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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY
RULE 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-12
West Bancorporation, Inc.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
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pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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PERSONS WHO POTENTIALLY ARE TO RESPOND TO THE COLLECTION OF INFORMATION
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SEC 1913 (02-02)
WEST BANCORPORATION, INC.
NOTICE OF ANNUAL MEETING
TO BE HELD APRIL 20, 2006
To the Shareholders of West Bancorporation, Inc.:
The Annual Meeting of Shareholders of West Bancorporation, Inc. (the "Company")
will be held in the Conference Center at the headquarters of the Company,
located at 1601 22nd Street, West Des Moines, Iowa, on Thursday, April 20, 2006,
at 4:00 p.m., to consider and vote on:
1. The election of nine Directors to serve on the Company's Board
of Directors until the next Annual Meeting and until their
successors are elected and have qualified; and
2. Such other business as may properly come before the Annual
Meeting or any adjournment thereof.
The Company's Board of Directors has fixed the close of business on February 16,
2006, as the record date for determination of Shareholders entitled to notice of
and to vote at the Annual Meeting and at any and all adjournments thereof. A
list of eligible Shareholders will be maintained at the offices of the Company,
at 1601 22nd Street, West Des Moines, Iowa, during the ten-day period preceding
the Annual Meeting.
WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING, PLEASE MARK, SIGN, DATE,
AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED ENVELOPE, OR YOU MAY VOTE
YOUR PROXY ELECTRONICALLY VIA THE INTERNET AS INSTRUCTED ON THE CARD. A PROMPT
RESPONSE WOULD BE APPRECIATED.
WE HOPE YOU WILL ATTEND THE ANNUAL MEETING IN PERSON AND LOOK FORWARD TO SEEING
YOU THERE.
For the Board of Directors
/s/ Thomas E. Stanberry
--------------------------
Thomas E. Stanberry
Chairman, President and Chief Executive Officer
March 10, 2006
WEST BANCORPORATION, INC.
1601 22nd Street
West Des Moines, IA 50266
PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 20, 2006
This proxy statement is furnished in connection with the solicitation by the
Board of Directors of West Bancorporation, Inc. (the "Board" and the "Company"),
of proxies to be used at the Annual Meeting of Shareholders to be held in the
conference center at the headquarters of the Company on April 20, 2006, at 4:00
o'clock p.m., local time, at 1601 22nd Street, West Des Moines, Iowa, and at any
and all adjournments thereof (the "Annual Meeting"). A copy of the Company's
2005 summary annual report to Shareholders and appendix to the proxy statement,
including financial statements, accompanies this proxy statement. This proxy
statement, form of proxy, and other accompanying materials are first being
mailed to Shareholders on or about March 10, 2006.
Only Shareholders of record at the close of business on February 16, 2006, are
entitled to notice of and to vote at the Annual Meeting. There were 16,701,843
shares of the Company's Common Stock outstanding at the close of business on
that date, all of which will be entitled to vote at the Annual Meeting. The
presence, in person or by proxy, of the holders of a majority of the outstanding
shares is necessary to constitute a quorum for the transaction of business at
the Annual Meeting. Holders of Common Stock are entitled to one vote per share
standing in their names on the record date on all matters to properly come
before the Annual Meeting. If a shareholder abstains from voting on any matter,
or if shares are held by a broker who has indicated that it does not have
discretionary authority to vote on a particular matter, those shares will be
considered to be present for the purpose of determining whether a quorum is
present, but will not be counted as votes cast with respect to any matter to
come before the Annual Meeting and will not affect the outcome of any matter.
The Company is not aware of any matters to be presented at the Annual Meeting
other than the election of the nine nominees described in this proxy statement.
Election of any nominee for director will require the affirmative vote of a
majority of those shares voting at the Annual Meeting in person or by proxy. If
any matters not described in this proxy statement are properly presented at the
Annual Meeting, the proxies will use their personal judgment to determine how to
vote your shares. If the Annual Meeting is adjourned, the proxies can vote your
common shares on the new meeting date as well, unless you have revoked your
proxy instructions.
If you hold shares through a broker, follow the voting instructions provided by
your broker. If you want to vote in person, a legal proxy must be obtained from
your broker and brought to the Annual Meeting. If you do not submit voting
instructions to your broker, generally your broker is permitted to vote your
shares in its discretion.
Holders of Common Stock through the Company's Employee Savings and Stock
Ownership Plan ("the Plan") can direct the Trustee of the Plan how to vote the
number of shares held in the Plan for the benefit of the Holder as of the record
date for any matter put to the vote of the Shareholders. If a Plan participant
does not provide directions to the Trustee on how to vote, then the Trustee
shall vote those shares in the same proportion as it votes the shares for which
it received proper direction to vote.
A form of proxy is enclosed for use at the Annual Meeting. Before the Annual
Meeting, you can appoint a proxy to vote your shares of Common Stock by
completing and signing the enclosed proxy card and mailing it in time to be
received before the Annual Meeting, or by using the internet
(http://www.illinoisstocktransfer.com). The electronic proxy appointment
procedures are designed to confirm your identity and to allow you to give your
proxy voting instructions. If you wish to vote via the internet, please follow
the instructions on the enclosed proxy card.
If the accompanying proxy is properly signed and returned and is not withdrawn
or revoked, the shares represented thereby will be voted in accordance with the
instructions indicated thereon. If the manner of voting such shares is not
indicated on the proxy, the shares will be voted FOR the election of the
nominees for directors named herein.
If the enclosed proxy is executed and returned, it may nevertheless be revoked
at any time prior to the Annual Meeting. A person may revoke a proxy
electronically by entering a new vote via the internet or the enclosed proxy may
be revoked by filing with the Secretary of the Company at the Company's
principal office at 1601 22nd Street, West Des Moines, Iowa 50266, Attn:
Secretary, either a written revocation of the proxy or a duly executed proxy
bearing a later date. A Shareholder may also withdraw a proxy by attending the
Annual Meeting and voting in person. Attendance at the Annual Meeting without
voting in person will not serve as the revocation of a proxy.
1
The Company will bear the cost of solicitation of proxies. In addition to the
use of the mails, proxies may be solicited by officers, directors and regular
employees of the Company, without extra compensation, by telephone, e-mail,
facsimile or personal contact. It will greatly assist the Company in limiting
expense in connection with the Annual Meeting if any Shareholder who does not
expect to attend the Annual Meeting in person will return a signed proxy
promptly, or vote via the internet.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND EXECUTIVE OFFICERS
The following table sets forth the shares of Common Stock beneficially owned as
of February 16, 2006, by each director, each executive officer listed in the
Summary Compensation Table, and by all directors and executive officers of the
Company (including the named executive officers) as a group.
Shares Beneficially Percent of Total
Name Owned (1) (2) Shares Outstanding
-------------------------- ------------------ --------------------
Frank W. Berlin 44,625 *
Steven G. Chapman 15,750 *
Michael A. Coppola 24,846 *
Orville E. Crowley (3) 126,913 *
George D. Milligan - *
Robert G. Pulver (4) 69,379 *
Thomas E. Stanberry (5) 12,182 *
Jack G. Wahlig - *
Connie Wimer 29,190 *
Joyce A. Chapman 63,811 *
Scott D. Eltjes 2,746 *
Douglas R. Gulling 4,171 *
Sharen K. Surber 30,437 *
Brad L. Winterbottom 8,181 *
Executive officers and directors
as a group (15 persons) 433,252 2.59%
* Indicates less than 1% ownership of outstanding shares.
(1) Shares "beneficially owned" include shares owned by or for, among others,
the spouse and/or minor children of the named individual and any other
relative who has the same home address as such individual, as well as
other shares with respect to which the named individual has or shares
voting or investment power. Beneficial ownership may be disclaimed as to
certain of the shares.
(2) Except as otherwise indicated in the following notes, each named
individual owns his or her shares directly, or indirectly through a
self-directed IRA or the Company's profit sharing plan, and has sole
investment and voting power with respect to such shares.
(3) Mr. Crowley disclaims any beneficial ownership of 283,500 shares held in
his spouse's name.
(4) Mr. Pulver disclaims any beneficial ownership of
6,300 shares held in his spouse's name.
(5) Mr. Stanberry disclaims any beneficial ownership of 472 shares held in his
spouse's name.
2
OTHER BENEFICIAL OWNERS
The following table sets forth certain information on each person who is known
to the Company to be the beneficial owner as of February 16, 2006, of more than
five percent of the Common Stock.
Shares Beneficially Percent of Total
Name and Address Owned Shares Outstanding
---------------- ------------------- ------------------
Columbia Wanger Asset Management, L.P. 928,600 5.56%
227 West Monroe Street, Suite 3000
Chicago, Illinois 60606
The Jay Newlin Trust 992,336 5.94%
6165 NW 86th St., #114
Johnston, IA 50131
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires that the Company's
directors and executive officers and persons who own more than 10 percent of the
Company's Common Stock file initial reports of ownership and reports of changes
of ownership with the SEC and NASDAQ. Reporting persons are required by the SEC
regulations to furnish the Company with copies of all Section 16(a) forms they
file. The Company has not received any Section 16(a) form indicating that any
one person owns more than 10 percent of the Company's stock. The Company does
not know of any one Shareholder who owns more than 10 percent of the Company's
stock. Based solely on its review of the copies of Section 16(a) forms received
from its directors and executive officers or written representations that no
other reports were required, the Company believes that all Section 16(a) reports
applicable to its directors and officers during 2005 were filed.
PROPOSAL 1
ELECTION OF DIRECTORS
The Board currently consists of nine members. The term for the persons elected
as directors is until the next Annual Meeting of Shareholders and until their
successors are duly elected and qualified or until their earlier resignation,
removal from office, death, or incapacity.
The By-laws of the Company provide that the number of directors of the Company
shall not be less than five and not greater than 15. The Board has set the
number of directors for 2006 at nine. The Board has decided that nine directors
are sufficient to conduct the business of the Company. Proxies cannot be voted
for a greater number of persons than the number of nominees named herein.
The Board recommends a vote FOR the nominees listed in the table on the next
page.
Proxies in the accompanying form will be voted FOR the election of these
individuals, unless contrary instructions are given thereon. If any nominee or
nominees shall become unavailable for election, it is intended that the proxies
will be voted for the election of the substitute nominees as the Board may
propose. Any Shareholder has the option to withhold authority to vote for all
nominees for directors, or to withhold authority to vote for individual nominees
for directors. The effect on the election of directors of casting votes against
nominees or of withholding authority to vote for nominees is that the
Shareholder is considered present at the Annual Meeting and considered for
meeting quorum requirements, but the vote is not a vote in favor of the nominee
for purposes of determining whether the nominee has received the favorable vote
of a majority of shares present at the Annual Meeting needed for the election.
Information concerning the nominees for election, including their age, year
first elected a director, and business experience of each during the previous
five years as of February 16, 2006, is set forth in the following table. Each of
the nominees is currently serving as a director of the Company and all nominees,
except Mr. Crowley, also serve as a director of West Bank (the "Bank"). Of the
nominees, only Mr. Stanberry is currently serving as a director of WB Capital
Management Inc. and Investors Management Group, Ltd., subsidiaries of the
Company.
3
NOMINEES
Has Served
Name as a Director Position with Company and its
(Age) Since Subsidiaries and/or Principal Occupation
------------------- ------------- --------------------------------------------
Frank W. Berlin 1995 President, Frank W. Berlin & Associates,
(Age 60) West Des Moines, Iowa
Steven G. Chapman 1994 Chairman, President and Chief Executive
(Age 54) Officer, ITAGroup, Inc., West Des Moines,
Iowa
Michael A. Coppola 1996 President, Coppola Enterprises, Inc.,
(Age 49) Des Moines, Iowa
Orville E. Crowley 1984 President and Chief Operating Officer,
(Age 79) Linden Lane Farms Company, Cumming, Iowa
George D. Milligan 2005 President, The Graham Group, Inc., Des
(Age 49) Moines, Iowa
Robert G. Pulver 1984 President and CEO,
(Age 58) All State Industries, Inc., West Des Moines,
Iowa
Thomas E. Stanberry 2003 Chairman, President and Chief Executive
(Age 51) Officer of the Company
Chairman and Chief Executive Officer of West
Bank
Chairman of WB Capital Management Inc.
Chairman of Investors Management Group, Ltd.
Jack G. Wahlig 2001 President, Integrus Financial, L.C.,
(Age 73) West Des Moines, Iowa
Connie Wimer 1985 Owner/Publisher, Business Publications
(Age 73) Corporation, Des Moines, Iowa
In addition to the positions listed above, the nominees were employed in the
following capacities during the past five years. Prior to 2003, Mr. Stanberry
served in a variety of capacities with U.S. Bancorp Piper Jaffray, most recently
as Managing Director. Ms. Wimer served as President of Iowa Title Company until
her retirement in November 2001.
With the exception of George D. Milligan, who is a director of United Fire &
Casualty Company, none of the other above nominees hold a directorship in any
other company with a class of securities registered pursuant to Section 12 or
subject to Section 15(d) of the Securities Exchange Act or registered as an
investment company under the Investment Company Act of 1940.
4
BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
During 2005, and until the Annual Meeting on April 20, 2006, the Board was and
will be comprised of nine (9) members. Pursuant to NASD Rule 4200(a)(15), the
Board has made an affirmative determination that the following members of the
Board and the nominees are "independent" within the meaning of such rule: Frank
W. Berlin, Steven G. Chapman, Michael A. Coppola, Orville E. Crowley, George D.
Milligan, Robert G. Pulver, Jack G. Wahlig and Connie Wimer. The Board does not
consider the relationship between the Company and Michael A. Coppola (as further
described hereinafter under the heading "Loans to Directors and Officers and
Other Transactions with Directors and Officers") to be material to either party,
and therefore considers Mr. Coppola to be an independent director of the
Company. As such, a majority of the members of the Board and all of the members
of the Audit Committee are "independent" as so defined. Subsequent to the Annual
Meeting, the Board will be comprised of nine (9) members, the majority of which
shall be "independent." West Bank, WB Capital Management Inc. and Investors
Management Group, Ltd. are "controlled companies" within the meaning of NASD
Rule 4350(c)(5) and are therefore exempt from the requirements of NASD Rule
4350(c). The Board holds regular quarterly meetings and held four such meetings
during 2005. The Board also held four special meetings during 2005. The Board
requires that each member attend at least 75% of the scheduled meetings and,
during 2005, each of the Directors attended at least 75% of all meetings of the
Board and meetings of committees to which such Director was appointed, except
George D. Milligan. Mr. Milligan was absent from one regular meeting and one
special meeting of the Board. All of the members of the Board attended last
year's Annual Shareholders' Meeting.
The Board has established the Audit Committee, Compensation Committee, and
Nominating and Corporate Governance Committee as standing committees. Each of
the committees is governed by a written charter that is available for review in
the investor relations section of the Company's website www.westbankiowa.com.
The membership and primary responsibilities of the committees are described
below.
AUDIT COMMITTEE. The current members of the Audit Committee are Jack G. Wahlig,
as Chair, Michael A. Coppola and Connie Wimer, all of whom are independent
directors under criteria established by the SEC and NASDAQ. Based on the
attributes, education and experience requirements set forth in Section 407 of
the Sarbanes-Oxley Act of 2002 and associated regulations; the Board has
identified Jack G. Wahlig as the "Audit Committee Financial Expert", and has
determined him to be "independent." The Audit Committee recommends independent
auditors to the Board, reviews with the independent auditors the plan, scope and
results of the auditors' services, approves their fees and reviews the Company's
financial reporting and internal control functions. The Audit Committee also
performs the duties set forth in its written charter, which has been adopted by
the Board. The Audit Committee is also prepared to meet privately at any time at
the request of the independent registered public accountants or members of
management to review any special situation arising on any of the above subjects.
The Audit Committee regularly reviews its written charter and recommends to the
Board changes to the charter, when it deems necessary. Reference is also made to
the "Report of the Audit Committee" contained herein. The Audit Committee met
four times during 2005. None of the Audit Committee members serve on any other
audit committee of a listed company.
COMPENSATION COMMITTEE. The current members of the Compensation Committee are
Robert G. Pulver, as Chair, Frank W. Berlin, Michael A. Coppola and Orville E.
Crowley, all of whom are independent directors under criteria established by the
SEC and NASDAQ. The Compensation Committee reviews the Company's compensation
and benefit policies, including the individual salaries of the executive
officers, makes recommendations to the Board as to the salary of the Chief
Executive Officer, makes recommendations to the Board as to incentive
compensation plans and employment agreements between the Company, the Chief
Executive Officer and other executive officers of the Company or any of its
subsidiaries and makes recommendations to the Board with respect to compensation
of directors. The Compensation Committee also has responsibility for
administration of the Company's Restricted Stock Compensation Plan. It also
performs the duties set forth in its written charter, which has been adopted by
the Board. Reference is also made to the "Report of the Compensation Committee"
contained herein. The Compensation Committee met one time during 2005.
5
NOMINATING AND CORPORATE GOVERNANCE COMMITTEE. The current members of the
Nominating and Corporate Governance Committee are Steven G. Chapman, as Chair,
Frank W. Berlin, George D. Milligan and Robert G. Pulver, all of whom are
independent directors under criteria established by the SEC and NASDAQ. During
2005, the Nominating and Corporate Governance Committee met one time. This
Committee makes recommendations to the Board regarding the composition and
structure of the Board and nominations for elections of Directors and develops
policies and processes regarding principles of corporate governance in order to
ensure the Board's compliance with its fiduciary duties to the Company and its
Shareholders, including establishment and periodic review of a code of ethics
and conduct for all directors, officers, and employees of the Company and its
subsidiaries. This Committee recommended the director-nominees proposed in this
proxy statement for election by the Shareholders. The Committee reviews the
qualifications of, and recommends to the Board, candidates to fill Board
vacancies if any were to occur during the year. The Nominating and Corporate
Governance Committee also performs the duties set forth in its written charter,
which has been adopted by the Board. This Committee will consider, as part of
its nomination process, any director candidate recommended by a Shareholder who
follows the procedures shown under the heading "2007 Shareholder Proposals". The
Nominating and Corporate Governance Committee (the "Committee") follows the
processes below when identifying and evaluating nominees to the Board:
Procedures for identifying candidates:
a) Review current directors of the Company.
b) Review current directors of the Company's banking subsidiary, West
Bank.
c) Solicit input from existing directors and executive officers.
d) Review submissions from Shareholders, if any.
The following criteria will be considered when evaluating nominee
candidates:
a) Composition
The Board should be composed of:
1. Directors chosen with a view to bringing to the Board a
variety of experiences and backgrounds.
2. Directors who have high level managerial experience or are
accustomed to dealing with complex problems.
3. Directors who will represent the balanced, best interests of
the Shareholders as a whole rather than special interest
groups or constituencies, while also taking into consideration
the overall composition and needs of the Board.
A majority of the Board's directors shall be independent directors
under the criteria for independence required by the SEC and NASDAQ.
b) Selection Criteria
In considering possible candidates for election as an independent
outside director, the Committee and other directors should be guided
by the foregoing general guidelines and by the following criteria:
1. Each director should be an individual of the highest character
and integrity, have experience at or demonstrated
understanding of strategy/policy-setting and a reputation for
working constructively with others.
2. Each director should have sufficient time available to devote
to the affairs of the Company in order to carry out the
responsibilities of a director.
3. Each director should be free of any conflict of interest that
would interfere with the proper performance of the
responsibilities of a director.
4. The Chief Executive is expected to be a director. Other
members of senior management may be considered, but Board
membership is not necessary or a prerequisite to a higher
management position.
6
During 2005, directors of the Company received an annual retainer of $2,400 plus
$400 per meeting (board and committee) with the exception of the Audit
Committee, which received $500 per meeting. If the Audit Committee meeting is on
the same day as a regular board meeting, the fee paid directors attending the
Audit Committee and attending the board meeting would be a total of $500.
Directors of the Company who also served as directors of the Bank received fees
during 2005 of $350 for each Bank board meeting attended (ten meetings held)
plus an annual retainer of $2,400 per year, $400 for loan committee meetings
attended and $300 for other committee meetings attended. Directors who are also
officers of the Company do not receive director's fees.
Directors of the Company are eligible to receive grants of restricted stock
under the Restricted Stock Compensation Plan. No awards of such restricted stock
were made during 2005.
EXECUTIVE COMPENSATION
The following table sets forth all compensation earned or paid to the six most
highly compensated executive officers for services rendered in the fiscal years
ended December 31, 2005, 2004, and 2003. All compensation was paid by the Bank
for services rendered as executive officers, except Scott D. Eltjes, who was
paid by WB Capital Management Inc. No compensation was paid by the Company to
any of the named executive officers. Bonus amounts are shown in the year
accrued.
7
SUMMARY COMPENSATION TABLE
Name
and Current Base All Other
Positions Year Salary Bonus(1) Compensation (2)
-----------------------------------------------------------------------------------------------------
Thomas E. Stanberry, Chairman, President and 2005 $200,000 $304,000 $ 20,738
Chief Executive Officer of the Company 2004 200,000 224,346 15,690
Chairman and Chief Executive Officer of the Bank 2003 166,667 136,666 85,336
Chairman of WB Capital Management Inc.
Chairman of Investors Management Group, Ltd.
Brad L. Winterbottom, Vice President of the Company 2005 $180,000 $ 39,600 $ 18,477
Director and President of the Bank 2004 173,000 38,060 17,737
Director of WB Capital Management Inc. 2003 168,000 34,610 17,019
Director of Investors Management Group, Ltd.
Douglas R. Gulling, Executive Vice President and 2005 $161,000 $ 35,420 $ 16,742
Chief Financial Officer of the Company 2004 155,000 39,450 16,085
Director and Chief Financial Officer of the Bank 2003 125,000 27,500 12,708
Director and Treasurer of WB Capital Management Inc.
Director and Treasurer of Investors Management
Group, Ltd.
