32
 
$
0.304
 
 
See accompanying notes to consolidated financial statements.

3

 


West Bancorporation, Inc. and Subsidiaries
 
Consolidated Statements of Stockholders' Equity
 
(unaudited)
 
   
   
Six Months Ended June 30,
 
(in thousands, except per share data)
 
2007
 
2006
 
Common stock:
         
Beginning of year balance
 
$
3,000
 
$
3,000
 
End of period balance
   
3,000
   
3,000
 
Additional paid-in capital:
             
Beginning of year balance
   
32,000
   
32,000
 
End of period balance
   
32,000
   
32,000
 
Retained earnings:
             
Beginning of year balance
   
80,397
   
71,951
 
Net income
   
9,571
   
9,427
 
Dividends on common stock; per share amounts
             
2007 - $0.32 and 2006 - $.304
   
(5,611
)
 
(5,345
)
End of period balance
   
84,357
   
76,033
 
Accumulated other comprehensive loss:
             
Beginning of year balance
   
(1,585
)
 
(2,430
)
Unrealized gains (losses) on securities, net of tax
   
(1,418
)
 
(1,923
)
End of period balance
   
(3,003
)
 
(4,353
)
Total stockholders' equity
 
$
116,354
 
$
106,680
 
 
West Bancorporation, Inc. and Subsidiaries
 
Consolidated Statements of Comprehensive Income
 
(unaudited)
 
   
   
Six Months Ended June 30,
 
(in thousands)
 
2007
 
2006
 
Net income
 
$
9,571
 
$
9,427
 
Other comprehensive income (loss), unrealized gains
             
(losses) on securities, net of reclassification adjustment,
             
net of tax
   
(1,418
)
 
(1,923
)
Comprehensive income
 
$
8,153
 
$
7,504
 
 
See accompanying notes to consolidated financial statements.
 
4

 

West Bancorporation, Inc. and Subsidiaries
 
Consolidated Statements of Cash Flows
 
(unaudited)
 
   
   
Six Months Ended June 30,
 
(in thousands)
 
2007
 
2006
 
Cash Flows from Operating Activities:
         
Net income
 
$
9,571
 
$
9,427
 
Adjustments to reconcile net income to net cash provided by
             
operating activities:
             
Provision for loan losses
   
650
   
900
 
Net amortization and accretion
   
759
   
685
 
Loss on disposition of fixed assets
   
28
   
9
 
Net losses from sales of securities available for sale
   
9
   
144
 
Net gains from sales of loans held for sale
   
(38
)
 
(63
)
Proceeds from sales of loans held for sale
   
4,205
   
4,673
 
Originations of loans held for sale
   
(4,592
)
 
(4,744
)
Increase in value of bank-owned life insurance
   
(435
)
 
(422
)
Depreciation
   
458
   
450
 
Deferred income taxes
   
(53
)
 
(294
)
Change in assets and liabilities:
             
Increase in accrued interest receivable
   
(377
)
 
(636
)
Increase (decrease) in accrued expenses and other liabilities
   
(459
)
 
914
 
Net cash provided by operating activities
   
9,726
   
11,043
 
Cash Flows from Investing Activities:
             
Proceeds from sales, calls, and maturities of securities available for sale
   
10,624
   
20,299
 
Purchases of securities available for sale
   
(2,159
)
 
(18,273
)
Acquisition of Federal Home Loan Bank stock
   
(3,205
)
 
(533
)
Proceeds from redemption of Federal Home Loan Bank stock
   
320
   
431
 
Net increase in loans
   
(32,926
)
 
(81,027
)
Proceeds from sale of premises and equipment
   
29
   
16
 
Purchases of premises and equipment
   
(351
)
 
(279
)
Change in other assets
   
643
   
(1,244
)
Net cash used in investing activities
   
(27,025
)
 
(80,610
)
Cash Flows from Financing Activities:
             
Net change in deposits
   
(67,630
)
 
84,366
 
Net change in federal funds purchased and securities sold
             
under agreements to repurchase
   
34,714
   
17,926
 
Net change in other short-term borrowings
   
38,932
   
(2,333
)
Proceeds from long-term borrowings
   
30,000
   
-
 
Principal payments on long-term borrowings
   
(11,900
)
 
-
 
Cash dividends
   
(5,611
)
 
(5,345
)
Net cash provided by financing activities
   
18,505
   
94,614
 
Net increase in cash and cash equivalents
   
1,206
   
25,047
 
Cash and Cash Equivalents:
             
Beginning
   
35,678
   
40,665
 
End
 
$
36,884
 
$
65,712
 
Supplemental Disclosures of Cash Flow Information
             
Cash payments for:
             
Interest
 
$
22,799
 
$
18,306
 
Income taxes
   
3,989
   
4,722
 
 
See accompanying notes to consolidated financial statements.

5


West Bancorporation, Inc.
Notes to Consolidated Financial Statements
(unaudited)
(in thousands, except per share information)

1. Basis of Presentation

The accompanying consolidated statements of income for the three and six months ended June 30, 2007 and 2006, and the consolidated statements of stockholders’ equity, comprehensive income (loss), and cash flows for the six months ended June 30, 2007 and 2006, and the consolidated balance sheets as of June 30, 2007 and December 31, 2006, include the accounts and transactions of the Company and its wholly-owned subsidiaries, West Bank and WB Capital Management Inc. 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, 2007, and the results of operations and cash flows for the three and six months ended June 30, 2007 and 2006.

The results for these interim periods may not be indicative of results for the entire year or for any other period.

2. Earnings per Common Share

Earnings per share represent income available to common shareholders divided by the weighted average number of shares outstanding during the period. The Company has no common equivalent shares that could cause dilution. The average number of shares outstanding for the three and six months ended June 30, 2007 and 2006 was 17,536,682 and 17,536,935, respectively.

