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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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2) Aggregate number 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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5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
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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2) Form, Schedule or Registration Statement No.:
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4) Date Filed:
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PERSONS WHO POTENTIALLY ARE TO RESPOND TO THE COLLECTION OF INFORMATION
CONTAINED IN THIS FORM ARE NOT REQUIRED TO RESPOND UNLESS THE FORM DISPLAYS A
CURRENTLY VALID OMB CONTROL NUMBER.
SEC 1913 (02-02)
[LOGO FOR WEST BANCORPORATION]
WEST BANCORPORATION, INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 15, 2004
To the Shareholders of West Bancorporation, Inc.:
You are cordially invited to attend the Annual Shareholders' Meeting of West
Bancorporation, Inc. to be held in the conference room at the headquarters of
the Iowa Independent Bankers, located at 1603 22nd Street, Suite 202, West Des
Moines, Iowa, on Thursday, April 15, 2004, at 4:30 p.m., for the following
purposes:
1. To elect a Board of Directors to serve until the next Annual Meeting
and until their successors are elected and have qualified; and
2. To transact such other business as may properly come before the
meeting or any adjournment thereof.
In addition, we will report to you on the business and results of operations for
2003. The 2003 summary annual report and appendix to the proxy statement,
including financial statements, are enclosed for your information.
The Board of Directors of the Company has fixed the close of business on
February 6, 2004, 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 such shareholders will be maintained at the offices of West
Bancorporation, Inc., at 1601 22nd Street, West Des Moines, Iowa, during the
ten-day period preceding the Annual Meeting.
This proxy statement is longer this year because of the adoption of various
committee charters and policies to comply with new corporate governance rules
adopted by NASDAQ and the Securities and Exchange Commission.
TO ENSURE YOUR REPRESENTATION AT THE MEETING, THE BOARD OF DIRECTORS REQUESTS
THAT YOU MARK, SIGN, DATE AND RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED
ENVELOPE. REGARDLESS OF THE SIZE OF YOUR INVESTMENT, YOUR VOTE IS IMPORTANT. A
PROMPT RESPONSE IS HELPFUL AND YOUR COOPERATION IS APPRECIATED. WE HOPE YOU WILL
BE ABLE TO ATTEND THE MEETING IN PERSON.
By Order of the Board of Directors
/s/ Thomas E. Stanberry
-----------------------------------------------
Thomas E. Stanberry
Chairman, President and Chief Executive Officer
March 3, 2004
WEST BANCORPORATION, INC.
1601 22nd Street
West Des Moines, IA 50266
PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS
To Be Held on April 15, 2004
This Proxy Statement is furnished to shareholders of West Bancorporation, Inc.,
an Iowa corporation, (the "Company"), in connection with the solicitation of
proxies by the Board of Directors of the Company for use at the Annual Meeting
of Shareholders to be held on Thursday, April 15, 2004, at 4:30 o'clock p.m.,
local time, in the conference room at the headquarters of the Iowa Independent
Bankers at 1603 22nd Street, Suite 202, West Des Moines, Iowa, and at any
adjournment or postponement thereof (the "Meeting"). This Proxy Statement and
form of Proxy enclosed herewith are first being sent to the shareholders of the
Company entitled thereto on or about March 3, 2004.
Only shareholders of record at the close of business on February 6, 2004, are
entitled to notice of and to vote at the Meeting. There were 16,060,271 shares
of the Company's Common Stock (the "Common Stock") outstanding at the close of
business on that date, all of which will be entitled to vote at the Meeting. The
presence, in person or by proxy, of the holders of a majority of such
outstanding shares is necessary to constitute a quorum for the transaction of
business at the Meeting. Holders of the shares 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 Meeting. If the holder of shares abstains from voting
on any matter, or if shares are held by a broker which 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 Meeting and will not affect the outcome of any matter.
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. Election of any nominee for director will
require the affirmative vote of a majority of those shares voting at the Meeting
in person or by proxy.
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 Meeting if any shareholder who does not expect to
attend the Meeting in person will return a signed Proxy promptly.
A shareholder may revoke his or her Proxy at any time prior to the exercise
thereof 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 the Proxy by attending the Meeting and voting in
person. Attendance at the Meeting without voting in person will not serve as the
revocation of a Proxy.
1
PROPOSAL 1
ELECTION OF DIRECTORS
The Board of Directors of the Company currently consists of eleven members. Two
long-time directors, David L. Miller and Raymond G. Johnston have decided to
retire for personal reasons. 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 incapacitation.
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 currently set
the size for 2004 at nine members.
The Board of Directors 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 of
Directors 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 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 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 6, 2004, 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 ("Bank"). Of the
nominees, only Mr. Milligan and Mr. Stanberry are currently serving as directors
of WB Capital Management Inc.
2
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 58) West Des Moines, Iowa
Steven G. Chapman 1994 President and Chief Executive Officer,
(Age 52) ITAGroup, Inc., West Des Moines, Iowa
Michael A. Coppola 1996 President, Coppola Enterprises, Inc.,
(Age 47) Des Moines, Iowa
Orville E. Crowley 1984 President and Chief Operating Officer,
(Age 77) Linden Lane Farms Company, Cumming, Iowa
David R. Milligan 2002 Executive Vice President of Company;
(Age 56) Director, Chairman and Chief Executive Officer
of the Bank
Director of WB Capital Management Inc.
Robert G. Pulver 1984 Chairman, President and CEO,
(Age 56) All State Industries, Inc., West Des Moines, Iowa
Thomas E. Stanberry 2003 Chairman, President and Chief Executive
(Age 49) Officer of Company
Vice Chairman of the Bank
Chairman of WB Capital Management Inc.
Jack G. Wahlig 2001 President, Integrus Financial, L.C.,
(Age 71) West Des Moines, Iowa
Connie Wimer 1985 Owner/Publisher, Business Publications Corporation
(Age 71) 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 2002, David R.
Milligan served as Executive Vice President and General Counsel of the Bank. His
employment began in 1980. Mr. Stanberry joined the Company effective March 1,
2003. Prior to 2003, Mr. Stanberry served in a variety of capacities with U.S.
Bancorp Piper Jaffray, most recently as Managing Director. Connie Wimer served
as President of Iowa Title Company until her retirement in November 2001.
None of the 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.
3
BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
During 2003, and until the Annual Shareholders' Meeting on April 15, 2004, the
Board of Directors was and will be comprised of eleven (11) members. Pursuant to
NASD Rule 4200(a)(15), the Board has made an affirmative determination that the
following members of the Board of Directors are "independent" within the meaning
of such rule: Frank W. Berlin, Steven G. Chapman, Michael A. Coppola, Orville E.
Crowley, Robert G. Pulver, Jack G. Wahlig and Connie Wimer. The Board of
Directors 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, and pursuant to NASD Rule 4350(c)(1), a
majority of the members of the Board of Directors 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." Both West Bank and WB Capital Management Inc. 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 of
Directors holds regular quarterly meetings and held four such meetings during
2003. The Board of Directors also held five special meetings during 2003. It is
a requirement of the Board that each member of the Board of Directors attend at
least 75% of the scheduled meetings and, during 2003, each of the directors of
the Company attended at least 75% of all meetings of the Board of Directors and
meetings of committees to which such director was appointed. All of the members
of the Board of Directors attended last year's Annual Shareholders' Meeting.
The Board of Directors has established the Audit Committee, the Compensation
Committee and the Nominating and Corporate Governance Committee as standing
committees of the Board of Directors. Additional information concerning each of
the committees and the directors serving on them are described below.
The Audit Committee consists of Jack G. Wahlig, as Chairperson, Michael A.
Coppola and Connie Wimer, all of whom are independent directors under criteria
established by the Securities and Exchange Commission and NASDAQ. Based on the
attributes, education and experience requirements required by NASD Rule
4350(d)(2)(A), the requirements set forth in Section 407 of the Sarbanes-Oxley
Act of 2002 and associated regulations, the Board of Directors has identified
Jack G. Wahlig as an "Audit Committee Financial Expert" as defined under Item
401(h) of Regulation S-K, 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 updated to reflect new legal requirements and has
been adopted by the Board of Directors. A copy of the charter is attached to
this Proxy Statement as Exhibit A. The committee is also prepared to meet
privately at any time at the request of the independent public accountants or
members of management to review any special situation arising on any of the
above subjects. Reference is made to the "Report of the Audit Committee". The
Audit Committee met four times during 2003. None of the Audit Committee members
serve on any other audit committee of a listed company.
The Compensation Committee consists of Connie Wimer, as Chairperson, Frank W.
Berlin, Orville E. Crowley and Robert G. Pulver, all of whom are independent
directors under criteria established by the Securities and Exchange Commission
and NASDAQ. The Compensation Committee reviews the Company's compensation and
benefit policies, including the individual salaries of the executive officers
and makes recommendations to the Board of Directors as to the salary of the
Chief Executive Officer. The Compensation Committee also performs the duties set
forth in its written charter which was adopted by the Board of Directors. A copy
of the charter is attached to this Proxy Statement as Exhibit B. During 2003,
the Committee was also involved in the hiring of the Company's Chairman,
President and Chief Executive Officer, Thomas E. Stanberry. Reference is made to
the "Report of the Compensation Committee". The Compensation Committee met three
times during 2003.
The Company's Nominating and Corporate Governance Committee was established
during late 2003. The Committee consists of Robert G. Pulver, as Chairperson,
Frank W. Berlin and Steven G. Chapman, all of whom are independent directors
under criteria established by the Securities and Exchange Commission and NASDAQ.
During 2003, the Nominating and Corporate Governance Committee met one time.
This committee makes recommendations to the Board of Directors regarding the
composition and structure of the Board, nominations for elections of Directors
and 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. This committee recommended to the Board the director-nominees
proposed in this Proxy Statement for election by the shareholders. It 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 was adopted by the Board of Directors. A copy of the charter is attached
to this Proxy Statement as Exhibit C. This Committee will consider, as part of
its nomination process, any director candidate recommended by a shareholder of
the Company who follows the procedures shown under the heading "2005 Shareholder
Proposals". The Nominating and Corporate Governance Committee (the "Committee")
follows the processes below when identifying and evaluating nominees to the
Company's board of directors:
4
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.
4. 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 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 which 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.
The directors of the Company were not paid a fee by the Company during 2003.
Directors of the Company who also served as directors of the Bank received fees
during 2003 of $350 for each meeting attended (ten meetings held) plus $2,400
per year, $400 for loan committee meetings attended and $300 for other committee
meetings attended. A new compensation schedule was adopted to begin in 2004.
Company directors will receive an annual retainer of $2,400 plus $400 per
meeting (board and committee) with the exception of the Audit Committee which
will be $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. Company directors also
serving as Bank directors will be compensated for serving on the Bank board
under the same fee schedule in effect during 2003. Directors who are also
officers of the Company do not receive director's fees.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND EXECUTIVE OFFICERS
The following table sets forth the shares of Common Stock of the Company (the
"Common Stock") beneficially owned as of February 6, 2004, by each director of
the Company, each executive officer listed in the Summary Compensation Table and
by all directors and executive officers (including the named executive officers)
as a group.
5
Shares Beneficially Percent of Total
Name Owned (1) (2) Shares Outstanding
-------------------------------- ------------------ ------------------
Frank W. Berlin 32,500 *
Steven G. Chapman 15,000 *
Michael A. Coppola 22,500 *
Orville E. Crowley (3) 120,870 *
Raymond G. Johnston (4) 29,542 *
David L. Miller (5) 634,630 3.95%
David R. Milligan 24,300 *
Robert G. Pulver (6) 66,076 *
Thomas E. Stanberry (7) 7,800 *
Jack G. Wahlig - *
Connie Wimer 27,800 *
Douglas R. Gulling 2,200 *
Sharen K. Surber 27,500 *
Brad L. Winterbottom 7,614 *
Executive officers and directors
as a group (15 persons) 1,130,948 7.04%
* 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 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 270,000 shares held in
his spouse's name.
(4) Mr. Johnston disclaims any beneficial ownership of 11,700 shares held in
his spouse's name.
(5) Mr. Miller disclaims any beneficial ownership of 103,500 shares held in his
spouse's name.
(6) Mr. Pulver disclaims any beneficial ownership of 6,000 shares held in his
spouse's name.
(7) Mr. Stanberry disclaims any beneficial ownership of 350 shares held in his
spouse's name.
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 6, 2004, of more than
five percent of the Common Stock.
Shares Beneficially Percent of Total
Name and Address Owned Shares Outstanding
---------------------- ------------------- ------------------
The Jay Newlin Trust 945,082 5.88%
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 Securities and Exchange Commission and NASDAQ. Reporting
persons are required by the SEC regulations to furnish the Company with copies
of all Section 16(a) forms they file. Based solely on its review of the copies
of such forms received or written representations that no other reports were
required, the Company believes that all of the applicable filing requirements
were satisfied by the officers and directors during 2003.
6
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, 2003, 2002 and 2001. All compensation was paid by the Bank
for services rendered as executive officers of the Bank, except Thomas E.
Stanberry, who was compensated by the Company. No compensation was paid by the
Company to any of the other named executive officers, except Mr. Gulling for
compensation in the year 2001. Bonus amounts are shown in the year accrued.
SUMMARY COMPENSATION TABLE
Name
and Current Base All Other
Position Year Salary Bonus (1) Compensation (2)
----------------------------------------------- ---- -------- --------- ----------------
Thomas E. Stanberry, Chairman, President and 2003 $166,667 $ 136,666 $ 85,336
Chief Executive Officer of the Company, Vice 2002 - - -
Chairman of the Bank and Chairman of WB Capital 2001 - - -
Management Inc.
David L. Miller, Chairman Emeritus of the 2003 $108,000 $ 2,160 $ 17,316
Company (3) 2002 106,295 336,909 17,656
2001 126,000 455,020 16,496
David R. Milligan, Executive Vice President 2003 $174,000 $ 35,780 $ 18,059
of the Company, Chairman and Chief 2002 167,000 26,140 16,886
Executive Officer of the Bank and 2001 142,000 17,840 14,462
Director of WB Capital Management Inc.
Brad L. Winterbottom, President of the 2003 $168,000 $ 34,610 $ 17,019
Bank and Director of the Bank and 2002 163,000 19,860 19,509
WB Capital Management Inc. 2001 157,500 18,150 15,884
Douglas R. Gulling, Chief Financial Officer 2003 $125,000 $ 27,500 $ 12,708
of the Company and the Bank and Director and 2002 92,500 31,850 54
Treasurer of WB Capital Management Inc. 2001 14,167 283 -
Sharen K. Surber, Executive Vice President 2003 $104,000 $ 21,780 $ 10,687
of the Bank 2002 101,000 13,220 10,371
2001 98,000 9,960 10,061
(1) Includes a holiday bonus equal to two percent of annual salary which is
paid to all officers and employees.
(2) Consists entirely of contributions made by the Company on behalf of the
named executive officer to the Company's 401(k) Profit Sharing Plan except
for the following amounts for 2003, 2002 and 2001, respectively, which
represent premiums on group term life insurance coverage: Stanberry - $51,
$0 and $0; Miller - $74, $467 and $486; Milligan - $640, $604 and $254;
Winterbottom - $212, $203 and $130; Gulling - $207, $54 and $0; and Surber
- $279, $263 and $253; and relocation expense reimbursements of $85,285 in
2003 for Stanberry.
(3) Mr. Miller served as Chairman, President and Chief Executive Officer of the
Company throughout 2002. His retirement became effective on February 28,
2003.
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors reviews the Company's
compensation and benefit policies, including the individual salaries of the
executive officers, and submits recommendations to the Board of Directors.
7
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 and
personal performance objectives established early in the year.
Chief Executive Officer Compensation
The compensation arrangement for Mr. Thomas E. Stanberry was comprised of a base
salary of $200,000 plus a bonus. Mr. Stanberry was paid a salary of $166,667 in
2003, which represented ten months of salary at an annual rate of $200,000. A
bonus of $133,333 was accrued in 2003 and will be paid to him in 2004. In 2004,
Mr. Stanberry's bonus will be based upon the attainment of certain financial
performance goals as determined by the Compensation Committee.
The compensation arrangement for Mr. David L. Miller, Chief Executive Officer of
the Company until his retirement in February 2003, was comprised of a salary of
$108,000 per year that is part of a lifetime employment agreement entered into
between the Bank and Mr. Miller in 2000. A second component was an incentive
payment equal to 2% of the net income of the Bank for the year 2002, payable in
2003. This was paid to Mr. Miller in 2003 and amounted to $334,783. In years
subsequent to 2002, the incentive component is no longer in effect.
The Compensation Committee of the Company 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.
The undersigned members of the Compensation Committee have submitted this
report.
Connie Wimer, Chair
Frank W. Berlin
Orville E. Crowley
Robert G. Pulver
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are set forth in the preceding
section. There are no members of the Compensation Committee who were officers or
employees of the Company, West Bank or WB Capital Management Inc. during the
fiscal year, who were previously officers or employees of the Company, West Bank
or WB Capital Management Inc., or had any relationship otherwise requiring
disclosure hereunder.
EMPLOYMENT CONTRACTS
The executive officers named in the Summary Compensation Table, with the
exception of Mr. Miller and Mr. Stanberry, 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 term of
the individual contracts ranges from one to three years.