Scott D. Eltjes, Director and Head of WB Capital 2005 $150,000 $ 0 $ 4,710
Management Inc. 2004 150,000 0 15,690
Director of Investors Management Group, Ltd. 2003 38,077 0 3,808
Joyce A. Chapman, Vice President of the Company 2005 $111,000 $ 24,420 $ 12,282
Executive Vice President and Director of the Bank 2004 107,000 23,540 11,775
Director of WB Capital Management Inc. 2003 102,000 21,340 10,476
Director of Investors Management Group, Ltd.
Sharen K. Surber, Executive Vice President 2005 $111,000 $ 24,420 $ 12,282
of the Bank 2004 107,000 23,540 11,775
2003 104,000 21,780 10,687
(1) Includes a holiday bonus equal to two percent of annual salary, which is
paid to all officers and employees of the Bank.
(2) Consists entirely of contributions made by the Company on behalf of the
named executive officer to the Company's Employee Savings and Stock
Ownership Plan except for the following amounts for 2005, 2004, and 2003,
respectively, which represent premiums on group term life insurance
coverage: Stanberry - $690, $690, and $61; Winterbottom - $446, $437, and
$212; Gulling - $600, $585, and $207; Eltjes - $210, $189, and $18;
Chapman - $1,105 , $1,075, and $268; and Surber $1,105, $1,075, and $279;
and relocation expense reimbursement of $85,285 in 2003 for Stanberry.
8
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee reviews the Company's compensation and benefit
policies, including the salaries of the executive officers, and submits
recommendations to the Board.
Executive Officer Compensation. The Compensation Committee has established a
compensation program consisting of an annual base salary and the opportunity to
earn incentive compensation. The base salaries are intended to be competitive
and consistent with amounts paid to executives performing similar functions in
comparable companies. The incentive compensation is contingent upon the
attainment of targeted net income of the Company and personal performance
objectives established early in the year.
Chief Executive Officer Compensation. The 2005 compensation arrangement for Mr.
Stanberry consisted of a base salary of $200,000 plus a bonus. A $300,000 bonus
was accrued in 2005 and paid in 2006. The bonus was determined based upon the
attainment of certain financial performance goals as determined by the
Compensation Committee. The financial performance goals included return on
average assets and return on average equity as a multiple of the Company's peer
group and the attainment of budgeted net income. In 2006, Mr. Stanberry's
financial performance goals will be similar to those in 2005.
The Compensation Committee believes the Chief Executive Officer and other
executive officers of the Company and the Bank receive appropriate compensation
for their responsibilities and the resulting financial performance of the
Company, based upon the review of published comparative data.
The undersigned members of the Compensation Committee have submitted this
report.
Robert G. Pulver, Chair
Frank W. Berlin
Michael A. Coppola
Orville E. Crowley
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are set forth in the preceding
section. No members of the Committee have ever been officers or employees of the
Company or any of its subsidiaries, or have ever had any relationship otherwise
requiring disclosure hereunder.
EMPLOYMENT CONTRACTS.
The executive officers named in the Summary Compensation Table, with the
exception of Messrs. Stanberry and Eltjes, have entered into employment
contracts with the Bank. The provisions are similar for each executive, except
for salary which is shown in the table above, and call for compensation in the
event of a change in control of up to two year's salary, compensation in certain
cases of termination by the Company and by the executive, and an agreement by
the executive not to compete against the Company during the term of the
executive's employment and for a period of one year after termination of the
agreement, in the event of voluntary termination by the employee. The terms of
the individual contracts are automatically renewable for one year unless
modification not to renew is given by either party prior to September 30th of
each year.
9
EMPLOYMENT AGREEMENTS.
Effective March 1, 2003, Mr. Stanberry entered into an employment agreement with
the Company whereby, in exchange for his service, he receives a base salary of
$200,000 per year subject to an annual review by the Board. In addition, Mr.
Stanberry is eligible to receive an annual incentive payment, with the amount
and criteria to be determined at the discretion of the Board. He is also
eligible to participate in the Company's employee benefit plans and receives
reimbursement for club memberships. The annual incentive payment for 2005 was
$300,000. The agreement is for a three-year period and is renewable on an annual
basis for a three-year period. The agreement calls for compensation in the event
of a change in control equal to three times the base salary plus the most recent
annual incentive payment, compensation in certain cases of termination by the
Company or by Mr. Stanberry, and an agreement by Mr. Stanberry not to compete
against the Company during the term of his employment and for a period of one
year after termination of the agreement, in the event of voluntary termination
by the employee.
Mr. Eltjes has entered into an employment agreement with WB Capital Management
Inc. that runs through September 30, 2008. Subsequent to September 30, 2008, the
agreement will automatically renew for additional terms of one year. The
agreement includes a covenant not to compete. In the event of termination due to
a change in control of the Company, the agreement requires payment of Mr.
Eltjes' salary for the remaining term of the agreement.
EMPLOYEE BENEFIT PLANS
The Company sponsors an employee savings and stock ownership plan with a 401(k)
feature covering substantially all of its employees. The plan was originally
established as a profit sharing plan for the Bank effective January 1, 1965. It
was amended to add 401(k) provisions as of April 15, 2000, and was restated
during 2004 to include a stock ownership plan. The plan allows for employee
contributions that are employer matched up to certain levels. The plan provides
for profit sharing contributions as the Board determines annually.
In 2005, the Shareholders approved the West Bancorporation, Inc. Restricted
Stock Compensation Plan. The purpose of the Plan is to attract and retain able
individuals by rewarding directors and employees of the Company and its
subsidiaries and to align the interests of directors and employees with those of
the Shareholders. The Plan provides for restricted stock awards to be made under
the Plan until March 1, 2015, up to a maximum of 300,000 shares. As of December
31, 2005, no awards had been granted.
LOANS TO DIRECTORS AND OFFICERS AND OTHER TRANSACTIONS WITH DIRECTORS AND
OFFICERS
Certain directors and executive officers of the Company, their associates, or
members of their families were customers of and have had transactions with the
Bank from time to time in the ordinary course of business, and additional
transactions are expected to occur in the ordinary course of business in the
future. All loans and commitments included in such transactions have been made
on substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with other persons. In
the opinion of management of the Company, such loan transactions do not involve
more than the normal risk of collectibility or present other unfavorable
features.
The Bank leases two branch facilities from a company that is 33 1/3% owned by
Mr. Coppola. Mr. Coppola also serves as the president of the lessor. Annual
lease payments on those two branch facilities totaled approximately $167,000 in
2005. One lease, which was modified in 2005, expires in 2030, and the other
expires in 2018. The latter lease contains options to renew for up to 25
additional years. Terms of the original leases were consummated prior to Mr.
Coppola being named a director in 1996.
The Audit Committee has conducted an appropriate review of these transactions
for conflict of interest situations and has approved or ratified same.
10
STOCK PRICE PERFORMANCE GRAPH
The following performance graph provides information regarding cumulative,
five-year return on an indexed basis of the Common Stock as compared with the
NASDAQ - Total US Index and the SNL Midwest Bank Index prepared by SNL Financial
L.C. of Charlottesville, Virginia. The latter index reflects the performance of
bank holding companies operating principally in the Midwest as selected by SNL
Financial. The indices assume the investment of $100 on December 31, 2000, in
the Common Stock, the NASDAQ - Total US Index, and the SNL Midwest Bank Index,
with all dividends reinvested. The Company's stock price performance shown in
the following graph is not indicative of future stock price performance.
WEST BANCORPORATION, INC.
[TOTAL RETURN PERFORMANCE GRAPH]
Period Ending
---------------------------------------------------------------------------------
Index 12/31/00 12/31/01 12/31/02 12/31/03 12/31/04 12/31/05
------------------------------------------------------------------------------------------------------------
West Bancorporation, Inc. 100.00 112.15 150.68 178.04 197.93 217.74
NASDAQ - Total US 100.00 79.18 54.44 82.09 89.59 91.54
SNL Midwest Bank Index 100.00 102.20 98.59 126.20 142.40 137.21
*Source: SNL Financial LC, Charlottesville, VA. Used with permission. All rights
reserved.
REPORT OF THE AUDIT COMMITTEE
The incorporation by reference of this proxy statement into any document filed
with the SEC by the Company shall not be deemed to include the following report
unless such report is specifically stated to be incorporated by reference into
such document.
The Audit Committee hereby reports as follows:
1. The Audit Committee has reviewed and discussed the audited financial
statements for the year ended December 31, 2005, (the "Audited
Financial Statements"), with the Company's management.
11
2. The Audit Committee has discussed with McGladrey & Pullen, LLP, the
Company's independent registered public accounting firm, the matters
required to be discussed by Statement on Auditing Standards No. 61
and No. 90 (Communication with Audit Committees), as in effect on
the date of this proxy statement.
3. The Audit Committee has received the written disclosures and the
letter from McGladrey & Pullen, LLP required by Independence
Standards Board Standard No. 1 (Independence Discussions with Audit
Committees), as in effect on the date of this proxy statement, and
has discussed with McGladrey & Pullen, LLP its independence.
4. Based on the review and discussion referred to in paragraphs (1)
through (3) above, the Audit Committee recommended to the Board, and
the Board approved, that the Audited Financial Statements be
included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2005, for filing with the SEC.
5. The Board has approved the Audit Committee Charter.
6. The Audit Committee has approved or ratified all related party
transactions between directors and the Company.
The undersigned members of the Audit Committee have submitted this report.
Jack G. Wahlig, Chair
Michael A. Coppola
Connie Wimer
REPORT OF THE NOMINATING AND CORPORATE GOVERNANCE COMMITTEE
The Nominating and Corporate Governance Committee ("the Committee") evaluated
the qualifications and performance of each of the members of the Board of
Directors. In its evaluation, the Committee compared each of the current Board
members to the qualifications and characteristics of a director set forth in the
Committee's charter. The Committee then contacted each director to determine his
or her willingness to stand for re-election and determined that each was willing
to continue service. The Committee also determined that the current size of the
Board should be maintained. Based on the foregoing, the Committee concluded that
each of the current Board members should be nominated for re-election at the
Annual Meeting.
The Committee reviewed the adequacy of its Charter and the Charters of the Audit
and Compensation Committees. The Committee did not recommend any modifications
to the Charters. The Committee also reviewed the Company's Code of Conduct and
recommended a change which will be considered by the boards of the Company and
its affiliates at their next regularly scheduled meetings. The Committee
performed all the other duties stated in its Charter.
The undersigned members of the Nominating and Corporate Governance Committee
have submitted this report.
Steven G. Chapman, Chair
Frank W. Berlin
George D. Milligan
Robert G. Pulver
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board, at the recommendation of the Audit Committee, has approved McGladrey
& Pullen, LLP, an independent registered public accounting firm, as the
principal accountant for the Company. McGladrey & Pullen, LLP, will conduct the
audit examination of the Company and its subsidiaries for 2006. McGladrey &
Pullen, LLP was also the principal accountant and performed the audit in 2005.
A representative from McGladrey & Pullen, LLP will be present at the Annual
Meeting. He will have the opportunity to make a statement and will be available
to respond to appropriate questions from Shareholders.
12
AUDIT FEES
The following table presents fees for professional audit services rendered by
McGladrey & Pullen, LLP for the audit of the Company's annual financial
statements for the fiscal years ended December 31, 2005, and 2004, and fees
billed for other services rendered by McGladrey & Pullen, LLP and its associated
entity RSM McGladrey, Inc.:
----------------------------------------
2005 2004
----------------------------------------
Audit fees (1) $ 129,000 $ 151,915
Audit-related fees (2) 30,102 19,564
Tax fees (3) 12,540 10,730
All other fees - -
----------------------------------------
Total $ 171,642 $ 182,209
========================================
(1) Audit fees represent fees for professional services provided for the
audit of the Company's annual financial statements, review of the
Company's quarterly financial statements in connection with the
filing of current and periodic reports, and reporting on internal
controls in accordance with Section 404 of Sarbanes Oxley.
(2) Audit-related fees represent an audit of the Company's profit
sharing plan in 2005 and 2004 and agreed upon procedures for
student lending.
(3) Tax fees represent fees for professional services related to tax
compliance, which included preparation of tax returns and tax advice
regarding acquisitions.
Independence: The Audit Committee considered whether the non-audit services
provided by McGladrey & Pullen, LLP and its associated entity RSM McGladrey,
Inc. to the Company are compatible with maintaining the independence of
McGladrey & Pullen, LLP and concluded that the independence of McGladrey &
Pullen, LLP is not compromised by the provision of such services.
The Audit Committee pre-approves all auditing services and permitted non-audit
services, including the fees and terms of those services, to be performed for
the Company by its independent registered public accounting firm prior to
engagement.
SHAREHOLDER COMMUNICATIONS
The Company provides a process for Shareholders to send communications to the
Board. Shareholders may send communications to the Board by contacting Mr.
Douglas Gulling, the Company's Chief Financial Officer, in one of the following
ways:
- in writing, mailed or delivered to 1601 22nd Street, Suite
209, West Des Moines, IA 50266, or
- by e-mail to dgulling@westbankiowa.com.
The Chief Financial Officer will submit each communication received to the Board
at the next regular meeting.
2007 SHAREHOLDER PROPOSALS
In order for any proposals of Shareholders to be presented as an item of
business at the Annual Meeting of Shareholders of the Company to be held in
2007, the proposal must be received at the Company's principal executive offices
no later than November 9, 2006, and must be limited to 500 words. To be included
in the Company's proxy statement, the Shareholder must be a holder of record or
beneficial owner of at least $2,000 in market value of the Company's shares
entitled to be voted on the proposal and have held the shares for at least one
year and shall continue to hold the shares through the date of the meeting.
Either the Shareholder, or the Shareholder's representative who is qualified
under state law to present the proposal on his or her behalf, must attend the
meeting to present the proposal. Shareholders may not submit more than one
proposal. A Shareholder proposal submitted outside the procedures prescribed in
Rule 14a-8 under the Securities Exchange Act of 1934 shall be considered
untimely unless received no later than January 24, 2007.
13
Shareholders wishing to recommend names of individuals for possible nomination
to the Board may do so according to the following procedures established by the
Board:
1. Contact the Secretary of the Company to obtain the Board Membership
Criteria established by the Board.
2. Make typewritten submission to the Secretary of the Company naming
the proposed candidate and specifically noting how the candidate
meets the criteria set forth by the Board.
3. Submit the recommendation to the Company by 120 days prior to the
expected mailing date of the proxy.
4. Prove the person making the recommendation is a Shareholder who owns
shares with a market value of at least $2,000 and who has held those
shares for at least one year at the time the submission is made.
5. If the person being recommended is aware of the submission, he or
she must sign a statement so indicating.
6. If the person being recommended is not aware of the submission, the
submitter must explain why.
The written submission must be mailed to:
Corporate Secretary
West Bancorporation, Inc.
1601 22nd Street, Suite 209
West Des Moines, Iowa 50266
GENERAL MATTERS
The Company will provide, when available, a copy of its annual report on Form
10-K as filed with the SEC, without charge to each Shareholder solicited, upon
the written or oral request of any such Shareholder. Such request should be
directed to the Chief Financial Officer, West Bancorporation, Inc., 1601 22nd
Street, West Des Moines, Iowa 50266 or by calling 515-222-2300. The Company's
Form 10-K will also be available on the SEC's internet website at
http://www.sec.gov/edgar/searchedgar/webusers.htm and through a link in the
investor relations section of the Company's website at www.westbankiowa.com.
OTHER MATTERS
Management does not know of any other matters to be presented at the Annual
Meeting, but should other matters properly come before the Annual Meeting, the
proxies will vote on such matters in accordance with their best judgment.
By Order of the Board of Directors
/s/ Alice A. Jensen
--------------------------------------
Alice A. Jensen, Secretary
March 10, 2006
14
WEST BANCORPORATION, INC.
APPENDIX TO THE PROXY STATEMENT
FISCAL YEAR 2005
TABLE OF CONTENTS
PAGE
General Information...................................................................... 2
Selected Financial Data.................................................................. 3
Management's Discussion and Analysis..................................................... 4
Reports of Independent Registered Public Accounting Firm................................. 26
Management's Report on Internal Control over Financial Reporting......................... 29
Consolidated Balance Sheets.............................................................. 30
Consolidated Statements of Income........................................................ 31
Consolidated Statements of Stockholders' Equity.......................................... 32
Consolidated Statements of Cash Flows.................................................... 33
Notes to Consolidated Financial Statements............................................... 35
Stock Information........................................................................ 64
1
WEST BANCORPORATION, INC.
GENERAL INFORMATION
West Bancorporation, Inc. (the "Company") is an Iowa corporation and bank
holding company registered under the Bank Holding Company Act of 1956, as
amended. The Company was organized and incorporated in 1984 to serve as a
holding company for its principal banking subsidiary, West Bank.
West Bank's operations are conducted primarily within the Des Moines and Iowa
City, Iowa metropolitan areas. The principal sources of revenue are from
interest and fees earned on loans, service charges on deposit accounts and
interest on fixed income securities.
On October 1, 2003, the Company, through a new wholly-owned subsidiary, WB
Capital Management Inc., purchased the assets of VMF Capital, L.L.C., a
registered investment advisor. The company is doing business as VMF Capital,
with offices in Cedar Rapids and West Des Moines, Iowa and provides portfolio
management services to individuals, retirement plans, corporations, foundations
and endowments.
On December 30, 2005, the Company purchased Investors Management Group, Ltd.
("IMG") from AMCORE Financial, Inc. IMG is an asset management company located
in West Des Moines, Iowa and provides portfolio management services to insurance
companies, banks, political subdivisions, associations, other organizations and
individuals.
West Bancorporation Capital Trust I (the "Trust") was formed in 2003 for the
purpose of issuing trust preferred securities. The Trust is recorded on the
books of the Company using the equity method of accounting.
The Company's stock trades on the NASDAQ National Market under the symbol WTBA.
2
WEST BANCORPORATION, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
Years Ended December 31
----------------------------------------------------------------------------
(dollars in thousands, except per share amounts) 2005 2004 2003 2002 2001
-----------------------------------------------------------------------------------------------------------------------------------
Operating Results
Interest income $ 63,475 $ 49,599 $ 43,461 $ 44,640 $ 54,614
Interest expense 25,102 13,952 11,139 13,650 24,952
----------------------------------------------------------------------------
Net interest income 38,373 35,647 32,322 30,990 29,662
Provision for loan losses 1,775 1,200 850 910 1,063
----------------------------------------------------------------------------
Net interest income after provision for loan losses 36,598 34,447 31,472 30,080 28,599
----------------------------------------------------------------------------
Noninterest income 11,517 10,706 9,305 6,614 6,314
Noninterest expense 18,645 16,968 14,694 11,220 10,480
----------------------------------------------------------------------------
Income before income taxes 29,470 28,185 26,083 25,474 24,433
Income taxes 9,395 9,571 8,800 9,098 8,697
----------------------------------------------------------------------------
Net income $ 20,075 $ 18,614 $ 17,283 $ 16,376 $ 15,736
============================================================================
Dividends and Per Share Data (1)
Cash dividends $ 10,689 $ 10,484 $ 10,279 $ 9,957 $ 9,636
Cash dividends per share 0.640 0.625 0.610 0.590 0.571
Basic earnings per share 1.20 1.11 1.02 0.97 0.93
Average common shares outstanding 16,701,843 16,761,278 16,863,285 16,863,285 16,863,285
Year End Balances
Total assets $ 1,244,380 $ 1,148,435 $ 1,000,612 $ 886,116 $ 815,970
Investment securities 274,718 347,052 274,913 212,292 189,473
Loans 867,504 725,845 599,355 488,453 493,399
Allowance for loan losses (7,615) (6,527) (5,975) (4,494) (4,240)
Deposits 944,893 865,932 705,074 613,099 571,730
Long-term borrowings 99,188 101,893 106,024 51,600 48,000
Stockholders' equity 104,520 97,620 92,896 85,824 79,012
Equity to assets ratio 8.40% 8.50% 9.28% 9.69% 9.68%
Years Ended December 31
----------------------------------------------------------------------
(dollars in thousands) 2005 2004 2003 2002 2001
-------------------------------------------------------------------------------------------------------------------------
Net income $ 20,075 $ 18,614 $ 17,283 $ 16,376 $ 15,736
Average assets 1,192,208 1,066,511 932,907 837,938 837,798
Average stockholders' equity 100,392 94,209 88,742 81,904 74,977
Return on assets (net income divided by average
assets) 1.68% 1.75% 1.85% 1.95% 1.88%
Return on equity (net income divided by average
equity) 20.00% 19.76% 19.48% 19.99% 20.99%
Efficiency ratio (noninterest expense divided by
noninterest income plus taxable equivalent net
interest income) 36.22% 35.78% 34.78% 29.19% 28.23%
Dividend payout ratio (dividends paid divided
by net income) 53.25% 56.32% 59.26% 60.78% 61.22%
Equity to assets ratio (average equity divided by
average assets) 8.42% 8.83% 9.51% 9.77% 8.95%
(1) In July 2004, the Company's Board of Directors authorized a 5 percent common
stock dividend. Per share numbers in this report have been adjusted for that
stock dividend.
3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION
The following discussion is provided for the consolidated operations of the
Company, which includes its wholly-owned banking subsidiary, West Bank (the
"Bank"), and its wholly-owned investment advisory subsidiaries, WB Capital
Management Inc. d/b/a VMF Capital ("VMF Capital") and Investors Management
Group, Ltd. ("IMG"). The purpose of this discussion is to focus on significant
factors affecting the Company's financial condition and results of operations.
IMG was acquired on December 30, 2005 and the balance sheet is included in the
consolidated balance sheet. This subsidiary had no effect on the results of
operations for 2005 and is expected to be neutral to earnings in 2006 and
accretive thereafter.
"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.
CRITICAL ACCOUNTING POLICIES
The "Management's Discussion and Analysis of Financial Condition and Results of
Operations," and disclosures included within this report, are based on the
Company's audited consolidated financial statements. These statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The financial information contained in these
statements is, for the most part, based on approximate measures of the financial
effects of transactions and events that have already occurred. However, the
preparation of these statements requires management to make certain estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses.
