SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-A
AMENDMENT NO. 1
GENERAL FORM FOR
REGISTRATION OF SECURITIES
Pursuant to Section 12 (b) or 12 (g) of the Securities Exchange Act of 1934
WEST BANCORPORATION, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
IOWA 42 - 1230603
--------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1601 22nd STREET, WEST DES MOINES, IOWA 50266
-------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(515) 222-2300
(Registrant's telephone number, including area code)
Securities to be registered pursuant to Section 12 (b) of the Act: NONE
Securities to be registered pursuant to Section 12 (g) of the Act:
COMMON STOCK, NO PAR VALUE
--------------------------
(Title of Class)
1
TABLE OF CONTENTS
Page
----
ITEM 1. BUSINESS ............................................... 3
ITEM 2. FINANCIAL INFORMATION .................................. 13
ITEM 3. PROPERTIES ............................................. 29
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT ............................................. 30
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS ....................... 31
ITEM 6. EXECUTIVE COMPENSATION ................................. 33
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ......... 34
ITEM 8. LEGAL PROCEEDINGS ...................................... 34
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S COMMON
EQUITY AND RELATED SHAREHOLDER MATTERS ................. 35
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES ................ 35
ITEM 11. DESCRIPTION OF COMPANY'S SECURITIES TO BE REGISTERED ... 36
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS .............. 36
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ............ 37
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE .................... 37
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS ...................... 37
2
WEST BANCORPORATION, INC.
FORM 10 REGISTRATION STATEMENT
ITEM 1. BUSINESS
GENERAL
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 owns 100 percent of the stock of one state banking
subsidiary, as described below. All of the Company's operations are conducted in
the State of Iowa and primarily within the Des Moines, Iowa metropolitan area.
The Company does not engage in any material business activities apart from its
ownership of its banking subsidiary. The principal executive offices of the
Company are located at 1601 22nd Street, West Des Moines, Iowa 50266 and its
telephone number is (515) 222-2300.
The Company was organized and incorporated on May 22, 1984 under the laws of the
State of Iowa to serve as a holding company for its principal banking
subsidiary, West Des Moines State Bank ("West Bank" or the "Bank") located in
West Des Moines, Iowa.
The principal sources of Company revenue are from West Bank: (1) interest and
fees earned on loans made; (2) service charges on deposit accounts; (3) interest
on fixed income securities and (4) trust fees.
West Bank's lending activities consist primarily of short-term and medium-term
commercial and real estate loans, business operating loans and lines of credit,
equipment loans, vehicle loans, personal loans and lines of credit, home
improvement loans and conventional and secondary market mortgage loan
origination. West Bank also offers a variety of demand, savings and time
deposits, merchant credit card processing, safe deposit boxes, wire transfers,
debit cards, direct deposit of payroll and social security checks and automated
teller machine access, trust services and correspondent bank services.
BANKING SUBSIDIARY
West Des Moines State Bank, West Des Moines, Iowa. West Bank is a state
chartered commercial bank insured by the Federal Deposit Insurance Corporation
("FDIC"). It was organized in 1893 as First Valley Junction Savings Bank. The
name was changed to West Des Moines State Bank in 1938. The bank became a wholly
owned subsidiary of the Company in 1984 through a bank holding company
organization whereby the bank's controlling interest was transferred to West
Bancorporation, Inc. West Bank provides full-service banking to businesses and
residents primarily in the Des Moines metropolitan area as well as correspondent
services to banking organizations primarily located in Iowa. It provides a
variety of products and services designed to meet the needs of the market it
serves. It has an experienced staff of bank officers who have spent the majority
of their banking careers with West Bank and local financial service
organizations and who emphasize long-term customer relationships. West Bank
conducts business out of eight full-service offices all located within the Des
Moines metropolitan area.