EMPLOYMENT AGREEMENTS
Mr. Stanberry's employment arrangement is covered under an employment agreement
with the Company whereby, in exchange for his service, he receives an initial
base salary of $200,000 per year, with an annual review by the Board. In
addition, under the agreement, Mr. Stanberry is eligible to receive an annual
incentive payment, with the amount and criteria to be determined at the
discretion of the Board, and is eligible to participate in the Company's
employee benefit plans and will receive reimbursement for club memberships. The
annual incentive payment for 2003 was $133,333. 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 and 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.
8
Mr. Miller's employment arrangement is covered under an employment agreement
with the Bank whereby, in exchange for advisory services, he receives
compensation of $108,000 per year, indexed for inflation. In addition, under the
agreement, Mr. Miller is entitled to certain other benefits including health
care insurance, club memberships, a company car every two years, not to exceed a
cost of $30,000, trust services provided by the Bank, and legal and accounting
services up to a cost of $10,000 annually. The agreement continues until the
death of Mr. Miller unless terminated by the Bank for material breach by Mr.
Miller or in the event he is convicted of a felony or by Mr. Miller for material
breach by the Bank. For the year 2002, the agreement also called for Mr. Miller
to receive incentive compensation equal to 2% of the net income of the Bank. In
years subsequent to 2002, the incentive component is no longer effective.
EMPLOYEE BENEFIT PLANS
The Company sponsors a 401(k) profit sharing plan covering substantially all of
its employees. The plan was originally established as a profit sharing plan
effective January 1, 1965. It was amended to add 401(k) provisions as of April
15, 2000. The plan allows for employee contributions that are employer matched
up to certain levels. The plan provides for profit sharing contributions as the
Board of Directors determines annually.
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 may be expected to take place 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 collectability 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 $153,000 for
2003. One lease expires in 2004 and the other expires in 2018. Both leases
contain options to renew for up to 25 additional years. Terms of the leases were
consummated prior to Mr. Coppola being named a director in 1996.
Said transactions referred to in the two immediately preceding paragraphs are
hereby disclosed under Regulation S-K, Item 404. To that end, and pursuant to
NASD Rule 4350(h), the Audit Committee has conducted an appropriate review of
these transactions for conflict of interest situations and has approved same.
9
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 indexes assume the investment of $100 on December 31, 1998 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. GRAPH]
PERIOD ENDING
-------------------------------------------------------------------------
INDEX 12/31/98 12/31/99 12/31/00 12/31/01 12/31/02 12/31/03
--------------------------------------------------------------------------------------------------------
West Bancorporation, Inc. 100.00 96.71 85.39 95.76 128.66 152.03
NASDAQ - Total US 100.00 185.95 113.19 89.65 61.67 92.90
SNL Midwest Bank Index 100.00 78.57 95.15 97.24 93.80 120.07
*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 Securities and Exchange Commission by West Bancorporation, Inc. 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 of the Board of Directors hereby reports as follows:
1. The Audit Committee has reviewed and discussed the audited financial
statements for the year ended December 31, 2003 (the "Audited
Financial Statements") with the Company's management.
10
2. The Audit Committee has discussed with McGladrey & Pullen, LLP, the
Company's independent accountants, 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 of
Directors of the Company, and the Board has approved, that the Audited
Financial Statements be included in West Bancorporation, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 2003, for filing
with the Securities and Exchange Commission.
5. The Board has adopted a new Audit Committee Charter, attached to this
Proxy Statement as Exhibit A.
6. The Audit Committee has reviewed and approved 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 ("Nominating Committee")
evaluated the current board membership and concluded all were capable and
effectively contributing to the responsibilities expected of them as directors
of West Bancorporation, Inc. The Nominating Committee then contacted each
director to determine their personal desire to stand for re-election. In doing
so, Mr. Miller and Mr. Johnston each indicated it was his desire to retire from
the Board at the completion of his term for personal reasons. The Nominating
Committee concluded that the remaining members of the current board would be
nominated for election to the Board of Directors of West Bancorporation, Inc. at
the annual shareholders' meeting on April 15, 2004. The Nominating Committee
decided not to select additional nominees for the Board and determined that the
composition and size of the Board was sufficient.
The undersigned members of the Nominating and Corporate Governance Committee
have submitted this report.
Robert G. Pulver, Chair
Frank W. Berlin
Steven G. Chapman
INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors of the Company, at the recommendation of the Audit
Committee, has approved the accounting firm of McGladrey & Pullen, LLP,
independent certified public accountants, as the principal accountant for the
Company. McGladrey & Pullen, LLP, will conduct the audit examination of the
Company and its subsidiaries for 2004. McGladrey & Pullen, LLP was also the
principal accountant and performed the audit in 2003.
A representative from McGladrey & Pullen, LLP is expected to be present at the
Annual Meeting of shareholders. He will have the opportunity to make a statement
if he desires to do so and is expected to be available to respond to appropriate
questions from shareholders.
11
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, 2003 and 2002, and fees
billed for other services rendered by McGladrey & Pullen, LLP and its associated
entity RSM McGladrey, Inc.:
------------------------
2003 2002
------------------------
Audit fees (1) $ 74,700 $ 95,950
Audit related fees (2) 5,910 -
Tax fees (3) 13,235 10,800
All other fees (4) 4,215 5,450
-------- --------
Total $ 98,060 $112,200
======== ========
(1) Audit Fees represent fees for professional services provided for the
audit of the Company's annual financial statements and review of the
Company's quarterly financial statements in connection with the filing
of current and periodic reports.
(2) Audit-Related Fees represent consultations in connection with
acquisitions.
(3) Tax Fees represent fees for professional services related to tax
compliance, which included preparation of tax returns and tax advice
regarding acquisitions.
(4) All other fees represent services provided for the edgarization of
periodic reports.
Independence:
The Audit Committee has considered whether the non-audit services provided by
McGladrey & Pullen, LLP and its associated entity RSM McGladrey, Inc. to West
Bancorporation, Inc. 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 auditor prior to engagement.
STOCKHOLDER COMMUNICATIONS
The Company provides for a process for stockholders to send communications to
the Board of Directors. Stockholders may send communications to the Board of
Directors by contacting the Company's Chief Financial Officer in one of the
following ways:
- In writing at 1601 22nd Street, Suite 209, West Des Moines, IA
50266;
- By e-mail at dgulling@westbankiowa.com.
The Chief Financial Officer will submit each communication received to the Board
of Directors at the next regular meeting.
2005 SHAREHOLDER PROPOSALS
In order for any proposals of shareholders pursuant to the procedures prescribed
in Rule 14a-8 under the Securities Exchange Act of 1934 to be presented as an
item of business at the Annual Meeting of Shareholders of the Company to be held
in 2005, the proposal must be received at the Company's principal executive
offices no later than November 3, 2004 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 or one percent
(1%) 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 you, or your representative who is qualified
under state law to present the proposal on your 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
shall be considered untimely unless received no later than January 17, 2005.
12
Shareholders wishing to recommend names of individuals for possible nomination
to the Company's Board of Directors 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 of Directors.
2. Make type-written 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. Submission must be received by the Company 120 days prior to the
expected mailing date of the proxy.
4. Person making submission must prove they are a shareholder of the
Company and that they own shares with a market value of at least
$2,000 and have held those shares for at least one year at the time
the submission is made.
5. If the person being submitted is aware of the submission, he or she
must sign a statement indicating such.
6. If the person being submitted 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 Securities and Exchange Commission, without charge to
each shareholder solicited, upon the written or oral request of any such
shareholder. Such request should be directed to Chief Financial Officer, West
Bancorporation, Inc., 1601 22nd Street, West Des Moines, Iowa 50266 or by
calling 515-222-2300. It will also be available on the Securities and Exchange
Commission's Internet web site at
http://www.sec.gov/edgar/searchedgar/webusers.htm and through a link on the
Company's investor relations web page at www.westbankiowa.com.
OTHER MATTERS
Management does not know of any other matters to be presented at the meeting,
but should other matters properly come before the 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 3, 2004
13
EXHIBIT A
WEST BANCORPORATION, INC.
CHARTER OF THE AUDIT COMMITTEE
The Audit Committee is appointed by the Board of Directors (the "Board") to
assist the Board in monitoring (1) the integrity of the financial reporting
processes and systems of internal accounting and financial controls of the
Company; (2) the independent auditor's qualifications and independence; (3) the
performance of the Company's internal and independent auditors; and (4) the
compliance by the Company with applicable legal and regulatory requirements.
The Audit Committee shall consist of no fewer than three members. The members of
the Audit Committee shall meet the independence and experience requirements of
the NASDAQ, Section 10A of the Securities Exchange Act of 1934 (the "Exchange
Act") and the rules and regulations of the Securities and Exchange Commission
(the "Commission"). At least one member of the Audit Committee shall be an
"audit committee financial expert" as defined by the Commission.
The Audit Committee shall meet as often as it determines necessary or desirable,
but not less frequently than quarterly. The Audit Committee shall meet
periodically with management, the internal auditors and the independent auditor
in separate executive sessions. The Audit Committee may request any officer or
employee of the Company or the Company's outside counsel or independent auditor
to attend a meeting of the Committee or to meet with any members of, or
consultants to, the Committee.
AUTHORITY AND RESPONSIBILITIES
The Audit Committee shall be directly responsible for the appointment,
termination, compensation and oversight of the work of the independent auditor
(including resolution of disagreements between management and the independent
auditor regarding financial reporting) for the purpose of preparing or issuing
an audit report or related work. The independent auditor shall report directly
to the Audit Committee.
The Audit Committee shall pre-approve all audit and any permitted non-audit
services provided to the Company by the independent auditors and the fees to be
paid for those services. The Audit Committee may form and delegate authority to
subcommittees consisting of one or more members when appropriate, including the
authority to grant pre-approvals of certain audit and permitted non-audit
services, provided that decisions of such subcommittee to grant pre-approvals
shall be presented to the full Audit Committee at its next scheduled meeting.
The Audit Committee shall have the authority, to the extent it deems necessary
or appropriate, to retain special legal, accounting or other consultants to
advise the Committee. The Company shall provide for appropriate funding, as
determined by the Audit Committee, for payment of compensation to the
independent auditor for the purpose of rendering or issuing an audit report or
performing other permitted services and to any consultants engaged by the Audit
Committee.
The Audit Committee shall make regular reports to the Board. The Audit Committee
shall review and reassess the adequacy of this Charter annually and recommend
any proposed changes to the Board for approval. The Audit Committee shall
annually review the Audit Committee's own performance.
The Audit Committee shall:
1. Review and discuss with management and the independent auditor the
annual audited and quarterly financial statements, including
disclosures made in management's discussion and analysis, earnings
press releases and any earnings guidance provided to analysts and
rating agencies, prior to the release of quarterly and annual earnings
results.
2. Discuss with management and the independent auditor significant
financial reporting issues and judgments made in connection with the
preparation of the Company's financial statements, including any
significant changes in the Company's selection or application of
accounting principles and the adequacy of the Company's internal
controls.
3. Review and discuss with the independent auditors:
(i) the scope, planning and staffing of the audit;
(ii) any problems or difficulties encountered in the course of the
audit, including any restrictions on the scope of the
independent auditors' activities or on access to requested
information and management's response, and any significant
disagreements with management;
14
(iii) any report by the independent auditor as required by Section
10A of the Exchange Act, including any report related to
critical accounting policies and practices to be used, all
alternative treatments of financial information within
generally accepted accounting principles that have been
discussed with management, ramifications of the use of such
alternative disclosures and treatments, and the treatment
preferred by the independent auditor, and other material
written communications between the independent auditor and
management;
(iv) the matters required to be discussed by Statement on Auditing
Standards No. 61 or No. 90 relating to the conduct of the
audit, including any difficulties encountered in the course of
the audit work.
4. Discuss with management the Company's major financial risk exposures
and the steps management has taken to monitor and control such
exposures, including the Company's risk assessment and risk management
policies.
5. Review any disclosures made to the Audit Committee by the Company's
CEO and CFO during their certification process for the Form 10-K and
Form 10-Q about any significant deficiencies in the design or
operation of internal controls or material weaknesses therein and any
fraud involving management or other employees who have a significant
role in the Company's internal controls.
6. Obtain and review a report from the independent auditor at least
annually regarding (i) the independent auditor's internal
quality-control procedures, (ii) any material issues raised by the
most recent internal quality-control review, or peer review, of the
firm, or by any inquiry or investigation by governmental or
professional authorities within the preceding five years respecting
one or more independent audits carried out by the firm, (iii) any
steps taken to deal with any such issues, and (iv) all relationships
between the independent auditor and the Company.
7. Evaluate the qualifications, performance and independence of the
independent auditor, including considering whether the auditor's
quality controls are adequate and the provision of permitted non-audit
services is compatible with maintaining the auditor's independence,
and taking into account the opinions of management and internal
auditors.
8. Review and evaluate the lead partner of the independent auditor team
and ensure the rotation of the lead (or coordinating) audit partner
having primary responsibility for the audit and the audit partner
responsible for reviewing the audit as required by law.
9. Discuss with the independent auditor and management the Company's
internal audit function and the responsibilities of those performing
the internal audit, the internal audit budget, the staffing of the
internal audit, and any recommended changes in the scope of the
internal audit function.
10. Establish procedures for (i) the receipt, retention and treatment of
complaints received by the Company regarding accounting, internal
accounting controls or auditing matters, and (ii) the confidential,
anonymous submission by employees of concerns regarding questionable
accounting or auditing matters. Such procedures may be amended from
time to time by the Audit Committee.
11. Discuss with management and the independent auditor any correspondence
with regulators or governmental agencies and any published reports
which raise material issues regarding the Company's financial
statements or accounting policies.
12. Obtain advice and assistance from the Company's counsel as to matters
that may have a material impact on the financial statements or the
Company's compliance policies.
13. Review and approve all "related party transactions." The term "related
party transactions" shall refer to transactions required to be
disclosed pursuant to Item 404 of SEC Regulation S-K.
While the Audit Committee has the responsibilities, duties and powers set forth
in this Charter, it is not the duty of the Audit Committee to plan or conduct
audits or to determine that the Company's financial statements and disclosures
are complete and accurate and are in accordance with generally accepted
accounting principles and applicable rules and regulations. These are the
responsibilities of management and the independent auditor.
15
EXHIBIT B
WEST BANCORPORATION, INC.
COMPENSATION COMMITTEE CHARTER
A. PURPOSE AND SCOPE
The primary function of the Compensation Committee (the "Committee") is to
assist the Board of Directors (the "Board") in fulfilling its responsibilities
and duties by making recommendations to the Board with respect to the
compensation of the Company's Chief Executive Officer ("CEO") and its executive
officers.
B. COMPOSITION AND MEETINGS
The Committee shall be comprised of a minimum of three members of the Board, as
appointed by the Board, each of whom shall meet the applicable independence
requirements promulgated by the Securities and Exchange Commission (the "SEC")
and the National Association of Securities Dealers ("NASD").
The members of the Committee shall be elected by the Board and shall serve until
their successors shall be duly elected and qualified or until their earlier
resignation or removal. Unless a Chair of the Committee is elected by the full
Board, the members of the Committee may designate a Chair by majority vote of
the full Committee membership. A majority of the number of Committee members
shall constitute a quorum for the transaction of business.
The Committee shall meet as often as necessary, but at least once each year, to
enable it to fulfill its responsibilities and duties as set forth herein. The
Committee shall report its actions to the Board and keep written minutes of its
meetings, which shall be recorded and filed with the books and records of the
Company.
C. RESPONSIBILITIES AND DUTIES
To fulfill its responsibilities and duties the Committee shall:
1. Produce an annual report on executive compensation for inclusion in
the Company's proxy statement.
2. Annually review and approve corporate goals and objectives relevant to
the CEO's compensation; evaluate the CEO's performance in light of
these goals and objectives; and recommend to the Board the CEO's
compensation level based on this evaluation. The CEO shall not be
present during the voting or any deliberations concerning the CEO's
compensation.
3. Annually recommend to the Board the compensation of executive officers
of the Company. The CEO may participate in such deliberations, but
shall not vote to approve or recommend any form of compensation for
such executive officers.
4. Make awards of restricted stock to the executive officers and other
key employees under any duly approved employee restricted stock plan,
stock option or stock-related plans, now or from time to time
hereafter in effect, and exercise such other power and authority as
may be permitted or required under such plans.
5. Make recommendations to the Board with respect to
incentive-compensation plans and equity-based plans, and employment
agreements between the Company and the CEO and other executive
officers.
6. From time to time review and make recommendations to the Board with
respect to the compensation of directors.
7. Make regular reports to the Board.
8. Review committee member qualifications; committee member appointment
and removal; committee structure and operations (including authority
to delegate to subcommittees); and committee reporting to the Board.
9. Have sole authority to retain and terminate any compensation
consultant used to assist in the evaluation or development of
compensation arrangements between the Company and its directors, CEO
and other executive officers, and shall have sole authority to approve
the firm's fees and other retention terms.
10. Have sole authority to obtain advice and assistance from internal or
external legal, financial or other advisors.
16
11. Review and assess the adequacy of this Charter periodically as
conditions dictate, but at least annually, and recommend any
modifications to this Charter if and when appropriate to the Board for
its approval.
12. Annually review the Committee's own performance.
17
EXHIBIT C
WEST BANCORPORATION, INC.