The Company's significant accounting policies are described in the "Notes to
Consolidated Financial Statements". Based on its consideration of accounting
policies that involve the most complex and subjective estimates and judgments,
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 loans.
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.
RESULTS OF OPERATIONS - 2005 COMPARED TO 2004
OVERVIEW
For the year ended December 31, 2005, the Company recorded net income of
$20,075,000, an increase of 7.8 percent from net income of $18,614,000 in 2004.
Earnings per share were $1.20 in 2005 compared to $1.11 in 2004. The increase
was primarily due to higher net interest income, which increased $2,726,000 due
to significant loan growth. Average loans grew 22 percent over the prior year.
The provision for loan losses was $575,000 higher than the prior year.
Noninterest income increased by $811,000, while noninterest expenses were
$1,677,000 higher in 2005.
4
The Company's return on average assets (ROA) was 1.68 percent in 2005, compared
to 1.75 percent in 2004. The return on average equity (ROE) was 20.00 percent,
compared to 19.76 percent for the prior year.
The flattening yield curve during 2005 caused the net interest margin to decline
9 basis points from a year ago. The decline is the result of the cost of
short-term borrowings and jumbo certificates of deposit rising more than the
yields on the loan and investment portfolios.
Year-to-date noninterest income was higher than last year due to investment
advisory fees earned by VMF Capital, increased trust fees, higher loan-related
fees (not subject to deferral and amortization), and increased gains on sale of
investment securities.
Year-to-date noninterest expense was 9.9 percent higher than a year ago due to
increases in compensation related expenses, occupancy costs, consulting fees and
net other real estate owned expense.
The Company has consistently used the efficiency ratio to measure productivity.
This ratio is computed by dividing noninterest expense by the sum of
tax-equivalent net interest income plus noninterest income (excluding gains and
losses from the sale of securities). For the year ended December 31, 2005, the
Company's efficiency ratio was 36.22 percent, up from the prior year's ratio of
35.78 percent. This ratio for both years is significantly better than peer group
averages, which are generally around 60 percent according to data in the
September 2005 Bank Holding Company Performance Report, a report prepared by the
Federal Reserve Board's Division of Banking Supervision and Regulation. The
Company expects the efficiency ratio for 2006 to be in the range of 44 percent.
The ratio is expected to increase in part due to the acquisition of IMG, which
is a non-bank investment advisory firm.
Net Interest Income
Net interest income increased 7.6 percent to $38,373,000 for 2005 primarily due
to the increase in loan volume, which more than offset the rising rates paid on
deposits and borrowings. Average loans grew by 21.6 percent and the average
balance of the investment portfolio was up 3.7 percent. The average yield on
earning assets increased 77 basis points, while the average rate on
interest-bearing liabilities increased 106 basis points. The net interest
spread, which is the difference between the yield earned on assets and the rate
paid on liabilities, declined to 3.07 percent from 3.36 percent a year earlier.
Net interest margin, which is tax-equivalent net interest income as a percent of
average earning assets, was 3.62 percent in 2005, down from 3.71 percent in
2004.
Loan Growth/Loan Quality
At December 31, 2005, total loans increased approximately $142 million to $868
million from $726 million a year earlier. Most of the growth came in commercial,
construction and commercial real estate loans. Loan quality remained good with
non-performing loans at December 31, 2005 totaling $4,912,000, or .57 percent of
total loans. One loan accounted for $3,867,000 of this total. The loan is a
commercial loan secured by commercial real estate used in the operation of the
customer's business and farmland. Due to the time period that could be involved
in resolving this loan and the fact it may be necessary for the collateral to be
liquidated in order to satisfy the obligation, it was placed on non-accrual
status. At December 31, 2004, non-performing loans totaled $860,000 or .12
percent of total loans. Non-performing loans include loans on non-accrual
status, loans that have been renegotiated to below market interest rates or
terms, and loans past due 90 days or more.
The allowance for loan losses, which totaled $7,615,000, represented 155 percent
of non-accrual loans and loans past due more than 90 days at the end of 2005,
compared to 759 percent for 2004. The provision for loan losses totaled
$1,775,000 for 2005, up from $1,200,000 for 2004. The Company's net charge-offs
as a percent of average loans were .09 percent for 2005, compared to .10 percent
for 2004. The amount of loans charged off in 2005 totaled $823,000 compared to
$815,000 in 2004. Recoveries in 2005 from loans previously charged-off were
$136,000, down from $167,000 in the prior year.
The allowance for loan losses represents a reserve available to absorb probable
loan losses within the loan portfolio as of December 31, 2005. The allowance is
based on management's judgment after considering various factors such as the
current and anticipated economic environment, historical loan loss experience,
and evaluation of individual loans.
5
Management considered the allowance for loan losses at December 31, 2005
sufficient to absorb probable loan losses within the portfolio.
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 (in thousands).
Years ended December 31
------------------------------------
2005 2004 Change Change-%
------------------------------------
Noninterest income
Service charges on deposit accounts $ 4,660 $ 4,968 $ (308) -6.20%
Trust services 820 632 188 29.75%
Investment advisory fees 3,349 2,683 666 24.82%
Increase in cash value of bank-owned
life insurance 843 869 (26) -2.99%
Net realized gains on sale of securities 291 199 92 46.23%
Other income:
VISA/MasterCard income 132 175 (43) -24.57%
Debit card usage fees 194 156 38 24.36%
ATM surcharge fees 86 96 (10) -10.42%
Gain on sale of residential mortgages 119 152 (33) -21.71%
Gain on sale of commercial loans 51 - 51 N/A
Other loan fees 178 - 178 N/A
All other income 794 776 18 2.32%
------------------------------------
Total other income 1,554 1,355 199 14.69%
------------------------------------
Total noninterest income $11,517 $10,706 $ 811 7.58%
====================================
Service charges on deposit accounts declined for two reasons. First, higher
interest rates resulted in a higher earnings credit on commercial checking
accounts, which resulted in lower service charges. Second, return check charges
declined in 2005 due to fewer customers overdrawing their accounts. Income from
trust services was up due to a higher amount of custodial assets and assets
under management. Also, certain types of trusts, such as estates, can cause
fluctuations in earned fees. Investment advisory fees are fees earned by VMF
Capital. The increase in fees was due to sales efforts throughout the past year,
which resulted in total average assets under management increasing from $715
million in 2004 to $800 million in 2005. In 2006, investment advisory fees will
also include the revenue of IMG, which was purchased on December 30, 2005. The
decline in VISA/MasterCard income was due to a decline in the number of merchant
customers and lower sales activity at certain merchants. The increase in debit
card usage fees was the result of higher volumes as customers continued to
expand utilization of this convenient payment method. The decline in the ATM
card usage fees was due to changes in behavior as non-customers seek to avoid
surcharges when using an ATM. Gains from sale of residential mortgages
originated for sale in the secondary market declined because of lower volume due
to rising interest rates and increased pricing competition. The gains from the
sale of commercial loans resulted from the sale of the United States Department
of Agriculture (USDA) guaranteed portion of commercial loans in the first half
of the year. Noninterest related loan fees included the recognition of a fee for
a loan commitment that was terminated by a customer in the second quarter of
2005.
Noninterest Expense
Total noninterest expense increased 9.9 percent to $18,645,000 in 2005 from
$16,968,000 in 2004.
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 (in thousands).
6
Years ended December 31
----------------------------------------------
2005 2004 Change Change-%
----------------------------------------------
Noninterest expense:
Salaries and employee benefits $ 10,308 $ 9,680 $ 628 6.49%
Occupancy 2,497 2,057 440 21.39%
Data processing 1,428 1,361 67 4.92%
Charitable contributions 147 147 - 0.00%
Other expenses:
Professional fees 531 567 (36) -6.35%
Insurance 160 129 31 24.03%
Marketing 369 324 45 13.89%
Postage and courier 398 373 25 6.70%
Consulting fees 284 84 200 238.10%
Other real estate owned expense 9 (175) 184 105.14%
Miscellaneous operating losses 183 110 73 66.36%
All other expenses 2,331 2,311 20 0.87%
----------------------------------------------
Total other expenses 4,265 3,723 542 14.56%
----------------------------------------------
Total noninterest expense $ 18,645 $ 16,968 $ 1,677 9.88%
==============================================
The increase in salaries and benefits was the result of staff additions, annual
compensation adjustments and certain benefit costs, primarily medical insurance.
As of the end of 2005, the Company had 158 full-time equivalent employees
excluding IMG, compared to 145 full-time equivalent employees at December 31,
2004. As of the end of 2005, IMG had 25 full-time equivalent employees.
Occupancy expenses were higher in 2005 due to one additional location
(Coralville, Iowa) and increased depreciation expense related to remodeling
projects and technology upgrades throughout the Company. Professional fees
declined from the prior year due to lower legal fees. Insurance expense is
higher because the Company's director's and officer's policy renewed in the
third quarter of 2004 at premiums that were significantly higher. Marketing
expense increased as a result of additional targeted marketing campaigns. The
increase in consulting fees was due to a change in the contract with the
Company's former chairman from that of an employment agreement to a consulting
agreement and the hiring of an outside consultant to help with the
implementation of software programs to assist with asset-liability management
and profitability measurement. The net expense for other real estate owned
increased as 2004 included gains from the sale of several other real estate
properties.
Income Taxes
The Company records a provision for income taxes currently payable, along with a
provision for those taxes payable in the future. Such deferred taxes arise from
differences in the timing of certain items for financial statement reporting
compared to income tax reporting. The effective income tax rate differs from the
federal statutory income tax rate primarily due to tax-exempt interest income,
the tax-exempt increase in cash value of bank-owned life insurance, tax-exempt
proceeds from life insurance in 2003, disallowed interest expense, tax
deductible dividends paid into the employee savings and stock ownership plan and
state income taxes. Also, during 2005, management determined that with the
acquisition of IMG and improving profitability at VMF Capital, the Company will
be able to utilize the existing state operating loss carryforwards. The
valuation allowance was recognized as a reduction in tax expense in December
2005. The effective rate of income tax expense as a percent of income before
income taxes was 31.9 percent for 2005, compared to 34.0 percent for 2004. The
reasons for the decline in the effective rate were the significant increase in
tax-exempt municipal income and the recognition of the previously mentioned
valuation allowance. The federal income tax expense was approximately $7,950,000
and $8,200,000 for 2005 and 2004, respectively, while state income tax expense
was approximately $1,450,000 and $1,350,000, respectively.
RESULTS OF OPERATIONS - 2004 COMPARED TO 2003
OVERVIEW
For the year ended December 31, 2004, the Company recorded net income of
$18,614,000, an increase of 7.7 percent from net income of $17,283,000 in 2003.
Earnings per share were $1.11 in 2004 compared to $1.02 in 2003. Earnings per
share for 2003 were restated to reflect a 5 percent common stock dividend which
was issued in August 2004. Most of the increase in earnings was attributable to
higher net interest income, which increased in large part because of significant
asset growth. Interest income increased due to favorable volume variances
despite a slight decline in the net interest margin of 6 basis points to 3.71
percent. Net income for 2004 included the first full year of operations for VMF
Capital, which was formed October 1, 2003, and for the two acquired bank
branches in Iowa City.
7
The Company's return on average assets (ROA) was 1.75 percent in 2004, compared
to 1.85 percent in 2003. The return on average equity (ROE) was 19.76 percent,
compared to 19.48 percent for the prior year.
For the year ended December 31, 2004, the Company's efficiency ratio was 35.78
percent, up from the prior year's ratio of 34.78 percent.
Net Interest Income
Net interest income increased 10.3 percent to $35,647,000 for 2004 primarily due
to the increase in the volume of interest-earning assets that exceeded
unfavorable rate variances. Average loans grew by 22 percent and the average
balance of the investment portfolio was also up 22 percent. The average yield on
earning assets increased 9 basis points, while the average rate on
interest-bearing liabilities increased 15 basis points. The net interest spread
declined to 3.36 percent from 3.42 percent a year earlier. Net interest margin
was 3.71 percent in 2004 down from 3.77 percent in 2003.
Loan Growth/Loan Quality
At December 31, 2004, total loans increased approximately $127 million to $726
million from $599 million a year earlier. Most of the growth came in commercial,
construction and commercial real estate loans. Loan quality remained good with
non-performing loans at December 31, 2004 totaling $860,000 or .12 percent of
total loans. This compared to $1,793,000 or .30 percent of total loans at
December 31, 2003.
The allowance for loan losses, which totaled $6,527,000, represented 759 percent
of non-accrual loans and loans past due more than 90 days at the end of 2004,
compared to 333 percent for 2003. The provision for loan losses totaled
$1,200,000 for 2004, up from $850,000 for 2003. The Company's net charge-offs as
a percent of average loans were .10 percent for 2004, compared to .05 percent
for 2003. The amount of loans charged off in 2004 totaled $815,000 compared to
$485,000 in 2003. Recoveries in 2004 from loans previously charged-off were
$167,000, down from $205,000 in the prior year.
Management considered the allowance for loan losses at December 31, 2004
sufficient to absorb probable loan losses within the portfolio.
8
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 (in thousands).
Years ended December 31
-----------------------------------------
2004 2003 Change Change-%
-----------------------------------------
Noninterest income
Service charges on deposit accounts $ 4,968 $ 4,984 $ (16) -0.32%
Trust services 632 507 125 24.65%
Investment advisory fees 2,683 504 2,179 432.34%
Increase in cash value of bank-owned
life insurance 869 667 202 30.28%
Proceeds from bank-owned life insurance - 821 (821) -100.00%
Net realized gains on sale of securities 199 300 (101) -33.67%
Other income:
Gain on sale of residential mortgages 152 396 (244) -61.62%
Debit card usage fees 156 129 27 20.93%
ATM surcharge fees 96 111 (15) -13.51%
Safe deposit box rental 153 138 15 10.87%
All other income 798 748 50 6.68%
-----------------------------------------
Total other income 1,355 1,522 (167) -10.97%
-----------------------------------------
Total noninterest income $10,706 $ 9,305 $ 1,401 15.06%
=========================================
Service charges on deposit accounts declined slightly due to somewhat lower
nonsufficient funds fees. Income from trust services was up due to an increase
in the amount of trust assets under management. Investment advisory fees are
fees earned by VMF Capital, which commenced operations on October 1, 2003.
Bank-owned life insurance was purchased during the first and third quarters of
2003 and the Company received tax-exempt income from life insurance proceeds in
2003 as the result of the untimely death of one of the Bank's officers. The
decrease in gains on sale of real estate loans was due to lower volumes of loan
originations. Debit card usage fees were up due to higher volumes. ATM surcharge
fees declined as consumers sought to avoid the surcharge fee by using ATMs
sponsored by their own bank. The increase in safe deposit box rental income was
the result of a full year's worth of fees in the Iowa City market.
Noninterest Expense
Total noninterest expense increased 15.5 percent to $16,968,000 in 2004, from
$14,694,000 in 2003.
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 (in thousands).
9
Years ended December 31
-----------------------------------------------
2004 2003 Change Change-%
-----------------------------------------------
Noninterest expense:
Salaries and employee benefits $ 9,680 $ 7,701 $ 1,979 25.70%
Occupancy 2,057 1,583 474 29.94%
Data processing 1,361 1,130 231 20.44%
Charitable contributions 147 1,483 (1,336) -90.09%
Other expenses:
Professional fees 567 326 241 73.93%
Intangible amortization 358 170 188 110.59%
Supplies 282 207 75 36.23%
Marketing 324 252 72 28.57%
Postage and courier 373 338 35 10.36%
Other real estate owned and
collection expenses (175) 66 (241) -365.15%
Investment advisory
marketers expense 216 38 178 468.42%
All other expenses 1,778 1,400 378 27.00%
----------------------------------------------
Total other expenses 3,723 2,797 926 33.11%
----------------------------------------------
Total noninterest expense $ 16,968 $ 14,694 $ 2,274 15.48%
==============================================
The increase in salaries and benefits included compensation related expenses for
the employees associated with the two acquisitions in the last half of 2003.
Occupancy expenses likewise were higher in 2004 due to the four additional
locations acquired in the second half of 2003 and a new bank office in
Coralville in the fourth quarter of 2004. Charitable contributions expense was
significantly lower than the prior year because the Company formed and donated
to the West Bancorporation Foundation, Inc. the tax equivalent amount received
from a death claim from bank-owned life insurance in 2003. The increase in
professional fees was the result of additional legal and accounting services
associated with complying with the Sarbanes-Oxley Act of 2002 and the decision
to outsource the Company's internal audit services. The increase in intangible
asset amortization also related to the 2003 acquisitions. Supplies expense is
higher because of the introduction of a new logo and a full year's expense for
the Iowa City branches and VMF Capital. Marketing expense increased as the
result of the decision to do more direct marketing to selected customer
segments. Postage and courier expense was up also due to a full year's operation
in Iowa City and with VMF Capital. Other real estate owned expense declined as a
result of selling several other real estate properties at gains. Investment
advisory marketers expense included a full year's expense compared to only the
fourth quarter for 2003, and also increased due to referrals for new business.
Income Taxes
The effective rate of income tax expense as a percent of income before income
taxes was 34.0 percent for 2004, compared to 33.7 percent for 2003. Federal
income tax expense was approximately $8,200,000 and $7,500,000 for 2004 and
2003, respectively, while state income tax expense was approximately $1,350,000
and $1,300,000, respectively.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES;
AND INTEREST DIFFERENTIAL
Average Balances and an Analysis of Average Rates Earned and Paid.
The following tables show average balances and interest income or interest
expense, with the resulting average yield or rate by category of average earning
assets or interest-bearing liability. Interest income and the resulting net
interest income are shown on a fully taxable basis.
10
(dollars in thousands)
2005 2004 2003
------------------------------- ----------------------------- -----------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------------------------------- ----------------------------- -----------------------------
Assets
Interest-earning assets:
Loans: (2) (3)
Commercial $ 280,123 $ 18,200 6.50% $ 279,268 $ 14,975 5.36% $ 270,129 $ 15,127 5.60%
Real estate 472,938 30,588 6.47% 334,532 20,459 6.12% 230,806 15,518 6.72%
Consumer 11,075 840 7.58% 13,864 1,008 7.27% 18,509 1,388 7.50%
Other (1) 21,028 1,036 4.93% 18,211 1,058 5.81% 11,589 879 7.58%
----------------------------- --------------------------- ---------------------------
Total loans 785,164 50,664 6.45% 645,875 37,500 5.81% 531,033 32,912 6.20%
----------------------------- --------------------------- ---------------------------
Investment securities:
Taxable 210,966 8,957 4.25% 240,601 9,442 3.92% 206,263 8,174 3.96%
Tax-exempt (1) 102,049 5,317 5.21% 61,117 2,977 4.87% 40,560 2,026 5.00%
----------------------------- --------------------------- ---------------------------
Total investment securities 313,015 14,274 4.56% 301,718 12,419 4.12% 246,823 10,200 4.13%
----------------------------- --------------------------- ---------------------------
Federal funds sold and other
short-term investments 12,211 412 3.37% 46,588 948 2.03% 103,883 1,265 1.22%
----------------------------- --------------------------- ---------------------------
Total interest-earning assets (1) 1,110,390 $ 65,350 5.89% 994,181 $ 50,867 5.12% 881,739 $ 44,377 5.03%
----------------------------- --------------------------- ---------------------------
Noninterest-earning assets:
Cash and due from banks 34,393 28,326 25,710
Premises and equipment, net 4,632 3,794 2,387
Other, less allowance for loan losses 42,793 40,210 23,071
---------- ---------- ---------
Total noninterest-earning assets 81,818 72,330 51,168
---------- ---------- ---------
Total assets $1,192,208 $1,066,511 $ 932,907
========== ========== =========
1 Tax-exempt income has been adjusted to a tax-equivalent basis using an
incremental rate of 35% and is adjusted to reflect the effect of the
nondeductible interest expense associated with owning tax-exempt
investments.
2 Average loan balances include non-accrual loans. Interest income on
non-accrual loans has been excluded.
3 Interest income on loans includes amortization of loan fees, which is not
material.
11
(dollars in thousands)
2005 2004 2003
------------------------------- ----------------------------- -----------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------------------------------- ----------------------------- -----------------------------
Liabilites and Stockholders' Equity
Interest-bearing liabilities:
Deposits:
Savings, checking with interest, $ 333,507 $ 5,482 1.64% $ 395,757 $ 3,682 0.93% $ 345,986 $ 3,084 0.89%
and money markets
Time deposits 333,912 10,459 3.13% 193,379 3,760 1.94% 113,910 2,666 2.34%
----------------------------- --------------------------- ----------------------------
Total deposits 667,419 15,941 2.39% 589,136 7,442 1.26% 459,896 5,750 1.25%
Other borrowed funds 223,346 9,161 4.10% 203,064 6,510 3.21% 231,794 5,389 2.32%
----------------------------- --------------------------- ----------------------------
Total interest-bearing liabilities 890,765 25,102 2.82% 792,200 13,952 1.76% 691,690 11,139 1.61%
----------------------------- --------------------------- ----------------------------
Noninterest-bearing liabilities:
Demand deposits 194,957 175,605 148,648
Other liabilities 6,094 4,497 3,827
Stockholders' equity 100,392 94,209 88,742
---------- ---------- ---------
Total liabilities and
stockholders'equity $1,192,208 $1,066,511 $ 932,907
========== ========== =========
Net interest income (1) $ 40,248 $ 36,915 $ 33,238
========== ======== ========
Margin Analysis
Interest income/yield on interest-
earning assets (1) $ 65,350 5.89% $ 50,867 5.12% $ 44,377 5.03%
Interest expense/rate on interest-
bearing liabilities 25,102 2.82% 13,952 1.76% 11,139 1.61%
----------------- --------------- ----------------
Net interest income/net interest
spread (1) $ 40,248 3.07% $ 36,915 3.36% $ 33,238 3.42%
================= =============== ================
Net interest margin (1) 3.62% 3.71% 3.77%
===== ===== ======
1 Tax-exempt income has been adjusted to a tax-equivalent basis using an
incremental rate of 35% and is adjusted to reflect the effect of the
nondeductible interest expense associated with owning tax-exempt
investments.