As of December 31, 2001, West Bank had capital of $ 78,932,712 and 110 full-time
equivalent employees. Full-time equivalents represent the number of people a
business would employ if all of its employees were employed on a full-time
basis. It is calculated by dividing the total number of hours worked by all full
and part-time employees by the number of hours a full-time individual would work
for a given period of time. West Bank had net income of $15,753,812 in 2001,
$14,422,235 in 2000 and $15,001,489 in 1999. Total assets as of December 31,
2001, 2000 and 1999 were $815,970,242, $827,876,370 and $775,717,987,
respectively.
3
BUSINESS STRATEGY AND OPERATIONS
The Company is a bank holding company serving primarily the Des Moines
metropolitan area. The business strategy is to emphasize strong personal and
business relationships to provide products and services that meet the needs of
its customers. The Company seeks to maintain a strong return on equity and net
income. To accomplish these goals, West Bank focuses on small to medium size
businesses that traditionally wish to develop an exclusive relationship with a
single bank. West Bank has the size to give the personal attention required by
business owners, in addition to the credit expertise to help businesses meet
their goals. The Company emphasizes strong cost controls while striving to
achieve return on equity and net income goals.
West Bank offers a full range of deposit services that are typically available
in most financial institutions, including checking accounts, savings accounts,
money market accounts and time certificates of deposit. One major goal in
developing the Bank's product mix is to keep the product offerings as simple as
possible, both in terms of the number of products and the features and benefits
of the individual services. The transaction accounts and time certificates are
tailored to the marketplace at competitive rates. In addition, retirement
accounts such as Individual Retirement Accounts are available. The FDIC insures
all deposit accounts up to the maximum amount. The Bank solicits these accounts
from small-to-medium sized businesses and from individuals who live and/or work
within its market area. Occasionally, one particular customer may have balances
in short-term deposits that represent approximately 20% of the Bank's total
deposits. Those funds are specifically invested in short-term liquid
investments. The Company does not believe that the loss of deposits of any one
customer or of a few customers would have an adverse effect on the Bank's
operation or erode its core deposit base.
Loans are provided to creditworthy borrowers regardless of their race, color,
national origin, religion, sex, age, marital status, disability, receipt of
public assistance or any other basis prohibited by law. West Bank intends to
fulfill this commitment while maintaining prudent credit standards. In the
course of fulfilling this obligation to meet the credit needs of the marketplace
it serves, West Bank will give consideration to each credit application
regardless of the fact that the applicant may reside in a low to moderate income
neighborhood, and without regard to the geographic location of the residence,
property or business within the market area.
The Bank provides quality financial products and services such as telephone and
internet banking and trust services that meet the banking needs of its customers
and its market place. The loan programs and acceptance of certain loans may vary
from time-to-time depending on the funds available and regulations governing the
banking industry. West Bank offers all basic types of credit to its marketplace
including commercial, real estate and consumer loans. The types of loans within
these categories are as follows:
Commercial Loans. Commercial loans are typically made to sole proprietors,
partnerships, corporations and other business entities such as municipalities
and individuals where the loan is to be used primarily for business purposes.
These loans are typically secured by assets owned by the borrower and often
involve personal guarantees given by the owners of the business. The types of
loans that West Bank offers include financing guaranteed under Small Business
Administration programs, operating and working capital loans, loans to finance
equipment and other capital purchases, commercial real estate loans, business
lines of credit, term loans, loans to professionals, and letters of credit.
4
Consumer Loans. Consumer loans are typically available to finance home
improvements and consumer purchases, such as automobiles, household furnishings,
boats and education. These loans are made on both a secured and an unsecured
basis. The types of loans that West Bank offers include automobiles and trucks,
boats and recreational vehicles, personal loans and lines of credit, home equity
lines of credit, home improvement and rehabilitation loans, credit card services
and residential real estate loans.
Other types of credit programs, such as loans to nonprofit organizations and to
public entities for community development, also are available.
West Bank offers trust services typically found in a commercial bank with trust
powers, including the administration of estates, conservatorships, personal and
corporate trusts and agency accounts.
West Bank earns fees on a limited basis from the origination of residential
mortgages that are sold in the secondary real estate market without retaining
the mortgage servicing rights.