NOMINATING AND CORPORATE GOVERNANCE COMMITTEE CHARTER
A. PURPOSE AND SCOPE
The primary function of the Nominating and Corporate Governance Committee
(the "Committee") is to assist the Board of Directors (the "Board") of West
Bancorporation, Inc. (the "Company") in fulfilling its responsibilities by:
(i) reviewing and making recommendations to the Board regarding the Board's
composition and structure, establishing criteria for Board membership and
evaluating corporate policies relating to the recruitment of Board members;
and (ii) establishing, implementing and monitoring 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.
B. COMPOSITION AND MEETINGS
The Committee shall be comprised of a minimum of three members of the Board
as appointed by the Board, each of whom shall meet any independence
requirements promulgated by the Securities and Exchange Commission, the
National Association of Securities Dealers, the NASDAQ Stock Market, any
exchange upon which securities of the Company are traded, or any
governmental or regulatory body exercising authority over the Company (each
a "Regulatory Body"), and each member of the Committee shall be free from
any relationship that, in the opinion of the Board, would interfere with
the exercise of his or her independent judgment as a member of the
Committee.
The members of the Committee shall be elected by the Board and shall serve
until their successors shall be duly elected and qualified or until their
earlier resignation or removal. Unless a Chair is elected by the full
Board, the members of the Committee may designate a Chair by majority vote
of the full Committee membership.
The Committee shall meet as necessary, but at least once each year, to
enable it to fulfill its responsibilities and duties as set forth herein.
The Committee shall report its actions to the Board and keep written
minutes of its meetings which shall be recorded and filed with the books
and records of the Company.
C. RESPONSIBILITIES AND DUTIES
To fulfill its responsibilities and duties the Committee shall:
Corporate Governance Policy Establishment and Review
1. Develop principles of corporate governance including, but not limited
to, the establishment of a corporate code of ethics and conduct for
all directors, officers and employees of the Company and its
affiliates, (a "Code of Conduct") designed to promote honest and
ethical conduct, including the ethical handling of conflicts of
interest; full, fair, accurate, timely and understandable disclosure
in the Company's periodic reports; and compliance with applicable
governmental rules and regulations. The Code of Conduct shall be
submitted by the Committee to the Board and the boards of the
Company's affiliates for their approval.
2. Review and assess the adequacy of the Code of Conduct approved by the
Board periodically, but at least annually. The Committee shall
recommend any modifications to the Code of Conduct to the Board for
approval. If so approved the Company shall submit the revised Code of
Conduct to the boards of its affiliates for their approval.
3. Direct members of the Company's senior management to report any
violations of or non-compliance with the Code of Conduct to the
Committee.
4. Be available to members of the Company's senior management team to
consult with and to resolve reported violations or instances of
non-compliance with the Code of Conduct.
5. Determine an appropriate response to material violations of or
non-compliance with the Code of Conduct including, at the discretion
of the Committee, reporting any material violations of or
non-compliance with the Code of Conduct to any appropriate Regulatory
Body.
18
6. Review and assess the adequacy of this Charter periodically as
conditions dictate, but at least annually and recommend any
modifications to the Charter if and when appropriate to the Board for
its approval.
7. Review and assess the adequacy of the charters of any committee of the
Board (the "Governing Documents") periodically in order to ensure
compliance with any principles of corporate governance developed by
the Committee and recommend to the Board any necessary modifications
to the Governing Documents.
Board Composition, Nominations and Shareholder Proposals
1. Evaluate the current composition and organization of the Board and its
committees in light of requirements established by any Regulatory Body
or any other applicable statute, rule or regulations which the
Committee deems relevant and make recommendations regarding the
foregoing to the Board for approval.
2. Review the composition and size of the Board in order to ensure that
the Board is comprised of members reflecting the proper expertise,
skills, attributes and personal and professional backgrounds for
service as a director of the Company.
3. Determine the criteria for selection of the Chairman of the Board,
Board members and Board committee members.
4. Evaluate the performance of current Board members proposed for
reelection, and make recommendations to the Board regarding the
appropriateness of members of the Board standing for reelection.
5. Evaluate and, if deemed necessary, recommend the termination of Board
membership of any director in accordance with the Code of Conduct or
any corporate governance principles adopted by the Board, for cause or
for other appropriate reason.
6. Review and recommend to the Board an appropriate course of action upon
the resignation of current Board members or any planned expansion of
the Board.
7. Evaluate and recommend to the Board the appointment of Board members
to committees of the Board.
8. Evaluate and approve a slate of nominees for election to the Board and
review the qualification, experience and fitness for service on the
Board of any potential members of the Board.
9. Review all stockholder proposals submitted to the Company (including
any proposal relating to the nomination of a member of the Board) and
the timeliness of the submission thereof and recommend to the Board
appropriate action on each such proposal.
Criteria for Evaluating Board Nominee Candidates
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.
4. A majority of the Board's directors shall be independent directors
under the criteria for independence required by the SEC and NASDAQ.
In considering possible candidates for election as an outside director, the
Nominating 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.
19
3. Each director should be free of any conflict of interest which 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.
Conflicts of Interest
1. Resolve actual and potential conflicts of interest a Board member may
have and issue to any Board member having an actual or potential
conflict of interest instructions on how to conduct him or herself in
matters before the Board which may pertain to the conflict.
2. To the extent deemed necessary by the committee, engage outside
counsel and/or independent consultants to review any matter under its
responsibility.
3. Take such other actions regarding the Company's corporate governance
that are in the best interest of the Company and its shareholders as
the Committee shall deem appropriate or as shall otherwise be required
by any Regulatory Body.
20
WEST BANCORPORATION, INC.
APPENDIX TO THE PROXY STATEMENT
FISCAL YEAR 2003
TABLE OF CONTENTS
PAGE
General Information .................................................................... 2
Selected Financial Data ................................................................ 3
Management's Discussion and Analysis ................................................... 4
Independent Auditor's Report............................................................ 24
Consolidated Balance Sheets............................................................. 25
Consolidated Statements of Income ...................................................... 26
Consolidated Statements of Stockholders' Equity ........................................ 27
Consolidated Statements of Comprehensive Income......................................... 27
Consolidated Statements of Cash Flows .................................................. 28
Notes to Consolidated Financial Statements ............................................. 30
Stock Information ...................................................................... 55
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 new company is doing business as VMF Capital,
with offices in Cedar Rapids and Clive, Iowa and provides portfolio management
services to individuals, retirement plans, corporations, foundations and
endowments.
The Company's stock trades on the Nasdaq National Market under the symbol WTBA.
2
WEST BANCORPORATION, INC. AND SUBSIDIARY
SELECTED FINANCIAL DATA
Years Ended December 31
--------------------------------------------------------------------
(dollars in thousands, except per share amounts) 2003 2002 2001 2000 1999
-------------------------------------------------------------------------------------------------------------------------
Operating Results
Interest income $ 43,461 $ 44,640 $ 54,614 $ 61,199 $ 52,192
Interest expense 11,139 13,650 24,952 33,639 23,820
--------------------------------------------------------------------
Net interest income 32,322 30,990 29,662 27,560 28,372
Provision for loan losses 850 910 1,063 1,190 290
--------------------------------------------------------------------
Net interest income after provision for loan losses 31,472 30,080 28,599 26,370 28,082
--------------------------------------------------------------------
Noninterest income 9,305 6,614 6,314 5,678 4,852
Noninterest expense 14,694 11,220 10,480 9,596 9,515
--------------------------------------------------------------------
Income before income taxes 26,083 25,474 24,433 22,452 23,419
Income taxes 8,800 9,098 8,697 8,036 8,466
--------------------------------------------------------------------
Net income $ 17,283 $ 16,376 $ 15,736 $ 14,416 $ 14,953
====================================================================
Dividends and Per Share Data
Cash dividends $ 10,279 $ 9,957 $ 9,636 $ 9,315 $ 8,566
Cash dividends per share 0.64 0.62 0.60 0.58 0.53
Basic earnings per share 1.08 1.02 0.98 0.93 0.93
====================================================================
Average common shares outstanding 16,060,271 16,060,271 16,060,271 16,060,271 16,060,271
====================================================================
Year End Balances
Total assets $ 1,000,612 $ 886,116 $ 815,970 $ 827,876 $ 775,718
Net loans 593,380 483,959 489,158 495,884 470,036
Deposits 705,074 613,099 571,730 547,283 541,962
Long-term borrowings 106,024 51,600 48,000 48,000 33,000
Stockholders' equity 92,896 85,824 79,012 70,845 61,125
====================================================================
Equity to assets ratio 9.28% 9.69% 9.68% 8.56% 7.88%
====================================================================
Years Ended December 31
--------------------------------------------------------------------
(dollars in thousands) 2003 2002 2001 2000 1999
-------------------------------------------------------------------------------------------------------------------------
Net income $ 17,283 $ 16,376 $ 15,736 $ 14,416 $ 14,953
Average assets 932,907 837,938 837,798 812,411 729,090
Average stockholders' equity 88,742 81,904 74,977 63,872 61,033
====================================================================
Return on assets (net income divided by average
assets) 1.85% 1.95% 1.88% 1.77% 2.05%
Return on equity (net income divided by average
equity) 19.48% 19.99% 20.99% 22.57% 24.50%
Efficiency ratio (noninterest expense divided by
noninterest income plus taxable equivalent net
interest income) 34.78% 29.19% 28.23% 27.98% 27.96%
Dividend payout ratio (dividends per share divided
by net income per share) 59.26% 60.78% 61.22% 64.44% 56.99%
Equity to assets ratio (average equity divided by
average assets) 9.51% 9.77% 8.95% 7.86% 8.37%
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 ("Bank")
and its wholly-owned investment advisory subsidiary, WB Capital Management Inc.
d/b/a VMF Capital ("VMF Capital"). The purpose of this discussion is to focus on
significant factors affecting the Company's financial condition and results of
operations.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
The information contained in this report may contain forward-looking statements
about the Company's growth and acquisition strategies, new products and
services, and future financial performance, including earnings and dividends per
share, return on average assets, return on average equity, efficiency ratio and
capital ratio. Certain statements in this report constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking information is based upon certain underlying
assumptions, risks and uncertainties. Because of the possibility of change in
the underlying assumptions, actual results could differ materially from these
forward-looking statements. Risks and uncertainties that may affect future
results include: competitive pressures, pricing pressures on loans and deposits,
actions of bank and non-bank competitors, changes in local and national economic
conditions, changes in regulatory requirements, actions of the Securities and
Exchange Commission and/or the Federal Reserve Board, and customer acceptance of
the Company's products and services. The Company undertakes no obligation to
revise or update such forward-looking statements to reflect current events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
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 credits.
On a quarterly basis, management reviews the appropriate level for the allowance
for loan losses incorporating a variety of risk considerations, both
quantitative and qualitative. Quantitative factors include the Company's
historical loss experience, delinquency and charge-off trends, collateral
values, known information about individual loans and other factors. Qualitative
factors include the general economic environment in the Company's market areas
and the expected trend of those economic conditions. To the extent actual
results differ from forecasts and management's judgment, the allowance for loan
losses may be greater or less than future charge-offs.
RESULTS OF OPERATIONS - 2003 COMPARED TO 2002
OVERVIEW
During 2003, the Company and its subsidiaries grew through two acquisitions. In
the first transaction, West Bank purchased the assets and assumed certain
liabilities of Hawkeye State Bank in Iowa City, Iowa on July 18, 2003. Assets
acquired in this transaction totaled approximately $129 million at two offices
in Iowa City. In the second transaction, a newly-formed subsidiary, WB Capital
Management Inc. purchased the assets and assumed certain liabilities of VMF
Capital, L.L.C., an independently-owned asset manager on October 1, 2003. The
new entity is operating under the name VMF Capital, with offices in Cedar Rapids
and Clive, Iowa and provides portfolio management services to individuals,
retirement plans, corporations, foundations and endowments.
4
For the year ended December 31, 2003, the Company recorded net income of
$17,283,000, an increase of 5.5 percent from net income of $16,376,000 in 2002.
Earnings per share were $1.08 in 2003 compared to $1.02 in 2002. Most of the
increase was attributable to higher net interest income. Net interest income
increased primarily because of the acquisition of approximately $103 million in
interest-earning assets in the Hawkeye State Bank transaction effective July 18,
2003. Interest income increased due to these favorable volume variances despite
continued pressure on the net interest margin which declined 20 basis points to
3.77%.
The Company's return on average assets (ROA) was 1.85 percent in 2003, compared
to 1.95 percent in 2002. The return on average equity (ROE) was 19.48 percent,
compared to 19.99 percent for the prior year. ROE declined even though net
income increased, because the Company's capital grew at a faster rate than net
income.
A significant transaction affecting net income in 2003 was the purchase of
bank-owned life insurance in the first and third quarters. The purpose of the
purchases was to offset the costs of employee benefits and to enhance revenue in
the current low interest rate environment. The increase in the cash value is
exempt from taxation and totaled $667,000 for the year ended December 31, 2003.
During the fourth quarter of 2003, the Company received $821,000 in tax-exempt
income from life insurance proceeds as a result of the death of one of the
Bank's officers. The Company decided to form a charitable foundation and
contribute the tax-equivalent amount of the income received from the insurance
claim. The amount of the donation was $1,330,000 and will allow the proceeds
from the death claim to benefit worthwhile charities in future years. The net
effect of these transactions on net income was zero.
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, 2003, the
Company's efficiency ratio was 34.78 percent, up from the prior year's ratio of
29.19 percent. The Company's efficiency ratio was higher in 2003 because of the
receipt of the income from life insurance proceeds and the related charitable
contribution, and the results of VMF Capital. Excluding these two items, the
Company's efficiency ratio would have been 31.10 percent for the year ended
December 31, 2003. This ratio for both years is significantly better than peer
group averages, which are generally around 64% according to data in the
September 2003 Bank Holding Company Performance Report, which was prepared by
the Federal Reserve Board's Division of Banking Supervision and Regulation. The
Company expects the efficiency ratio for 2004 to be in the range of 38 percent,
with 4 percent attributable to VMF Capital.
Net Interest Income
Net interest income increased 4.3 percent to $32,322,000 for 2003 due to the
increase in the volume of interest-earning assets which exceeded unfavorable
rate variances. The yield on both loans and investment securities declined more
than the decline in the rate paid on interest-bearing liabilities. The average
yield on earning assets declined 64 basis points, while the average rate on
interest-bearing liabilities declined 62 basis points. The net interest spread,
which is the difference between the yield earned on assets and the rate paid on
liabilities, declined to 3.42 percent from 3.44 percent a year earlier. Net
interest margin, which is tax-equivalent net interest income as a percent of
average earning assets, was 3.77 percent in 2003 down from 3.97 percent in 2002.
Loan Growth/Loan Quality
At December 31, 2003, total loans increased approximately $111.5 million, or
22.8 percent, to $600,065,000 from $488,574,000 a year earlier. Growth came in
all loan categories due to the combination of the acquisition of the two Iowa
City offices and increased loan demand. Exclusive of the acquired offices, loans
grew 8.6 percent. Loan quality remained good with nonperforming loans at
December 31, 2003 totaling $1,793,000 or .30 percent of total loans. This
compares to $1,899,000, or .39 percent of total loans at December 31, 2002.
Nonperforming loans include loans on nonaccrual 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 $5,975,000, represented 333 percent
of nonaccrual loans and loans past due more than 90 days at the end of 2003,
compared to 237 percent for 2002. The provision for loan losses totaled $850,000
for 2003, down slightly from $910,000 for 2002. The Company's net charge-offs as
a percent of average loans were .05 percent for 2003, an improvement from .14
percent for 2002. The amount of loans charged off in 2003 was approximately 59
percent less than in 2002, however, recoveries in 2003 from loans previously
charged-off were also significantly lower in the current year.
The allowance for loan losses represents a reserve available to absorb probable
loan losses within the loan portfolio as of December 31, 2003. 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.
Management considered the allowance for loan losses at December 31, 2003
sufficient to absorb probable loan losses within the portfolio.
5
\
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).
Year ended December 31
-----------------------------------------------
2003 2002 Change Change-%
-----------------------------------------------
Noninterest income
Service charges on deposit accounts $ 4,811 $ 4,527 $ 284 6.27%
Trust services 507 570 (63) -11.05%
Investment advisory fees 504 - 504 -
Increase in cash value of bank-owned
life insurance 667 - 667 -
Proceeds from bank-owned life insurance 821 - 821 -
Gain (loss) on sale of securities 300 116 184 158.62%
Other income:
Gain on sale of real estate loans 396 175 221 126.29%
Debit card income 129 91 38 41.76%
ATM surcharge fees 111 69 42 60.87%
All other income 1,059 1,066 (7) -0.66%
----------------------------------------------
Total other income 1,695 1,401 294 20.99%
----------------------------------------------
Total noninterest income $ 9,305 $ 6,614 $ 2,691 40.69%
==============================================
Service charges on deposit accounts grew due to higher volumes and an increase
in nonsufficient funds fees. Income from trust services was down due to a
decrease in the number of trust accounts. Investment advisory fees are fees
earned by VMF Capital, which commenced operations on October 1, 2003. As
previously discussed, bank-owned life insurance was purchased during 2003 and
the Company received tax-exempt income from life insurance proceeds as the
result of the untimely death of one of the Bank's officers. The increase in the
gain on sale of real estate loans is due to the increased loan volume as a
result of the lower interest rate environment and the addition of loan volume
through the banking offices acquired in Iowa City, Iowa. The volume of loans
originated and sold in the secondary market and the resulting gains on those
sales declined in the fourth quarter as interest rates moved slightly higher and
due to the cyclical nature of the market. Debit card income is up because of
increased promotion of debit cards to the Bank's customer base and ATM surcharge
fees were not implemented until the second quarter of 2002.