NET INTEREST INCOME
The Company's largest component of net income is net interest income, which is
the difference between interest earned on earning assets that are primarily
loans and investments and interest paid on interest-bearing liabilities that are
primarily deposits and borrowings. The volume of and yields earned on earning
assets and the volume of and the rates paid on interest-bearing liabilities
determine net interest income. Interest earned and interest paid are also
affected by general economic conditions, particularly changes in market interest
rates, and by competitive factors, government policies and the action of
regulatory authorities. Tax-equivalent net interest income divided by average
earning assets is referred to as net interest margin. For the years ending
December 31, 2005, 2004 and 2003, the Company's net interest margin was 3.62
percent, 3.71 percent and 3.77 percent, respectively.
12
Analysis of Changes in Interest Differential
The following table sets forth, on a tax-equivalent basis, a summary of the
changes in net interest income due to changes in asset and liability volumes and
due to changes in interest rates.
VOLUME AND YIELD/RATE VARIANCE (1)
(in thousands and on a tax equivalent basis)
2005 Compared to 2004 2004 Compared to 2003
---------------------------------------------------------------
Volume Rate Total Volume Rate Total
---------------------------------------------------------------
Interest Income
Loans: (2)
Commercial $ 46 $ 3,179 $ 3,225 $ 597 $ (749) $ (152)
Real estate 8,892 1,237 10,129 6,185 (1,244) 4,941
Consumer (210) 42 (168) (339) (41) (380)
Other (3) 151 (173) (22) 303 (124) 179
---------------------------------------------------------------
Total loans (including fees) 8,879 4,285 13,164 6,746 (2,158) 4,588
---------------------------------------------------------------
Investment securities:
Taxable (1,220) 735 (485) 1,347 (79) 1,268
Tax-exempt (3) 2,120 220 2,340 1,000 (49) 951
---------------------------------------------------------------
Total investment securities 900 955 1,855 2,347 (128) 2,219
---------------------------------------------------------------
Federal funds sold and other
short-term investments (943) 407 (536) (909) 592 (317)
---------------------------------------------------------------
Total interest income (3) 8,836 5,647 14,483 8,184 (1,694) 6,490
---------------------------------------------------------------
Interest Expense
Deposits:
Savings, checking with interest, (655) 2,455 1,800 459 139 598
and money markets
Time deposits 3,639 3,060 6,699 1,444 (350) 1,094
---------------------------------------------------------------
Total deposits 2,984 5,515 8,499 1,903 (211) 1,692
Other borrowed funds 698 1,953 2,651 (545) 1,666 1,121
---------------------------------------------------------------
Total interest expense 3,682 7,468 11,150 1,358 1,455 2,813
---------------------------------------------------------------
Net interest income (3) $ 5,154 $ (1,821) $ 3,333 $ 6,826 $ (3,149) $ 3,677
===============================================================
1 The change in interest that is due to both volume and rate changes have
been allocated to the change due to volume and the change due to rate in
proportion to the absolute value of the change in each.
2 Balances of non-accrual loans have been included for computational
purposes.
3 Tax-exempt income has been converted to a tax-equivalent basis using a
federal income tax rate of 35% and is adjusted for the effect of the
nondeductible interest expense associated with owning tax-exempt
investments.
13
INVESTMENT PORTFOLIO
The investments below are presented at carrying value and reported by
contractual maturity. Expected maturities may differ from contractual maturities
because issuers may have the right to call or prepay obligations with or without
prepayment penalties.
December 31, 2005
(dollars in thousands)
After one year After five years
Within one but within five but within ten After ten
year years years years Total
--------------------------------------------------------------------
U.S. Government agencies and corporations $ 1,995 $ 85,879 $ 51,672 $ 7,501 $ 147,047
States of the United States and political
subdivisions 5,529 16,858 24,814 56,746 103,947
Corporate notes and other investments 250 3,531 7,114 8,445 19,340
--------------------------------------------------------------------
Total $ 7,774 $ 106,268 $ 83,600 $ 72,692 $ 270,334
====================================================================
Weighted average yield:
U.S. Government agencies and corporations 4.40% 3.79% 4.50% 3.95%
States of the United States and political
subdivisions (1) 3.47% 4.75% 5.67% 5.31%
Corporate notes and other investments 0.00% 3.67% 4.27% 6.46%
-------------------------------------------------
Total 3.59% 3.94% 4.83% 5.31%
=================================================
1 Yields on tax-exempt obligations have been computed on a tax-equivalent
basis using an incremental tax rate of 35% and are adjusted to reflect the
effect of the nondeductible interest expense associated with owning
tax-exempt investments.
Investments in States of the United States and political subdivisions represent
purchases of municipal bonds issued by municipalities located primarily in the
State of Iowa.
Investments in corporate notes and other investments include corporate debt
obligations of companies located and doing business throughout the United
States. The debt obligations were all within the credit ratings acceptable under
West Bank's investment policy.
As of December 31, 2005, the Company did not have securities from a single
issuer, except for the United States government or its agencies, which exceeded
10 percent of consolidated stockholders' equity.
14
LOAN PORTFOLIO
Types of Loans
The following table sets forth the composition of the Company's loan portfolio
for the past five years ending December 31, 2005 (dollars in thousands).
As of December 31
------------------------------------------------------------
2005 2004 2003 2002 2001
------------------------------------------------------------
Commercial $ 315,512 $ 268,805 $ 244,173 $ 235,985 $ 226,183
Real Estate
Construction, land and land development 131,659 87,379 44,200 27,827 33,954
1-4 family residential 82,157 75,616 76,853 56,939 71,628
Commercial 306,804 273,204 204,673 143,560 138,409
Consumer and other loans 32,538 21,898 30,166 24,263 23,333
------------------------------------------------------------
Total loans 868,670 726,902 600,065 488,574 493,507
Deferred loan fees, net 1,166 1,057 710 121 108
------------------------------------------------------------
Total loans, net of deferred fees $ 867,504 $ 725,845 $ 599,355 $ 488,453 $ 493,399
============================================================
The Company's loan portfolio primarily consists of commercial, commercial real
estate, real estate construction, land and land development, residential real
estate, and consumer loans. As of December 31, 2005, gross loans totaled
approximately $869 million, which equals approximately 92 percent of total
deposits and 70 percent of total assets. As of December 31, 2005, almost all of
the loans were originated directly by West Bank to borrowers within the Bank's
principal market areas. There were no foreign loans outstanding during the years
presented.
Commercial loans consist primarily of loans to businesses for various purposes,
including revolving lines to finance current operations, inventory and accounts
receivable; and capital expenditure loans to finance equipment and other fixed
assets. These loans generally have short maturities, have either adjustable or
fixed rates and are either unsecured or secured by inventory, accounts
receivable and/or equipment.
Real estate loans include various types of loans for which West Bank holds real
property as collateral, and consist of loans primarily on commercial properties,
and single and multi-family residences. Real estate loans typically have fixed
rates for up to seven years, with the bank's loan policy having a maximum
amortization period of up to 30 years. The majority of construction loan volume
is to contractors and developers to construct commercial buildings or develop
residential real estate and generally have maturities of up to 24 months. West
Bank originates residential real estate loans for its portfolio and for sale in
the secondary market for a fee.
Consumer loans include loans extended to individuals for household, family and
other personal expenditures not secured by real estate. The majority of West
Bank's consumer lending is for vehicles, consolidation of personal debts, and
household improvements.
The interest rates charged on loans vary with the degree of risk, the amount of
the loan and the maturity of the loan. Competitive pressures, market interest
rates, the availability of funds and government regulation further influence the
rate charged on a loan.
West Bank follows a loan policy that has been approved by the Bank's Board of
Directors and is administered by West Bank's management. This policy establishes
lending limits, review criteria and other guidelines such as loan administration
and allowance for loan losses. Loans are approved by the Bank's Board of
Directors and/or designated officers in accordance with respective guidelines
and underwriting policies of the Bank. Loans to any one borrower are limited by
applicable state banking laws. Loan officer credit limits generally vary
according to the individual loan officer's experience.
Maturities of Loans
The contractual maturities of the Company's loan portfolio are as shown below.
Actual maturities may differ from contractual maturities because individual
borrowers may have the right to prepay loans with or without prepayment
penalties.
15
Loans as of December 31, 2005
(dollars in thousands)
After one but
Within one within five After five
year years years Total
---------------------------------------------------
Commercial $ 190,391 $ 104,203 $ 20,918 $ 315,512
Real Estate
Construction, land and land development 79,381 51,398 880 131,659
1-4 family residential 17,340 54,082 10,735 82,157
Commercial 19,569 233,531 53,704 306,804
Consumer and other loans 17,467 14,732 339 32,538
---------------------------------------------------
Total Loans $ 324,148 $ 457,946 $ 86,576 $ 868,670
===================================================
After one but
within five After five
years years
--------------------------
Loan maturities after one year with:
Fixed rates $ 346,219 $ 40,508
Variable rates 111,727 46,068
--------------------------
$ 457,946 $ 86,576
==========================
Risk Elements
The following table sets forth information concerning the Company's
non-performing assets for the past five years ending December 31, 2005 (dollars
in thousands).
Years Ended December 31
---------------------------------------------------------
2005 2004 2003 2002 2001
---------------------------------------------------------
Non-accrual loans $ 4,145 $ 785 $ 1,668 $ 1,354 $ 878
Loans past due 90 days and still
accruing interest 767 75 125 545 396
---------------------------------------------------------
Total non-performing loans 4,912 860 1,793 1,899 1,274
Other real estate owned 497 175 441 529 1,089
---------------------------------------------------------
Total non-performing assets $ 5,409 $ 1,035 $ 2,234 $ 2,428 $ 2,363
=========================================================
Non-performing loans to total loans 0.57% 0.12% 0.30% 0.39% 0.26%
Non-performing assets to total loans 0.62% 0.14% 0.37% 0.50% 0.48%
Non-performing assets to total assets 0.43% 0.09% 0.22% 0.27% 0.29%
The accrual of interest on past due and other impaired loans is generally
discontinued at 90 days or when, in the opinion of management, the borrower may
be unable to make payments as they become due. Interest income is subsequently
recognized only to the extent cash payments are received. In certain cases,
interest may continue to accrue on loans past due more than 90 days when the
value of the collateral is sufficient to cover both the principal amount of the
loan and accrued interest. Interest income on restructured loans is recognized
pursuant to the terms of the new loan agreement. Interest income on other
impaired loans is monitored and based upon the terms of the underlying loan
agreement. However, the recorded net investment in impaired loans, including
accrued interest, is limited to the present value of the expected cash flows of
the impaired loan or the observable fair market value of the loan's collateral.
16
Outstanding loans of approximately $6,738,000 were placed on non-accrual status
during 2005, with total non-accrual loans equaling $4,145,000 as of December 31,
2005. Two loans totaling approximately $6.1 million accounted for the majority
of the total placed on non-accrual during the year. One of those loans was
foreclosed upon and was subsequently sold prior to the end of the year and the
second one, with a balance of approximately $3.9 million, makes up the majority
of the December 31, 2005 non-accrual loans. For additional information on this
loan, see the "Results of Operations - 2005 Compared to 2004" section of this
report. The average balance of non-accrual loans during 2005 was approximately
$1.9 million. The total amount of loans on non-accrual status as of December 31,
2004 was $785,000. Loans are placed on non-accrual status when there is doubt as
to the borrower's ability to make scheduled principal and interest payments. A
loan may be removed from non-accrual status when payments have resumed and it is
reasonable to expect continued payment performance. For the years ended December
31, 2005, 2004 and 2003, interest income, which would have been recorded under
the original terms of such loans, was approximately $91,000, $98,000 and
$102,000, respectively. For the periods shown above, there were no restructured
loans. As of December 31, 2005, there were no additional potential problem loans
identified that are not included in the table above.
SUMMARY OF THE ALLOWANCE FOR LOAN LOSSES
The provision for loan losses represents charges made to earnings to maintain an
adequate allowance for loan losses. The allowance for loan losses is
management's best estimate of probable losses inherent in the loan portfolio as
of the balance sheet date. Factors considered in establishing an appropriate
allowance include: an assessment of the financial condition of the borrower; a
realistic determination of value and adequacy of underlying collateral; the
condition of the local economy and the condition of the specific industry of the
borrower; an analysis of the levels and trends of loan categories; and a review
of delinquent and classified loans.
The adequacy of the allowance for loan losses is evaluated quarterly by
management and reviewed by the Bank's Board of Directors. This evaluation
focuses on specific loan reviews, changes in the type and volume of the loan
portfolio given the current and forecasted economic conditions and historical
loss experience. Any one of the following conditions may result in the review of
a specific loan: concern about whether the customer's cash flow or net worth is
sufficient to repay the loan; delinquency status; criticism of the loan in a
regulatory examination; the suspension of interest accrual; or other reasons,
including 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.
Change in the Allowance for Loan Losses
The Company's policy is to charge off loans when, in management's opinion, the
loan is deemed uncollectible, although concerted efforts are made to maximize
future recoveries. The following table sets forth information regarding changes
in the Company's allowance for loan losses for the most recent five years
(dollars in thousands):
17
Analysis of the Allowance for Loan Losses for the Years
Ended December 31
------------------------------------------------------------
2005 2004 2003 2002 2001
------------------------------------------------------------
Balance at beginning of period $ 6,527 $ 5,975 $ 4,494 $ 4,240 $ 4,194
Charge-offs:
Commercial 685 499 302 943 926
Real Estate
Construction, land and land development 6 - - - -
1-4 family residential 69 230 4 56 -
Commercial - - - - -
Consumer and other loans 63 86 179 195 157
------------------------------------------------------------
823 815 485 1,194 1,083
------------------------------------------------------------
Recoveries:
Commercial 78 33 145 499 40
Real Estate
Construction, land and land development - - - - -
1-4 family residential 22 80 - - -
Commercial - - - - -
Consumer and other loans 36 54 60 39 26
------------------------------------------------------------
136 167 205 538 66
------------------------------------------------------------
Net charge-offs 687 648 280 656 1,017
Allowance related to acquisition - - 911 - -
Provision for loan losses charged
to operations 1,775 1,200 850 910 1,063
------------------------------------------------------------
Balance at end of period $ 7,615 $ 6,527 $ 5,975 $ 4,494 $ 4,240
============================================================
Average loans outstanding $ 785,164 $ 645,875 $ 531,033 $ 482,013 $ 495,825
============================================================
Ratio of net charge-offs during the period to
average loans outstanding 0.09% 0.10% 0.05% 0.14% 0.21%
============================================================
Ratio of allowance for loan losses to average
loans outstanding 0.97% 1.01% 1.13% 0.93% 0.86%
============================================================
As the previous table indicates the provision for loan losses and the allowance
acquired in the Hawkeye State Bank transaction are the most significant changes
in the reserve level for the five-year period presented. In the year 2001, the
net charge-off ratio was .21 percent and primarily included a number of
commercial loans. The net charge-off ratio for 2002 dropped to .14 percent
because of higher amounts recovered on loans that had been charged off in prior
years. The net charge-off ratio for 2003 was .05 percent, which is attributed to
the close monitoring of the loan portfolio and active collection efforts after a
loan has been charged off. The net charge-off ratios for 2004 and 2005 were .10
percent and .09 percent, respectively, which were slightly higher than 2003, but
still at levels that management considers good when compared to our peers.
According to the September 2005 Bank Holding Company Performance Report prepared
by the Federal Reserve Board's Division of Banking Supervision and Regulation,
the percentage of net charge-offs to average loans for all banks with total
assets between $1 billion and $3 billion was .14 percent for the first nine
months of 2005.
Factors that are considered when determining the adequacy of the allowance
include loan concentrations, loan growth, the economic outlook and historical
losses. The Company's concentration risks include geographic concentration in
central Iowa. The local economy is comprised primarily of service industries and
state and county governments. It is expected that the economy will grow at a
slightly slower pace in 2006 than it did in 2005. It is not possible to
determine the impact on the Company of potentially slower economic growth.
18
Breakdown of Allowance for Loan Losses by Category
The following table sets forth information concerning the Company's allocation
of the allowance for loan losses (dollars in thousands):
2005 2004 2003 2002 2001
-------------------------------------------------------------------------------------
Amount % * Amount % * Amount % * Amount % * Amount % *
-------------------------------------------------------------------------------------
Balance at end of period applicable to:
Commercial $ 2,717 36.32% $ 3,443 36.98% $ 3,659 40.69% $ 2,934 48.30% $ 2,315 45.83%
Real Estate
Construction, land and land
development 532 15.16% 298 12.02% 341 7.37% 279 5.70% 286 6.88%
1-4 family residential 894 9.46% 826 10.40% 179 12.81% 106 11.65% 130 14.51%
Commercial 3,326 35.32% 1,700 37.58% 1,211 34.11% 646 29.38% 856 28.05%
Consumer and other loans 146 3.75% 260 3.01% 585 5.03% 529 4.97% 653 4.73%
-------------------------------------------------------------------------------------
$ 7,615 100.00% $ 6,527 100.00% $ 5,975 100.00% $ 4,494 100.00% $ 4,240 100.00%
=====================================================================================
*Percent of loans in each category to total loans.
The allocation of the allowance for loan losses is dependent upon the change in
balances outstanding in the various categories, the historical net loss
experience by category, which can vary over time, and management's assessment of
economic factors that may influence potential losses in the loan portfolio.
DEPOSITS
Type of Deposits
The Company's primary source of funds is customer deposits. The Company attempts
to attract noninterest-bearing deposits, which are a low cost funding source. In
addition, West Bank offers a variety of interest-bearing accounts designed to
attract both short-term and longer-term deposits from customers.
Interest-bearing accounts earn interest at rates established by Bank management
based on competitive market factors and the Company's need for funds. While
approximately 83 percent of the Bank's certificates of deposit mature in the
next year, it is anticipated that a majority of these certificates will be
renewed. Rate sensitive certificates of deposits in excess of $100,000
experience somewhat higher volatility with regard to renewal volume as the Bank
adjusts rates based upon funding needs. In December 2005, management utilized
wholesale deposits of approximately $50 million with short-term maturities as a
lower-cost source of funding compared to short-term borrowing from the FHLB. In
the event a substantial volume of certificates is not renewed, the Company has
sufficient liquid assets and borrowing lines to fund significant runoff. A
sustained reduction in deposit volume would have a significant negative impact
on the Company's operations and liquidity.
The following table sets forth the average balances for each major category of
deposits and the weighted average interest rate paid for deposits during the
years ended December 31, 2005, 2004 and 2003 (dollars in thousands).
Average Deposits by Type
----------------------------------------------------------------------
2005 2004 2003
----------------------------------------------------------------------
Amount Rate Amount Rate Amount Rate
----------------------------------------------------------------------
Noninterest-bearing demand
deposits $ 194,957 - $ 175,605 - $ 148,648 -
Interest-bearing demand deposits
44,633 0.41% 42,360 0.20% 41,078 0.27%
Money market deposits 220,089 2.02% 259,012 1.09% 225,811 1.02%
Savings deposits 68,785 1.23% 94,385 0.81% 79,097 0.83%
Time certificates 333,912 3.13% 193,379 1.94% 113,910 2.34%
--------- --------- ---------
$ 862,376 $ 764,741 $ 608,544
========= ========= =========
19
Certificates of Deposit
The following table shows the amounts and remaining maturities of time
certificates of deposit with balances of $100,000 or more at December 31, 2005,
2004 and 2003 (in thousands).
As of December 31
-------------------------------------------
2005 2004 2003
-------------------------------------------
3 months or less $ 135,646 $ 77,090 $ 23,804
Over 3 through 6 months 50,289 41,085 11,396
Over 6 through 12 months 43,614 25,154 14,495
Over 12 months 39,508 50,387 13,768
-------------------------------------------
$ 269,057 $ 193,716 $ 63,463
===========================================
BORROWED FUNDS
The following table summarizes the outstanding amount of and the average rate on
borrowed funds as of December 31, 2005, 2004 and 2003 (in thousands).
As of December 31
-------------------------------------------------------------------------
2005 2004 2003
-------------------------------------------------------------------------
Balance Rate Balance Rate Balance Rate
-------------------------------------------------------------------------
Trust preferred securities $ - -% $ - -% $ 20,000 7.04%
Subordinated notes 20,619 7.04% 20,619 7.04% - - %
Long-term borrowings 78,569 4.98% 81,274 4.48% 86,024 4.30%
Federal funds purchased and securities sold
under agreements to repurchase 84,748 3.94% 74,543 2.18% 85,443 0.68%
Other short-term borrowings 4,732 4.53% 4,668 2.43% 9,142 1.04%
-------------------------------------------------------------------------
$ 188,668 4.73% $ 181,104 3.77% $ 200,609 2.88%
=========================================================================
Long-term borrowings consisted of Federal Home Loan Bank (FHLB) advances, an
installment note payable to VMF Capital, L.L.C. and a note payable to a
correspondent bank. Other short-term borrowings as of the end of each year
included Treasury, Tax and Loan option notes, and notes payable to VMF Capital
L.L.C. At December 31, 2005, other short-term borrowings also included a note
payable to a correspondent bank and at December 31, 2004 also included an FHLB
overnight advance.
20
The following tables set forth the average amount of, the average rate paid and
maximum outstanding balance on borrowed funds for the years ended December 31,
2005, 2004 and 2003 (in thousands).