3. Commitments

In the normal course of business, the Company enters into commitments to extend credit such as loan commitments and standby letters of credit to meet the financing needs of its customers. These commitments expose the Company to varying degrees of credit and market risk and are subject to the same credit reviews as those loans recorded on the balance sheet. For additional information on credit extension commitments see Note 13 of the Company’s 2006 consolidated financial statements. The Company’s commitments as of June 30, 2007 and December 31, 2006, are approximately as follows:
 
   
June 30,
2007
 
December 31,
2006
 
Commitments to extend credit
 
$
235,883
 
$
262,717
 
Standby letters of credit
   
20,880
   
22,301
 
   
$
256,763
 
$
285,018
 
 
6

 

4. Segment Information

An operating segment is generally defined as a component of a business for which discrete financial information is available and whose operating results are regularly reviewed by the chief operating decision-maker. The Company’s primary business segments are banking and investment advisory services. The banking segment generates revenue through interest and fees on loans, service charges on deposit accounts, interest on investment securities and fees for trust services. The banking segment includes West Bank and the Company and related elimination entries between the two, as the holding company’s operation is similar to the bank. The investment advisory segment consists of WB Capital Management Inc., and generates revenue by providing investment portfolio management services to individuals, retirement plans, corporations, foundations, endowments and public entities. Selected financial information on the Company’s segments is presented below for the three and six months ended June 30, 2007 and 2006.
 
 
 
Three months ended June 30,
 
 
 
2007 Segments
 
2006 Segments
 
 
 
 
 
Investment
 
 
 
 
 
 
 
Investment
 
 
 
 
 
 
 
Banking
 
Advisory
 
Other
 
Consolidated
 
Banking
 
Advisory
 
Other
 
Consolidated
 
Interest income
 
$
21,018
 
$
-
 
$
-
 
$
21,018
 
$
20,192
 
$
-
 
$
12
 
$
20,204
 
Interest expense
   
11,230
   
-
   
-
   
11,230
   
10,359
   
(4
)
 
12
   
10,367
 
Net interest income
   
9,788
   
-
   
-
   
9,788
   
9,833
   
4
   
-
   
9,837
 
Provision for loan losses
   
350
   
-
   
-
   
350
   
450
   
-
   
-
   
450
 
Net interest income after
                                                 
provision for loan losses
   
9,438
   
-
   
-
   
9,438
   
9,383
   
4
   
-
   
9,387
 
Noninterest income
   
1,977
   
2,112
   
(54
)
 
4,035
   
1,846
   
2,169
   
(55
)
 
3,960
 
Noninterest expense
   
4,130
   
1,832
   
(54
)
 
5,908
   
4,292
   
1,945
   
(55
)
 
6,182
 
Income before income taxes
   
7,285
   
280
   
-
   
7,565
   
6,937
   
228
   
-
   
7,165
 
Income taxes
   
2,324
   
114
   
-
   
2,438
   
2,191
   
92
   
-
   
2,283
 
Net income
 
$
4,961
 
$
166
 
$
-
 
$
5,127
 
$
4,746
 
$
136
 
$
-
 
$
4,882
 
                                                   
Depreciation and amortization
 
$
216
 
$
230
 
$
-
 
$
446
 
$
196
 
$
250
 
$
-
 
$
446
 
 
   
Six months ended June 30,
 
 
 
2007 Segments
 
2006 Segments
 
 
 
 
 
Investment
 
 
 
 
 
 
 
Investment
 
 
 
 
 
 
 
Banking
 
Advisory
 
Other
 
Consolidated
 
Banking
 
Advisory
 
Other
 
Consolidated
 
Interest income
 
$
41,266
 
$
-
 
$
-
 
$
41,266
 
$
38,662
 
$
-
 
$
(2
)
$
38,660
 
Interest expense
   
22,167
   
-
   
-
   
22,167
   
19,265
   
17
   
(2
)
 
19,280
 
Net interest income
   
19,099
   
-
   
-
   
19,099
   
19,397
   
(17
)
 
-
   
19,380
 
Provision for loan losses
   
650
   
-
   
-
   
650
   
900
   
-
   
-
   
900
 
Net interest income after
                                                 
provision for loan losses
   
18,449
   
-
   
-
   
18,449
   
18,497
   
(17
)
 
-
   
18,480
 
Noninterest income
   
3,888
   
4,125
   
(108
)
 
7,905
   
3,479
   
4,466
   
(104
)
 
7,841
 
Noninterest expense
   
8,676
   
3,794
   
(108
)
 
12,362
   
8,662
   
3,936
   
(104
)
 
12,494
 
Income before income taxes
   
13,661
   
331
   
-
   
13,992
   
13,314
   
513
   
-
   
13,827
 
Income taxes
   
4,285
   
136
   
-
   
4,421
   
4,189
   
211
   
-
   
4,400
 
Net income
 
$
9,376
 
$
195
 
$
-
 
$
9,571
 
$
9,125
 
$
302
 
$
-
 
$
9,427
 
                                                   
Depreciation and amortization
 
$
421
 
$
465
 
$
-
 
$
886
 
$
395
 
$
497
 
$
-
 
$
892
 
Goodwill
 
$
13,376
 
$
11,554
 
$
-
 
$
24,930
 
$
13,376
 
$
9,869
 
$
-
 
$
23,245
 
Total assets
 
$
1,280,432
 
$
14,654
 
$
(352
)
$
1,294,734
 
$
1,333,501
 
$
13,947
 
$
(193
)
$
1,347,255
 

7

 
 
5. Income Taxes

The Company adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes, effective January 1, 2007. The Interpretation provides clarification on accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement of Financial Accounting Standard (SFAS) No. 109, Accounting for Income Taxes. The Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As a result of the Company’s evaluation of the implementation of FIN 48, no significant income tax uncertainties were identified. Therefore, the Company recognized no adjustment for unrecognized income tax benefits during the six months ended June 30, 2007. Corporate tax returns for the years 2004 through 2006 remain open to examination by Federal and Iowa taxing authorities.

6. Impact of New Financial Accounting Standards

In February 2007, The FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 is an amendment of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. SFAS No. 159 generally permits the measurement of selected eligible financial instruments at fair value at specified election dates. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is expected to expand the use of fair value measurement, which is consistent with the FASB’s long-term measurement objectives for accounting for financial instruments. This Statement is effective for the Company beginning January 1, 2008. The Company has evaluated this pronouncement and has concluded its operations are not applicable to the primary objective of the pronouncement. The Company’s independent registered public accounting firm concurred with that assessment.

7. Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term are the allowance for loan losses and fair value of financial instruments.