Noninterest Expense
Total noninterest expense increased 31.0 percent to $14,694,000 in 2003 from
$11,220,000 in 2002. Exclusive of the previously discussed contribution to the
newly established charitable foundation, noninterest expense increased 19.1
percent.
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
Year ended December 31
----------------------------------------------
2003 2002 Change Change-%
----------------------------------------------
Noninterest expense:
Salaries and employee benefits $ 7,701 $ 6,408 $ 1,293 20.18%
Occupancy expenses 1,583 1,311 272 20.75%
Data processing expenses 1,130 1,006 124 12.33%
Charitable contributions 1,483 107 1,376 1285.98%
Other expenses:
Supplies 207 173 34 19.65%
Advertising 252 209 43 20.57%
Trust expense 260 283 (23) -8.13%
Professional fees 326 263 63 23.95%
Intangible amortization 170 32 138 431.25%
Postage and courier 338 282 56 19.86%
Other real estate owned and
collection expenses 66 13 53 407.69%
All other expenses 1,178 1,133 45 3.97%
----------------------------------------------
Total other expenses 2,797 2,388 409 17.13%
----------------------------------------------
Total noninterest expense $ 14,694 $ 11,220 $ 3,474 30.96%
==============================================
The increase in salaries and benefits includes the salaries of the employees in
the banking offices acquired in Iowa City for five and a half months, the
salaries of VMF Capital employees for the fourth quarter and one-time relocation
expenses for the Company's chief executive officer totaling $85,285. Occupancy
expenses were higher in 2003 due to the costs of the two acquired offices in
Iowa City and two offices for VMF Capital, higher maintenance costs due to snow
removal and increased depreciation expenses related to technology purchases. As
previously discussed, charitable contributions increased due to the one-time
donation of the tax-equivalent amount of life insurance proceeds of $1,330,000
to a charitable foundation. Professional fees increased due to the outsourcing
of certain internal audit functions, increased State of Iowa Banking Department
fee assessments related to the Hawkeye transaction and increased legal fees due
to new legal requirements pertaining to corporate governance. Intangible
amortization increased due to the amortization of the core deposit intangible
related to the acquisition of the two banking offices in Iowa City and the
non-compete and client list intangibles at VMF Capital. Postage and courier
expenses increased primarily due to the offices acquired in Iowa City. Other
real estate owned and collection expenses increased primarily due to the fourth
quarter write-down of two properties to net realizable value.
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, disallowed interest expense, meals and
entertainment expenses and state income taxes. The effective rate of income tax
expense as a percent of income before income taxes was 33.7 percent for 2003,
compared to 35.7 percent for 2002. The decline is due to the higher amount of
tax-exempt income in 2003. The federal income tax expense was approximately
$7,500,000 and $7,800,000 for 2003 and 2002, respectively, while state income
tax expense was approximately $1,300,000 in both years.
RESULTS OF OPERATIONS - 2002 COMPARED TO 2001
Net Income
For the year ended December 31, 2002, the Company recorded net income of
$16,376,000, an increase of 4.1 percent from net income of $15,736,000 in 2001.
Higher net interest income combined with increased noninterest income more than
offset an increase in noninterest expense to result in improved net income.
Earnings per share were $1.02 in 2002 compared to $.98 in 2001.
The Company's return on average assets (ROA) was 1.95 percent in 2002, compared
to 1.88 percent in 2001. The return on average equity (ROE) was 19.99 percent,
compared to 20.99 percent for the prior year. ROE declined even though net
income increased, because the Company's capital grew at a faster rate than net
income. For the year ended December 31, 2002, the Company's efficiency ratio was
29.19 percent, up slightly from the prior year's ratio of 28.23 percent.
7
Net Interest Income
Net interest income increased 4.5 percent to $30,990,000 for 2002 as the cost of
interest-bearing liabilities declined more than the yield on interest-earning
assets. The net interest spread increased to 3.44 percent from 2.94 percent a
year earlier. The average yield on earning assets decreased 125 basis points,
while the average rate on interest-bearing liabilities declined 175 basis
points. Net interest margin was 3.97 percent in 2002 up from 3.81 percent in
2001.
Loan Growth/Loan Quality
At December 31, 2002, total loans declined approximately $4.9 million, or 1.0
percent, to $488,574,000 from $493,507,000 a year earlier. Growth came in
commercial loans, up $9.8 million and commercial real estate, up $5.2 million.
Real estate mortgages on 1-4 family residences declined $14.7 million and
construction, land and land development loans were down $6.1 million. Loan
quality remained good with nonperforming loans at December 31, 2002 totaling
$1,899,000 or .39 percent of total loans. This compares to $1,274,000 or .26
percent of total loans at December 31, 2001.
The allowance for loan losses, which totaled $4,494,000, represented 237 percent
of nonaccrual loans and loans past due more than 90 days at the end of 2002,
compared to 333 percent for 2001. The provision for loan losses totaled $910,000
for 2002, down slightly from $1,062,500 for 2001. The Company's net charge-offs
as a percent of average loans were .14 percent for 2002, an improvement from .21
percent for 2001. The amount of loans charged off in 2002 was similar to 2001,
however, recoveries in 2002 from loans previously charged-off were significantly
higher in 2002 compared to 2001.
Management considered the allowance for loan losses at December 31, 2002
sufficient to absorb probable loan losses within the portfolio.
Noninterest Income
Noninterest income (excluding securities transactions) for 2002 was $6,498,000,
a 2.9 percent increase over 2001.
Service charges on deposit accounts were 1.4 percent higher than the prior year.
There were no fee increases in 2002. The increase in income was due to slightly
higher activity volumes.
Fees for trust services increased $38,000, or 7.2 percent, in 2002 compared to
2001. This increase in income was due to an increase in the amount of assets
under management.
Other income increased 6.3 percent, or $83,000, to $1,401,000 for 2002,
primarily due to a change in Iowa banking law that permitted a usage fee for
automatic teller machine ("ATM") withdrawals by non-bank customers. Income from
this service totaled $69,000 in 2002.
Noninterest Expense
Total noninterest expense increased 7.1 percent to $11,220,000 in 2002 from
$10,480,000 in 2001.
Salaries and employee benefits expense increased 6.6 percent in 2002 to
$6,445,000 from $6,044,000 in 2001. The number of full-time equivalent employees
increased by three from 2001 to 2002. In addition, the Company experienced an 18
percent increase in its health insurance costs, which amounted to an increase of
$56,000.
Occupancy expense for the year 2002 was $1,311,000, an increase of $85,000, or
7.0 percent, over 2001. This increase is attributable to an increase in lease
payments at the main bank facility and higher depreciation due to ATM and other
technology purchases.
Data processing expense was relatively stable, increasing only 1.3 percent over
last year.
Other expenses were $242,000, or 10.9 percent, higher in 2002 than 2001. A
significant portion of the increase is due to the expense associated with
registering the Company's stock with the Securities and Exchange Commission and
listing it on the Nasdaq National Market, which totaled approximately $155,000
Income Taxes
8
The effective rate of income tax expense as a percent of income before income
taxes was 35.7 percent for 2002, compared to 35.6 percent for 2001. The federal
income tax expense was approximately $7,800,000 and $7,500,000 for 2002 and
2001, respectively, while state income tax expense was approximately $1,300,000
and $1,200,000, 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.
(dollars in thousands)
2003 2002
------------------------------- -------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense Rate
------------------------------- -------------------------------
Assets
Interest-earning assets:
Loans: (2) (3)
Commercial $ 270,129 $ 15,127 5.60% $ 254,424 $ 15,721 6.18%
Real estate 230,806 15,518 6.72% 191,417 14,831 7.75%
Consumer 18,509 1,388 7.50% 20,532 1,639 7.98%
Other (1) 11,589 879 7.58% 15,640 1,223 7.82%
------------------------------ -------------------------------
Total loans 531,033 32,912 6.20% 482,013 33,414 6.93%
------------------------------ -------------------------------
Investment securities:
Taxable 206,263 8,174 3.96% 184,867 8,506 4.60%
Tax-exempt (1) 40,560 2,026 5.00% 28,494 1,867 6.55%
------------------------------ -------------------------------
Total investment securities 246,823 10,200 4.13% 213,361 10,373 4.86%
------------------------------ -------------------------------
Interest-bearing deposits 362 2 0.55% 488 11 2.25%
Federal funds sold and other
short-term investments 103,521 1,263 1.22% 108,992 1,810 1.66%
------------------------------ -------------------------------
Total interest-earning assets (1) 881,739 $ 44,377 5.03% 804,854 $ 45,608 5.67%
----------------------======== ----------------------=========
Noninterest-earning assets:
Cash and due from banks 25,710 29,029
Premises and equipment, net 2,387 1,306
Other, less allowance for loan losses 23,071 2,749
--------- ---------
Total noninterest-earning assets 51,168 33,084
--------- ---------
Total Assets $ 932,907 $ 837,938
========= =========
2001
-------------------------------
Average Revenue/ Yield/
Balance Expense Rate
-------------------------------
Assets
Interest-earning assets:
Loans: (2) (3)
Commercial $ 252,921 $ 19,891 7.86%
Real estate 204,557 16,557 8.09%
Consumer 20,697 1,915 9.25%
Other (1) 17,650 1,328 7.53%
------------------------------
Total loans 495,825 39,691 8.01%
------------------------------
Investment securities:
Taxable 177,217 10,608 5.99%
Tax-exempt (1) 25,920 1,771 6.83%
------------------------------
Total investment securities 203,137 12,379 6.09%
------------------------------
Interest-bearing deposits 488 23 4.71%
Federal funds sold and other
short-term investments 101,937 3,381 3.32%
------------------------------
Total interest-earning assets (1) 801,387 $ 55,474 6.92%
-------------------------=====
Noninterest-earning assets:
Cash and due from banks 31,438
Premises and equipment, net 1,066
Other, less allowance for loan losses 3,907
---------
Total noninterest-earning assets 36,411
---------
Total Assets $ 837,798
=========
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 nonaccrual loans. Interest income on
nonaccrual loans has been excluded.
3 Interest income on loans includes amortization of loan fees, which is not
material.
9
(dollars in thousands)
2003 2002
------------------------------- --------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense Rate
------------------------------- --------------------------------
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Deposits:
Savings, checking with interest,
and money markets $ 345,986 $ 3,084 0.89% $ 282,307 $ 3,756 1.33%
Time deposits 113,910 2,666 2.34% 145,341 5,084 3.50%
------------------------------ --------------------------------
Total deposits 459,896 5,750 1.25% 427,648 8,840 2.07%
Other borrowed funds 231,794 5,389 2.32% 184,224 4,810 2.61%
------------------------------ --------------------------------
Total interest-bearing liabilities 691,690 11,139 1.61% 611,872 13,650 2.23%
----------------------======== -----------------------=========
Noninterest-bearing liabilities:
Demand deposits 148,648 140,977
Other liabilities 3,827 3,185
Stockholders' equity 88,742 81,904
---------- ---------
Total Liabilities and Stockholders' Equity $ 932,907 $ 837,938
========== =========
Net interest income (1) $33,238 $ 31,958
======= ========
Margin Analysis
Interest income/yield on interest-earnings
assets (1) $44,377 5.03% $ 45,608 5.67%
Interest expense/rate on interest-bearing
liabilities 11,139 1.61% 13,650 2.23%
---------------- ------------------
Net interest income/net interest spread (1) $33,238 3.42% $ 31,958 3.44%
================ ==================
Net interest margin (1) 3.77% 3.97%
==== ====
2001
-------------------------------
Average Revenue/ Yield/
Balance Expense Rate
-------------------------------
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Deposits:
Savings, checking with interest,
and money markets $ 253,293 $ 7,069 2.79%
Time deposits 162,223 9,008 5.55%
------------------------------
Total deposits 415,516 16,077 3.87%
Other borrowed funds 210,876 8,875 4.21%
Total interest-bearing liabilities ------------------------------
626,392 24,952 3.98%
----------------------========
Noninterest-bearing liabilities:
Demand deposits 131,731
Other liabilities 4,698
Stockholders' equity 74,977
---------
Total Liabilities and Stockholders' Equity $ 837,798
=========
Net interest income (1) $30,522
=======
Margin Analysis
Interest income/yield on interest-earnings
assets (1) $55,474 6.92%
Interest expense/rate on interest-bearing
liabilities 24,952 3.98%
----------------
Net interest income/net interest spread (1) $30,522 2.94%
================
Net interest margin (1) 3.81%
====
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 contributing to net income is net interest
income, which is the difference between interest earned on earning assets which
are primarily loans and investments and interest paid on interest-bearing
liabilities which 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. Net interest income divided
by average earning assets is referred to as net interest margin. For the years
ending December 31, 2003, 2002 and 2001, the Company's net interest margin was
3.77 percent, 3.97 percent and 3.81 percent, respectively.
10
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)
2003 Compared to 2002 2002 Compared to 2001
------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
------------------------------------------------------------------------
Interest Income
Loans: (2)
Commercial $ 1,146 $ (1,740) $ (594) $ 119 $ (4,289) $ (4,170)
Real estate 1,922 (1,235) 687 (1,036) (690) (1,726)
Consumer (155) (96) (251) (15) (261) (276)
Other (308) (36) (344) (160) 55 (105)
------------------------------------------------------------------------
Total loans (including fees) 2,605 (3,107) (502) (1,092) (5,185) (6,277)
------------------------------------------------------------------------
Investment securities:
Taxable 1,672 (2,004) (332) 482 (2,584) (2,102)
Tax-exempt (3) 362 (203) 159 164 (68) 96
------------------------------------------------------------------------
Total investment securities 2,034 (2,207) (173) 646 (2,652) (2,006)
------------------------------------------------------------------------
Interest-bearing deposits (2) (7) (9) - (12) (12)
Federal funds sold and other
short-term investments (87) (460) (547) 253 (1,824) (1,571)
------------------------------------------------------------------------
Total interest income (3) 4,550 (5,781) (1,231) (193) (9,673) (9,866)
------------------------------------------------------------------------
Interest Expense
Deposits:
Savings, checking with interest,
and money markets 1,451 (2,123) (672) 928 (4,241) (3,313)
Time deposits (956) (1,462) (2,418) (861) (3,063) (3,924)
------------------------------------------------------------------------
Total deposits 495 (3,585) (3,090) 67 (7,304) (7,237)
Other borrowed funds 1,006 (427) 579 (1,015) (3,050) (4,065)
------------------------------------------------------------------------
Total interest expense 1,501 (4,012) (2,511) (948) (10,354) (11,302)
------------------------------------------------------------------------
Net interest income (3) $ 3,049 $ (1,769) $ 1,280 $ 755 $ 681 $ 1,436
========================================================================
1 The change in interest that is due to both volume and rate changes has 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 nonaccrual 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.
11
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, 2003
(dollars in thousands)
After one year After five years
Within one but within five but within ten
year years years After ten years Total
------------------------------------------------------------------------
U.S. Government agencies and corporations $ 11,094 $ 51,154 $ 54,724 $ 21,101 $138,073
States of the United States and political subdivisions 13,152 20,700 6,625 8,170 48,647
Corporate notes and other investments 47,092 27,717 - 8,186 82,995
------------------------------------------------------------------------
Total $ 71,338 $ 99,571 $ 61,349 $ 37,457 $269,715
========================================================================
Weighted average yield:
U.S. Government agencies and corporations 3.77% 3.78% 3.64% 5.04%
States of the United States and political subdivisions (1) 4.03% 3.85% 5.81% 8.06%
Corporate notes and other investments 3.23% 3.34% - 7.50%
----------------------------------------------------------
Total 3.46% 3.67% 3.88% 6.24%
==========================================================
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 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, 2003, 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.
12
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, 2003 (dollars in thousands).
As of December 31
-------------------------------------------------------------
2003 2002 2001 2000 1999
-------------------------------------------------------------
Commercial $ 244,173 $ 235,985 $ 226,183 $ 234,089 $ 227,887
Real Estate
Construction, land and land development 44,200 27,827 33,954 16,250 10,121
1-4 family residential 76,853 56,939 71,628 81,983 79,581
Commercial 204,673 143,560 138,409 138,705 125,518
Consumer and other loans 30,166 24,263 23,333 29,221 31,224
-------------------------------------------------------------
Total loans 600,065 488,574 493,507 500,248 474,331
Deferred loan fees, net 710 121 108 169 255
-------------------------------------------------------------
Total loans, net of deferred fees $ 599,355 $ 488,453 $ 493,399 $ 500,079 $ 474,076
=============================================================
The Company's loan portfolio primarily consists of commercial loans, commercial
real estate, real estate construction, land and land development, residential
real estate, and consumer loans. As of December 31, 2003, gross loans totaled
approximately $600 million, which equals approximately 85 percent of total
deposits and 60 percent of total assets. As of December 31, 2003, 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; capital expenditure loans to finance equipment and other fixed
assets; and letters of credit. These loans generally have short maturities, have
either adjustable or fixed rates and are unsecured or secured by inventory,
accounts receivable, equipment and/or real estate.