Years Ended December 31
---------------------------------------------------------------------
2005 2004 2003
---------------------------------------------------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
---------------------------------------------------------------------
Trust preferred securities $ - -% $ - -% $ 9,150 7.04%
Subordinated notes 20,619 7.04% 20,619 7.04% - -%
Long-term borrowings 71,210 4.95% 82,121 4.55% 68,398 4.72%
Federal funds purchased and securities sold
under agreements to repurchase 81,222 3.06% 72,397 1.18% 153,237 0.98%
Other short-term borrowings 50,295 3.35% 27,927 1.59% 1,009 0.85%
---------------------------------------------------------------------
$223,346 4.10% $ 203,064 3.21% $ 231,794 2.32%
=====================================================================
2005 2004 2003
-------- ---------- ----------
Maximum amount outstanding during the year:
Trust preferred securities $ - $ - $ 20,000
Subordinated notes 20,619 20,619 -
Long-term borrowings 80,274 86,024 90,215
Federal funds purchased and securities sold
under agreements to repurchase 135,285 135,987 212,814
Other short-term borrowings 114,920 99,805 9,142
OFF-BALANCE SHEET ARRANGEMENTS
In the normal course of business, the Company commits to extend credit through
vehicles such as loan commitments and standby letters of credit in order to meet
the financing needs of its customers. These commitments expose the company to
varying degrees of credit and market risk in excess of the amount recognized in
the consolidated balance sheets.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments. As of
December 31, 2005 and 2004, the Company had commitments to extend credit of
approximately $247.8 million and $188.5 million, respectively, and standby
letters of credit of approximately $23.2 million and $22.2 million,
respectively.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Company evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained is based on management's credit evaluation of the
party. Collateral held varies, but may include accounts receivable, inventory,
property and equipment, residential real estate, income-producing commercial
properties, crops and livestock.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held varies
as specified above and is required in instances which the Company deems
necessary. In the event the customer does not perform in accordance with the
terms of the agreement with the third party, the Bank would be required to fund
the commitment. The maximum potential amount of future payments the Bank could
be required to make is represented by the contractual amount shown above. If the
commitments were funded, the Bank would be entitled to seek recovery from the
customer. At December 31, 2005 and 2004, no amounts had been recorded as
liabilities for the Bank's potential obligations under these guarantees.
21
CONTRACTUAL OBLIGATIONS
The following table sets forth the balance of contractual obligations by
maturity period as of December 31, 2005 (in thousands).
Payments due by period
--------------------------------------------------------
Less than one One to three Three to five More than five
Total year years years years
--------------------------------------------------------------------
Subordinated notes $ 20,619 $ - $ - $ - $ 20,619
Long-term borrowings:
Federal Home Loan Bank advances 69,069 - 36,245 27,315 5,509
Note payable, VMF Capital, L.L.C. (1) 500 - 500 - -
Note payable, correspondent bank 9,000 - 2,000 7,000 -
Operating lease commitments 9,903 1,416 2,169 1,692 4,626
--------------------------------------------------------------------
Total $ 109,091 $ 1,416 $ 40,914 $ 36,007 $ 30,754
====================================================================
1 The $500,000 installment payable to VMF Capital, L.L.C. is due and payable
in January 2007 only if the amount of assets under management by VMF Capital on
the last day of the calendar year immediately preceding the due date of the
installment payment equals or exceeds assets under management as of October 1,
2003.
LIQUIDITY AND CAPITAL RESOURCES
The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all financial commitments and to capitalize on
opportunities for profitable business expansion. The Company's principal source
of funds is deposits, including demand, money market, savings and certificates
of deposit. Other sources include principal repayments on loans, proceeds from
the maturity and sale of investment securities, federal funds purchased,
repurchase agreements, advances from the Federal Home Loan Bank and funds
provided by operations. Liquid assets of cash on hand, balances due from other
banks, federal funds sold and corporate demand notes increased from $30 million
in 2004 to $41 million in 2005. The Bank had additional borrowing capacity
available from the Federal Home Loan Bank ("FHLB") of approximately $80 million
at December 31, 2005 and the Company has a $2.5 million unsecured line of credit
through a large regional correspondent bank. In addition, the Bank has $100
million in borrowing capacity available through unsecured federal funds lines of
credit with correspondent banks. The Bank was utilizing $25 million of those
lines of credit at December 31, 2005. Net cash from operating activities
contributed $22.3 million, $22.6 million and $16.8 million to liquidity for the
years 2005, 2004 and 2003, respectively. These cash flows from operations are
expected to continue in the foreseeable future.
The combination of high levels of potentially liquid assets, cash flows from
operations and additional borrowing capacity provided strong liquidity for the
Company at December 31, 2005.
The Company's total stockholders' equity increased to $104.5 million at December
31, 2005, from $97.6 million at December 31, 2004. Total equity increased due to
retention of earnings after dividend payments. At December 31, 2005,
stockholders' equity was 8.4 percent of total assets, compared to 8.5 percent at
December 31, 2004. No material capital expenditures or material changes in the
capital resource mix are anticipated at this time. The capital levels of the
Company exceed applicable regulatory guidelines as of December 31, 2005.
In April 2005, the Company's Board of Directors authorized the buy-back of the
Company's common stock for a period of twelve months, in an amount not to exceed
$5 million. No repurchases have taken place under this authorization.
On July 14, 2004, the Board of Directors of the Company declared a 5 percent
common stock dividend to be paid on August 2, 2004 to shareholders of record on
July 26, 2004. Any fractional shares resulting from the stock dividend were paid
in cash. The number of outstanding common shares and earnings per common share
in the accompanying financial statements and footnotes reflect the 5 percent
common stock dividend.
INTEREST RATE RISK
Interest rate risk refers to the exposure of earnings and capital arising from
changes in interest rates. Management's objectives are to manage interest rate
risk to work for consistent growth of earnings and capital. Interest rate risk
management focuses on fluctuations in net interest income identified through
computer simulations used to evaluate volatility, interest rate, spread, and
volume assumptions. This risk is quantified and compared against tolerance
levels.
22
The Company uses a purchased computer software simulation modeling program to
measure its exposure to potential interest rate changes. For various assumed
hypothetical changes in market interest rates, this analysis measures the
estimated change in net interest income.
Another measure of interest rate sensitivity is the gap ratio. This ratio
indicates the amount of interest-earning assets re-pricing within a given period
in comparison to the amount of interest-bearing liabilities re-pricing within
the same period of time. A gap ratio of 1.0 indicates a matched position, in
which case the effect on net interest income due to interest rate movements will
be minimal. A gap ratio of less than 1.0 indicates that more liabilities than
assets re-price within the time period and a ratio greater than 1.0 indicates
that more assets re-price than liabilities.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk is comprised primarily of 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 applies
strategies to mitigate this risk. Management does not believe that the Company's
primary market risk exposure and management of that exposure in 2005 changed
compared to 2004.
The following table presents the estimated change in net interest income for the
coming twelve months under several scenarios of assumed interest rate changes
for the rate shock levels shown:
Scenario % Change
300 basis points rising -8.23%
200 basis points rising -4.11%
100 basis points rising -2.32%
Base
100 basis points falling 1.25%
200 basis points falling 1.85%
300 basis points falling 2.75%
As shown above, at December 31, 2005, the estimated effect of an immediate 300
basis point increase in interest rates would cause the Company's net interest
income to decline by 8.23 percent, or approximately $3,300,000 in 2006. The
estimated effect of an immediate 300 basis point decrease in rates would
increase the Company's net interest income by 2.75 percent or approximately
$1,100,000. Because the majority of liabilities subject to interest rate
movements in the short term are of the type that generally lag interest rate
movements in the market, they do not change in the same magnitude in the short
term as the change in market rates.
Computations of the prospective effects of hypothetical interest rate changes
are based on numerous assumptions. Actual values may differ from those
projections set forth above. Further, the computations do not contemplate any
actions the Company may undertake in response to changes in interest rates.
Current interest rates on certain liabilities are at a level that does not allow
for significant re-pricing should market interest rates decline considerably.
The following table sets forth the estimated maturity or re-pricing and the
resulting interest sensitivity gap, of the Company's interest-earning assets and
interest-bearing liabilities and the cumulative interest sensitivity gap at
December 31, 2005. The expected maturities are presented on a contractual basis
or, if more relevant, based on projected call dates. Actual maturities may
differ from contractual maturities because of prepayment assumptions and early
withdrawal of deposits.
23
Three Over 3 Over 1
Months Through 12 Through Over
or Less Months 5 Years 5 Years Total
-----------------------------------------------------------------
Interest-earning assets:
Loans $ 498,368 $ 82,726 $ 261,280 $ 25,130 $ 867,504
Investment securities:
Available for sale 8,687 7,523 99,729 154,395 270,334
Federal funds sold and other
short-term investments 1,241 - - - 1,241
Federal Home Loan Bank stock - - - 4,384 4,384
-----------------------------------------------------------------
Total interest-earning assets 508,296 90,249 361,009 183,909 1,143,463
-----------------------------------------------------------------
Interest-bearing liabilities
Interest-bearing deposits:
Savings, money market and
interest-bearing demand 343,698 - - - 343,698
Time 186,904 138,483 66,148 2,168 393,703
Federal funds purchased and
securities sold under agreement to
repurchase 84,748 - - - 84,748
Other short-term borrowings 4,732 - - - 4,732
Long-term borrowings 9,000 - 64,060 26,128 99,188
-----------------------------------------------------------------
Total interest-bearing liabilities 629,082 138,483 130,208 28,296 926,069
-----------------------------------------------------------------
Interest sensitivity gap per period $ (120,786) $ (48,234) $ 230,801 $ 155,613 $ 217,394
=================================================================
Cumulative interest sensitivity gap $ (120,786) $ (169,020) $ 61,781 $ 217,394 $ 217,394
=================================================================
Interest sensitivity gap ratio 0.81 0.65 2.77 6.50 1.23
=================================================================
Cumulative interest sensitivity gap ratio 0.81 0.78 1.07 1.23 1.23
=================================================================
As of December 31, 2005, the Company's cumulative gap ratios for assets and
liabilities re-pricing within three months and within one year were .81 and .78,
respectively, meaning that the Company is liability sensitive. In other words,
more interest-bearing liabilities will be subject to re-pricing within those
time frames than interest-earning assets. However, the majority of the
interest-bearing liabilities subject to re-pricing within these time frames are
savings, money market and interest - bearing demand deposits. These types of
deposits generally do not re-price as quickly or with the same magnitude as
non-deposit money market instruments.
EFFECTS OF NEW STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In November 2005, the Financial Accounting Standards Board (FASB) issued FASB
Staff Position, or FSP, SFAS 115-1 and SFAS 124-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments. The
FSP addresses determining when an investment is considered impaired and whether
that impairment is other than temporary, and measuring an impairment loss. The
FSP also addresses the accounting after an entity recognizes an
other-than-temporary impairment, and requires certain disclosures about
unrealized losses that the entity did not recognize as other-than-temporary
impairments. The FSP is effective for reporting periods beginning after December
15, 2005. The Company does not expect this FSP to have a material effect on the
financial condition or results of operations.
24
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), Share-Based
Payment. This Statement addresses the accounting for transactions in which an
entity exchanges its equity instruments for goods or services. The Statement
eliminates the ability to account for share-based compensation transactions
using APB Opinion No. 25, Accounting for Stock Issued to Employees, and
generally requires instead that such transactions be accounted for using a
fair-value-based method. For public entities, the cost of employee services
received in exchange for an award of equity instruments, such as restricted
stock grants, will be measured based on the grant-date fair value of those
instruments, and that cost will be recognized over the period during which an
employee is required to provide service in exchange for the award (usually the
vesting period). This Statement is effective for the Company beginning on
January 1, 2006. The implementation of SFAS No. 123R is not expected to have a
material effect on the Company's financial condition or results of operations.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections. SFAS No. 154, is a replacement of APB Opinion No. 20, Accounting
Changes and FASB Statement No. 3, Reporting Accounting Changes in Interim
Financial Statements. SFAS No. 154 requires retrospective application for
voluntary changes in accounting principles unless it is impracticable to do so.
SFAS No. 154 is effective for accounting changes and corrections of errors in
fiscal years beginning after December 15, 2005. Early application is permitted
for accounting changes and corrections of errors during fiscal years beginning
after June 1, 2005. The Company does not expect the requirements of SFAS No. 154
to have a material effect on the financial condition or results of operations
INFLATION
The primary impact of inflation on the Company's operation is increased asset
yields, deposit costs and operating overhead. Unlike most industries, virtually
all of the assets and liabilities of a financial institution are monetary in
nature. As a result, interest rates generally have a more significant impact on
a financial institution's performance than they would on non-financial
companies. Although interest rates do not necessarily move in the same direction
or to the same extent as the prices of goods and services, increases in
inflation generally have resulted in increased interest rates. The effects of
inflation can magnify the growth of assets and, if significant, require that
equity capital increase at a faster rate than otherwise would be necessary.
25
McGladrey & Pullen
Certified Public Accountants
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
West Bancorporation, Inc.
West Des Moines, Iowa
We have audited the consolidated balance sheets of West Bancorporation, Inc. and
subsidiaries as of December 31, 2005 and 2004, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 2005. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of West Bancorporation,
Inc. and subsidiaries as of December 31, 2005 and 2004, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2005, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of West
Bancorporation, Inc. and subsidiaries' internal control over financial reporting
as of December 31, 2005, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and our report dated February 7, 2006 expressed an
unqualified opinion on management's assessment of the effectiveness of West
Bancorporation, Inc. and subsidiaries' internal control over financial reporting
and an unqualified opinion on the effectiveness of West Bancorporation, Inc. and
subsidiaries' internal control over financial reporting.
/s/ McGladrey & Pullen, LLP
Des Moines, Iowa
February 7, 2006
McGladrey & Pullen, LLP is an independent member firm of RSM International, an
affiliation of separate and independent legal entities.
26
McGladrey & Pullen
Certified Public Accountants
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
West Bancorporation, Inc. and subsidiaries
Des Moines, Iowa
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting that West
Bancorporation, Inc. and subsidiaries maintained effective internal control over
financial reporting as of December 31, 2005, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). West Bancorporation, Inc. and
subsidiaries' management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of the
Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the company's
assets that could have a material effect on the financial statements.
McGladrey & Pullen, LLP is an independent member firm of RSM International, an
affiliation of separate and independent legal entities.
27
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that West Bancorporation, Inc. and
subsidiaries maintained effective internal control over financial reporting as
of December 31, 2005 is fairly stated, in all material respects, based on
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also in
our opinion, West Bancorporation, Inc. and subsidiaries maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2005, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the balance sheets of West
Bancorporation, Inc. and subsidiaries as of December 31, 2005 and 2004, and the
related statements of income, stockholders' equity and cash flows for each of
the years in the three-year period ended December 31, 2005, and our report dated
February 7, 2006 expresses an unqualified opinion.
/s/ McGladrey & Pullen, LLP
Des Moines, Iowa
February 7, 2006
28
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of West Bancorporation, Inc. (the "Company") is responsible for
establishing and maintaining adequate internal control over financial reporting.
The Company's internal control system was designed to provide reasonable
assurance to the Company's management and board of directors regarding the
preparation and fair presentation of published financial statements. All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.
West Bancorporation, Inc.'s management assessed the effectiveness of the
Company's internal control over financial reporting as of December 31, 2005. In
making this assessment, it used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control -
Integrated Framework. Based on our assessment we believe that, as of December
31, 2005, the Company's internal control over financial reporting is effective
based on those criteria. The independent registered public accounting firm that
audited the financial statements included in the annual report has issued an
attestation report on management's assessment of the Company's internal control
over financial reporting.
/s/ Thomas E. Stanberry
--------------------------------
Thomas E. Stanberry
Chairman, President and Chief Executive Officer
/s/ Douglas R. Gulling
--------------------------------
Douglas R. Gulling
Executive Vice President and Chief Financial Officer
29
WEST BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2005 AND 2004
2005 2004
-------------- --------------
ASSETS
Cash and due from banks (Note 13) $ 39,424,270 $ 18,686,360
Federal funds sold and other short-term investments 1,241,044 11,193,099
-------------- --------------
CASH AND CASH EQUIVALENTS 40,665,314 29,879,459
Securities available for sale (Notes 2, 7 and 9) 270,333,846 281,110,020
Securities held to maturity (Notes 2, 7 and 9) - 59,419,549
Federal Home Loan Bank stock, at cost (Note 9) 4,384,400 6,522,800
Loans (Notes 3, 7 and 9) 867,504,620 725,845,003
Allowance for loan losses (Note 3) (7,615,188) (6,526,824)
-------------- --------------
Loans, net 859,889,432 719,318,179
Premises and equipment, net (Note 4) 5,650,009 4,309,597
Accrued interest receivable 7,861,647 6,505,047
Goodwill and other intangible assets (Note 5) 27,116,287 16,561,810
Bank-owned life insurance 22,099,259 21,256,138
Other assets (Note 10) 6,380,103 3,551,911
-------------- --------------
$1,244,380,297 $1,148,434,510
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing demand $ 207,492,888 $ 186,710,245
Savings and interest bearing demand 343,697,862 422,560,048
Time, in excess of $100,000 (Note 6) 269,057,298 193,716,248
Other time (Note 6) 124,645,285 62,945,833
-------------- --------------
TOTAL DEPOSITS 944,893,333 865,932,374
Federal funds purchased and securities sold under
agreements to repurchase (Note 9) 84,748,150 74,543,033
Other short-term borrowings (Notes 2 and 7) 4,732,124 4,668,451
Accrued expenses and other liabilities 6,298,408 3,777,903
Subordinated notes (Note 8) 20,619,000 20,619,000
Long-term borrowings (Notes 2, 3 and 9) 78,568,766 81,273,773
-------------- --------------
TOTAL LIABILITIES 1,139,859,781 1,050,814,534
-------------- --------------
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS' EQUITY (Notes 11 and 12)
Common stock, no par value; authorized 50,000,000 shares;
16,701,873 shares issued and outstanding 3,000,000 3,000,000
Additional paid-in capital 32,000,000 32,000,000
Retained earnings 71,950,620 62,565,046
Accumulated other comprehensive income (loss) (2,430,104) 54,930
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY 104,520,516 97,619,976
-------------- --------------
$1,244,380,297 $1,148,434,510
============== ==============
See Notes to Consolidated Financial Statements.
30
WEST BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
2005 2004 2003
------------- ------------- -------------
Interest income:
Loans, including fees $ 50,361,321 $ 37,168,986 $ 32,633,401
Securities:
U.S. Treasury, government agencies and corporations 6,902,778 6,408,522 4,727,838
States and political subdivisions 4,098,811 2,399,378 1,725,250
Other 1,699,978 2,673,791 3,111,436
Federal funds sold and other short-term investments 411,866 947,993 1,263,190
------------- ------------- -------------
TOTAL INTEREST INCOME 63,474,754 49,598,670 43,461,115
------------- ------------- -------------
Interest expense:
Demand and savings deposits 5,482,295 3,681,439 3,084,033
Time deposits 10,458,667 3,759,910 2,665,970
Federal funds purchased and securities sold under
agreements to repurchase 2,484,291 857,050 1,503,051
Other short-term borrowings 1,682,784 444,120 8,564
Trust preferred securities - - 649,280
Subordinated notes 1,471,483 1,475,429 -
Long-term borrowings 3,522,289 3,733,719 3,228,493
------------- ------------- -------------
TOTAL INTEREST EXPENSE 25,101,809 13,951,667 11,139,391
------------- ------------- -------------
NET INTEREST INCOME 38,372,945 35,647,003 32,321,724
Provision for loan losses (Note 3) 1,775,000 1,200,000 850,000
------------- ------------- -------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 36,597,945 34,447,003 31,471,724
------------- ------------- -------------
Noninterest income:
Service charges on deposit accounts 4,659,509 4,968,077 4,984,373
Trust services 820,292 631,500 507,000
Investment advisory fees 3,349,386 2,682,690 503,899
Increase in cash value of bank-owned life insurance 843,122 869,423 666,785
Proceeds from bank-owned life insurance - - 821,254
Net realized gains from sales of securities available for sale 290,941 198,877 299,562
Other income 1,553,693 1,355,342 1,522,348
------------- ------------- -------------
TOTAL NONINTEREST INCOME 11,516,943 10,705,909 9,305,221
------------- ------------- -------------
Noninterest expense:
Salaries and employee benefits 10,307,508 9,680,139 7,700,608
Occupancy 2,497,104 2,056,755 1,582,660
Data processing 1,428,509 1,360,724 1,130,131
Charitable contributions 146,990 147,584 1,483,516
Other expenses 4,264,663 3,722,923 2,797,331
------------- ------------- -------------
TOTAL NONINTEREST EXPENSE 18,644,774 16,968,125 14,694,246
------------- ------------- -------------
INCOME BEFORE INCOME TAXES 29,470,114 28,184,787 26,082,699
Income taxes (Note 10) 9,395,361 9,570,310 8,800,071
------------- ------------- -------------
NET INCOME $ 20,074,753 $ 18,614,477 $ 17,282,628
============= ============= =============
Earnings per share, basic $ 1.20 $ 1.11 $ 1.02
============= ============= =============
See Notes to Consolidated Financial Statements.
31
WEST BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
Accumulated
Additional Other
Comprehensive Common Paid-in Retained Comprehensive
Income Stock Capital Earnings Income (Loss) Total
------------- ------------ ------------ ------------- -------------- ------------
Balance, December 31, 2002 $ 3,000,000 $ 32,000,000 $ 49,792,716 $ 1,031,446 $ 85,824,162
Comprehensive income:
Net income $ 17,282,628 - - 17,282,628 - 17,282,628
Other comprehensive income,
unrealized gains on securities,
net of reclassification adjustment,
net of tax 68,127 - - - 68,127 68,127
-------------
Total comprehensive income $ 17,350,755
=============
Cash dividends declared, $0.610 per
share - - (10,278,573) - (10,278,573)
------------ ------------ ------------- -------------- ------------
Balance, December 31, 2003 3,000,000 32,000,000 56,796,771 1,099,573 92,896,344
Comprehensive income:
Net income $ 18,614,477 - - 18,614,477 - 18,614,477
Other comprehensive loss, unrealized
(losses) on securities, net of
reclassification adjustment,
net of tax (1,044,643) - - - (1,044,643) (1,044,643)
-------------
Total comprehensive income $ 17,569,834
=============
Cash dividends declared, $0.625 per
share - - (10,483,877) - (10,483,877)
Purchase of fractional shares
resulting from stock dividend - - (2,090) - (2,090)
Shares reacquired under the common
stock repurchase plan - - (2,360,235) - (2,360,235)
------------ ------------ ------------- -------------- ------------
Balance, December 31, 2004 3,000,000 32,000,000 62,565,046 54,930 97,619,976
Comprehensive income:
Net income $ 20,074,753 - - 20,074,753 - 20,074,753
Other comprehensive loss, unrealized
(losses) on securities, net of
reclassification adjustment,
net of tax (2,485,034) - - - (2,485,034) (2,485,034)
-------------
Total comprehensive income $ 17,589,719
=============
Cash dividends declared, $0.640 per
share - - (10,689,179) - (10,689,179)
------------ ------------ ------------- -------------- ------------
BALANCE, DECEMBER 31, 2005 $ 3,000,000 $ 32,000,000 $ 71,950,620 $ (2,430,104) $104,520,516
============ ============ ============= ============== ============
See Notes to Consolidated Financial Statements.