8. 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 areas 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

 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT

The information contained in this report may contain forward-looking statements about the Company’s growth and acquisition strategies, new products and services, and future financial performance, including earnings and dividends per share, return on average assets, return on average equity, efficiency ratio and capital ratio. Certain statements in this report constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based upon certain underlying assumptions, risks and uncertainties. Because of the possibility of change in the underlying assumptions, actual results could differ materially from these forward-looking statements. Risks and uncertainties that may affect future results include: interest rate risk, competitive pressures, pricing pressures on loans and deposits, actions of bank and non-bank competitors, changes in local and national economic conditions, changes in regulatory requirements, actions of the Securities and Exchange Commission and/or the Federal Reserve Board, and customers’ acceptance of the Company’s products and services. The Company undertakes no obligation to revise or update such forward-looking statements to reflect current events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

THREE AND SIX MONTHS ENDED JUNE 30, 2007
(dollars in thousands)

OVERVIEW

The following discussion describes the consolidated operations of the Company, including its wholly-owned subsidiaries, West Bank and WB Capital Management Inc. (“WB Capital”). Consolidated results of operations for the three and six months ended June 30, 2007, are compared to the results for the same periods in 2006 and the consolidated financial condition of the Company at June 30, 2007, is compared to the December 31, 2006 position.

Net income for the three months ended June 30, 2007, was $5,127 compared to $4,882 for the same period in 2006, an increase of 5.0 percent.

For the first six months of 2007, net income increased 1.5 percent to $9,571, or $0.55 per share, compared to $9,427 for the first six months of 2006. The annualized return on average assets was 1.47 percent for both periods. Net interest income for the first six months of 2007 was $281 lower than during the first half of 2006, primarily because of a 10 basis point decline in the net interest margin to 3.29 percent. This decline was offset by a $250 decrease in the provision for loan losses compared to the first half of 2006.

Year-to-date noninterest income was 0.8 percent higher than last year as an increase in service charges and lower realized losses from sales of securities were offset by a decline in revenue from investment advisory fees. Realized losses on the sale of investment securities totaled $9 in the first six months of 2007 compared to $144 in the same period of 2006.

WB capital year-to-date net income was $195 for the six months ended June 30, 2007 compared to $302 for the same period in 2006. Revenues were lower than a year ago because of a decision to reduce the fees on the Vintage mutual funds. Operating expenses at WB Capital were $142 lower during the first half of 2007 compared to the same 2006 period.
 
9

 

RESULTS OF OPERATIONS

The following table shows selected financial results and measures for the three and six months ended June 30, 2007 compared with the same periods in 2006:
 
 
 
Three months ended June 30,
 
 Six months ended June 30,
 
   
2007
 
2006
 
Change
 
Change-%
 
2007
 
2006
 
Change
 
Change-%
 
Net income
 
$
5,127
 
$
4,882
 
$
245
   
5.0
%   
$
9,571
 
$
9,427
 
$
144
   
1.5
%
Average assets
   
1,323,901
   
1,317,852
   
6,049
   
0.5
%
 
1,314,146
   
1,294,836
   
19,310
   
1.5
%
Average stockholders'
                                                 
equity
   
115,535
   
105,488
   
10,047
   
9.5
%
 
114,608
   
105,102
   
9,506
   
9.0
%
                                                   
Return on assets
   
1.55
%
 
1.49
%
 
0.06
%
       
1.47
%
 
1.47
%
 
0.00
%
     
                                                   
Return on equity
   
17.80
%
 
18.56
%
 
-0.76
%
       
16.84
%
 
18.09
%
 
-1.25
%
     
                                                   
Efficiency ratio
   
41.54
%
 
43.35
%
 
-1.81
%
       
44.46
%
 
44.25
%
 
0.21
%
     
                                                   
Dividend payout ratio
   
54.72
%
 
54.74
%
 
-0.02
%
       
58.63
%
 
56.69
%
 
1.94
%
     
                                                   
Equity to assets ratio
   
8.73
%
 
8.00
%
 
0.73
%
       
8.72
%
 
8.12
%
 
0.60
%
     
 
Definitions of ratios:

Return on assets - annualized net income divided by average assets.
 
Return on equity - annualized net income divided by average stockholders’ equity.
 
Efficiency ratio - noninterest expense divided by noninterest income (excluding securities gains) plus taxable equivalent net interest income.
 
Dividend payout ratio - dividends paid divided by net income.
 
Equity to assets ratio - average equity divided by average assets.
 
Net Interest Income

The following tables show average balances and related interest income or interest expense, with the resulting average yield or rate by category of interest-earning assets or interest-bearing liabilities. Interest income and the resulting net interest income are shown on a fully taxable basis.

10

 

Data for the three months ended June 30:
 
   
 Average Balance
 
 Interest Income/Expense
 
 Yield/Rate
 
   
2007
 
2006
 
Change
 
Change-%
 
2007
 
2006
 
Change
 
Change-%
 
2007
 
2006
 
Change
 
Interest-earning assets:
                                             
Loans:
                                             
Commercial
 
$
348,949
 
$
353,339
 
$
(4,390
)
 
-1.24
%   
$
6,961
 
$
6,767
 
$
194
   
2.87
%
 
8.00
%
 
7.68
%
 
0.32
%
Real estate
   
583,496
   
569,618
   
13,878
   
2.44
%
 
10,799
   
10,106
   
693
   
6.86
%
 
7.42
%
 
7.12
%
 
0.30
%
Consumer and other
   
14,141
   
14,353
   
(212
)
 
-1.48
%
 
257
   
248
   
9
   
3.63
%
 
7.28
%
 
6.93
%
 
0.35
%
Total loans
   
946,586
   
937,310
   
9,276
   
0.99
%
 
18,017
   
17,121
   
896
   
5.23
%
 
7.63
%
 
7.33
%
 
0.30
%
                                                                     
Investment securities:
                                                                   
Taxable
   
169,612
   
174,075
   
(4,463
)
 
-2.56
%
 
1,975
   
2,008
   
(33
)
 
-1.64
%
 
4.66
%
 
4.61
%
 
0.05
%
Tax-exempt
   
87,288
   
98,326
   
(11,038
)
 
-11.23
%
 
1,142
   
1,282
   
(140
)
 
-10.92
%
 
5.23
%
 
5.21
%
 
0.02
%
Total investment securities
   
256,900
   
272,401
   
(15,501
)
 
-5.69
%
 
3,117
   
3,290
   
(173
)
 
-5.26
%
 
4.85
%
 
4.83
%
 
0.02
%
                                                                     
Federal funds sold and
                                                                   
short-term investments
   
20,472
   
17,228
   
3,244
   
18.83
%
 
271
   
219
   
52
   
23.74
%
 
5.30
%
 
5.10
%
 
0.20
%
Total interest-earning assets
 
$
1,223,958
 
$
1,226,939
 
$
(2,981
)
 