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 fixed
maturity of up to 25 years. The majority of construction loan volume is to
contractors to construct commercial buildings and generally have maturities of
up to 12 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.
13
Loans as of December 31, 2003
(dollars in thousands)
After one but
Within one within five After five
year years years Total
-------------------------------------------------
Commercial $ 135,908 $ 90,090 $ 18,175 $ 244,173
Real Estate
Construction, land and land development 37,756 6,276 168 44,200
1-4 family residential 14,727 47,670 14,456 76,853
Commercial 20,758 118,002 65,913 204,673
Consumer and other loans 20,482 8,958 726 30,166
-------------------------------------------------
Total Loans $ 229,631 $ 270,996 $ 99,438 $ 600,065
=================================================
After one but
within five After five
years years
--------------------------
Loan maturities after one year with:
Fixed rates $ 207,429 $ 45,841
Variable rates 63,567 53,597
-------------------------
$ 270,996 $ 99,438
=========================
Risk Elements
The following table sets forth information concerning the Company's
nonperforming assets for the past five years ending December 31, 2003
(dollars in thousands).
Years Ended December 31
---------------------------------------------------------
2003 2002 2001 2000 1999
---------------------------------------------------------
Nonaccrual loans $ 1,668 $ 1,354 $ 878 $ 705 $ 582
Loans past due 90 days and still
accruing interest 125 545 396 466 437
---------------------------------------------------------
Total nonperforming loans 1,793 1,899 1,274 1,171 1,019
Other real estate owned 441 529 1,089 1,363 2,194
---------------------------------------------------------
Total nonperforming assets $ 2,234 $ 2,428 $ 2,363 $ 2,534 $ 3,213
=========================================================
Nonperforming loans to total loans 0.30% 0.39% 0.26% 0.23% 0.21%
Nonperforming assets to total loans 0.37% 0.50% 0.48% 0.51% 0.68%
Nonperforming assets to total assets 0.22% 0.27% 0.29% 0.31% 0.41%
The accrual of interest on past due and other impaired loans is discontinued at
90 days or when, in the opinion of management, the borrower may be unable to
make payments as they become due. When the interest accrual is discontinued, all
unpaid accrued interest is reversed. Interest income is subsequently recognized
only to the extent cash payments are received. 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.
14
Outstanding loans of approximately $1,910,000 were placed on nonaccrual status
during 2003 with total nonaccrual loans equaling $1,668,000 as of December 31,
2003. The average balance of nonaccrual loans during 2003 was approximately
$1,255,000. The total amount of loans on nonaccrual status as of December 31,
2002 was $1,354,000. Loans are placed on nonaccrual status when there is doubt
as to the borrower's ability to make scheduled principal and interest payments.
A loan may be removed from nonaccrual status when payments have resumed and it
is reasonable to expect continued payment performance. For the years ended
December 31, 2003, 2002 and 2001, interest income, which would have been
recorded under the original terms of such loans, was approximately $102,000 in
2003, $85,000 in 2002 and was an immaterial amount in 2001. For the periods
shown above, there were no restructured loans. As of December 31, 2003, there
were no additional potential problem loans and leases identified that are not
included in the amounts reported 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 when the loan has other special or unusual characteristics which
suggest special monitoring is warranted.
While management uses available information to recognize losses on loans,
further reduction in the carrying amounts of loans may be necessary based on
changes in local economic conditions. In addition, regulatory agencies, as an
integral part of their examination process, periodically review the estimated
losses on loans. Such agencies may require the Company to recognize additional
losses based on their judgment about information available to them at the time
of their 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 uncollectable, 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):
15
Analysis of the Allowance for Loan Losses for the Years
Ended December 31
-------------------------------------------------------------
2003 2002 2001 2000 1999
-------------------------------------------------------------
Balance at beginning of period $ 4,494 $ 4,240 $ 4,194 $ 4,040 $ 3,872
Charge-offs:
Commercial 302 943 926 1,027 108
Real Estate
Construction, land and land development - - - - -
1-4 family residential 4 56 - 2 31
Commercial - - - - -
Consumer and other loans 179 195 157 147 61
-------------------------------------------------------------
485 1,194 1,083 1,176 200
-------------------------------------------------------------
Recoveries:
Commercial 145 499 40 85 64
Real Estate
Construction, land and land development - - - - -
1-4 family residential - - - - -
Commercial - - - - -
Consumer and other loans 60 39 26 55 14
-------------------------------------------------------------
205 538 66 140 78
-------------------------------------------------------------
Net charge-offs 280 656 1,017 1,036 122
Allowance related to acquisition 911 - - - -
Provision for loan losses charged
to operations 850 910 1,063 1,190 290
-------------------------------------------------------------
Balance at end of period $ 5,975 $ 4,494 $ 4,240 $ 4,194 $ 4,040
=============================================================
Average loans outstanding $531,033 $ 482,013 $ 495,825 $489,598 $434,131
=============================================================
Ratio of net charge-offs during the period to
average loans outstanding 0.05% 0.14% 0.21% 0.21% 0.03%
=============================================================
Ratio of allowance for loan losses to average
loans outstanding 1.13% 0.93% 0.86% 0.86% 0.93%
=============================================================
As the previous table indicates, the provision for loan losses and the allowance
acquired in the Hawkeye State Bank transaction are the most significant change
in the reserve level for the five-year period presented. Net charge-offs as a
percent of average loans outstanding for 1999 were .03 percent, which is very
low when compared to peer group averages. In the year 2000, the charge-off of
one specific commercial loan caused an increase in this ratio to .21 percent.
The net charge-off ratio in 2001 was also .21 percent, but was caused by loans
with individually smaller loan balances. 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 credited to the close monitoring of the loan portfolio and
active collection efforts after a loan has been charged off. It is felt that the
increase in the amount of loans charged off from 2000 through 2002 was
attributable to the economic slow down experienced during that time frame.
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. The local economy is beginning to show signs of
improvement; however, the State of Iowa will need to reduce spending or increase
taxes to avoid a current year budget deficit. These conditions may have an
undeterminable impact on the Bank.
16
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):
2003 2002 2001
------------------------------------------------------------------
Amount % * Amount % * Amount % *
------------------------------------------------------------------
Balance at end of period applicable to:
Commercial $3,659 40.69% $2,934 48.30% $2,315 45.83%
Real Estate
Construction, land and land development 341 7.37% 279 5.70% 286 6.88%
1-4 family residential 179 12.81% 106 11.65% 130 14.51%
Commercial 1,211 34.11% 646 29.38% 856 28.05%
Consumer and other loans 585 5.03% 529 4.97% 653 4.73%
------------------------------------------------------------------
$5,975 100.00% $4,494 100.00% $4,240 100.00%
====== ====== ====== ====== ====== ======
2000 1999
------------------------------------------
Amount % * Amount % *
------------------------------------------
Balance at end of period applicable to:
Commercial $2,154 46.79% $2,056 48.05%
Real Estate
Construction, land and land development 141 3.25% 85 2.13%
1-4 family residential 134 16.39% 178 16.78%
Commercial 980 27.73% 863 26.46%
Consumer and other loans 785 5.84% 858 6.58%
------------------------------------------
$4,194 100.00% $4,040 100.00%
====== ====== ====== ======
* Percent of loans in each category to total loans.
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 73 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 the event a substantial volume of
certificates are 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, 2003, 2002 and 2001 (dollars in thousands).
Average Deposits by Type
------------------------------------------------------------------------
2003 2002 2001
------------------------------------------------------------------------
Amount Rate Amount Rate Amount Rate
------------------------------------------------------------------------
Noninterest-bearing demand
deposits $ 148,648 - $ 140,977 - $ 131,731 -
Interest-bearing demand deposits 41,078 0.27% 32,388 0.42% 28,752 0.77%
Money market deposits 225,811 1.02% 174,923 1.50% 161,815 3.20%
Savings deposits 79,097 0.83% 74,996 1.32% 62,726 1.32%
Time certificates 113,910 2.34% 145,341 3.50% 162,223 5.55%
--------- --------- ---------
$ 608,544 $ 568,625 $ 547,247
========= ========= =========
17
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, 2003,
2002 and 2001 (in thousands).
As of December 31
----------------------------------------
2003 2002 2001
----------------------------------------
3 months or less $ 23,804 $ 14,690 $ 31,253
Over 3 through 6 months 11,396 17,590 10,956
Over 6 through 12 months 14,495 5,897 7,673
Over 12 months 13,768 50,416 52,997
----------------------------------------
$ 63,463 $ 88,593 $102,879
========================================
BORROWED FUNDS
The following table summarizes the outstanding amount of and the average rate on
borrowed funds as of December 31, 2003, 2002 and 2001 (in thousands).
As of December 31
-------------------------------------------------------
2003 2002 2001
-------------------------------------------------------
Balance Rate Balance Rate Balance Rate
-------------------------------------------------------
Trust preferred securities $ 20,000 7.04% $ - -% $ - -%
Long-term borrowings 86,024 4.30% 51,600 5.56% 48,000 5.57%
Federal funds purchased and securities
sold under agreements to repurchase 85,443 0.68% 127,419 1.08% 107,832 1.51%
Short-term borrowings 9,142 1.04% 5,097 0.99% 6,000 1.41%
-------------------------------------------------------
$ 200,609 2.88% $ 184,116 2.33% $ 161,832 2.71%
=======================================================
Long-term borrowings consisted of Federal Home Loan Bank (FHLB) advances and an
installment note payable to VMF Capital, L.L.C. The short-term borrowings as of
the end of each year are Treasury, Tax and Loan option notes and at December 31,
2003 included an FHLB overnight advance. Average balances for short-term
borrowings for the years shown below also include an occasional borrowing from
the Federal Reserve Bank discount window and overnight borrowings from the
Federal Home Loan Bank.
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,
2003, 2002 and 2001 (in thousands).
Years Ended December 31
----------------------------------------------------------
2003 2002 2001
----------------------------------------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
----------------------------------------------------------
Trust preferred securities $ 9,150 7.04% $ - - % $ - -%
Long-term borrowings 68,398 4.72% 51,156 5.57% 50,466 5.58%
Federal funds purchased and securities sold under
agreements to repurchase 153,237 0.98% 131,026 1.47% 157,800 3.78%
Short-term borrowings 1,009 0.85% 2,042 1.45% 2,610 3.45%
---------------------------------------------------------
$ 231,794 2.32% $ 184,224 2.61% $ 210,876 4.21%
=========================================================
18
2003 2002 2001
---- ---- ----
Maximum amount outstanding during the year:
Trust preferred securities $ 20,000 $ - $ -
Long-term borrowings 90,215 51,600 58,000
Federal funds purchased and securities sold under 212,814 161,863 176,103
agreements to repurchase
Short-term borrowings 9,142 6,000 6,000
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, 2003 and 2002, the Company had commitments to extend credit of
approximately $166.9 million and $136.4 million, respectively, and standby
letters of credit of approximately $20.0 million and $15.8 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, crops,
livestock, inventory, property and equipment, residential real estate, and
income-producing commercial properties.
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
commitment was funded, the Bank would be entitled to seek recovery from the
customer. At December 31, 2003 and 2002, no amounts had been recorded as
liabilities for the Bank's potential obligations under these guarantees.
CONTRACTUAL OBLIGATIONS
The following tables set forth the balance of contractual obligations by
maturity period as of December 31, 2003 (in thousands).
Payments due by period
----------------------------------------------------------
Less than one One to three Three to five More than five
Total year years years years
-----------------------------------------------------------------------------
Trust preferred securities $ 20,000 $ - $ - $ - $ 20,000
Long-term borrowings:
Federal Home Loan Bank advances 84,474 13,905 900 36,537 33,132
Note payable, VMF Capital, L.L.C. (1) 1,550 - 1,050 500 -
Operating lease commitments 4,375 760 1,333 541 1,741
---------------------------------------------------------------------------
Total $ 110,399 $ 14,665 $ 3,283 $ 37,578 $ 54,873
===========================================================================
1 Three $500,000 installments payable to VMF Capital, L.L.C. are due and
payable 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
payments equal or exceed assets under management as of October 1, 2003.
19
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, corporate demand notes, money market mutual funds and
interest-bearing deposits in financial institutions declined from $181 million
in 2002 to $82 million in 2003. The Company had additional borrowing capacity
available from the Federal Home Loan Bank ("FHLB") of approximately $29 million
at December 31, 2003 and has a $5 million unsecured line of credit through a
large regional correspondent bank. In addition, the Bank has $80 million in
borrowing capacity available through unsecured federal funds lines of credit
with correspondent banks. Net cash from operating activities contributed $17.5
million, $17.2 million and $19.1 million to liquidity for the years 2003, 2002
and 2001, 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, 2003.
The Company's total stockholders' equity increased to $92,896,000 at December
31, 2003, from $85,824,000 at December 31, 2002. At December 31, 2003,
stockholders' equity was 9.28 percent of total assets, compared to 9.69 percent
at December 31, 2002. Total equity increased due to retention of earnings and
from appreciation in West Bank's available for sale investment portfolio. 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, 2003.
In October of 2002, the Company's Board of Directors authorized the repurchase
of the Company's common stock for a period of 12 months, in an amount not to
exceed $5 million. No shares were repurchased prior to expiration of the
authorization.
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 and 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.
The Company uses an in-house computer software simulation modeling program to
measure its exposure to potential interest rate changes. For various assumed
hypothetical changes in market interest rates, 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 repricing within a given period
in comparison to the amount of interest-bearing liabilities repricing 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 reprice within the time period and a ratio greater than 1.0 indicates
that more assets reprice than liabilities.
The simulation model process provides a dynamic assessment of interest rate
sensitivity, whereas a static interest rate gap table is compiled as of a point
in time. The model simulations differ from a traditional gap analysis because a
traditional gap analysis does not reflect the multiple effects of interest rate
movement on the entire range of assets and liabilities, and ignores the future
impact of new business strategies.
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 how that exposure was managed in 2003 changed
compared to 2002.
20
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
-------- --------
200 basis points rising 3.14%
100 basis points rising 2.64%
Base
100 basis points falling -1.64%
As shown above, at December 31, 2003, the estimated effect of an immediate 200
basis point increase in interest rates would increase the Company's net interest
income by 3.14 percent or approximately $1,100,000 in 2004. The estimated effect
of an immediate 100 basis point decrease in rates would decrease the Company's
net interest income by 1.64 percent or approximately $600,000. 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, 2003. 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.
21
Three Over 3 Over 1
Months Through 12 Through Over
or Less Months 5 Years 5 Years Total
---------------------------------------------------------
Interest-earning assets:
Loans $ 153,479 $ 110,036 $ 255,067 $ 81,483 $ 600,065
Investment securities:
Available for sale 26,862 33,739 49,782 67,926 178,309
Held to maturity 2,785 19,263 43,661 25,697 91,406
Federal funds sold and other
short-term investments 54,287 - - - 54,287
Federal Home Loan Bank stock - - - 5,198 5,198
---------------------------------------------------------
Total interest-earning assets 237,413 163,038 348,510 180,304 929,265
---------------------------------------------------------
Interest-bearing liabilities
Interest-bearing deposits:
Savings, money market and
interest-bearing demand 403,061 - - - 403,061
Time 42,049 53,064 34,144 685 129,942
Federal funds purchased and
securities sold under agreement to
repurchase 85,443 - - - 85,443
Other short-term borrowings 9,142 - - - 9,142
Long-term borrowings 13,905 - 38,987 53,132 106,024
---------------------------------------------------------
Total interest-bearing liabilities 553,600 53,064 73,131 53,817 733,612
---------------------------------------------------------
Interest sensitivity gap per period $ (316,187) $ 109,974 $ 275,379 $ 126,487 $ 195,653
=========================================================
Cumulative interest sensitivity gap $ (316,187) $ (206,213) $ 69,166 $ 195,653 $ 195,653
=========================================================
Interest sensitivity gap ratio 0.43 3.07 4.77 3.35 1.27
=========================================================
Cumulative interest sensitivity gap ratio 0.43 0.66 1.10 1.27 1.27
=========================================================
Investments with maturities over 5 years include the market values of equity
securities of $5,198,000.
As of December 31, 2003, the Company's cumulative gap ratios for assets and
liabilities re-pricing within three months and within one year were .43 and .66,
respectively, meaning that the Company is liability sensitive, or in other
words, more interest-bearing liabilities will be subject to repricing within
those time frames than interest-earning assets. However, the majority of the
interest-bearing liabilities subject to repricing within these time frames are
savings, money market and interest - bearing demand deposits. These types of
deposits generally do not reprice as quickly or with the same magnitude as
non-deposit money market instruments. The effect of this relationship is that
interest expense does not rise as quickly in times of increasing market interest
rates.
EFFECTS OF NEW STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS amends and clarifies
accounting for derivative instruments and hedging activities under Statement
133. In addition, this Statement clarifies under what circumstances a contract
with an initial net investment meets the characteristic of a derivative and when
a derivative contains a financing component that warrants special reporting in
the statement of cash flows. This Statement is effective for contracts entered
into or modified after June 30, 2003. The Company adopted this Statement as it
relates to the Company's loan commitments and it did not have a material impact
on the Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity (SFAS 150). SFAS
150 established standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or asset in some circumstances). The Company adopted SFAS 150 on
July 1, 2003 and such adoption did not have a material effect on its financial
position or results of operations.