32
WEST BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
2005 2004 2003
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 20,074,753 $ 18,614,477 $ 17,282,628
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 1,775,000 1,200,000 850,000
Net amortization and accretion 1,020,841 1,910,806 1,833,470
Loss on disposition of fixed assets 29,144 28,236 -
Net (gains) from sales of securities available for sale and loans
held for sale (460,568) (351,343) (657,029)
Proceeds from sales of loans held for sale 15,830,780 12,977,354 34,940,846
Originations of loans held for sale (15,537,153) (12,878,888) (34,626,996)
Increase in value of bank-owned life insurance (843,122) (869,423) (666,785)
Depreciation 551,982 359,004 252,164
Deferred income taxes (351,914) 486,713 (265,517)
Change in assets and liabilities:
(Increase) in accrued interest receivable (1,356,600) (626,167) (674,677)
Increase (decrease) in accrued expenses and other liabilities 1,605,580 1,745,612 (1,483,171)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 22,338,723 22,596,381 16,784,933
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales, calls and maturities of securities
available for sale 90,552,674 103,179,320 48,649,704
Purchases of securities available for sale (44,478,980) (195,052,005) (147,154,163)
Proceeds from maturities and calls of securities held to maturity 19,431,000 48,453,000 70,566,334
Purchases of securities held to maturity - (30,717,948) (16,755,419)
Cash effect of Hawkeye State Bank, VMF Capital
and Investors Management Group, Ltd. transactions (9,479,215) - 19,124,018
Acquisition of Federal Home Loan Bank stock (14,998,900) (12,591,300) (446,900)
Proceeds from redemption of Federal Home Loan Bank stock 17,137,300 11,266,100 191,400
Net (increase) in loans (142,470,253) (127,084,359) (26,501,634)
Purchases of premises and equipment (1,409,672) (1,013,817) (180,406)
Purchase of bank-owned life insurance - - (20,000,000)
Change in other assets (1,977,392) (37,707) 354,362
------------ ------------ ------------
NET CASH (USED IN) INVESTING ACTIVITIES (87,693,438) (203,598,716) (72,152,704)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 78,960,959 160,858,361 (10,343,765)
Net change in federal funds purchased and securities
sold under agreements to repurchase 10,205,117 (10,899,642) (43,321,061)
Net change in other short-term borrowings (1,436,327) (5,023,522) 4,045,101
Proceeds from issuing trust preferred securities - - 20,000,000
Proceeds from long-term borrowings 10,000,000 10,619,000 1,550,000
Principal payments on long-term borrowings (10,900,000) (13,900,000) (5,424,200)
Purchase of fractional shares resulting from stock dividend - (2,090) -
Payment for shares reacquired under common stock
repurchase plan - (2,360,235) -
Cash dividends (10,689,179) (10,483,877) (10,278,573)
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 76,140,570 128,807,995 (43,772,498)
------------ ------------ ------------
(Continued)
33
WEST BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
2005 2004 2003
------------ -------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 10,785,855 $ (52,194,340) $ (99,140,269)
CASH AND CASH EQUIVALENTS
Beginning 29,879,459 82,073,799 181,214,068
------------ -------------- -------------
Ending $ 40,665,314 $ 29,879,459 $ 82,073,799
============ ============== =============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash payments for:
Interest $ 23,851,270 $ 12,939,967 $ 11,523,793
Income taxes 9,541,763 8,548,000 9,747,183
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Assets and (liabilities) received in conjunction with
acquisition transactions:
Cash $ 520,785 $ - $ 22,701,753
Investment securities - - 17,424,813
Federal Home Loan Bank stock - - 1,812,400
Loans, net - - 83,725,241
Premises and equipment 511,866 - 2,360,129
Goodwill 8,392,706 - 14,518,585
Core deposit and other intangibles 2,186,000 - 2,503,982
Other assets 244,706 - 1,206,565
Deposits - - (102,319,278)
Federal Home Loan Bank advances - - (38,614,630)
Securities sold under agreements to repurchase - - (1,345,065)
Deferred tax liability (879,409) - -
Other liabilities (976,654) - (396,760)
------------ -------------- -------------
10,000,000 - 3,577,735
Less cash acquired (520,785) - (22,701,753)
------------ -------------- -------------
NET CASH USED IN (PROVIDED BY) TRANSACTIONS $ 9,479,215 $ - $ (19,124,018)
============ ============== =============
See Notes to Consolidated Financial Statements.
34
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Organization and nature of business: West Bancorporation, Inc. (the "Holding
Company") is a holding company that has three wholly-owned subsidiaries: West
Bank (the "Bank"), WB Capital Management Inc. ("WB Capital"), and Investors
Management Group, Ltd. ("IMG") (referred to collectively as the "Company"). The
Bank is state chartered and has its main office in West Des Moines, Iowa, with
seven branches located in the Des Moines metropolitan area and three branches
located in the Iowa City metropolitan area. WB Capital (d/b/a "VMF Capital") was
formed in 2003 and is an investment advisory firm with offices located in West
Des Moines and Cedar Rapids, Iowa. IMG, which was incorporated in 1982, was
purchased on December 30, 2005, and is an investment advisory firm located in
West Des Moines, Iowa. In addition, the Company owns a non-consolidated
subsidiary, West Bancorporation Capital Trust I (the "Trust"), which was formed
in 2003 for the purpose of issuing trust preferred securities.
Significant accounting policies:
Accounting estimates and assumptions: The consolidated financial
statements have been prepared in conformity with generally accepted
accounting principles. In preparing the financial statements, management
is required to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the reported amounts of revenue and
expense for the reporting 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.
Consolidation policy: The consolidated financial statements include the
accounts of the Holding Company, the Bank, WB Capital and IMG. All
significant intercompany transactions and balances have been eliminated in
consolidation. A revision to FASB Interpretation No. 46, Consolidation of
Variable Interest Entities, in the first quarter of 2004 stated that the
financial statements for the Trust should not be consolidated with the
Company's and intercompany transactions should not be eliminated. The
result of this change was that the balance of subordinated debt increased
by $619,000, which represents debt issued by the Company to the Trust. In
addition, other assets increased by $619,000, which represents the
Company's investment in the common stock of the Trust. The results of the
Trust are recorded on the books of the Company using the equity method of
accounting. There was no impact to net income as a result of this change.
Other comprehensive income: The Financial Accounting Standards Board
(FASB) Statement No. 130 requires unrealized gains and losses on the
Company's securities available for sale to be included in comprehensive
income.
Cash and cash equivalents: For the statement of cash flow purposes, the
Company considers cash, due from banks, federal funds sold and short-term
investments, including money market mutual funds, to be cash and cash
equivalents.
Securities: Securities available for sale are reported at fair value, with
unrealized gains and losses reported as a separate component of
accumulated other comprehensive income, net of deferred income taxes.
Available for sale securities may be sold for general liquidity needs,
response to market interest rate fluctuations, implementation of
asset-liability management strategies, funding increased loan demand,
changes in securities prepayment risk or other similar factors. Realized
gains and losses on sales are computed on a specific identification basis.
35
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Securities held to maturity consist of debt securities for which the
Company has the positive intent and the ability to hold to maturity. They
are stated at cost, net of premium amortization and discount accretion.
During 2005, the Company transferred all held to maturity investment
securities to the available for sale category. The related unrealized
gains at the date of transfer were included in other comprehensive income.
The decision to transfer all held to maturity securities to the available
for sale category was made to allow the entire investment portfolio to be
managed on a total return basis.
The amortized cost of debt securities classified as available for sale or
held to maturity is adjusted for accretion of discounts to maturity and
amortization of premiums over the estimated average life of each security,
or in the case of callable securities, through the first call date, using
the effective yield method. Such amortization and accretion is included in
interest income.
Declines in the fair value of individual securities, classified as either
available for sale or held to maturity, below their amortized cost, that
are determined to be other than temporary, result in write-downs of the
individual securities to their fair value with the resulting write-downs
included in current earnings as realized losses.
Loans: Loans are stated at the principal amounts outstanding net of
unearned loan fees with interest income recognized on the interest method
based upon those outstanding loan balances.
The accrual of interest on past due and other impaired loans is generally
discontinued at 90 days or when, in the opinion of management, the
borrower may be unable to make payments as they become due. Interest
income is subsequently recognized only to the extent cash payments are
received.
A loan is impaired when it is probable the Bank will be unable to collect
all contractual principal and interest payments due in accordance with the
terms of the loan agreement. Impaired loans are measured based on the
present value of expected future cash flows discounted at the loan's
effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. The amount of impairment, if any, and any subsequent
changes are included in the allowance for loan losses.
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 allowance is an amount
that management believes will be adequate to absorb probable losses on
existing loans, based on an evaluation of the collectibility of loans and
prior loss experience. This evaluation also takes into consideration such
factors as changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans, and current economic
conditions that may affect the borrower's ability to pay. While management
uses the best information available to make its evaluation, future
adjustments to the allowance may be necessary if there are significant
changes in economic conditions. In addition, regulatory agencies, as an
integral part of their examination process, periodically review the Bank's
allowance for loan losses, and may require the Bank to make additions to
the allowance based on their judgment about information available to them
at the time of their examinations.
Premises and equipment: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets.
Trust assets: Assets held by the Bank in fiduciary or agency capacities
are not included in the consolidated financial statements.
36
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Investment advisory assets under management: Assets managed by WB Capital
and IMG are not included in the consolidated financial statements.
Intangible assets: The price paid over the net fair value of the acquired
businesses ("goodwill") is not amortized. Other intangible assets are
amortized over their estimated useful lives, using straight-line and
accelerated methods. The recoverability of goodwill and other intangible
assets is evaluated annually, at a minimum, or on an interim basis if
events or circumstances indicate a possible inability to realize the
carrying amount.
Bank-owned life insurance: The carrying amount of bank-owned life
insurance consists of the initial premium paid plus increases in cash
value less the carrying amount associated with any death benefit received.
Death benefits paid in excess of the applicable carrying amount are
recognized as income, which is exempt from income taxes.
Income taxes: The Company files a consolidated federal income tax return.
Income tax expense is generally allocated as if the Holding Company and
its subsidiaries file separate income tax returns. Deferred taxes are
provided on a liability method whereby deferred tax assets are recognized
for deductible temporary differences and operating loss and tax credit
carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the changes between the
reported amounts of assets and liabilities and their tax basis. Deferred
tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized.
Current accounting developments: In November 2005, the Financial
Accounting Standards Board (FASB) issued FASB Staff Position, or FSP, SFAS
115-1 and SFAS 124-1, The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments. The FSP addresses determining when
an investment is considered impaired and whether that impairment is other
than temporary, and measuring an impairment loss. The FSP also addresses
the accounting after an entity recognizes an other-than-temporary
impairment, and requires certain disclosures about unrealized losses that
the entity did not recognize as other-than-temporary impairments. The FSP
is effective for reporting periods beginning after December 15, 2005. The
Company does not expect this FSP to have a material effect on the
financial condition or results of operations.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), Share-Based
Payment. This Statement addresses the accounting for transactions in which
an entity exchanges its equity instruments for goods or services. The
Statement eliminates the ability to account for share-based compensation
transactions using APB Opinion No. 25, Accounting for Stock Issued to
Employees, and generally requires instead that such transactions be
accounted for using a fair-value-based method. For public entities, the
cost of employee services received in exchange for an award of equity
instruments, such as restricted stock grants, will be measured based on
the grant-date fair value of those instruments, and that cost will be
recognized over the period during which an employee is required to provide
service in exchange for the award (usually the vesting period). This
Statement is effective for the Company beginning on January 1, 2006. The
implementation of SFAS No. 123R is not expected to have a material effect
on the Company's financial condition or results of operations.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections. SFAS No. 154, is a replacement of APB Opinion No. 20,
Accounting Changes and FASB Statement No. 3, Reporting Accounting Changes
in Interim Financial Statements. SFAS No. 154 requires retrospective
application for voluntary changes in accounting principles unless it is
impracticable to do so. SFAS No. 154 is effective for accounting changes
and corrections of errors in fiscal years beginning after December 15,
2005. Early application is permitted for accounting changes and
corrections of errors during fiscal years beginning after June 1, 2005.
The Company does not expect the requirements of SFAS No. 154 to have a
material effect on the financial condition or results of operations.
37
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Acquisitions: On July 18, 2003, the Company, through its wholly-owned bank
subsidiary, West Bank, purchased the assets and assumed certain
liabilities of Hawkeye State Bank in Iowa City, Iowa. In conjunction with
this acquisition, the Company issued $20,000,000 in company-obligated,
mandatorily redeemable preferred securities (commonly known as trust
preferred securities) through a pooled transaction. Goodwill of
$13,376,000 and a core deposit intangible of $1,680,000 were recorded as a
result of the transaction. The core deposit intangible is being amortized
over an estimated average life of approximately seven years.
On October 1, 2003, the Company, through a newly formed subsidiary, WB
Capital Management Inc., purchased the assets and assumed certain
liabilities of VMF Capital, L.L.C. The company does business as VMF
Capital. The purchase price was paid for with a combination of cash and a
note payable. The payment of the note is contingent upon maintaining a
certain amount of assets under management, which is expected to occur.
Additional payments are contingent upon the attainment of certain
profitability measures. Based upon operating results for the year ended
December 31, 2005, an additional contingent payment of approximately
$315,000 was recorded as additional goodwill and as a liability. The
probability of attaining those profitability measures for the remainder of
the contingent period, through December 31, 2008, is likely based on
management's judgment. The maximum amount of additional payments
contingent upon profitability measures is $1,685,000. Goodwill of
$1,162,000 and identifiable intangible assets of $824,000 were recorded at
the time of the purchase transaction. The identifiable intangible assets
are being amortized over estimated lives of 6 - 10 years.
On December 30, 2005, the Company purchased 100 percent of the stock of
Investors Management Group, Ltd. (IMG). The transaction was effective as
of the end of 2005. The purchase price was paid by cash. In conjunction
with this acquisition, the Company borrowed $10,000,000 from a regional
correspondent bank. Goodwill of $8,393,000 (not deductible for tax
purposes) and identifiable intangible assets of $2,186,000 ($2,009,000 of
which is not deductible for tax purposes) were recorded with this
transaction. The identifiable intangible assets are being amortized over
estimated lives of 4 - 10 years. IMG is an investment advisor focusing on
fixed income assets, which complements and adds to the investment advisory
services offered through VMF Capital.
The operations of the former Hawkeye State Bank offices and VMF Capital
are included in the consolidated statements of income, and cash flows from
the date of acquisition and the operations of IMG will be included
beginning in 2006.
Earnings per share: Earnings per share represents income available to
common shareholders divided by the weighted average number of shares
outstanding during the period.
On July 14, 2004, the Board of Directors of the Company declared a 5
percent common stock dividend, which was effective on August 2, 2004.
Fractional shares resulting from the stock dividend were paid in cash. The
average number of common shares outstanding and the earnings per common
share have been restated for the stock dividend as if it occurred on
January 1, 2003.
38
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Presented below are the numerator and denominator used in the computations
for earnings per common share for the years ended December 31: (The
Company has no common equivalent shares that could cause dilution.)
2005 2004 2003
----------- ----------- -----------
Numerator, income available to
common stockholders $20,074,753 $18,614,477 $17,282,628
=========== =========== ===========
Denominator, weighted-average
shares outstanding 16,701,843 16,761,278 16,863,285
=========== =========== ===========
Basic earnings per common share $ 1.20 $ 1.11 $ 1.02
=========== =========== ===========
NOTE 2. SECURITIES
Securities available for sale are as follows as of December 31, 2005 and 2004:
2005
---------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
------------- ---------- ------------ -------------
U.S. Government agencies and corporations $ 150,093,417 $ 2,700 $ (3,049,226) $ 147,046,891
State and political subdivisions 104,662,390 531,810 (1,247,223) 103,946,977
Corporate notes and other investments 19,495,801 154,924 (310,747) 19,339,978
------------- ---------- ------------ -------------
$ 274,251,608 $ 689,434 $ (4,607,196) $ 270,333,846
============= ========== ============ =============
2004
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------- ---------- ------------ -------------
U.S. Government agencies and corporations $ 186,008,795 $ 670,429 $ (378,224) $ 186,301,000
State and political subdivisions 59,220,322 467,694 (959,570) 58,728,446
Corporate notes and other investments 35,790,055 327,497 (36,978) 36,080,574
------------- ---------- ------------ -------------
$ 281,019,172 $1,465,620 $ (1,374,772) $ 281,110,020
============= ========== ============ =============
39
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Securities held to maturity are as follows as of December 31, 2004:
2004
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------- ---------- ------------ -------------
U.S. Government agencies and corporations $ 13,000,532 $ 95,868 $ - $ 13,096,400
State and political subdivisions 38,185,095 629,910 (99,697) 38,715,308
Corporate notes and other investments 8,233,922 148,249 (52,721) 8,329,450
------------- ---------- ------------ -------------
$ 59,419,549 $ 874,027 $ (152,418) $ 60,141,158
============= ========== ============ =============
During 2005, the Company transferred all held to maturity investment securities
to the available for sale category. The net carrying amount of transferred
securities was $39,848,000. The related unrealized gains at the date of transfer
were $413,000, and are included in other comprehensive income. The decision to
transfer all held to maturity securities to the available for sale category was
made to allow the entire investment portfolio to be managed on a total return
basis.
The following tables show the gross fair value and gross unrealized losses,
aggregated by investment category and length of time that individual securities
have been in a continuous loss position, as of December 31, 2005 and 2004:
2005
-----------------------------------------------------------------------------------------
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
-------------------------- --------------------------- ---------------------------
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
VALUE (LOSSES) VALUE (LOSSES) VALUE (LOSSES)
------------ ----------- ------------ ------------ ------------- -----------
U.S. Government agencies and
corporations $ 91,939,695 $(1,787,780) $ 52,104,496 $ (1,261,446) $ 144,044,191 $(3,049,226)
State and political
subdivisions 45,784,117 (629,075) 26,831,182 (618,148) 72,615,299 (1,247,223)
Corporate notes and
other investments 5,801,400 (195,622) 4,591,518 (115,125) 10,392,918 (310,747)
------------ ----------- ------------ ------------ ------------- -----------
$143,525,212 $(2,612,477) $ 83,527,196 $ (1,994,719) $ 227,052,408 $(4,607,196)
============ =========== ============ ============ ============= ===========
40
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2004
-----------------------------------------------------------------------------------------
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
-------------------------- --------------------------- ---------------------------
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
VALUE (LOSSES) VALUE (LOSSES) VALUE (LOSSES)
------------ ----------- ------------ ------------ ------------- -----------
U.S. Government agencies and
corporations $ 57,715,120 $ (272,469) $ 2,887,500 $ (105,755) $ 60,602,620 $ (378,224)
State and political
subdivisions 54,733,968 (1,046,436) 1,239,176 (12,831) 55,973,144 (1,059,267)
Corporate notes and
other investments 11,694,243 (89,699) - - 11,694,243 (89,699)
------------ ----------- ------------ ------------ ------------- -----------
$124,143,331 $(1,408,604) $ 4,126,676 $ (118,586) $ 128,270,007 $(1,527,190)
============ =========== ============ ============ ============= ===========
As of December 31, 2005, the investment portfolio included 25 U.S. agency
securities, 105 municipal securities and five corporate notes with current
unrealized losses that have existed for longer than one year. These securities
reside in the Company's and the Bank's available for sale portfolio. The
majority of the municipal obligations are with Iowa communities considered to be
acceptable credit risks. Because the declines in fair value were due to changes
in market interest rates, not in estimated cash flows, no other-than-temporary
impairment was recorded at December 31, 2005.
The amortized cost and fair value of securities available for sale as of
December 31, 2005 and 2004 by contractual maturity are shown below:
2005 2004
---------------------------------- -----------------------------------
AMORTIZED FAIR Amortized Fair
COST VALUE Cost Value
------------- ------------- ------------- ------------
Due in one year or less $ 7,805,789 $ 7,772,971 $ 25,400,202 $ 25,454,217
Due after one year through five years 108,121,339 106,267,915 80,033,811 79,985,321
Due after five years through ten years 85,065,042 83,600,435 115,059,485 115,323,290
Due after ten years 73,259,438 72,692,525 60,525,674 60,347,192
------------- ------------- ------------- ------------
$ 274,251,608 $ 270,333,846 $ 281,019,172 $281,110,020
============= ============= ============= ============
41
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and fair value of securities held to maturity as of December
31, 2005 and 2004 by contractual maturity are shown below:
2005 2004
---------------------------------- -----------------------------------
AMORTIZED FAIR Amortized Fair
COST VALUE Cost Value
------------- ------------- ------------- ------------
Due in one year or less $ - $ - $ 11,761,280 $ 11,785,795
Due after one year through five years - - 13,002,163 13,210,685
Due after five years through ten years - - 11,174,923 11,405,073
Due after ten years - - 23,481,183 23,739,605
------------- ------------- ------------- ------------
$ - $ - $ 59,419,549 $ 60,141,158
============= ============= ============= ============
For the years ended December 31, 2005, 2004 and 2003, proceeds from sales of
securities available for sale amounted to $26,169,166, $12,388,666 and
$23,310,427, respectively. Security gains of $301,109, $255,845 and $363,881
were realized for the years ended December 31, 2005, 2004 and 2003,
respectively. Security losses of $10,168, $56,968 and $64,319 were realized for
the years ended December 31, 2005, 2004 and 2003, respectively.