West Bank offers traditional banking services, such as safe deposit boxes, wire
transfers, direct deposit of payroll and social security checks, automated
teller machine access and automatic drafts (ACH) for various accounts.
West Bank offers correspondent bank services to community banks located
primarily in Iowa. These services include the buying and selling of federal
funds as well as purchases and sales of loan participations.
CREDIT MANAGEMENT
The Company strives to achieve sound credit risk management. In order to achieve
this, the Company has established uniform credit policies and underwriting
criteria for West Bank's loan portfolio. The Bank diversifies the types of loans
offered and is subject to regular credit examinations by regulators, annual
external loan audits and an internal annual review of large loans. The Company
attempts to identify potential problem loans early, charge off loans promptly
and maintain an adequate allowance for loan losses. The Bank has established
credit guidelines for the lending activities that include guidelines relating to
the more commonly requested loan types, as follows:
Commercial Real Estate Loans - Commercial real estate loans are normally based
on loan to appraisal value ratios of not more than 75 percent and secured by a
first priority lien position. Loans are typically subject to interest rate
adjustments no less frequently than 5 years from origination. Fully amortized
monthly repayment terms normally do not exceed twenty years. Projections and
cash flows that show ability to service debt within the amortization period are
required. Property and casualty insurance is required to protect the Banks'
collateral interests. A major risk factor for commercial real estate loans, as
well as the other loan types described below is the geographic concentration in
the Des Moines metropolitan area. Loans are generally guaranteed by the
principal(s).
Commercial Operating Lines - These loans are made to businesses with normal
terms up to twelve months. The credit needs are generally seasonal with the
source of repayment coming from the entity's normal business cycle. Cash flow
reviews are completed to establish the ability to service the debt within the
terms of the loan. A first priority lien on the general assets of the business
normally secures these types of loans. Loan to value limits vary and are
dependent upon the nature and type of the underlying collateral and the
financial strength of the borrower. Loans are generally guaranteed by the
principal(s).
5
Commercial Term Loans - These loans are made to businesses to finance equipment
and other capital expenditures. Terms are generally the lesser of five years or
the useful life of the asset. Term loans are normally secured by the asset being
financed and are often additionally secured with the general assets of the
business. Loan to value is generally a maximum of 75 percent of the cost or
value of the assets. Loans are normally guaranteed by the principal(s).
Construction Loans - Construction loans on commercial real estate are normally
based on a loan to appraisal value ratio of not more than 75 percent and secured
by a first priority lien position. Loan payments are typically interest only
during the term of the construction period. The interest rate is usually
variable, based on the prime rate. Loans are normally guaranteed by the
principal(s). Residential construction loans are generally for a term not to
exceed one year, based on a loan to appraisal value ratio of not more than 80%
and secured by a first priority lien position. Interest is normally paid monthly
or quarterly based on a variable rate tied to prime.
Residential First Mortgage Loans - Proceeds of these loans are used to buy or
refinance the purchase of residential real estate with the loan secured by a
first lien on the real estate. Most of the residential mortgage loans originated
by the Bank during the past year (including servicing rights) have been sold in
the secondary mortgage market due to the higher interest rate risk inherent in
the 15 and 30 year fixed rate terms consumers prefer. Loans that are originated
and not sold in the secondary market generally have higher interest rates and
have rate adjustment periods normally no longer that seven years. The maximum
amortization of first mortgage residential real estate loans is 30 years. The
loan-to-value ratios do not exceed 80 percent. Property insurance is required on
all loans to protect the Banks' collateral position.
Home Equity Term Loans - These loans are normally for the purpose of home
improvement or other consumer purposes and are secured by a junior mortgage on
residential real estate. Loan-to-value ratios normally do not exceed 90 percent
of market value.
Home Equity Lines of Credit - The Bank offers a home equity line of credit with
a maximum term of 60 months. These loans are secured by a junior mortgage on the
residential real estate and normally do not exceed a loan-to-value ratio of 90
percent with the interest adjusted quarterly.