-0.24
%
 
21,405
   
20,630
   
775
   
3.76
%
 
7.01
%
 
6.74
%
 
0.27
%
                                                                     
Interest-bearing liabilities:
                                                                   
Deposits:
                                                                   
                                                                   
Checking with interest, savings and money markets
 
$
306,375
 
$
311,362
 
$
(4,987
)
 
-1.60
%
 
2,293
   
1,996
   
297
   
14.88
%
 
3.00
%
 
2.57
%
 
0.43
%
Time deposits
   
424,504
   
530,675
   
(106,171
)
 
-20.01
%
 
5,390
   
6,132
   
(742
)
 
-12.10
%
 
5.09
%
 
4.64
%
 
0.45
%
Total deposits
   
730,879
   
842,037
   
(111,158
)
 
-13.20
%
 
7,683
   
8,128
   
(445
)
 
-5.47
%
 
4.22
%
 
3.87
%
 
0.35
%
Other borrowed funds
   
279,809
   
174,862
   
104,947
   
60.02
%
 
3,547
   
2,239
   
1,308
   
58.42
%
 
5.09
%
 
5.14
%
 
-0.05
%
Total interest-bearing liabilities
 
$
1,010,688
 
$
1,016,899
 
$
(6,211
)
 
-0.61
%
 
11,230
   
10,367
   
863
   
8.32
%
 
4.46
%
 
4.09
%
 
0.37
%
                                                                     
Tax-equivalent net interest income
                         
$
10,175
 
$
10,263
 
$
(88
)
 
-0.86
%
                 
Net interest spread
                                                   
2.55
%
 
2.65
%
 
-0.10
%
Net interest margin
                                                   
3.33
%
 
3.35
%
 
-0.02
%
 
Data for the six months ended June 30:
 
 
 
 Average Balance
 
 Interest Income/Expense
 
 Yield/Rate
 
   
2007
 
2006
 
Change
 
Change-%
 
2007
 
2006
 
Change
 
Change-%
 
2007
 
2006
 
Change
 
Interest-earning assets:
                                             
Loans:
                                             
Commercial
 
$
343,431
 
$
339,169
 
$
4,262
   
1.26
%   
$
13,601
 
$
12,619
 
$
982
   
7.78
%
 
7.99
%
 
7.50
%
 
0.49
%
Real estate
   
579,195
   
562,376
   
16,819
   
2.99
%
 
21,072
   
19,576
   
1,496
   
7.64
%
 
7.34
%
 
7.02
%
 
0.32
%
Consumer and other
   
14,496
   
14,047
   
449
   
3.20
%
 
536
   
471
   
65
   
13.80
%
 
7.46
%
 
6.77
%
 
0.69
%
Total loans
   
937,122
   
915,592
   
21,530
   
2.35
%
 
35,209
   
32,666
   
2,543
   
7.78
%
 
7.58
%
 
7.19
%
 
0.39
%
                                                                     
Investment securities:
                                                                   
Taxable
   
169,945
   
173,620
   
(3,675
)
 
-2.12
%
 
3,956
   
3,921
   
35
   
0.89
%
 
4.66
%
 
4.52
%
 
0.14
%
Tax-exempt
   
89,102
   
99,640
   
(10,538
)
 
-10.58
%
 
2,331
   
2,597
   
(266
)
 
-10.24
%
 
5.23
%
 
5.21
%
 
0.02
%
Total investment securities
   
259,047
   
273,260
   
(14,213
)
 
-5.20
%
 
6,287
   
6,518
   
(231
)
 
-3.54
%
 
4.85
%
 
4.77
%
 
0.08
%
                                                                     
Federal funds sold and
                                                                   
short-term investments
   
21,439
   
14,248
   
7,191
   
50.47
%
 
560
   
345
   
215
   
62.32
%
 
5.26
%
 
4.88
%
 
0.38
%
Total interest-earning assets
 
$
1,217,608
 
$
1,203,100
 
$
14,508
   
1.21
%
 
42,056
   
39,529
   
2,527
   
6.39
%
 
6.96
%
 
6.63
%
 
0.33
%
                                                                     
Interest-bearing liabilities:
                                                                   
Deposits:
                                                                   
Checking with interest, savings
                                                                   
and money markets
 
$
297,762
 
$
314,021
 
$
(16,259
)
 
-5.18
%
 
4,333
   
3,768
   
565
   
14.99
%
 
2.93
%
 
2.42
%
 
0.51
%
Time deposits
   
432,846
   
496,187
   
(63,341
)
 
-12.77
%
 
10,922
   
10,989
   
(67
)
 
-0.61
%
 
5.09
%
 
4.47
%
 
0.62
%
Total deposits
   
730,608
   
810,208
   
(79,600
)
 
-9.82
%
 
15,255
   
14,757
   
498
   
3.37
%
 
4.21
%
 
3.67
%
 
0.54
%
Other borrowed funds
   
273,719
   
181,707
   
92,012
   
50.64
%
 
6,912
   
4,523
   
2,389
   
52.82
%
 
5.09
%
 
5.02
%
 
0.07
%
Total interest-bearing liabilities
 
$
1,004,327
 
$
991,915
 
$
12,412
   
1.25
%
 
22,167
   
19,280
   
2,887
   
14.97
%
 
4.45
%
 
3.92
%
 
0.53
%
                                                                     
Tax-equivalent net interest income
                         
$
19,889
 
$
20,249
 
$
(360
)
 
-1.78
%
                 
Net interest spread
                                                   
2.51
%
 
2.71
%
 
-0.20
%
Net interest margin
                                                   
3.29
%
 
3.39
%
 
-0.10
%
 
11


Fluctuations in net interest income can result from the combination of changes in the balances of asset and liability categories and changes in interest rates. Net interest margin is a measure of the net return on interest-earning assets and is computed by dividing annualized tax-equivalent net interest income by the average of total interest-earning assets for the period. The net interest margin for the second quarter of 2007 was 3.33 percent, which was 2 basis points lower than the same quarter last year and 9 basis points higher than the first quarter of 2007. The increase from the prior quarter was primarily due to an increase in the yield on loans. The yield on loans was impacted by the collection of a prepayment penalty and recognition of unamortized fees on early loan payoffs.