Securities with an amortized cost of approximately $239,200,000 and $237,346,000
as of December 31, 2005 and 2004, respectively, were pledged as collateral on
the treasury tax and loan option notes, securities sold under agreements to
repurchase, federal funds purchased, Federal Home Loan Bank (FHLB) notes
payable, and for other purposes as required or permitted by law or regulation.
Securities sold under agreements to repurchase are held in safekeeping on behalf
of the Company.
42
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of other comprehensive income (loss), net unrealized gains
(losses) on securities available for sale, net of tax for the years ended
December 31, 2005, 2004 and 2003, are as follows:
2005 2004 2003
----------- ----------- ---------
Unrealized holding gains (losses) arising
during the period including the reclassification
of held to maturity securities $(3,717,669) $(1,482,872) $ 408,535
----------- ----------- ---------
Less reclassification adjustment for net (gains)
realized in net income (290,941) (198,877) (299,562)
----------- ----------- ---------
OTHER COMPREHENSIVE INCOME (LOSS),
NET UNREALIZED GAINS (LOSSES)
ON SECURITIES AVAILABLE FOR
SALE BEFORE TAX (EXPENSE) CREDIT (4,008,610) (1,681,749) 108,973
Tax (expense) credit 1,523,576 637,106 (40,846)
----------- ----------- ---------
OTHER COMPREHENSIVE INCOME (LOSS),
NET UNREALIZED GAINS (LOSSES) ON
SECURITIES AVAILABLE FOR SALE, NET
OF TAX $(2,485,034) $(1,044,643) $ 68,127
=========== =========== =========
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are as follows, as of December 31, 2005 and 2004:
2005 2004
------------ ------------
Commercial $315,511,895 $268,805,257
Real estate:
Construction, land and land development 131,659,324 87,379,222
1-4 family residential 82,157,459 75,615,737
Commercial 306,803,580 273,204,333
Consumer and other loans 32,538,388 21,897,355
------------ ------------
868,670,646 726,901,904
Unearned loan fees 1,166,026 1,056,901
------------ ------------
$867,504,620 $725,845,003
============ ============
43
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The loan portfolio includes approximately $407,096,000 and $322,027,000 of fixed
rate loans and $461,575,000 and $404,875,000 of variable rate loans as of
December 31, 2005 and 2004, respectively.
Loans of approximately $1,212,000 and $354,000 as of December 31, 2005 and 2004,
respectively, were pledged as collateral on the treasury tax and loan option
notes and for other purposes as required or permitted by regulation.
Changes in the allowance for loan losses were as follows for the years ended
December 31, 2005, 2004 and 2003:
2005 2004 2003
----------- ----------- -----------
Balance, at beginning of year $ 6,526,824 $ 5,975,587 $ 4,493,583
Increase in allowance related to acquisition - - 911,000
Provision for loan losses 1,775,000 1,200,000 850,000
Recoveries 136,130 166,311 205,057
Charge-offs (822,766) (815,074) (484,053)
----------- ----------- -----------
Balance, at end of year $ 7,615,188 $ 6,526,824 $ 5,975,587
=========== =========== ===========
Impaired loans (non-accrual loans) were approximately $4,145,000 and $785,000 as
of December 31, 2005 and 2004, respectively. One impaired loan totaling
$3,867,000 has been specifically reviewed and it has been determined that based
upon the information available a loss is not expected. The remaining balance of
$278,000 consists of five different borrowers. An allowance totaling $70,000 has
been assigned to these loans. The balance of impaired loans at December 31, 2004
comprised eight different borrowers. An allowance totaling $196,000 was assigned
to those loans. The average recorded investment in impaired loans during 2005
and 2004 was approximately $ 1,910,000 and $1,793,000, respectively. Interest
income foregone on impaired loans was approximately $91,000 during 2005 and
$98,000 in 2004. Loans past due 90 days or more and still accruing interest
totaled $767,000 and $75,000 at December 31, 2005 and 2004, respectively.
The Company has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with directors, executive
officers, their immediate families and affiliated companies in which they are
principal stockholders (commonly referred to as related parties), all of which
have been, in the opinion of management, on the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with unrelated parties.
Loan transactions with related parties were as follows for the years ended
December 31, 2005 and 2004:
2005 2004
------------ ------------
Balance, beginning of year $ 14,547,357 $ 17,963,975
New loans 9,356,559 5,863,825
Repayments (9,576,339) (9,280,443)
------------ ------------
Balance, end of year $ 14,327,577 $ 14,547,357
============ ============
44
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. PREMISES AND EQUIPMENT
Premises and equipment are as follows as of December 31, 2005 and 2004:
2005 2004
---------- ----------
Land $1,306,816 $1,306,816
Building 1,014,866 1,014,866
Furniture and equipment 5,194,263 3,644,879
Leasehold improvements 1,243,858 938,764
---------- ----------
8,759,803 6,905,325
Accumulated depreciation 3,109,794 2,595,728
---------- ----------
$5,650,009 $4,309,597
========== ==========
NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is the excess of the cash paid over the net fair value of assets
acquired and liabilities assumed in an acquisition, less the amount of
identifiable intangible assets. Goodwill is not amortized, but is tested for
impairment on an annual basis. The Company has determined that there is no
impairment of goodwill.
Other intangible assets are those that can be separately identified and assigned
a value. Other intangible assets are amortized over their estimated life using
an appropriate amortization method. The Company is using the straight-line
method to amortize the core deposit intangible and employment/non-compete
contracts and accelerated methods to amortize the intangible assets associated
with client lists. The value of the core deposit intangible was determined
according to four major deposit categories: noninterest bearing demand deposits,
interest bearing demand deposits, savings deposits and money market deposits. A
separate estimated life was determined for each component.
Goodwill and other intangible assets primarily result from the acquisition of
Hawkeye State Bank, VMF Capital, L.L.C. and IMG. The following table summarizes
the changes in the gross carrying amount of intangible assets during 2004 and
2005:
Employment/
Noncompete
Goodwill Core Deposit Client Base Contracts Total
----------- ---------- ---------- ----------- -----------
Balance, December 31, 2003 $14,518,585 $1,679,655 $ 499,082 $325,245 $17,022,567
Additions - 2004 19,000 - - - 19,000
----------- ---------- ---------- -------- -----------
Balance, December 31, 2004 14,537,585 1,679,655 499,082 325,245 17,041,567
Additions - 2005 8,707,631 - 2,009,000 177,000 10,893,631
----------- ---------- ---------- -------- -----------
BALANCE, DECEMBER 31, 2005 $23,245,216 $1,679,655 $2,508,082 $502,245 $27,935,198
=========== ========== ========== ======== ===========
45
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The gross carrying amount of intangible assets and the accumulated amortization
at December 31, 2005 and 2004 is presented in the following table:
2005 2004
------------------------------ ---------------------------
ACCUMULATED Accumulated
GROSS AMORTIZATION Gross Amortization
----------- ------------ ----------- ------------
Goodwill $23,245,216 $ - $14,537,585 $ -
Amortized intangible assets:
Core deposit 1,679,655 531,473 1,679,655 314,747
Client base 2,508,082 163,704 499,082 95,012
Employment/noncompete contracts 502,245 123,734 325,245 69,998
----------- ----------- ----------- ------------
$27,935,198 $ 818,911 $17,041,567 $ 479,757
=========== =========== =========== ============
Amortization expense for the years ended December 31, 2005, 2004 and 2003 was
$339,154, $357,677 and $169,810, respectively. The future scheduled amortization
as of December 31, 2005 is as follows:
Employment/
Noncompete
Core Deposit Client Base Contracts Total
------------ ----------- ------------ ----------
2006 $ 216,726 $ 569,399 $ 97,986 $ 884,111
2007 216,726 541,083 97,986 855,795
2008 237,608 391,423 97,986 727,017
2009 204,922 288,212 84,553 577,687
2010 147,662 207,491 - 355,153
Thereafter 124,538 346,770 - 471,308
---------- ---------- ---------- ----------
$1,148,182 $2,344,378 $ 378,511 $3,871,071
========== ========== ========== ==========
NOTE 6. DEPOSITS
At December 31, 2005, the scheduled maturities of time deposits are as follows:
2006 $ 326,608,096
2007 42,618,419
2008 16,227,622
2009 5,675,474
2010 and thereafter 2,572,972
-------------
$ 393,702,583
=============
46
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. OTHER SHORT-TERM BORROWINGS
Short-term borrowings as of December 31, 2005 consisted of Treasury, Tax and
Loan option notes, a note payable to VMF Capital L.L.C. and a note payable to a
regional correspondent bank. Short-term borrowings as of December 31, 2004
consisted of Treasury, Tax and Loan option notes and a note payable to VMF
Capital L.L.C. The Treasury, Tax and Loan option notes and the FHLB short-term
advances are collateralized by certain loans and investment securities.
NOTE 8.
SUBORDINATED NOTES
On July 18, 2003, the Company obtained $20,619,000 in trust preferred securities
from its participation in the issuance of a pooled trust preferred security. The
security has a 30-year maturity, does not require any principal amortization and
is callable in seven years at par at the issuer's option. The interest rate is
fixed for seven years at 6.975 percent and then becomes variable based on the
three-month LIBOR rate plus 3.05 percent. Interest is payable quarterly. Holders
of the subordinated notes have no voting rights, are unsecured, and rank junior
in priority to all of the Company's indebtedness and senior to the Company's
common stock. See Note 1 for a discussion of the accounting principles related
to this debt.
47
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. LONG -TERM BORROWINGS
At December 31, 2005, long -term borrowings consist of the following FHLB
advances, a note payable to VMF Capital, L.L.C. and a note payable to a regional
correspondent bank:
Interest
Amount Rate Maturity
------------- -------- --------
FHLB advances $ 2,975,479 3.34% 2007
33,269,882 4.89 2008(a)
1,971,921 4.16 2009
25,342,472 5.49 2010(a)
5,509,012 3.46 2011
-------------
TOTAL FHLB ADVANCES 69,068,766
-------------
Note payable, VMF Capital, L.L.C. 500,000 6.00 2007
Note payable, correspondent bank 1,000,000 5.50 2007
1,000,000 5.50 2008
1,000,000 5.50 2009
6,000,000 5.50 2010
-------------
TOTAL LONG-TERM PORTION OF NOTE
PAYBLE TO CORRESPONDENT BANK (b) 9,000,000
-------------
TOTAL LONG-TERM BORROWINGS $ 78,568,766
=============
(a) These advances are callable on a quarterly basis.
(b) The interest rate is variable and is tied to prime rate.
The FHLB advances are collateralized by FHLB stock, investment securities and
real estate loans as required by the FHLB's collateral policy. Certain advances
listed above were assumed in the Hawkeye State Bank transaction. Balances shown
and the indicated interest rate reflect purchase accounting adjustments.
The $500,000 installment payable to VMF Capital, L.L.C. is due and payable only
if the amount of assets under the management of WB Capital on the last day of
the calendar year immediately preceding the due date of the installment payment
equals or exceeds assets under management as of October 1, 2003. Management
currently believes this payment will be required.
On December 30, 2005, the Company obtained a $10 million note payable to a large
regional correspondent bank. The proceeds were used to acquire IMG on that date.
Principal is payable in 19 quarterly installments of $250,000 plus a final
payment which is due on December 30, 2010. Principal may be prepaid without
penalty. Interest is payable quarterly and the rate is variable and tied to
prime rate. The loan agreement covenants require the Company to maintain the
Bank's regulatory capital ratios in excess of those required to be
well-capitalized and to maintain the Bank's return on average assets in excess
of 1.25%.
48
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the fourth quarter of 2005, the Company obtained a $2.5 million unsecured
line of credit through a large regional correspondent bank. The interest rate is
variable and tied to LIBOR. Neither this line nor the previously established
line was used during 2005, 2004 or 2003.
At December 31, 2005, the Bank had arrangements to borrow $100 million in
unsecured federal funds lines of credit at correspondent banks which are
available under the correspondent bank's normal terms. Two of these lines expire
at various times through December 2006. The others have no stated expiration
date. As of December 31, 2005, $25 million was outstanding under these
arrangements. The Bank also has additional borrowing capacity of approximately
$80 million at the FHLB as of December 31, 2005.
NOTE 10. INCOME TAXES
The components of income tax expense are as follows for the years ended December
31, 2005, 2004 and 2003:
2005 2004 2003
----------- ---------- -----------
Current:
Federal $ 8,301,232 $7,728,405 $ 7,757,894
State 1,446,043 1,355,192 1,307,694
Deferred (351,914) 486,713 (265,517)
----------- ---------- -----------
$ 9,395,361 $9,570,310 $ 8,800,071
=========== ========== ===========
Total income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 35% to income before income taxes as a result of the
following:
Years Ended December 31,
--------------------------------------------------------------------------------------
2005 2004 2003
--------------------------- ------------------------- ----------------------------
PERCENT Percent Percent
OF PRETAX of Pretax of Pretax
AMOUNT INCOME Amount Income Amount Income
------------ --------- ----------- --------- ----------- ---------
Computed "expected" tax
expense $ 10,314,540 35.0% $ 9,864,676 35.0% $ 9,128,944 35.0%
State income tax, net of
federal income tax benefit 916,753 3.1 902,065 3.2 825,336 3.2
Tax-exempt interest income (1,595,378) (5.4) (971,936) (3.4) (698,784) (2.7)
Nondeductible interest
expense to own
tax-exempts 187,712 0.6 77,507 0.3 53,921 0.2
Tax-exempt life insurance
proceeds and increase
in cash value (295,093) (1.0) (304,298) (1.1) (520,814) (2.0)
Other, net (133,173) (0.4) 2,296 - 11,468 -
------------ ---- ----------- ---- ----------- ----
$ 9,395,361 31.9% $ 9,570,310 34.0% $ 8,800,071 33.7%
============ ==== =========== ==== =========== ====
49
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net deferred tax assets consist of the following as of December 31, 2005 and
2004:
2005 2004
----------- -----------
Deferred tax assets:
Allowance for loan losses $ 2,893,771 $ 2,480,193
Net unrealized losses on securities available for sale 1,487,659 -
Purchase accounting on borrowings 519,230 670,272
State net operating loss carryforward 96,200 101,300
Other 99,932 56,216
----------- -----------
5,096,792 3,307,981
----------- -----------
Deferred tax liabilities:
Deferred loan fees 121,831 164,336
Net unrealized gain on securities available for sale 35,917
Intangibles 2,388,385 1,360,357
Premises and equipment 447,662 397,665
Other 154,824 260,397
----------- -----------
3,112,702 2,218,672
----------- -----------
Net deferred tax asset before valuation allowance 1,984,090 1,089,309
Valuation allowance for deferred tax asset - (101,300)
----------- -----------
NET DEFERRED TAX ASSET $ 1,984,090 $ 988,009
=========== ===========
The Company has approximately $1,604,000 of operating loss carryforwards
available to the Holding Company, WB Capital and IMG to offset future state
taxable income. During 2005, the Company did not record a valuation allowance
against the tax effect of those net operating loss carryforwards, as management
believes it is more likely than not that such carryforwards will be utilized due
to projected taxable income of the non-bank affiliates. The valuation allowance
which was established prior to 2005 was recognized as a reduction to tax expense
in the current year. The state operating loss carryforwards expire as follows:
Year expiring:
2006 $ 42,000
2007 12,000
2008 -
2009 -
2010 and thereafter 1,550,000
------------
$ 1,604,000
============
50
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. REGULATORY CAPITAL REQUIREMENTS
The Company and West Bank are subject to various regulatory capital requirements
administered by federal and state banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators which, if undertaken, could have a direct
material effect on the Company's consolidated financial statements. Under
capital adequacy guidelines and regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Company's and West
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the following table) of total and Tier I capital to risk-weighted
assets and of Tier I capital to average assets. Management believes the Company
and Bank met all capital adequacy requirements to which they are subject as of
December 31, 2005.
As of December 31, 2005, the most recent notification from regulatory agencies
categorized the Bank as well-capitalized under the regulatory framework for
prompt corrective action. There are no conditions or events since that
notification that management believes have changed the Bank's category.
51
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's and West Bank's capital amounts and ratios are as follows:
To Be Well-
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------- ----------------- ------------------
(dollar amounts in thousands) Amount Ratio Amount Ratio Amount Ratio
-------- ----- --------- ----- --------- ------
AS OF DECEMBER 31, 2005:
TOTAL CAPITAL (TO RISK-
WEIGHTED ASSETS)
CONSOLIDATED $107,450 10.8% $ 79,227 8.0% $ 99,036 10.0%
WEST BANK 111,303 11.3 78,926 8.0 98,658 10.0
TIER I CAPITAL (TO RISK-
WEIGHTED ASSETS)
CONSOLIDATED 99,835 10.1 39,613 4.0 59,420 6.0
WEST BANK 83,688 8.5 39,463 4.0 59,195 6.0
TIER I CAPITAL (TO
AVERAGE ASSETS)
CONSOLIDATED 99,835 8.3 48,019 4.0 60,024 5.0
WEST BANK 83,688 7.0 48,122 4.0 60,152 5.0
As of December 31, 2004:
Total Capital (to Risk-
Weighted Assets)
Consolidated $107,530 12.3% $ 69,821 8.0% $ 87,276 10.0%
West Bank 101,128 11.6 69,563 8.0 86,954 10.0
Tier I Capital (to Risk-
Weighted Assets)
Consolidated 101,003 11.6 34,910 4.0 52,366 6.0
West Bank 74,601 8.6 34,782 4.0 52,173 6.0
Tier I Capital (to
Average Assets)
Consolidated 101,003 8.6 47,041 4.0 58,801 5.0
West Bank 74,601 6.4 46,775 4.0 58,469 5.0
The Bank is restricted as to the amount of dividends that may be paid to the
Holding Company without prior regulatory approval. The Bank may not pay
dividends that would result in its capital levels being reduced below the
minimum requirements. As of December 31, 2005, the Bank had approximately $2.5
million of retained earnings available for dividends.
52
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. COMMON STOCK TRANSACTIONS
On April 13, 2005, the Board of Directors authorized the buy-back of the
Company's common stock for a period of twelve months, in an amount not to exceed
$5 million. Since the authorization, there have been no purchases of Company
stock.
On April 12, 2005, shareholders approved the West Bancorporation, Inc.
Restricted Stock Compensation Plan. The plan provides awards to be made until
March 1, 2015, with a maximum of 300,000 shares purchased in the open market to
be issued as awards, subject to certain restrictions. The Compensation Committee
of the Company's Board of Directors administers the Plan. As of December 31,
2005, no awards had been granted.
On July 14, 2004, the Board of Directors of the Company declared a 5 percent
common stock dividend for holders of record on July 26, 2004. As a result of
this action, 795,202 shares of common stock were issued. Fractional shares
resulting from the 5 percent common stock dividend were paid in cash.
On April 15, 2004, the Board of Directors authorized the buy-back of the
Company's common stock for a period of twelve months, in an amount not to exceed
$5 million. Since the authorization, which expired on April 14, 2005, 161,312
shares (restated for the 5 percent common stock dividend) were purchased in the
second quarter of 2004 at a cost of $2,360,235.
NOTE 13. COMMITMENTS AND CONTINGENCIES AND RELATED-PARTY LEASES
The Company leases real estate under several noncancelable operating lease
agreements. Rent expense was approximately $994,000, $881,000 and $773,000 for
the years ended December 31, 2005, 2004 and 2003, respectively.
The Company leases certain real estate from two directors of the Company. Terms
of two noncancelable operating leases were consummated prior to one of the
directors being named by the Company in 1996. Terms for one of the leases were
renegotiated during 2005 and terms of another noncancelable operating lease were
consummated on terms deemed to be at arm's-length. Rent expense to the related
parties was approximately $204,000, $192,000 and $187,000 for the years ended
December 31, 2005, 2004 and 2003, respectively.
The approximate total minimum rental commitments as of December 31, 2005 are as
follows:
Related Party Total
--------------- -----------
2006 $ 223,000 $ 1,416,000
2007 200,000 1,167,000
2008 190,000 1,002,000
2009 194,000 925,000
2010 194,000 767,000
Thereafter 3,083,000 4,626,000
--------------- -----------
$ 4,084,000 $ 9,903,000
=============== ===========
53
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Required reserve balances: The Bank is required to maintain an average reserve
balance with the Federal Reserve Bank. Required reserve balances were
approximately $2,855,000 and $4,122,000 as of December 31, 2005 and 2004,
respectively.
When issued investment securities: As of December 31, 2005, the Bank had
commitments to purchase municipal securities to be issued in January 2006. The
total principal of these securities is approximately $1,738,000.
Financial instruments with off-balance-sheet risk: The Company is party to
financial instruments with off-balance-sheet risk in the normal course of
business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit and standby letters of credit.
These instruments involve, to varying degrees, elements of credit risk in excess
of the amount recognized in the consolidated balance sheets.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as they do for on-balance-sheet instruments. The
Company's commitments as of December 31, 2005 and 2004 are approximately as
follows:
2005 2004
-------------- --------------
Commitments to extend credit $ 247,849,000 $ 188,495,000
Standby letters of credit 23,230,000 22,181,000
-------------- --------------
$ 271,079,000 $ 210,676,000
============= ===============
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Company evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained is based on management's credit evaluation of the
party. Collateral held varies, but may include accounts receivable, inventory,
property and equipment, residential real estate, income-producing commercial
properties, crops and livestock.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held varies
as specified above, and is required in instances in which the Company deems
necessary. In the event the customer does not perform in accordance with the
terms of the agreement with the third party, the Bank would be required to fund
the commitment. The maximum potential amount of future payments the Bank could
be required to make is represented by the contractual amount shown in the
summary above. If the commitment is funded, the Bank would be entitled to seek
recovery from the customer. At December 31, 2005 and 2004, no amounts have been
recorded as liabilities for the Bank's potential obligations under these
guarantees.