Consumer Loans - Consumer loans are normally made to consumers under the
following guidelines: automobiles - loans on new and used automobiles generally
will not exceed 80 and 75 percent of the value, respectively; recreational
vehicles and boats - 75 percent of value; mobile home loans have a maximum term
of 180 months with the loan-to-value ratio generally not exceeding 80 percent.
Each of these loans is secured by a first priority lien on the assets and
requires insurance to protect the Banks' collateral position. The term for
unsecured loans generally does not exceed 24 months.
EMPLOYEES
At December 31, 2001, the Bank had a total of 110 full-time equivalent employees
and the Company had one employee. Employees are provided with a comprehensive
program of benefits, including comprehensive medical and dental plans, long-term
disability coverage, and a profit sharing plan with a 401(k) feature. Management
considers its relations with employees to be satisfactory. Unions represent none
of the employees.
6
MARKET AREA
The Company operates one commercial bank with eight locations throughout the Des
Moines, Iowa metropolitan area.
West Bank's main location is located in West Des Moines, Iowa, one of the
fastest growing communities in Iowa. The population of the Des Moines
metropolitan area is approximately 456,000. Des Moines is the capitol of Iowa.
Major employers are the State of Iowa, Principal Life Insurance Company, Pioneer
Hi-Bred International, Inc., Central Iowa Hospital Corporation, Mercy Hospital
Medical Center, Hy-Vee Food Stores, Inc., and the Des Moines School District.
West Bank's primary business includes providing business and retail banking
services and lending.
COMPETITION
The geographic market area served by West Bank is highly competitive with
respect to both loans and deposits. The Bank competes principally with other
commercial banks, savings and loans associations, credit unions, mortgage
companies, finance divisions of auto companies, and other service providers.
Some of these competitors are local, while others are statewide or nationwide.
The major commercial bank competitors include Bankers Trust Company, NA, a local
banking organization; regional banks: Union Planters Bank, NA and Commercial
Federal Bank; and several nationwide banks: Wells Fargo Bank, Bank of America
and U.S. Bank, NA. Among the advantages such larger banks have are their ability
to finance extensive advertising campaigns and to allocate their investment
assets to geographic regions of higher yield and demand. Such banks offer
certain services, which are not offered directly by West Bank, but that may be
offered through correspondent banking institutions. These larger banking
organizations have much higher legal lending limits than West Bank and thus are
better able to finance large regional, national and global commercial customers.
In order to compete with the other financial institutions in its primary trade
area, West Bank uses, to the fullest extent possible, the flexibility that is
accorded by its independent status. This includes an emphasis on specialized
services, local promotional activity and personal contacts by the Bank's
officers, directors and employees. In particular, the Bank competes for deposits
principally by offering depositors a variety of deposit programs, convenient
office locations, hours and other services. West Bank competes for loans
primarily by offering competitive interest rates, experienced lending personnel
with local decision-making authority and quality products and services.
As of June 30, 2001, there were 28 other banks and savings and loan associations
within Polk County, Iowa, where the bank's offices are located. West Bank ranked
5th based on total deposits of all offices in Polk County. For the entire state,
West Bank ranks 7th in terms of deposit size.
The Bank also competes with the financial markets for funds. Yields on corporate
and government debt securities and commercial paper affect the ability of
commercial banks to attract and hold deposits. Commercial banks also compete for
funds with money market instruments and similar investment vehicles offered by
competitors including brokerage firms, insurance companies, credit card issuers
and retailers such as Sears. Money market funds offered by these types of
organizations have provided substantial competition for deposits. This trend
will likely continue in the future.
The Company anticipates bank competition will continue to change significantly
over the next several years as more banks, including the major regionals and
nationals, continue to consolidate. The larger financial institutions will
continue to consolidate their branch systems by providing incentives to their
customers to use electronic banking instead of brick and mortar branches. Credit
unions, because of their income tax advantage, will continue to show substantial
growth.