22
FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an
interpretation of Accounting Research Bulletin No. 51, establishes accounting
guidance for consolidation of variable interest entities (VIE) that function to
support the activities of the primary beneficiary. Prior to the implementation
of FIN 46, VIEs were generally consolidated by an enterprise when the enterprise
had a controlling financial interest through ownership of a majority of voting
interest in the entity. The provisions of FIN 46 were effective immediately for
all arrangements entered into after January 31, 2003. In December 2003, the FASB
issued a revision to FIN 46 (FIN 46R) which clarified certain implementation
issues and revised implementation dates for VIEs created before January 31,
2003. Under the new guidance, special effective date provisions apply to
enterprises that have fully or partially applied FIN 46 prior to issuance of the
revised Interpretation. Otherwise, application of FIN 46R (or FIN 46) is
required in financial statements of public entities that have interests in
special-purpose entities for periods ending after December 15, 2003. Application
by public entities, other than small business issuers, for all other types of
VIEs is required in financial statements for periods ending after March 15,
2004.
The Company adopted FIN 46 in connection with its consolidated financial
statements for the year ending December 31, 2003. An unintended consequence of
this standard is requiring some companies to conclude deconsolidation is
necessary for certain transactions involving the issuance of trust preferred
securities. Based upon its interpretation of FIN 46, the Company continues to
consolidate its wholly-owned subsidiary trust entity involved with the issuance
of its trust preferred securities, but will deconsolidate for the quarter ending
March 31, 2004. Such deconsolidation will have no effect on reported earnings or
stockholders' equity. These securities qualify for treatment as Tier 1 capital
for the Company. In July 2003, the Board of Governors of the Federal Reserve
System issued a supervisory letter instructing bank holding companies to
continue to include the trust preferred securities in Tier 1 capital for
regulatory capital purposes until notice is given to the contrary. There can be
no assurance that the Federal Reserve will continue to permit institutions to
include trust preferred securities in Tier 1 capital for regulatory capital
purposes. As of December 31, 2003, assuming the Company was not permitted to
include the $20 million in trust preferred securities issued by the trust in its
Tier 1 capital, the Company would still exceed the regulatory required minimums
for capital adequacy purposes (see Note 12 of Notes to Consolidated Financial
Statements). If the trust preferred securities were no longer permitted to be
included in Tier 1 capital, the Company would also be permitted to redeem the
capital securities without penalty.
The interpretations of FIN 46 and its application to various transaction types
and structures are evolving. Management continuously monitors emerging issues
related to FIN 46, some of which could potentially impact the Company's
financial statements.
The Accounting Standards Executive Committee has issued Statement of Position
03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer.
This Statement applies to all loans acquired in a transfer, including those
acquired in the acquisition of a bank or a branch, and provides that such loans
be accounted for at fair value with no allowance for loan losses, or other
valuation allowance, permitted at the time of acquisition. The difference
between cash flows expected at the acquisition date and the investment in the
loan should be recognized as interest income over the life of the loan. If
contractually required payments for principal and interest are less than
expected cash flows, this amount should not be recognized as a yield adjustment,
a loss accrual, or a valuation allowance. For the Company, this Statement is
effective for calendar year 2005 and, early adoption, although permitted, is not
planned. No significant impact is expected on the consolidated financial
statements at the time of adoption.
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 would be otherwise necessary.
23
[MCGLADREY & PULLEN LOGO]
Certified Public Accountants
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
West Bancorporation, Inc.
West Des Moines, Iowa
We have audited the accompanying consolidated balance sheets of West
Bancorporation, Inc. and subsidiaries, as of December 31, 2003 and 2002, and the
related consolidated statements of income, stockholders' equity, comprehensive
income, and cash flows for each of the three years in the period ended December
31, 2003. 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 generally accepted
in the United States of America. 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, 2003 and 2002, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America.
/s/ MCGLADREY & PULLEN, LLP
Des Moines, Iowa
January 9, 2004
McGladrey & Pullen, LLP is an independent member firm of RSM International, an
affiliation of independent accounting and consulting firms.
24
WEST BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
ASSETS 2003 2002
------ ---- ----
Cash and due from banks (Note 13) $ 27,786,795 $ 23,022,298
Federal funds sold and other short-term investments 54,287,004 158,191,770
-------------- --------------
CASH AND CASH EQUIVALENTS 82,073,799 181,214,068
Securities available for sale (Notes 3, 8 and 10) 178,308,941 70,862,435
Securities held to maturity (Notes 3, 8 and 10) 91,406,205 138,299,566
Federal Home Loan Bank stock, at cost (Note 10) 5,197,600 3,129,700
Loans, net of allowance for loan losses (Notes 4, 8 and 10) 593,379,820 483,959,328
Premises and equipment, net (Note 5) 3,683,020 1,394,649
Accrued interest receivable 5,878,880 5,204,203
Goodwill and other intangible assets (Note 6) 16,900,487 47,730
Bank-owned life insurance 20,386,714 -
Other assets (Note 11) 3,396,145 2,004,384
-------------- --------------
$1,000,611,611 $ 886,116,063
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing demand $ 172,070,832 $ 145,208,492
Savings and interest bearing demand 403,060,980 338,775,544
Time, in excess of $100,000 (Note 7) 63,463,030 88,592,994
Other time (Note 7) 66,479,171 40,521,470
-------------- --------------
TOTAL DEPOSITS 705,074,013 613,098,500
Federal funds purchased and securities sold under
agreements to repurchase 85,442,675 127,418,671
Other short-term borrowings (Notes 3 and 8) 9,141,973 5,096,872
Accrued expenses and other liabilities 2,032,291 3,077,858
Trust preferred securities (Note 9) 20,000,000 -
Long-term borrowings (Note 3, 4 and 10) 86,024,315 51,600,000
-------------- --------------
TOTAL LIABILITIES 907,715,267 800,291,901
-------------- --------------
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS' EQUITY (Note 12)
Common stock, no par value; authorized 50,000,000 shares;
shares issued and outstanding; 16,060,271 3,000,000 3,000,000
Additional paid-in capital 32,000,000 32,000,000
Retained earnings 56,796,771 49,792,716
Accumulated other comprehensive income 1,099,573 1,031,446
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY 92,896,344 85,824,162
-------------- --------------
$1,000,611,611 $ 886,116,063
============== ==============
See Notes to Consolidated Financial Statements.
25
WEST BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
---- ---- ----
Interest income:
Loans $32,633,401 $33,035,194 $39,322,663
Securities:
U.S. Treasury, government agencies and corporations 4,727,838 6,764,475 9,945,440
States and political subdivisions 1,725,250 1,625,568 1,570,671
Other 3,111,436 1,404,173 394,246
Federal funds sold and other short-term investments 1,263,190 1,810,348 3,381,198
---------- ----------- -----------
TOTAL INTEREST INCOME 43,461,115 44,639,758 54,614,218
---------- ----------- -----------
Interest expense:
Demand and savings deposits 3,084,033 3,755,205 7,069,318
Time deposits 2,665,970 5,084,437 9,007,791
Federal funds purchased and securities sold under
agreements to repurchase 1,503,051 1,929,097 5,971,626
Other short-term borrowings 8,564 29,622 90,122
Trust preferred securities 649,280 - -
Long-term borrowings 3,228,493 2,851,210 2,813,531
---------- ----------- -----------
TOTAL INTEREST EXPENSE 11,139,391 13,649,571 24,952,388
---------- ----------- -----------
NET INTEREST INCOME 32,321,724 30,990,187 29,661,830
Provision for loan losses (Note 4) 850,000 910,000 1,062,500
---------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 31,471,724 30,080,187 28,599,330
---------- ----------- -----------
Noninterest income:
Service charges on deposit accounts 4,811,335 4,527,170 4,463,921
Trust services 507,000 569,634 531,495
Investment advisory fees 503,899 - -
Increase in cash value of bank-owned life insurance 666,785 - -
Proceeds from bank-owned life insurance 821,254 - -
Net realized gains from sales of securities available for sale 299,562 115,939 -
Other income 1,695,386 1,401,459 1,318,640
---------- ----------- -----------
TOTAL NONINTEREST INCOME 9,305,221 6,614,202 6,314,056
---------- ----------- -----------
Noninterest expenses:
Salaries and employee benefits 7,700,608 6,408,438 5,981,699
Occupancy 1,582,660 1,310,971 1,225,553
Data processing 1,130,131 1,006,272 993,274
Charitable contributions 1,483,516 106,552 117,648
Other expenses 2,797,331 2,388,294 2,161,733
---------- ----------- -----------
TOTAL NONINTEREST EXPENSES 14,694,246 11,220,527 10,479,907
---------- ----------- -----------
INCOME BEFORE INCOME TAXES 26,082,699 25,473,862 24,433,479
Income taxes (Note 11) 8,800,071 9,098,059 8,697,039
--------- ----------- -----------
NET INCOME $17,282,628 $16,375,803 $15,736,440
=========== =========== ===========
Earnings per share, basic $ 1.08 $ 1.02 $ 0.98
=========== =========== ===========
See Notes to Consolidated Financial Statements.
26
WEST BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
---- ---- ----
Common stock
Beginning of year balance $ 3,000,000 $ 3,000,000 $ 3,000,000
------------ ------------ ------------
End of year balance 3,000,000 3,000,000 3,000,000
------------ ------------ ------------
Additional paid-in capital
Beginning of year balance 32,000,000 32,000,000 32,000,000
------------ ------------ ------------
End of year balance 32,000,000 32,000,000 32,000,000
------------ ------------ ------------
Retained earnings
Beginning of year balance 49,792,716 43,374,281 37,274,004
Net income 17,282,628 16,375,803 15,736,440
Dividends on common stock; per share amounts
2003 $0.64; 2002 $0.62; 2001 $0.60 (10,278,573) (9,957,368) (9,636,163)
------------ ------------ ------------
End of year balance 56,796,771 49,792,716 43,374,281
------------ ------------ ------------
Accumulated other comprehensive income (loss)
Beginning of year balance 1,031,446 637,980 (1,428,660)
Other comprehensive income, unrealized gains on securities,
net of reclassification adjustment, net of tax (Note 3) 68,127 393,466 2,066,640
------------ ------------ ------------
End of year balance 1,099,573 1,031,446 637,980
------------ ------------ ------------
TOTAL STOCKHOLDERS' EQUITY $ 92,896,344 $ 85,824,162 $ 79,012,261
============ ============ ============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
---- ---- ----
Net income $ 17,282,628 $ 16,375,803 $ 15,736,440
Other comprehensive income, unrealized gains on securities,
net of reclassification adjustment, net of tax (Note 3) 68,127 393,466 2,066,640
------------- ------------ ------------
COMPREHENSIVE INCOME $ 17,350,755 $ 16,769,269 $ 17,803,080
============= ============ ============
See Notes to Consolidated Financial Statements.
27
WEST BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 17,282,628 $ 16,375,803 $ 15,736,440
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 850,000 910,000 1,062,500
Amortization and accretion 1,833,470 570,344 99,592
Loss on disposition of fixed assets - 28,665 -
Net (gains) from sales of securities available for sale and loans
held for sale (657,029) (290,802) -
Proceeds from sales of loans held for sale 34,940,846 11,135,193 9,724,283
Originations of loans held for sale (34,626,996) (10,972,180) (10,018,283)
Depreciation 252,164 171,791 153,429
Deferred income taxes (265,517) (20,179) (145,943)
Change in assets and liabilities:
Decrease (increase) in accrued interest receivable (674,677) (101,611) 3,159,216
(Decrease) in accrued expenses and other liabilities (1,483,171) (559,056) (623,003)
------------- ------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 17,451,718 17,247,968 19,148,231
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales, calls, and maturities of securities
available for sale 48,649,704 12,827,854 171,795,782
Purchases of securities available for sale (147,154,163) (51,171,184) -
Proceeds from maturities and calls of securities held to maturity 70,566,334 149,242,544 76,955,000
Purchases of securities held to maturity (16,755,419) (133,505,723) (151,012,328)
Cash effect of Hawkeye State Bank and VMF Capital transactions 19,124,018 - -
Acquisition of Federal Home Loan Bank stock (446,900) - -
Proceeds from redemption of Federal Home Loan Bank stock 191,400 - 8,002,200
Net decrease (increase) in loans (26,501,634) 4,300,974 5,957,502
Purchases of premises and equipment (180,406) (447,955) (240,939)
Purchase of bank-owned life insurance (20,000,000) - -
Change in other assets (312,423) 574,900 420,241
------------- ------------- -------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (72,819,489) (18,178,590) 111,877,458
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (10,343,765) 41,368,210 24,447,179
Net change in federal funds purchased and securities
sold under agreements to repurchase (43,321,061) 19,586,736 (46,285,160)
Net change in other short-term borrowings 4,045,101 (903,128) 2,387,939
Proceeds from issuing trust preferred securities 20,000,000 - -
Proceeds from long-term borrowings 1,550,000 3,600,000 10,000,000
Principal payments on long-term borrowings (5,424,200) - (10,000,000)
Cash dividends (10,278,573) (9,957,368) (9,636,163)
------------- ------------- -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (43,772,498) 53,694,450 (29,086,205)
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (99,140,269) 52,763,828 101,939,484
CASH AND CASH EQUIVALENTS
Beginning 181,214,068 128,450,240 26,510,756
------------- ------------- -------------
Ending $ 82,073,799 $ 181,214,068 $ 128,450,240
============= ============= =============
(Continued)
28
WEST BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
---- ---- ----
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash payments for:
Interest $ 11,523,793 $ 14,305,494 $ 26,416,081
Income taxes 9,747,183 9,198,986 8,393,795
See Notes to Consolidated Financial Statements.
29
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 which has three wholly-owned subsidiaries, West
Bank (the Bank), WB Capital Management Inc. (WB Capital) and West Bancorporation
Capital Trust I which has formed in 2003 for the purpose of issuing trust
preferred securities (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 two branches located in
Iowa City. WB Capital was formed in 2003 and is an investment advisory firm with
offices located in Clive and Cedar Rapids, Iowa.
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. A
material estimate that is particularly susceptible to significant change in
the near term is the allowance for loan losses.
Consolidation policy: The consolidated financial statements include the
accounts of the Holding Company and the subsidiaries. All significant
intercompany transactions and balances have been eliminated in
consolidation.
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.
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.
Declines in the fair value of individual securities, classified as either
held to maturity or available for sale 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 held for sale: Loans held for sale are those loans held with the
intent to sell in the foreseeable future. They are carried at the lower of
aggregate cost or market value. Sales are made without recourse and any
gain or loss is recognized at the settlement date.
30
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loans: Loans are stated at the principal amounts outstanding reduced by the
allowance for loan losses, unearned discount, and unearned loan fees with
interest income recognized on the interest method based upon those
outstanding loan balances.
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.
Investment advisory assets under management: Assets managed by WB Capital
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. During 2003, the Bank made two purchases
of bank-owned life insurance with the initial premium totaling $20,000,000.
During the fourth quarter of 2003 income from a death benefit claim totaled
approximately $821,000. It was decided to contribute the tax-equivalent
amount of the death benefit to a newly formed charitable foundation to
benefit worthwhile charities for years to come. The amount of the
contribution was $1,330,000.
31
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 April 2003, the FASB issued SFAS No.
149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. SFAS amends and clarifies accounting for derivative instruments
and hedging activities under Statement 133. In addition, this Statement
clarifies under what circumstances a contract with an initial net
investment meets the characteristic of a derivative and when a derivative
contains a financing component that warrants special reporting in the
statement of cash flows. This Statement is effective for contracts entered
into or modified after June 30, 2003. The Company adopted this Statement as
it relates to the Company's loan commitments and it did not have a material
impact on the Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity (SFAS 150).
SFAS 150 established standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or asset in some circumstances). The
Company adopted SFAS 150 on July 1, 2003 and such adoption did not have a
material effect on its financial position or results of operations.
FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an
interpretation of Accounting Research Bulletin No. 51, (FIN 46) establishes
accounting guidance for consolidation of variable interest entities (VIE)
that function to support the activities of the primary beneficiary. Prior
to the implementation of FIN 46, VIEs were generally consolidated by an
enterprise when the enterprise had a controlling financial interest through
ownership of a majority of voting interest in the entity. The provisions of
FIN 46 were effective immediately for all arrangements entered into after
January 31, 2003. In December 2003, the FASB issued a revision to FIN 46
(FIN 46R) which clarified certain implementation issues and revised
implementation dates for VIEs created before January 31, 2003. Under the
new guidance, special effective date provisions apply to enterprises that
have fully or partially applied FIN 46 prior to issuance of the revised
Interpretation. Otherwise, application of FIN 46R (or FIN 46) is required
in financial statements of public entities that have interests in
special-purpose entities for periods ending after December 15, 2003.
Application by public entities, other than small business issuers, for all
other types of VIEs is required in financial statements for periods ending
after March 15, 2004.