For the six months ended June 30, 2007, the net interest margin declined to 3.29 percent. This was a 10 basis point reduction compared to the six months ended June 30, 2006. The relatively flat yield curve, where short-term interest rates are not significantly lower than long-term rates, continued to negatively impact the net interest margin. The Company’s tax-equivalent net interest income for the six months ended June 30, 2007 declined $360 compared to the six months ended June 30, 2006.

Taxable-equivalent interest income and fees on loans increased $2.5 million in the first six months of 2007 compared to the same period in 2006, due to the combination of a higher volume of outstanding loans and increasing yields. Average loans were $21.5 million higher than the first six months of 2006 and the average yield on loans increased to 7.58 percent for the first six months of 2007, compared to 7.19 percent for the same period in 2006. The yield on the Company’s loan portfolio is affected by the mix of the portfolio, the effects of competition, the interest rate environment and the amount of non-accrual loans. The interest rate environment can influence the volume of new loan originations and the mix of variable rate versus fixed rate loans. Loan pricing in the Company’s market areas remains very competitive.

For the first six months of 2007, the average balance of investment securities was $14.2 million lower than in the first six months of 2006, while the yield has increased 8 basis points. There have been minimal purchases of investment securities during the first six months of 2007 as yields on short-term investments have approximated those of longer-term investment securities and are generally lower than the marginal cost of funds.

The average rate paid on deposits for the first six months of 2007 increased to 4.21 percent from 3.67 percent for the same period last year. This increase is primarily the result of an increase in market interest rates and the shift in funds from money market and savings accounts to a new market rate interest-bearing checking account and certificates of deposits. Clients have made these transfers to maximize their earnings. The reduction in time deposits in the first six months of 2007 compared to the same time period in 2006 was due to using fewer wholesale certificates of deposit as a source of funding loan growth.

The average balance of borrowings for the first six months of 2007 was $92.0 million higher than a year ago and the mix of borrowings has changed significantly since last year. Overnight borrowings in the form of Federal funds purchased from correspondent banks averaged $43.4 million more than the first six months of last year. Because these funds are short-term, the amount that is not needed for funding loans is invested overnight and earns only slightly more than the rate the Bank is paying. Average securities sold under agreements to repurchase increased $14.4 million compared to the prior year. Average long-term borrowings increased $32.7 million. Lower rates paid on those additional borrowings resulted in a 37 basis point decline in the rate compared to 2006.
 
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 six months ended June 30, 2007 and 2006, as well as common ratios related to the allowance for loan losses.
 
   
Three months ended June 30,
 
Six months ended June 30,
 
   
2007
 
2006
 
Change
 
2007
 
2006
 
Change
 
Balance at beginning of period
 
$
8,743
 
$
8,049
 
$
694
 
$
8,494
 
$
7,615
 
$
879
 
Charge-offs
   
(331
)
 
(66
)
 
(265
)
 
(486
)
 
(100
)
 
(386
)
Recoveries
   
17
   
7
   
10
   
121
   
25
   
96
 
Net charge-offs
   
(314
)
 
(59
)
 
(255
)
 
(365
)
 
(75
)
 
(290
)
Provision charged to operations
   
350
   
450
   
(100
)
 
650
   
900
   
(250
)
Balance at end of period
 
$
8,779
 
$
8,440
 
$
339
 
$
8,779
 
$
8,440
 
$
339
 
                                       
Average loans outstanding
 
$
946,586
 
$
937,310
       
$
937,122
 
$
915,592
       
                                       
Ratio of net charge-offs during the
                                     
period to average loans outstanding
   
0.03
%
 
0.01
%
       
0.04
%
 
0.01
%
     
Ratio of allowance for loan losses
                                     
to average loans outstanding
   
0.93
%
 
0.90
%
       
0.94
%
 
0.92
%
     
 
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.

Net charge-offs during the first six months of 2007 were $290 higher than in the same period in 2006. The majority of the charge-offs were for 1-4 family real estate and commercial loans. The net charge-off ratio for the six months ended June 30, 2007, was 0.04 percent compared to 0.01 percent for the six months ended June 30, 2006. While the level of net charge-offs increased over the prior year, this level of charge-offs is considered good when compared to the Bank’s peers which had net charge-offs averaging 0.11 percent for the first quarter of 2007 (latest information available). Significant efforts continue to be made to maximize recoveries.

The allowance for loan losses represented 1,380 percent of non-accrual loans and loans past due more than 90 days at June 30, 2007, compared to 1,307 percent at December 31, 2006.

The adequacy of the allowance for loan losses is evaluated quarterly by management and reviewed by the West Bank Board of Directors. This evaluation focuses on specific loan reviews, changes in the type and volume of the loan portfolio given the current and forecasted economic conditions, and historical loss experience. Any one of the following conditions may result in the review of a specific loan: concern about whether the customer’s cash flow or net worth is sufficient to repay the loan; delinquency status; criticism of the loan in a regulatory examination; the suspension of interest accrual; or other reasons including whether the loan has other special or unusual characteristics that suggest special monitoring is warranted.

While management uses available information to recognize losses on loans, further reduction in the carrying amounts of loans may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the Company to recognize additional losses based on their judgment about information available to them at the time of their examination. See also the discussion of non-performing assets later in this report.
 
13

 

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,
 
Noninterest income
 
2007
 
2006
 
Change
 
Change-%
 
Service charges on deposit accounts
 
$
1,211
 
$
1,117
 
$
94
   
8.4
%
Trust services
   
188
   
195
   
(7
)
 
-3.6
%
Investment advisory fees
   
2,043
   
2,112
   
(69
)
 
-3.3
%
Increase in cash value of bank-owned
                         
life insurance
   
219
   
213
   
6
   
2.8
%
Net realized losses from
                         
sales of securities
   
(13
)
 
(38
)
 
25
   
-65.8
%
Other:
                         
Debit card usage fees
   
87
   
58
   
29
   
50.0
%
Check printing fees
   
31
   
36
   
(5
)
 
-13.9
%
Visa/MasterCard income
   
53
   
40
   
13
   
32.5
%
Gain on sale of commercial loans
   
-
   
34
   
(34
)
 
-100.0
%
Gain on sale of residential mortgages
   
25
   
17
   
8
   
47.1
%
All other
   
191
   
176
   
15
   
8.5
%
Total other
   
387
   
361
   
26
   
7.2
%
Total noninterest income
 
$
4,035
 
$
3,960
 
$
75
   
1.9
%

   
Six months ended June 30,
 
Noninterest income
 
2007
 
2006
 
Change
 
Change-%
 
Service charges on deposit accounts
 
$
2,339
 
$
2,121
 
$
218
   
10.3
%
Trust services
   
369
   
363
   
6
   
1.7
%
Investment advisory fees
   
4,002
   
4,361
   
(359
)
 