54
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Concentrations of credit risk: Substantially all of the Company's loans,
commitments to extend credit, and standby letters of credit have been granted to
customers in the Company's market area (a 50-mile radius of the greater Des
Moines, Iowa, metropolitan area and a 30-mile radius of the Iowa City, Iowa,
metropolitan area). Securities issued by state and political subdivisions
primarily involve governmental entities within the state of Iowa. The
concentrations of credit by type of loan are set forth in Note 3. The
distribution of commitments to extend credit approximates the distribution of
loans outstanding. Standby letters of credit were granted primarily to
commercial borrowers.
Contingencies: In the normal course of business, the Company is involved in
various legal proceedings. In the opinion of management, any liability resulting
from such proceedings would not have a material adverse effect on the
consolidated financial statements.
NOTE 14. EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLAN
The Company restated its profit sharing plan during 2004 to include a stock
ownership plan. The restated plan is an employee savings and stock ownership
plan covering substantially all of its employees. The plan consists of two
components. One component is an employee stock ownership plan. The other
component is a profit sharing plan. Both components have a qualified cash or
deferred arrangement under Code Section 401(k). The purpose of the plan is to
offer participants a systematic program for the accumulation of retirement and
savings income, as well as a means by which to obtain beneficial interest of
ownership in company stock. The stock ownership component of the plan is
intended to invest exclusively in common stock of the Company.
The contributions made by the Company to the profit sharing component are
determined annually by the Board of Directors. Profit sharing expense for the
years ended December 31, 2005, 2004 and 2003 was approximately $358,000,
$413,000 and $323,000, respectively.
The plan allows eligible employees to defer a portion of their compensation
ranging from 1% to the maximum dollar amount allowed by current law. The Company
is required to match a portion of the employees' contribution. The Company's
match is 100% of the first 2% of employee deferrals and 50% of the next 2% of
employee deferrals. Expense for the years ended December 31, 2005, 2004 and 2003
was approximately $180,000, $170,000 and $133,000, respectively.
As of December 31, 2005 and 2004, the plan held 230,856 and 225,551 shares of
Company stock, respectively. These shares are included in the computation of
earnings per share. Dividends on shares held in the plan may be reinvested in
Company stock or paid in cash to the participants.
NOTE 15. ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires
disclosure of fair value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to estimate that
value. In cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to independent
markets and, in many cases, are not necessarily indicative of the amounts that
the Company could realize in a current market exchange. SFAS No. 107 excludes
all nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.
55
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
Cash and due from banks: The carrying amount approximates fair value.
Federal funds sold and other short-term investments: The carrying amount
approximates fair value.
Securities: Fair values for securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based on
quoted market prices of comparable financial instruments.
Federal Home Loan Bank stock: The fair value of this untraded stock is estimated
at its carrying value and redemption price of $100 per share.
Loans: Fair values of loans are estimated using discounted cash flow analysis
based on interest rates currently being offered for loans with similar terms to
borrowers with similar credit quality.
Deposits: The carrying amounts for demand and savings deposits, which represents
the amount payable on demand, approximates their fair values. Fair values for
fixed-rate and variable-rate certificates of deposit are estimated using
discounted cash flow analysis based on interest rates currently being offered on
certificates with similar terms.
Accrued interest receivable and payable: The fair values of both accrued
interest receivable and payable approximate their carrying amounts.
Federal funds purchased and securities sold under agreements to repurchase and
other borrowings: The carrying amounts of federal funds purchased and securities
sold under agreements to repurchase and certain other borrowings approximate
their fair values. Fair values of long-term borrowings including subordinated
notes are estimated using discounted cash flow analysis based on interest rates
currently being offered with similar terms.
Commitments to extend credit and standby letters of credit: The approximate fair
values of commitments and standby letters of credit are considered equal to
their notional values, based on the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
creditworthiness of the counterparties.
56
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The carrying amounts and approximate fair values are as follows as of December
31, 2005 and 2004:
2005 2004
---------------------------- ---- -----------------------
CARRYING APPROXIMATE Carrying Approximate
AMOUNT FAIR VALUE Amount Fair Value
------------------------------------------------------------
Financial assets:
Cash and due from banks $ 39,424,000 $ 39,424,000 $ 18,686,000 $ 18,686,000
Federal funds sold and other short-term 1,241,000 1,241,000 11,193,000 11,193,000
investments
Securities available for sale 270,334,000 270,334,000 281,110,000 281,110,000
Securities held to maturity - - 59,420,000 60,141,000
Federal Home Loan Bank stock 4,384,000 4,384,000 6,523,000 6,523,000
Loans, net 859,889,000 856,920,000 719,318,000 720,682,000
Accrued interest receivables 7,862,000 7,862,000 6,505,000 6,505,000
Financial liabilities:
Deposits 944,893,000 944,855,000 865,932,000 864,399,000
Federal funds purchased and securities sold
under agreements to repurchase 84,748,000 84,748,000 74,543,000 74,543,000
Other short-term borrowings 4,732,000 4,732,000 4,668,000 4,668,000
Accrued interest payable 2,882,000 2,882,000 1,631,000 1,631,000
Subordinated notes 20,619,000 21,769,000 20,619,000 22,796,000
Long-term borrowings 78,569,000 78,604,000 81,274,000 83,600,000
Off-balance-sheet financial instruments:
Commitments to extend credit - - - -
Standby letters of credit - - - -
57
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 16. OPERATING SEGMENTS
An operating segment is generally defined as a component of a business for which
discrete financial information is available and the operating results of which
are regularly reviewed by the chief operating decision-maker. The Company's
primary business segment is banking. The banking segment generates revenue
through interest and fees on loans, service charges on deposit accounts,
interest on investment securities and fees for trust services. The banking
segment includes West Bank, the Holding Company and related elimination entries
between the two, as the Holding Company's operation is similar to the bank. The
"Other" segment represents the Company's investment management subsidiaries and
intercompany eliminations. Selected financial information on the Company's
segments is presented below for the years ended December 31, 2005, 2004 and 2003
(dollars in thousands).
2005
SEGMENTS
-------------------------------------------
BANKING OTHER CONSOLIDATED
-------------------------------------------
Interest income $ 63,475 $ - $ 63,475
Interest expense 25,042 60 25,102
------------ ----------- ------------
Net interest income 38,433 (60) 38,373
Provision for loan losses 1,775 - 1,775
------------ ----------- ------------
Net interest income after provision
for loan losses 36,658 (60) 36,598
Noninterest income 8,168 3,349 11,517
Noninterest expense 16,020 2,625 18,645
------------ ----------- ------------
Income before income taxes 28,806 664 29,470
Income taxes 9,131 264 9,395
------------ ----------- ------------
Net income $ 19,675 $ 400 $ 20,075
============ =========== ============
Depreciation and amortization $ 722 $ 169 $ 891
============ =========== ============
Goodwill $ 13,376 $ 9,869 $ 23,245
============ =========== ============
Total assets $ 1,229,703 $ 14,677 $ 1,244,380
============ =========== ============
58
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2004
Segments
--------------------------------------------
Banking Other Consolidated
--------------------------------------------
Interest income $ 49,599 $ - $ 49,599
Interest expense 13,862 90 13,952
------------ ----------- -------------
Net interest income 35,737 (90) 35,647
Provision for loan losses 1,200 - 1,200
------------ ----------- -------------
Net interest income after provision
for loan losses 34,537 (90) 34,447
Noninterest income 8,023 2,683 10,706
Noninterest expense 14,464 2,504 16,968
------------ ----------- -------------
Income before income taxes 28,096 89 28,185
Income taxes 9,538 33 9,571
------------ ----------- -------------
Net income $ 18,558 $ 56 $ 18,614
============ =========== ====-========
Depreciation and amortization $ 538 $ 173 $ 711
============ =========== =============
Goodwill $ 13,376 $ 1,162 $ 14,538
============ =========== =============
Total assets $ 1,145,686 $ 2,749 $ 1,148,435
============ =========== =============
2003
Segments
--------------------------------------------
Banking Other Consolidated
--------------------------------------------
Interest income $ 43,461 $ - $ 43,461
Interest expense 11,116 23 11,139
------------ ----------- -------------
Net interest income 32,345 (23) 32,322
Provision for loan losses 850 - 850
------------ ----------- -------------
Net interest income after provision
for loan losses 31,495 (23) 31,472
Noninterest income 8,801 504 9,305
Noninterest expense 14,087 607 14,694
------------ ----------- -------------
Income before income taxes 26,209 (126) 26,083
Income taxes 8,844 (44) 8,800
------------ ----------- -------------
Net income $ 17,365 $ (82) $ 17,283
============ =========== =============
Depreciation and amortization $ 365 $ 52 $ 417
============ =========== =============
Goodwill $ 13,375 $ 1,144 $ 14,519
============ =========== =============
Total assets $ 998,069 $ 2,543 $ 1,000,612
============ =========== =============
59
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. WEST BANCORPORATION, INC. (PARENT COMPANY ONLY) CONDENSED FINANCIAL
STATEMENTS
BALANCE SHEETS
DECEMBER 31, 2005 AND 2004
2005 2004
-----------------------------------------------------------------------------------
ASSETS
Cash $ 553,980 $ 1,271,011
Investment in securities available for sale 4,873,850 5,147,981
Investment in West Bank 95,805,859 89,427,275
Investment in WB Capital Management Inc. 1,873,483 1,473,917
Investment in Investors Management Group, Ltd. 10,000,000 -
Investment in West Bancorporation Capital Trust I 619,000 619,000
Intercompany debentures from West Bank 20,000,000 20,000,000
Other assets 1,458,836 566,113
------------- -------------
TOTAL ASSETS $ 135,185,008 $ 118,505,297
============= =============
LIABILITIES AND EQUITY
LIABILITIES
Accrued expenses and other liabilities $ 45,492 $ 266,321
Note payable 10,000,000 -
Subordinated notes 20,619,000 20,619,000
------------- -------------
TOTAL LIABILITIES 30,664,492 20,885,321
------------- -------------
EQUITY
Common stock 3,000,000 3,000,000
Additional paid-in capital 32,000,000 32,000,000
Retained earnings 71,950,620 62,565,046
Accumulated other comprehensive income (loss) (2,430,104) 54,930
------------- -------------
TOTAL EQUITY 104,520,516 97,619,976
------------- -------------
TOTAL LIABILITIES AND EQUITY $ 135,185,008 $ 118,505,297
============= =============
60
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
2005 2004 2003
----------------------------------------------
Operating income:
Equity in net income of West Bank $ 19,670,202 $ 18,908,160 $ 17,782,998
Equity in net income (loss) of WB Capital
Management Inc. 399,566 55,533 (81,616)
Equity in net income of West Bancorporation
Capital Trust I 43,775 43,846 -
Interest and dividend income 1,607,560 1,546,620 433,637
Gain on sale of investment securities 41,527 9,301 160,277
------------ ------------ ------------
21,762,630 20,563,460 18,295,296
------------ ------------ ------------
Operating expenses:
Interest on note payable 3,056 - -
Interest on trust preferred securities - - 649,280
Interest on subordinated notes 1,471,483 1,475,429 -
Salaries and employee benefits 229,339 464,254 409,668
Other 368,957 292,990 178,899
------------ ------------ ------------
2,072,835 2,232,673 1,237,847
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 19,689,795 18,330,787 17,057,449
Income tax (credits) (384,958) (283,690) (225,179)
------------ ------------ ------------
NET INCOME $ 20,074,753 $ 18,614,477 $ 17,282,628
============ ============ ============
61
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
2005 2004 2003
----------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 20,074,753 $ 18,614,477 $ 17,282,628
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in net income of West Bank (19,670,202) (18,908,160) (17,782,998)
Equity in net (income) loss of WB Capital Management Inc. (399,566) (55,533) 81,616
Equity in net income of West Bancorporation Capital Trust I (43,775) (43,846) -
Dividends received from West Bank 10,800,000 15,275,000 16,369,500
Dividends received from West Bancorporation Capital
Trust I 43,775 43,846 -
Gains from sale of securities available for sale (41,527) (9,301) (160,277)
Amortization 48,655 39,949 6,030
Deferred income taxes (82,784) (1,066) (2,355)
Changes in assets and liabilities:
Increase in other assets (826,817) (141,926) (403,743)
Increase (decrease) in accrued expenses and
other liabilities (220,829) 36,554 217,373
------------- ------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,681,683 14,849,994 15,607,774
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities available for sale 2,441,431 944,901 491,977
Purchases of securities available for sale (2,150,966) (5,985,752) (502,650)
Capitalization of WB Capital Management Inc. - - (1,500,000)
Purchase of Investors Management Group, Ltd. (10,000,000) - -
Capitalization of West Bancorporation Capital Trust I - (619,000) -
Issuance of debentures to subsidiary - - (20,000,000)
------------- ------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (9,709,535) (5,659,851) (21,510,673)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of trust preferred securities - - 20,000,000
Proceeds from issuance of subordinated debentures - 619,000 -
Proceeds from long-term borrowing 10,000,000 - -
Purchase of fractional shares resulting from stock dividend - (2,090) -
Payment for shares reacquired under common stock
repurchase plan - (2,360,235) -
Dividends paid (10,689,179) (10,483,877) (10,278,573)
------------- ------------- -------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (689,179) (12,227,202) 9,721,427
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH (717,031) (3,037,059) 3,818,528
CASH
Beginning 1,271,011 4,308,070 489,542
------------- ------------- -------------
Ending $ 553,980 $ 1,271,011 $ 4,308,070
============= ============= =============
62
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
2005
----------------------------------------------------
THREE MONTHS ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
Interest income $ 14,457 $ 15,285 $ 16,152 $ 17,581
Interest expense 4,860 5,811 6,790 7,641
---------- ---------- ---------- ----------
NET INTEREST INCOME 9,597 9,474 9,362 9,940
Provision for loan losses 375 500 450 450
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 9,222 8,974 8,912 9,490
Noninterest income 2,527 3,008 3,032 2,950
Noninterest expense 4,590 4,616 4,654 4,785
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 7,159 7,366 7,290 7,655
Income taxes 2,317 2,381 2,327 2,370
---------- ---------- ---------- ----------
NET INCOME $ 4,842 $ 4,985 $ 4,963 $ 5,285
========== ========== ========== ==========
Net income per common share - basic $ 0.29 $ 0.30 $ 0.30 $ 0.32
========== ========== ========== ==========
2004
----------------------------------------------------
Three months ended March 31 June 30 September 30 December 31
-------------------------------------------------------------------------------------------
(amounts in thousands, except per share amount)
Interest income $ 11,433 $ 11,639 $ 12,572 $ 13,955
Interest expense 2,860 3,056 3,553 4,483
---------- ---------- ---------- ----------
NET INTEREST INCOME 8,573 8,583 9,019 9,472
Provision for loan losses 225 225 325 425
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 8,348 8,358 8,694 9,047
Noninterest income 2,436 2,828 2,757 2,685
Noninterest expense 4,296 4,251 4,158 4,263
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 6,488 6,935 7,293 7,469
Income taxes 2,226 2,382 2,486 2,477
---------- ---------- ---------- ----------
NET INCOME $ 4,262 $ 4,553 $ 4,807 $ 4,992
========== ========== ========== ==========
Net income per common share - basic $ 0.25 $ 0.27 $ 0.29 $ 0.30
========== ========== ========== ==========
63
STOCK INFORMATION
West Bancorporation, Inc. common stock is traded on the NASDAQ National Market
and quotations are furnished by the NASDAQ System. There were 314 common
stockholders of record on December 31, 2005, and an estimated 800 additional
beneficial holders whose stock was held in street name by brokerage houses.
MARKET AND DIVIDEND INFORMATION (1) High Low Dividends
-------- -------- --------
2005
----
1st quarter $ 19.25 $ 15.93 $ 0.160
2nd quarter 19.09 15.34 0.160
3rd quarter 20.02 17.25 0.160
4th quarter 19.95 17.50 0.160
2004
----
1st quarter $ 17.14 $ 15.40 $ 0.152
2nd quarter 17.14 13.93 0.152
3rd quarter 17.54 14.76 0.160
4th quarter 18.15 16.21 0.160
(1) In July 2004, the Company's Board of Directors authorized a 5 percent common
stock dividend. Per share numbers in this table have been adjusted for that
stock dividend.
The prices shown above are the high and low sale prices for the Company's common
stock. The market quotations, reported by NASDAQ, do not include retail markup,
markdown or commissions.
NASDAQ SYMBOL: WTBA
Wall Street Journal and
Other Newspapers: WestBcp
TRANSFER AGENT/DIVIDEND PAYING AGENT
Illinois Stock Transfer Company
209 West Jackson Boulevard, Suite 903
Chicago, Illinois 60606-6905
800-757-5755
www.illinoisstocktransfer.com
FORM 10-K
Copies of the Company's annual report to the Securities and Exchange Commission
on Form 10-K will be mailed when available without charge to shareholders upon
written request. Such written request should be directed to, Chief Financial
Officer, West Bancorporation, Inc., 1601 22nd Street, West Des Moines, Iowa
50266. It will also be available on the Securities and Exchange Commission's
website at http://www.sec.gov/edgar/searchedgar/webusers.htm and through a link
in the investor relations section of the Company's website at
www.westbankiowa.com.
64
[LOGO]
West Bancorporation, Inc.
ANNUAL MEETING OF SHAREHOLDERS
THURSDAY, APRIL 20, 2006 AT 4:00 P.M.
1601 22ND STREET, WEST DES MOINES, IA
YOU CAN VOTE IN ONE OF TWO WAYS: 1) BY MAIL, 2) BY INTERNET
See the reverse side of this sheet for instructions.
IF YOU ARE NOT VOTING BY INTERNET, COMPLETE BOTH SIDES OF PROXY CARD,
DETACH AND RETURN IN THE ENCLOSED ENVELOPE TO:
Illinois Stock Transfer Co.
209 West Jackson Boulevard, Suite 903
Chicago, Illinois 60606
DETACH ATTENDANCE CARD HERE AND
DETACH PROXY CARD HERE MAIL WITH PROXY CARD
---------------------- -------------------------------
This Proxy, when properly executed, will be voted in the manner directed herein
by the undersigned shareholder. IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE
VOTED (1) FOR THE ELECTION OF THE NOMINEES LISTED IN PROPOSAL 1; AND (2) IN THE
DISCRETION OF THE NAMED PROXIES UPON SUCH OTHER MATTERS AS MAY PROPERLY COME
BEFORE THE MEETING.
VOTER CONTROL NUMBER ABOVE NAME HERE WEST BANCORPORATION, INC.
If you plan to personally attend the
Annual Meeting of Shareholders,
please check the box below and list
Dated _______________________, 2006 names of attendees on reverse side.
___________________________________
Return this stub in the enclosed
___________________________________ envelope with your completed proxy
(PLEASE SIGN HERE) card.
Please sign exactly as name appears above. When shares are held by joint I do plan to attend [ ]
tenants, both should sign. When signing as administrator, attorney, executor, the 2006 meeting
guardian, trustee, or similar fiduciary, please give full title as such. If the
shareholder is a business entity, the authorized signer should sign the full
entity name and indicate position held.
TO VOTE BY MAIL
To vote by mail, complete both sides, sign and date the proxy card below. Detach
the card below and return it in the envelope provided.
TO VOTE BY INTERNET
Your Internet vote is quick, confidential and your vote is immediately
submitted. Just follow these easy steps:
1. Read the accompanying Proxy Statement.
2. Visit our Internet voting site at HTTP://WWW.ILLINOISSTOCKTRANSFER.COM, click
on the heading "Internet Voting" and follow the instructions on the screen.
3. When prompted for your Voter Control Number, enter the number printed just
above your name on the front of the proxy card.
Please note that all votes cast by Internet must be COMPLETED and SUBMITTED
prior to Tuesday, April 18, 2006 at 11:59 p.m. Central Time.
Your Internet vote authorizes the named proxies to vote your shares to the same
extent as if you marked, signed, dated and returned the proxy card.
THIS IS A "SECURED" WEB PAGE SITE. YOUR SOFTWARE AND/OR INTERNET PROVIDER MUST
BE "ENABLED" TO ACCESS THIS SITE. PLEASE CALL YOUR SOFTWARE OR INTERNET PROVIDER
FOR FURTHER INFORMATION, IF NEEDED.
IF You Vote By INTERNET. Please Do Not Return Your Proxy Card By mail
WEST BANCORPORATION, INC. WEST DES MOINES, IOWA PROXY
PLEASE LIST PROXY FOR ANNUAL MEETING OF SHAREHOLDERS ON APRIL 20, 2006
NAMES OF PERSONS ATTENDING The undersigned hereby appoints Thomas E. Stanberry and Jack G. Wahlig, or either of them, the
undersigned's attorneys and proxies, with full power of substitution, to vote all shares of
Common Stock of West Bancorporation, Inc. which the undersigned is entitled to vote as of the
record date, February 16, 2006, as fully as the undersigned could do if personally present, at
the Annual Meeting of Shareholders of said corporation to be held in the Conference Center at
the headquarters of the Company, located at 1601 22nd Street, West Des Moines, Iowa, on
Thursday, April 20, 2006 at 4:00 p.m., Central Time, and at any and all adjournments thereof.
________________________________ THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 1.
1. Election of Directors: 01 Frank W. Berlin 04 Orville E. Crowley 07 Thomas E. Stanberry
02 Steven G. Chapman 05 George D. Milligan 08 Jack G. Wahlig
________________________________ 03 Michael A. Coppola 06 Robert G. Pulver 09 Connie Wimer
[ ] Vote FOR all nominees listed above [ ] Vote WITHHELD from all nominees
________________________________ (except as marked to the contrary below)
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDICATED NOMINEE,
________________________________ WRITE THE NUMBER(S) OF THE NOMINEE(S) IN THE SPACE PROVIDED TO THE RIGHT.) ___________________
2. In accordance with their discretion, upon all other matters that may properly come before said
meeting and any adjournments or postponements thereof.
(Continued and to be signed and dated, on other side)