32
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company adopted FIN 46 in connection with its consolidated financial
statements for the year ending December 31, 2003. An unintended consequence
of this standard is requiring some companies to conclude deconsolidation is
necessary for certain transactions involving the issuance of trust
preferred securities. Based upon its interpretation of FIN 46, the Company
continues to consolidate its wholly-owned subsidiary trust entity involved
with the issuance of its trust preferred securities, but will deconsolidate
for the quarter ending March 31, 2004. Such deconsolidation will have no
effect on reported earnings or stockholders' equity. These securities
qualify for treatment as Tier 1 capital for the Company. In July 2003, the
Board of Governors of the Federal Reserve System issued a supervisory
letter instructing bank holding companies to continue to include the trust
preferred securities in Tier 1 capital for regulatory capital purposes
until notice is given to the contrary. There can be no assurance that the
Federal Reserve will continue to permit institutions to include trust
preferred securities in Tier 1 capital for regulatory capital purposes. As
of December 31, 2003, assuming the Company was not permitted to include the
$20 million in trust preferred securities issued by the trust in its Tier 1
capital, the Company would still exceed the regulatory required minimums
for capital adequacy purposes (see Note 12 of Notes to Consolidated
Financial Statements). If the trust preferred securities were no longer
permitted to be included in Tier 1 capital, the Company would also be
permitted to redeem the capital securities without penalty.
The interpretations of FIN 46 and its application to various transaction
types and structures are evolving. Management continuously monitors
emerging issues related to FIN 46, some of which could potentially impact
the Company's financial statements.
The Accounting Standards Executive Committee has issued Statement of
Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in
a Transfer. This Statement applies to all loans acquired in a transfer,
including those acquired in the acquisition of a bank or a branch, and
provides that such loans be accounted for at fair value with no allowance
for loan losses, or other valuation allowance, permitted at the time of
acquisition. The difference between cash flows expected at the acquisition
date and the investment in the loan should be recognized as interest income
over the life of the loan. If contractually required payments for principal
and interest are less than expected cash flows, this amount should not be
recognized as a yield adjustment, a loss accrual, or a valuation allowance.
For the Company, this Statement is effective for calendar year 2005 and,
early adoption, although permitted, is not planned. No significant impact
is expected on the consolidated financial statements at the time of
adoption.
Reclassification: Certain items on the consolidated Statements of Income as
of December 31, 2002 and 2001 were reclassified with no effect on net
income, to be consistent with the classifications used in the December 31,
2003 statement.
Earnings per share: Earnings per share represents income available to
common shareholders divided by the weighted average number of shares
outstanding during the period.
33
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Presented below is 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.)
2003 2002 2001
---- ---- ----
Numerator, income available to
common stockholders $ 17,282,628 $ 16,375,803 $ 15,736,440
============= ============ ==============
Denominator, weighted-average
shares outstanding 16,060,271 16,060,271 16,060,271
============= ============ ==============
Basic earnings per common share $ 1.08 $ 1.02 $ 0.98
============= ============ ==============
NOTE 2. 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 $13,375,000 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 new company will do business as VMF Capital. The purchase
price was paid for by 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 based
upon the attainment of certain profitability measures. The probability of
attaining those profitability measures is not determinable. Goodwill of
$1,144,000 and identifiable intangible assets of $824,000 were recorded with
this transaction. The identifiable intangible assets are being amortized over
estimated lives of 6 - 10 years.
34
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The operations of Hawkeye State Bank and VMF Capital are included in the
consolidated Statements of Income, Comprehensive Income and Cash Flows from the
date of acquisition. The following table summarizes the estimated fair value of
the assets acquired and the liabilities assumed, and the resulting cash impact
of the transactions:
Hawkeye VMF
State Bank Capital, L.L.C. Total
---------- --------------- -----
Assets and (liabilities) received in conjunction
with the specified transactions:
Cash $ 22,701,753 $ - $ 22,701,753
Investment securities 17,424,813 - 17,424,813
Federal Home Loan Bank stock 1,812,400 - 1,812,400
Loans, net 83,725,241 - 83,725,241
Premises and equipment 2,156,244 203,885 2,360,129
Goodwill 13,374,563 1,144,022 14,518,585
Core deposit and other intangibles 1,679,655 824,327 2,503,982
Other assets 1,173,349 33,216 1,206,565
Deposits (102,319,278) - (102,319,278)
Federal Home Loan Bank advances (38,614,630) - (38,614,630)
Securities sold under agreements to repurchase (1,345,065) - (1,345,065)
Other liabilities (362,300) (34,460) (396,760)
------------- ------------ -------------
1,406,745 2,170,990 3,577,735
Less cash acquired (22,701,753) - (22,701,753)
------------- ------------ -------------
NET CASH (PROVIDED BY) USED IN
TRANSACTIONS $ (21,295,008) $ 2,170,990 $ (19,124,018)
============= ============ =============
NOTE 3. SECURITIES
Securities available for sale are as follows as of December 31, 2003 and 2002:
2003
------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
---- ----- -------- -----
U.S. Government agencies and corporations $ 98,032,442 $ 1,038,983 $ (191,298) $ 98,880,127
State and political subdivisions 11,384,712 373,553 (5,931) 11,752,334
Corporate notes and other investments 67,119,191 638,896 (81,607) 67,676,480
------------- ----------- ------------- -------------
$ 176,536,345 $ 2,051,432 $ (278,836) $ 178,308,941
============= =========== ============= =============
35
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2002
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---- ----- -------- -----
U.S. Government agencies and corporations $ 37,569,677 $ 1,393,062 $ - $ 38,962,739
State and political subdivisions 2,869,229 201,539 (81) 3,070,687
Corporate notes and other investments 28,759,967 119,729 (50,687) 28,829,009
------------ ------------ ------------ ------------
$ 69,198,873 $ 1,714,330 $ (50,768) $ 70,862,435
============ ============ ============ ============
Securities held to maturity are as follows as of December 31, 2003 and 2002:
2003
-----------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
---- ----- -------- -----
U.S. Government agencies and corporations $ 39,192,519 $ 925,543 $ - $ 40,118,062
State and political subdivisions 36,894,510 874,988 (39,163) 37,730,335
Corporate notes and other investments 15,319,176 309,296 - 15,628,472
------------ ------------ ------------ ------------
$ 91,406,205 $ 2,109,827 $ (39,163) $ 93,476,869
============ ============ ============ ============
2002
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---- ----- -------- -----
U.S. Government agencies and corporations $ 87,110,127 $ 1,841,585 $ - $ 88,951,712
State and political subdivisions 32,753,419 778,279 (77,502) 33,454,196
Corporate notes and other investments 18,436,020 439,070 (13,795) 18,861,295
------------ ------------ ---------- -------------
$138,299,566 $ 3,058,934 $ (91,297) $ 141,267,203
============ ============ ========== =============
36
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows 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, at December 31, 2003.
2003
-------------------------------------------------------------------------------
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 $ 22,817,468 $ (191,298) $ - $ - $ 22,817,468 $ (191,298)
State and political
subdivisions 8,814,323 (25,854) 903,389 (19,240) 9,717,712 (45,094)
Corporate notes and
other investments 10,284,607 (81,607) - - 10,284,607 (81,607)
------------ ------------ --------- -------- ------------ ----------
$ 41,916,398 $ (298,759) $ 903,389 $(19,240) $ 42,819,787 $ (317,999)
============ ============ ========= ======== ============ ==========
As of December 31, 2003, the investment portfolio included two municipal
securities with a current unrealized loss which has existed for longer than one
year. Both securities reside in the Bank's held to maturity portfolio and are
obligations with Iowa communities considered to be acceptable credit risks. The
carrying amount of these two securities is not considered permanently impaired
as of December 31, 2003 due to the Bank's intent and ability to hold them until
final maturity and the perceived credit-worthiness of the municipalities.
The amortized cost and fair value of securities available for sale as of
December 31, 2003 and 2002, by contractual maturity are shown below:
2003 2002
--------------------------- ---------------------------
AMORTIZED FAIR Amortized Fair
COST VALUE Cost Value
--------------------------- ---------------------------
Due in one year or less $ 49,040,785 $ 49,290,174 $ 14,054,257 $ 14,157,955
Due after one year through five years 55,103,846 55,909,990 34,471,104 35,322,440
Due after five years through ten years 52,052,317 52,306,727 12,073,007 12,356,875
Due after ten years 20,339,397 20,802,050 8,600,505 9,025,165
------------ ------------- ------------ ------------
$176,536,345 $ 178,308,941 $ 69,198,873 $ 70,862,435
============ ============= ============ ============
37
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, 2003 and 2002, by contractual maturity are shown below:
2003 2002
--------------------------- --------------------------
AMORTIZED FAIR Amortized Fair
COST VALUE Cost Value
--------------------------- --------------------------
Due in one year or less $ 22,048,507 $ 22,322,211 $ 12,495,500 $ 12,590,181
Due after one year through five years 43,660,928 44,597,553 85,755,067 87,545,720
Due after five years through ten years 9,042,035 9,252,782 21,551,996 21,823,387
Due after ten years 16,654,735 17,304,323 18,497,003 19,307,915
------------ ------------ ------------ ------------
$ 91,406,205 $ 93,476,869 $138,299,566 $141,267,203
============ ============ ============ ============
For the years ended December 31, 2003, 2002 and 2001, proceeds from sales of
securities available for sale amounted to $23,310,427, $9,437,287 and $0,
respectively. Security gains of $363,881, $115,939 and $0, were realized for the
years ended December 31, 2003, 2002 and 2001, respectively. Security losses of
$64,319, $0 and $0 were realized for the years ended December 31, 2003, 2002 and
2001, respectively.
Securities with an amortized cost of approximately $103,863,000 and $93,899,000
as of December 31, 2003 and 2002, respectively, were pledged as collateral on
the treasury tax and loan option notes, securities sold under agreements to
repurchase, federal funds purchased, FHLB notes payable, and for other purposes
as required or permitted by law or regulation.
The components of other comprehensive income, unrealized gains (losses) on
securities, net of tax for the years ended December 31, 2003, 2002 and 2001, are
as follows:
2003 2002 2001
---- ---- ----
Unrealized holding gains arising during the period $ 408,535 $ 750,502 $ 3,333,292
Less reclassification adjustment for (gains)
realized in net income (299,562) (115,939) -
---------- ---------- -----------
OTHER COMPREHENSIVE INCOME, NET
UNREALIZED GAINS ON SECURITIES
AVAILABLE FOR SALE BEFORE TAX
(EXPENSE) 108,973 634,563 3,333,292
Tax (expense) (40,846) (241,097) (1,266,652)
---------- ---------- -----------
OTHER COMPREHENSIVE INCOME, NET
UNREALIZED GAINS ON SECURITIES
AVAILABLE FOR SALE, NET OF TAX $ 68,127 $ 393,466 $ 2,066,640
========== ========== ===========
38
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. LOANS
Loans are as follows, as of December 31, 2003 and 2002:
2003 2002
---- ----
Commercial $244,172,603 $235,985,080
Real estate:
Construction, land and land development 44,199,507 27,827,337
1-4 family residential 76,852,982 56,938,380
Commercial 204,673,438 143,560,219
Consumer and other loans 30,166,472 24,263,262
------------ ------------
600,065,002 488,574,278
------------ ------------
Allowance for loan losses 5,975,587 4,493,583
Unearned discount and loan fees 709,595 121,367
------------ ------------
6,685,182 4,614,950
------------ ------------
$593,379,820 $483,959,328
============ ============
The loan portfolio includes approximately $324,207,000 and $269,896,000 of fixed
rate loans and $275,858,000 and $218,678,000 of variable rate loans as of
December 31, 2003 and 2002, respectively.
Loans of approximately $472,000 and $955,000 as of December 2003 and 2002,
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, 2003, 2002 and 2001:
2003 2002 2001
---- ---- ----
Balance, at beginning of year $ 4,493,583 $ 4,239,990 $ 4,194,498
Increase in allowance related to acquisition 911,000 - -
Provision for loan losses 850,000 910,000 1,062,500
Recoveries 205,057 537,902 66,316
Charge-offs (484,053) (1,194,309) (1,083,324)
----------- ----------- -----------
Balance, at end of year $ 5,975,587 $ 4,493,583 $ 4,239,990
=========== =========== ===========
Impaired loans (nonaccrual loans) were approximately $1,668,000 and $1,354,000
as of December 31, 2003 and 2002, respectively. The total allowance for loan
losses related to these loans was approximately $166,800 and $135,400 as of
December 31, 2003 and 2002, respectively. The average recorded investment in
impaired loans during 2003 and 2002 was approximately $1,255,000 and $1,355,000,
respectively. Interest income foregone on impaired loans was approximately
$102,000 during 2003 and $85,000 in 2002.
39
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2003 and 2002:
2003 2002
---- ----
Balance, beginning of year $ 17,852,354 $ 15,287,428
New loans 17,537,995 13,476,126
Repayments (16,615,166) (10,911,200)
Reduction in reported amounts due to director retirements (811,208) -
------------ ------------
Balance, end of year $ 17,963,975 $ 17,852,354
============ ============
NOTE 5. PREMISES AND EQUIPMENT
Premises and equipment are as follows as of December 31, 2003 and 2002:
2003 2002
---- ----
Land $ 1,306,816 $ 56,000
Building 949,976 195,793
Equipment 3,258,926 2,866,848
Leasehold improvements 952,078 823,790
------------ ------------
6,467,796 3,942,431
Accumulated depreciation 2,784,776 2,547,782
------------ ------------
$ 3,683,020 $ 1,394,649
============ ============
NOTE 6. 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; non-interest-bearing demand
deposits, interest-bearing demand deposits, savings deposits and money market
deposits. A separate estimated life was determined for each component.
40
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill and other intangible assets primarily result from the acquisition of
Hawkeye State Bank and VMF Capital, L.L.C. The composition of goodwill and other
intangible assets is as follows:
Employee/
Core Deposit Noncompete
Goodwill Intangible Client Base Contracts Total
-------------------------------------------------------------------------
Balance December 31, 2001 $ - $ 79,997 $ - $ - $ 79,997
Amortization - 2002 - 32,267 - - 32,267
-------------------------------------------------------------------------
Balance December 31, 2002 - 47,730 - - 47,730
Additions - 2003 14,518,585 1,679,655 499,082 325,245 17,022,567
Amortization - 2003 - 129,842 23,706 16,262 169,810
-------------------------------------------------------------------------
BALANCE DECEMBER 31, 2003 $ 14,518,585 $ 1,597,543 $ 475,376 $ 308,983 $ 16,900,487
=========================================================================
The future scheduled amortization as of December 31, 2003 is as follows:
Employee/
Core Deposit Noncompete
Intangible Client Base Contracts Total
---------------------------------------------------------
2004 $ 216,726 $ 71,306 $ 53,736 $ 341,768
2005 216,726 68,692 53,736 339,154
2006 216,726 65,399 53,736 335,861
2007 216,726 61,083 53,736 331,545
2008 237,608 55,423 53,736 346,767
Thereafter 493,031 153,473 40,303 686,807
---------------------------------------------------------
$ 1,597,543 $ 475,376 $ 308,983 $2,381,902
=========================================================
NOTE 7. DEPOSITS
At December 31, 2003, the scheduled maturities of time deposits are as follows:
2004 $ 95,570,599
2005 18,448,129
2006 9,471,067
2007 3,558,553
2008 and thereafter 2,893,853
-------------
$ 129,942,201
=============
41
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. SHORT-TERM BORROWINGS
Short-term borrowings as of December 31, 2003, and the related interest expense
for the year 2003 consisted of Treasury, Tax, and Loan option notes and an FHLB
overnight advance. Short-term borrowings as of December 31, 2002, and the
related interest expense for the years 2002 and 2001 consisted of Treasury, Tax
and Loan option notes. The notes are collateralized by certain loans and
investment securities.
NOTE 9. TRUST PREFERRED SECURITIES
On July 18, 2003, the Company obtained $20,000,000 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% and then becomes variable based on the three
month LIBOR rate plus 3.05 percent. Interest is payable quarterly. Holders of
the Trust Preferred Securities 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.
NOTE 10. LONG-TERM BORROWINGS
At December 31, 2003, long-term borrowings consist of the following Federal Home
Loan Bank (FHLB) advances and a note payable to VMF Capital, L.L.C.:
Interest
Amount Rate Maturity
--------------------------------------------
FHLB advances $ 13,905,454 1.19% 2004
900,000 4.06 2005
- - 2006
3,056,170 3.32 2007
33,481,155 4.88 2008 (a)
2,004,567 4.15 2009
25,463,747 5.48 2010 (a)
5,663,222 3.46 2011
----------------
TOTAL FHLB ADVANCES 84,474,315
----------------
Note payable, VMF Capital, L.L.C. 50,000 - % 2005
500,000 6.00 2005
500,000 6.00 2006
500,000 6.00 2007
----------------
TOTAL NOTE PAYABLE,
VMF CAPITAL, L.L.C. 1,550,000
----------------
TOTAL LONG-TERM BORROWINGS $ 86,024,315
================
(a) These advances are callable on a quarterly basis.
42
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 three $500,000 installments payable to VMF Capital, L.L.C. are due and
payable only if the amount of assets under the management of WB Capital
Management Inc. on the last day of the calendar year immediately preceding the
due date of the installment payments equal or exceed assets under management as
of October 1, 2003.
In the second quarter of 2003, the Company obtained a $5 million unsecured line
of credit through a large regional correspondent bank. The interest rate is
variable and tied to LIBOR. The line was not used during 2003.