-8.2
%
Increase in cash value of bank-owned
                         
life insurance
   
435
   
422
   
13
   
3.1
%
Net realized losses from
                         
sales of securities
   
(9
)
 
(144
)
 
135
   
-93.8
%
Other:
                         
Debit card usage fees
   
169
   
112
   
57
   
50.9
%
Check printing fees
   
67
   
83
   
(16
)
 
-19.3
%
Visa/MasterCard income
   
107
   
75
   
32
   
42.7
%
Gain on sale of commercial loans
   
-
   
34
   
(34
)
 
-100.0
%
Gain on sale of residential mortgages
   
38
   
29
   
9
   
31.0
%
All other
   
388
   
385
   
3
   
0.8
%
Total other
   
769
   
718
   
51
   
7.1
%
Total noninterest income
 
$
7,905
 
$
7,841
 
$
64
   
0.8
%
 
Service charges on deposit accounts increased primarily because of implementing pricing changes for return check charges in the third quarter of 2006. Offsetting this increase were slight declines in service charges collected on commercial and consumer accounts.

Investment advisory fees are fees earned by WB Capital. The decline in investment advisory fees in 2007 compared to 2006 was due to a reduction in certain fee schedules and a lower level of assets under management in certain categories.

14

 

The Company recognized losses from the sale of investment securities in the first half of both years. In the first half of 2007, the holding company investment portfolio was liquidated and proceeds used to pay down long-term debt. During 2006, lower yielding investments were sold with the proceeds being reinvested at higher yields. Debit card usage fees continued to increase as a result of higher usage of this convenient payment method. Meanwhile, check printing income declined as customers continue to increase utilization of all forms of electronic payments, thus reducing the frequency of ordering checks. Revenue from Visa/MasterCard increased as a result of the fees earned on an additional volume of cards issued, along with a rate increase in July 2006 on lower performing merchants. Gains from the sale of commercial loans result from the occasional sale of the guaranteed portion of commercial loans. No sales have occurred in 2007. While the volume of originations of residential mortgages sold into the secondary market remained about the same as in 2006, the average income per loan increased approximately 15 basis points in the first half of 2007 compared to the prior year.

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,
 
Noninterest expense:
 
2007
 
2006
 
Change
 
Change-%
 
Salaries and employee benefits
 
$
3,355
 
$
3,492
 
$
(137
)
 
-3.9
%
Occupancy
   
897
   
866
   
31
   
3.6
%
Data processing
   
473
   
506
   
(33
)
 
-6.5
%
Other:
                         
Insurance
   
66
   
57
   
9
   
15.8
%
Supplies
   
126
   
125
   
1
   
0.8
%
Marketing
   
154
   
108
   
46
   
42.6
%
Business development
   
92
   
81
   
11
   
13.6
%
Professional fees
   
152
   
175
   
(23
)
 
-13.1
%
Other real estate owned expense
   
(263
)
 
-
   
(263
)
 
n/a
 
Intangible amortization
   
214
   
221
   
(7
)
 
-3.2
%
All other
   
642
   
551
   
91
   
16.5
%
Total other
   
1,183
   
1,318
   
(135
)
 
-10.2
%
Total noninterest expense
 
$
5,908
 
$
6,182
 
$
(274
)
 
-4.4
%

   
Six months ended June 30,
 
Noninterest expense:
 
2007
 
2006
 
Change
 
Change-%
 
Salaries and employee benefits
 
$
6,971
 
$
7,167
 
$
(196
)
 
-2.7
%
Occupancy
   
1,831
   
1,722
   
109
   
6.3
%
Data processing
   
940
   
985
   
(45
)
 
-4.6
%
Other:
                         
Insurance
   
139
   
121
   
18
   
14.9
%
Supplies
   
151
   
141
   
10
   
7.1
%
Marketing
   
258
   
206
   
52
   
25.2
%
Business development
   
198
   
161
   
37
   
23.0
%
Professional fees
   
357
   
339
   
18
   
5.3
%
Other real estate owned expense
   
(244
)
 
(7
)
 
(237
)
 
3385.7
%
Intangible amortization
   
428
   
442
   
(14
)
 
-3.2
%
All other
   
1,333
   
1,217
   
116
   
9.5
%
Total other
   
2,620
   
2,620
   
-
   
0.0
%
Total noninterest expense
 
$
12,362
 
$
12,494
 
$
(132
)
 
-1.1
%

15

 

The decline in salaries and benefits resulted from a reduction in full-time equivalent employees due to certain positions that were eliminated and other positions experiencing turnover, and a reduction in certain benefit expenses.

Occupancy expenses were higher in 2007 due to the relocation of one of the Des Moines metropolitan branches to a rented facility in a higher traffic location during the third quarter of 2006 and additional space rented for certain operational departments of the Bank. The Company continues to market excess space available in the facility in which WB Capital is located in West Des Moines. There were savings realized by relocating the Cedar Rapids office of WB Capital to the Coralville banking office during the second quarter of 2007.

Marketing and business development related costs increased due to continued efforts to increase and expand current and new customer relationships. Other real estate owned expense has declined as a result of selling several other real estate properties at gains. One sale of farmland in eastern Iowa resulted in a gain of $250 in the second quarter of 2007.

Income Tax Expense

The Company incurred income tax expense of $4.4 million for the six months ended June 30, 2007 and 2006. The effective income tax rates as a percent of income before taxes for the three and six months ended June 30, 2007 and 2006, were approximately 32 percent for each period.

The Company adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes, effective January 1, 2007. The Interpretation provides clarification on accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement of Financial Accounting Standard (SFAS) No. 109, Accounting for Income Taxes. The Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As a result of the Company’s evaluation of the implementation of FIN 48, no significant income tax uncertainties were identified. Therefore, the Company recognized no adjustment for unrecognized income tax benefits during the six months ended June 30, 2007.
 
FINANCIAL CONDITION

Total assets as of June 30, 2007, were approximately $1.3 billion, which was a 2.1 percent increase compared to December 31, 2006. The increase is primarily due to increased loan volumes.

Investment Securities

Investment securities available for sale declined approximately $11.1 million from December 31, 2006, to $245.6 million. During the six months ended June 30, 2007, $4.5 million of securities were sold in an effort to shorten the duration of the portfolio. On a quarterly basis, the investment securities portfolio is reviewed for other-than-temporary impairment. As of June 30, 2007, existing unrealized losses are considered to be temporary in nature due to market interest rate fluctuations and accordingly, no impairment adjustment was recorded.

Loans and Non-performing Assets

Loans outstanding increased approximately $32.8 million from December 31, 2006, to June 30, 2007. The increase was primarily attributable to growth in commercial and commercial real estate loans. West Bank expects modest loan growth in the third quarter of 2007.

16

 

The following table sets forth the amount of non-performing loans and assets held by the Company and common ratio measurements of those items.
 
   
June 30, 2007
 
December 31, 2006
 
Change
 
Non-accrual loans
 
$
605
 
$
495
 
$
110
 
Loans past due 90 days and still
                   
accruing interest
   
31
   
155
   
(124
)
Total non-performing loans
   
636
   
650
   
(14
)
Other real estate owned
   
154
   
2,002
   
(1,848
)
Total non-performing assets
 
$
790
 
$
2,652
 
$
(1,862
)
                     
Non-performing loans to total loans
   
0.07
%
 
0.07
%
 
0.00
%
Non-performing assets to total loans
   
0.08
%
 
0.29
%
 
-0.21
%
Non-performing assets to total assets
   
0.06
%
 
0.21
%
 
-0.15
%
 
Total non-performing assets have declined 70 percent since the end of 2006. The balance of loans in non-accrual status remained fairly steady and was $605 at June 30, 2007, and consisted of loans to eight different borrowers. Other real estate owned declined significantly since December 31, 2006, as a result of selling farmland in the second quarter of 2007 which had a carrying value of $1.6 million.

Reference is also made to the information and discussion earlier in this report under the heading of “Provision for Loan Losses and the Related Allowance for Loan Losses.”

Deposits

Total deposits as of June 30, 2007, were $858 million compared with $925 million as of December 31, 2006, a decline of 7.3 percent. The savings category of deposits which includes money market accounts, which are liquid accounts and therefore pay relatively lower interest rates, declined approximately $17.9 million. A portion of those funds moved into the time certificates of deposit category as customers attempted to increase interest earned on those funds. Other time deposits declined a net of $9.5 million primarily due to a reduction in the level of brokered certificates of deposit. Time deposits in excess of $100,000 declined $35.7 million as West Bank reduced its reliance on public unit deposit funding and increased its borrowings as described below.

Borrowings

The balance of Federal funds purchased and securities sold under agreements to repurchase was $144.1 million at June 30, 2007, up from $109.3 million at December 31, 2006. The increase was in Federal funds purchased, which includes funds sold to West Bank by approximately 25 banks throughout Iowa as part of the correspondent bank services provided by West Bank. The balance of Federal funds purchased from correspondent banks will fluctuate depending upon the loan demand and investment strategy of those banks. The amount of funds sold to West Bank by these banks is at a higher level than has been the case at this time of year in prior years. West Bank also purchases federal funds from regional and national correspondent banks as necessary for short-term liquidity needs. The balance of other short-term borrowings consisted of a $40 million advance from the Federal Home Loan Bank of Des Moines (“FHLB”) and Treasury, Tax and Loan option notes. Long-term borrowings increased $25.1 million as the result of a January 2007 10-year FHLB advance of $30 million, which has a rate of 4.32 percent. The advance is callable after three years.
 
17

 

Liquidity and Capital Resources

The objective of liquidity management is to ensure the availability of sufficient cash flows to meet all corporate financial commitments and to capitalize on opportunities for profitable business expansion. The Company’s principal sources of funds are deposits, which include demand, money market, savings and certificates of deposit. Other sources include principal repayments on loans, proceeds from the maturity and sale of investment securities, Federal funds purchased, repurchase agreements, advances from the FHLB, and funds provided by operations. Liquidity management is conducted on both a daily and a long-term basis. Investments in liquid assets are adjusted based on expected loan demand, projected loan maturities and payments, expected deposit flows, and the objectives set by the Company’s asset-liability management policy. The Company had liquid assets (cash and cash equivalents) of $36,884 million as of June 30, 2007, compared with $35,678 as of December 31, 2006. 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 $16.7 million at June 30, 2007, and has a $2.5 million unsecured line of credit through a large regional correspondent bank. In addition, West Bank has $95 million available through unsecured federal funds lines of credit with correspondent banks. West Bank had borrowed $30 million on those lines of credit at June 30, 2007. The combination of high levels of potentially liquid assets, cash flows from operations and additional borrowing capacity provided strong liquidity for the Company at June 30, 2007.

The Company’s total stockholders’ equity increased to $116.4 million at June 30, 2007, from $113.8 million at December 31, 2006. Total equity increased due to earnings less dividend payments equal to approximately 59 percent of year-to-date earnings, offset by an increase in accumulated other comprehensive loss due to declines in market values of investment securities held for sale. Total stockholders' equity was 8.99 and 8.97 percent of total assets as of June 30, 2007, and December 31, 2006, respectively. No material capital expenditures or material changes in the capital resource mix are anticipated at this time.

Quantitative measures established by regulation to ensure capital adequacy require the Company and West Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets. Management believes the capital levels of the Company and West Bank met all capital adequacy requirements to which they were subject at June 30, 2007.
 
   
Regulatory requirements to be:
 
Actual Regulatory Capital Ratios as of:
 
   
Adequately Capitalized
 
Well - Capitalized
 
June 30, 2007
 
December 31, 2006
 
Total risk-based capital
                 
as % of risk-weighted assets
                 
Consolidated
   
8.0
%
 
n/a
   
11.3
%
 
11.2
%
West Bank
   
8.0
%
 
10.0
%
 
10.9
%
 
11.8
%
Tier 1 capital as % of risk-weighted assets:
                         
Consolidated
   
4.0
%
 
n/a
   
10.5
%
 
10.4
%
West Bank
   
4.0
%
 
6.0
%
 
9.1
%
 
9.0
%
Tier 1 capital as % average assets
                         
Consolidated
   
4.0
%
 
n/a
   
8.6
%
 
8.5
%
West Bank
   
4.0
%
 
5.0
%
 
7.5
%
 
7.3
%
 
On April 18, 2007, the Company’s Board of Directors authorized $5 million to be used during the following 12 months for the buy-back of Company common stock. No repurchases took place during the six months ended June 30, 2007, under the current or previous authorizations.