At December 31, 2003, the Bank had arrangements to borrow $80 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 2004. The others have no stated expiration
date. There were no amounts outstanding under these arrangements at December 31,
2003.
NOTE 11. INCOME TAXES
The components of income tax expense are as follows for the years ended December
31, 2003, 2002 and 2001:
2003 2002 2001
-----------------------------------------------
Current:
Federal $ 7,757,894 $ 7,820,938 $ 7,603,709
State 1,307,694 1,297,300 1,239,273
Deferred (265,517) (20,179) (145,943)
-----------------------------------------------
$ 8,800,071 $ 9,098,059 $ 8,697,039
===============================================
43
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
---------------------------------------------------------------------------
2003 2002 2001
----------------------- ----------------------- -----------------------
PERCENT Percent Percent
OF PRETAX of Pretax of Pretax
AMOUNT INCOME Amount Income Amount Income
---------------------------------------------------------------------------
Computed "expected" tax
expense $ 9,128,944 35.0% $ 8,915,852 35.0% $ 8,551,719 35.0%
State income tax, net of
federal income tax benefit 825,336 3.2 843,245 3.3 796,055 3.3
Tax-exempt interest income (698,784) (2.7) (746,284) (2.9) (784,765) (3.2)
Nondeductible interest
expense to own
tax-exempts 53,921 0.2 66,678 0.3 121,249 0.5
Tax-exempt life insurance
proceeds and increase
in cash value (520,814) (2.0) - - - -
Other, net 11,468 - 18,568 - 12,781 -
---------------------------------------------------------------------------
$ 8,800,071 33.7% $ 9,098,059 35.7% $ 8,697,039 35.6%
===========================================================================
Net deferred tax assets consist of approximately the following as of December
31, 2003 and 2002:
2003 2002
----------------------------
Deferred tax assets:
Allowance for loan losses $ 2,270,723 $ 1,707,562
Purchase accounting on borrowings 887,501 -
State net operating loss carryforward 83,700 53,300
Other 60,447 64,579
----------------------------
3,302,371 1,825,441
----------------------------
Deferred income tax liabilities:
Deferred loan fees 206,667 287,783
Net unrealized gain on securities available for sale 673,022 632,177
Intangibles 1,173,750 -
Other 327,615 239,237
----------------------------
2,381,054 1,159,197
----------------------------
Net deferred tax asset before valuation allowance 921,317 666,244
Valuation allowance for deferred tax asset (83,700) (53,300)
----------------------------
NET DEFERRED TAX ASSET $ 837,617 $ 612,944
============================
44
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has approximately $1,395,000 of operating loss carryforwards
available to the Holding Company and WB Capital to offset future state taxable
income. The Company has recorded 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 expire without being utilized. The state
operating loss carryforwards expire as follows:
Year expiring:
2004 $ 209,000
2005 84,000
2006 42,000
2007 12,000
2008 and thereafter 1,048,000
------------
$ 1,395,000
============
NOTE 12. REGULATORY CAPITAL REQUIREMENTS
The Company and 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 that, 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 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 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 as of December 31, 2003, the
Company and Bank met all capital adequacy requirements to which it is subject.
As of December 31, 2003, the most recent notification from regulatory agencies
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
similar to those set forth in the following table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
45
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Holding Company's capital amounts and ratios are as follows:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------------
AS OF DECEMBER 31, 2003:
TOTAL CAPITAL (TO RISK-
WEIGHTED ASSETS) $ 100,868,000 13.1% $ 61,713,000 8.0% $ 77,142,000 10.0%
TIER I CAPITAL (TO RISK-
WEIGHTED ASSETS) 94,893,000 12.3 30,857,000 4.0 46,285,000 6.0
TIER I CAPITAL (TO
AVERAGE ASSETS) 94,893,000 9.6 39,725,000 4.0 49,656,000 5.0
As of December 31, 2002:
Total Capital (to Risk-
Weighted Assets) $ 89,239,000 13.8% $ 51,681,000 8.0% $ 64,601,000 10.0%
Tier I Capital (to Risk-
Weighted Assets) 84,745,000 13.1 25,840,000 4.0 38,760,000 6.0
Tier I Capital (to
Average Assets) 84,745,000 9.7 35,119,000 4.0 43,898,000 5.0
The Bank is restricted as to the amount of dividends which may be paid to the
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, 2003, the Bank had approximately $7 million of retained
earnings available for dividends.
NOTE 13. COMMITMENTS AND CONTINGENCIES AND RELATED-PARTY LEASES
The Company leases real estate under several noncancelable operating lease
agreements. Rent expense was approximately $773,000, $726,000 and $666,000 for
the years ended December 31, 2003, 2002 and 2001, 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 of another noncancelable
operating lease were consummated on terms deemed to be at arm's-length. Rent
expense to the related parties was approximately $187,000, $183,000 and $183,000
for the years ended December 31, 2003, 2002 and 2001, respectively.
46
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The approximate total minimum rental commitments as of December 31, 2003, are as
follows:
Related Party Total
-----------------------------
2004 $ 127,000 $ 760,000
2005 59,000 684,000
2006 59,000 649,000
2007 59,000 343,000
2008 59,000 198,000
Thereafter 577,000 1,741,000
-----------------------------
$ 940,000 $ 4,375,000
=============================
Required reserve balances: The Bank is required to maintain an average reserve
balance with the Federal Reserve Bank. Required reserve balances were
approximately $1,948,000 and $1,073,000 as of December 31, 2003 and 2002,
respectively.
Financial instruments with off-balance-sheet risk: The Company is party to
financial instruments with off-balancesheet 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, 2003 and 2002 are approximately as
follows:
2003 2002
----------------------------------
Commitments to extend credit $ 166,945,000 $ 136,424,000
Standby letters of credit 19,974,000 15,804,000
----------------------------------
$ 186,919,000 $ 152,228,000
==================================
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, crops,
livestock, inventory, property and equipment, residential real estate, and
income-producing commercial properties.
47
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 in the
summary above. If the commitment is funded, the Bank would be entitled to seek
recovery from the customer. At December 31, 2003 and 2002 no amounts have been
recorded as liabilities for the Bank's potential obligations under these
guarantees.
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
involve governmental entities within the state of Iowa. The concentrations of
credit by type of loan are set forth in Note 4. 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. PROFIT SHARING PLAN
The Company sponsors a profit sharing plan covering substantially all of its
employees. The plan provides for contributions the Board of Directors determines
annually. Profit sharing expense for the years ended December 31, 2003, 2002,
and 2001, was approximately $323,000, $252,000 and $224,000, respectively.
The profit sharing plan also has a 401(k) feature. The plan allows eligible
employees to defer a portion of their compensation ranging from 1% to 12%. The
Company is required to match a portion of the employees' contribution. The
Company's match is 100% of the first 2% of employee deferral and 50% of the next
2% of employee deferral. Expense for the years ended December 31, 2003, 2002 and
2001 was approximately $133,000, $104,000 and $98,000, respectively.
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.
48
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 amount of federal funds purchased and
securities sold under agreements to repurchase and certain other borrowings
approximate their fair values. Fair values of FHLB term borrowings and trust
preferred securities 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 credit worthiness of the counterparties.
49
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The approximate carrying amounts and fair values are as follows as of December
31, 2003 and 2002:
2003 2002
---------------------------------- ----------------------------------
CARRYING APPROXIMATE Carrying Approximate
AMOUNT FAIR VALUE Amount Fair Value
---------------------------------- ----------------------------------
Financial assets:
Cash and due from banks $ 27,787,000 $ 27,787,000 $ 23,022,000 $ 23,022,000
Federal funds sold and other short-term
investments 54,287,000 54,287,000 158,192,000 158,192,000
Securities available for sale 178,309,000 178,309,000 70,862,000 70,862,000
Securities held to maturity 91,406,000 93,477,000 138,300,000 141,267,000
Federal Home Loan Bank stock 5,198,000 5,198,000 3,130,000 3,130,000
Loans, net 593,380,000 601,568,000 483,959,000 495,736,000
Accrued interest receivables 5,879,000 5,879,000 5,204,000 5,204,000
Financial liabilities:
Deposits 705,074,000 706,256,000 613,098,000 614,848,000
Federal funds purchased and
securities sold under agreements
to repurchase 85,443,000 85,443,000 127,419,000 127,419,000
Other short-term borrowings 9,142,000 9,142,000 5,097,000 5,097,000
Accrued interest payable 616,000 616,000 1,004,000 1,004,000
Trust preferred securities 20,000,000 19,929,000 - -
Long-term borrowings 86,024,000 88,993,000 51,600,000 56,572,000
Off-balance-sheet financial instruments:
Commitments to extend credit - - - -
Standby letters of credit - - - -
50
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. WEST BANCORPORATION, INC. (PARENT COMPANY ONLY) CONDENSED FINANCIAL
STATEMENTS
BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
ASSETS 2003 2002
-----------------------------------------------------------------------------------
Cash $ 4,308,070 $ 489,542
Investment in common stock, available for sale 189,750 -
Investment in West Bank 86,796,310 85,326,906
Investment in WB Capital Management Inc. 1,418,384 -
Intercompany debentures from West Bank 20,000,000 -
Other assets 420,177 22,464
----------------------------------
TOTAL ASSETS $ 113,132,691 $ 85,838,912
==================================
LIABILITIES AND EQUITY
LIABILITIES
Accrued expenses and other liabilities $ 236,347 $ 14,750
Trust preferred securities 20,000,000 -
----------------------------------
20,236,347 14,750
----------------------------------
EQUITY
Common stock 3,000,000 3,000,000
Additional paid-in capital 32,000,000 32,000,000
Retained earnings 56,796,771 49,792,716
Accumulated other comprehensive income 1,099,573 1,031,446
----------------------------------
TOTAL EQUITY 92,896,344 85,824,162
----------------------------------
TOTAL LIABILITIES AND EQUITY $ 113,132,691 $ 85,838,912
==================================
51
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
-----------------------------------------------------
Operating income:
Equity in net income of West Bank $ 17,782,998 $ 16,516,279 $ 15,753,812
Equity in net (loss) of WB Capital
Management Inc. (81,616) - -
Interest and dividend income 433,637 1,269 1,806
Gain on sale of investment securities 160,277 - -
-----------------------------------------------------
18,295,296 16,517,548 15,755,618
-----------------------------------------------------
Operating expenses:
Interest on trust preferred securities 649,280 - -
Salaries and employee benefits 409,668 - 15,537
Other 178,899 217,386 12,997
-----------------------------------------------------
1,237,847 217,386 28,534
-----------------------------------------------------
INCOME BEFORE INCOME TAXES 17,057,449 16,300,162 15,727,084
Income tax (credits) (225,179) (75,641) (9,356)
-----------------------------------------------------
NET INCOME $ 17,282,628 $ 16,375,803 $ 15,736,440
=====================================================
52
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
----------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 17,282,628 $ 16,375,803 $ 15,736,440
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in net income of West Bank (17,782,998) (16,516,279) (15,753,812)
Equity in net loss of WB Capital Management Inc. 81,616 - -
Dividends received from West Bank 16,369,500 10,515,551 9,636,163
Gains from sale of securities available for sale (160,277) - -
Amortization 6,030 - -
Deferred income taxes (2,355) - -
Changes in assets and liabilities:
Increase in other assets (403,743) (13,092) (6,238)
Increase in accrued expenses and other liabilities 217,373 14,750 -
----------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 15,607,774 10,376,733 9,612,553
----------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities available for sale 491,977 - -
Purchases of securities available for sale (502,650) - -
Capitalization of WB Capital Management Inc. (1,500,000) - -
Issuance of debentures to subsidiary (20,000,000) - -
----------------------------------------------------
NET CASH (USED IN) INVESTING ACTIVITIES (21,510,673) - -
----------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of trust preferred securities 20,000,000 - -
Dividends paid (10,278,573) (9,957,368) (9,636,163)
----------------------------------------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 9,721,427 (9,957,368) (9,636,163)
----------------------------------------------------
NET INCREASE (DECREASE) IN CASH 3,818,528 419,365 (23,610)
CASH
Beginning 489,542 70,177 93,787
----------------------------------------------------
Ending $ 4,308,070 $ 489,542 $ 70,177
====================================================
53
WEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
2003
-------------------------------------------------------
THREE MONTHS ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------------------------------------------------------------------------------------------
Interest income $ 10,374 $ 10,340 $ 11,325 $ 11,422
Interest expense 2,716 2,664 2,817 2,942
-------------------------------------------------------
NET INTEREST INCOME 7,658 7,676 8,508 8,480
Provision for loan losses 200 175 250 225
-------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 7,458 7,501 8,258 8,255
Noninterest income 1,704 1,939 2,157 3,505
Noninterest expense 2,906 2,878 3,393 5,517
-------------------------------------------------------
INCOME BEFORE INCOME TAXES 6,256 6,562 7,022 6,243
Income taxes 2,205 2,311 2,458 1,826
-------------------------------------------------------
NET INCOME $ 4,051 $ 4,251 $ 4,564 $ 4,417
=======================================================
Net income per common share - basic $ 0.25 $ 0.26 $ 0.28 $ 0.28
=======================================================
2002
-------------------------------------------------------
Three months ended March 31 June 30 September 30 December 31
---------------------------------------------------------------------------------------------
Interest income $ 11,030 $ 11,264 $ 11,119 $ 11,227
Interest expense 3,609 3,481 3,398 3,162
-------------------------------------------------------
NET INTEREST INCOME 7,421 7,783 7,721 8,065
Provision for loan losses 230 230 250 200
-------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 7,191 7,553 7,471 7,865
Noninterest income 1,486 1,575 1,812 1,741
Noninterest expense 2,774 2,902 2,794 2,750
-------------------------------------------------------
INCOME BEFORE INCOME TAXES 5,903 6,226 6,489 6,856
Income taxes 2,084 2,217 2,319 2,478
-------------------------------------------------------
NET INCOME $ 3,819 $ 4,009 $ 4,170 $ 4,378
=======================================================
Net income per common share - basic $ 0.24 $ 0.25 $ 0.26 $ 0.27
=======================================================
54
STOCK INFORMATION
West Bancorporation, Inc. common stock is traded on the Nasdaq National Market
and quotations are furnished by the Nasdaq System. There were 337 common
stockholders of record on December 31, 2003, and an estimated 600 additional
beneficial holders whose stock was held in street name by brokerage houses.
MARKET AND DIVIDEND INFORMATION High Low Dividends
--------- --------- ----------
2003
1st quarter $ 17.54 $ 14.35 $ 0.16
2nd quarter 19.61 15.77 0.16
3rd quarter 18.82 16.56 0.16
4th quarter 18.54 17.05 0.16
----------
$ 0.64
==========
2002
1st quarter $ 14.00 $ 11.50 $ 0.15
2nd quarter 18.00 13.15 0.15
3rd quarter 16.50 14.38 0.16
4th quarter 15.63 14.40 0.16
----------
$ 0.62
==========
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 MARKET MAKERS
Wall Street Journal and Citgroup Global Markets
Other Newspapers: WestBcp Goldman, Sachs & Co.
Hill, Thompson, Magid & Co.
TRANSFER AGENT/DIVIDEND PAYING AGENT Howe Barnes Investments, Inc.
Illinois Stock Transfer Company Keefe, Bruyette & Woods, Inc.
209 West Jackson Boulevard, Suite 903 Knight Equity Markets, L.P.
Chicago, Illinois 60606-6905 Sandler O'Neill & Partners
800-757-5755 Schwab Global Markets
www.illinoisstocktransfer.com Wachovia Securities
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
on the Company's investor relations web page at www.westbankiowa.com.
55
[WEST BANCORPORATION LOGO]
West Bancorporation, Inc.
PLEASE COMPLETE BOTH SIDES OF THE PROXY CARD,
DETACH AND RETURN IN THE ENCLOSED ENVELOPE.
DETACH PROXY CARD HERE
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 (I) FOR THE ELECTION OF THE NOMINEES LISTED IN PROPOSAL 1; AND (II) IN THE
DISCRETION OF THE NAMED PROXIES UPON SUCH OTHER MATTERS AS MAY PROPERLY COME
BEFORE THE MEETING.
Dated , 2004
-------------------------------------
----------------------------------------------------
----------------------------------------------------
(PLEASE SIGN HERE)
Please sign exactly as name appears above. When shares are held by joint
tenants, both should sign. When signing as administrator, attorney, executor,
guardian or trustee, please give full title as such. If a corporation,
authorized officer please sign full corporate name and indicate office held.
DETACH ATTENDANCE CARD HERE AND
MAIL WITH PROXY CARD
West Bancorporation, Inc.
If you plan to personally attend the Annual Meeting of Shareholders, please
check the box below and list names of attendees on reverse side.
Return this stub in the enclosed envelope with your completed proxy card.
I do plan to attend the 2004 meeting [ ]
NAMES OF PERSONS ATTENDING
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
WEST BANCORPORATION, INC. WEST DES MOINES, IOWA PROXY
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS ON APRIL 15, 2004
The undersigned hereby appoints Thomas E. Stanberry and David R. Milligan, 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 fully as the undersigned could do
if personally present, at the Annual Meeting of Shareholders of said corporation
to be held in the conference room at the headquarters of the Iowa Independent
Bankers, located at 1603 22nd Street, Suite 202, West Des Moines, Iowa, on
Thursday, April 15, 2004 at 4:30 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 David R. 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)