18

 

Market Risk Management

Market risk is the risk of earnings volatility that results from adverse changes in interest rates and market prices. The Company's market risk is primarily interest rate risk arising from its core banking activities of lending and deposit taking. Interest rate risk is the risk that changes in market interest rates may adversely affect the Company's net interest income. Management continually develops and implements strategies to mitigate this risk. The analysis of the Company’s interest rate risk was presented in the Form 10-K filed with the Securities and Exchange Commission on March 9, 2007, and is incorporated herein by reference. The Company has not experienced any material changes to its market risk position since December 31, 2006. Management does not believe the Company's primary market risk exposures and how those exposures were managed in the first six months of 2007 changed relative to 2006.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

The information appearing above under the heading “Market Risk Management” is incorporated herein by reference.

Item 4. Controls and Procedures

a. Evaluation of disclosure controls and procedures. As of the end of the period covered by this report, an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 240.13a-15(f)) as of the end of the period covered by this report was performed under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s current disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

b. Changes in internal controls over financial reporting. There were no changes in the Company's internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
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 or its subsidiaries which, if determined adversely, would have a material adverse effect on the business or financial position of the Company or its subsidiaries.

Item 1A. Risk Factors

Management of the Company does not believe there have been any material changes in the risk factors that were disclosed in the Form 10-K filed with the Securities and Exchange Commission on March 9, 2007.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the first six months of 2007, there were no purchases of the Company’s common shares under the $5 million stock buy-back plan approved by the Board of Directors on April 18, 2007, or the previous stock buy-back plan approved in April 2006.

19

 

Item 4. Submission of Matters to a Vote of Security Holders

The Company’s annual meeting of shareholders was held on April 19, 2007. The record date for determination of shareholders entitled to vote at the meeting was February 15, 2007. There were 17,536,682 shares outstanding as of that date, each such share being entitled to one vote. At the shareholders’ meeting the holders of 16,477,774 shares or approximately 94 percent of the outstanding shares, were represented in person or by proxy, which constituted a quorum. The following proposal was voted on at the meeting:

Proposal I - Election of Directors

Ten directors were elected to serve for a one year term or until their successors shall have been elected and qualified. At the shareholders’ meeting, the individuals received the number of votes set opposite their names:
 
       
Vote
 
   
For
 
Withheld
 
Frank W. Berlin
   
16,397,538
   
80,236
 
Wendy L. Carlson
   
16,397,213
   
80,561
 
Steven G. Chapman
   
16,394,870
   
82,904
 
Michael A. Coppola
   
15,350,466
   
1,127,308
 
Orville E. Crowley
   
16,397,538
   
80,236
 
George D. Milligan
   
16,367,747
   
110,027
 
Robert G. Pulver
   
16,393,548
   
84,226
 
Thomas E. Stanberry
   
16,398,325
   
79,449
 
Jack G. Wahlig
   
16,352,304
   
125,470
 
Connie Wimer
   
16,343,371
   
134,403
 

20

 

Item 6. Exhibits

The following exhibits are filed as part of this report:
 
   Exhibits  
     
 
3.1
Restated Articles of Incorporation of the Company(1)
     
 
3.2
By-laws of the Company(1)
     
 
10.1
Lease for Main Bank Facility(1)
     
 
10.2
Supplemental Agreement to Lease for Main Bank Facility(1)
     
 
10.3
Short-term Lease related to Main Bank Facility(1)
     
 
10.4
Assignment(1)
     
 
10.5
Lease Modification Agreement No. 1 for Main Bank Facility(1)
     
 
10.6
Memorandum of Real Estate Contract(1)
     
 
10.7
Affidavit(1)
     
 
10.8
Addendum to Lease for Main Bank Facility(1)
     
 
10.9
Data Processing Contract(1)
     
 
10.10
Employment Contract(1)
     
 
10.11
Intentionally omitted
     
 
10.12
Data Processing Contract Amendment(2)
     
 
10.13
Intentionally omitted
     
 
10.14
Intentionally omitted
     
 
10.15
The Employee Savings and Stock Ownership Plan, as amended(3)
     
 
10.16
Amendment to Lease Agreement(4)
     
 
10.17
Employment Agreement with Scott Eltjes(4)
     
 
10.18
Consulting Agreement with David L. Miller(6)
     
 
10.19
West Bancorporation, Inc. Restricted Stock Compensation Plan(5)
     
 
10.20
Employment Agreement between Investors Management Group Ltd. and Jeff Lorenzen(7)
     
 
10.21
Assignment and Assumption of Lease and Consent to Assignment(8)
     
 
10.22
2007 Amendment to Lease Agreement(9)
     
 
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
     
 
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
 
32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 
(1)
Incorporated herein by reference to the related exhibit filed with the Form 10 on March 11, 2002.
     
 
(2)
Incorporated herein by reference to the related exhibit filed with the Form 10-K on March 26, 2003.
     
 
(3)
Incorporated herein by reference to the related exhibit filed with the Form S-8 on October 29, 2004.
     
 
(4)
Incorporated herein by reference to the related exhibit filed with the Form 10-K on March 3, 2005.
     
 
(5)
Incorporated herein by reference to the definitive proxy statement 14A filed on March 10, 2005.
     
 
(6)
Incorporated herein by reference to the related exhibit filed with the Form 10-Q on May 6, 2005.
     
 
(7)
Incorporated herein by reference to the related exhibit filed with the Form 8-K on February 22, 2006.
     
 
Incorporated herein by reference to the related exhibit filed with the Form 10-K on March 8, 2006.
     
 
(9)
Incorporated herein by reference to the related exhibit filed with the Form 10-Q on May 4, 2007.
 
21

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

West Bancorporation, Inc.
   
(Registrant)
   
 
     
August 3, 2007 By:   /s/ Thomas E. Stanberry
Dated
Thomas E. Stanberry
 
Chairman, President and Chief Executive Officer
 
     
August 3, 2007 By:   /s/ Douglas R. Gulling
Dated
Douglas R. Gulling
 
Executive Vice President and Chief Financial Officer
(Principal Accounting Officer)
 
22

 
 
EXHIBIT INDEX

The following exhibits are filed herewith:
 
Exhibit No.
 
Description
31.1
 
Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002
     
31.2
 
Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002
     
 
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
32.2
 
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002