7
SUPERVISION AND REGULATION
The following discussion generally refers to certain statutes and regulations
affecting the banking industry. These references provide brief summaries and
therefore do not purport to be complete and are qualified in their entirety by
reference to those statutes and regulations. In addition, due to the numerous
statutes and regulations that apply to and regulate the operation of the banking
industry, many are not referenced below.
The Company and West Bank are subject to extensive federal and state regulation
and supervision. Regulation and supervision of financial institutions is
primarily intended to protect depositors and the FDIC rather than shareholders
of the Company. The laws and regulations affecting banks and bank holding
companies have changed significantly over recent years, particularly with the
passage of the Financial Services Modernization Act. There is reason to expect
that similar changes will continue in the future. Any change in applicable laws,
regulations or regulatory policies may have a material effect on the business,
operations and prospects of the Company. The Company is unable to predict the
nature or the extent of the effects on its business and earnings that any fiscal
or monetary policies or new federal or state legislation may have in the future.
The Company
The Company is a bank holding company by virtue of its ownership of West Bank,
and is registered as such with the Board of Governors of the Federal Reserve
System (the "Federal Reserve"). The Company is subject to regulation under the
Bank Holding Company Act of 1956, as amended (the "BHCA"), which subjects the
Company and the Bank to supervision and examination by the Federal Reserve.
Under the BHCA, the Company files with the Federal Reserve quarterly and annual
reports of its operations and such additional information as the Federal Reserve
may require.
Source of Strength to the Bank. The Federal Reserve takes the position that a
bank holding company is required to serve as a source of financial strength to
its subsidiary bank and may not conduct its operations in an unsafe or unsound
manner. In addition, it is the Federal Reserve's position that in serving as a
source of strength to its subsidiary bank, a bank holding company should use
available resources to provide adequate capital funds to its subsidiary bank
during periods of financial stress or adversity. It should also maintain the
financial flexibility and capital raising capacity to obtain additional
resources for providing assistance to its subsidiary bank. A bank holding
company's failure to meet its obligations to serve as a source of strength to
its subsidiary bank will generally be considered by the Federal Reserve to be an
unsafe and unsound banking practice or a violation of the Federal Reserve's
regulations or both.
Federal Reserve Approval. Bank holding companies must obtain the approval of the
Federal Reserve before they: (1) acquire direct or indirect ownership or control
of any voting stock of any bank if, after such acquisition, they would own or
control, directly or indirectly, more than 5 percent of the voting stock of such
bank; (2) merge or consolidate with another bank holding company; or (3) acquire
substantially all of the assets of any additional banks.
Non-Banking Activities. With certain exceptions, the BHCA also prohibits bank
holding companies from acquiring direct or indirect ownership or control of
voting stock in any company other than a bank or bank holding company unless the
Federal Reserve finds the company's business to be incidental to the business of
banking. When making this determination, the Federal Reserve in part considers
whether allowing a bank holding company to engage in those activities would
offer advantages to the public that would outweigh possible adverse effects. A
bank holding company may engage in permissible non-banking activities on a de
novo basis, if the holding company meets certain criteria and notifies the
Federal Reserve within ten (10) business days after the activity has commenced.
8
Under the Financial Services Modernization Act, eligible bank holding companies
may elect (with the approval of the Federal Reserve) to become a "financial
holding company". Financial holding companies are permitted to engage in certain
financial activities through affiliates that had previously been prohibited
activities for bank holding companies. Such financial activities include
securities and insurance underwriting and merchant banking. At this time, the
Company has not elected to become a financial holding company, but may choose to
do so at some time in the future.
Control Transactions. The Change in Bank Control Act of 1978, as amended,
requires a person or group of persons acquiring "control" of a bank holding
company to provide the Federal Reserve with at least 60 days prior written
notice of the proposed acquisition. Following receipt of this notice, the
Federal Reserve has 60 days to issue a notice disapproving the proposed
acquisition, but the Federal Reserve may extend this time period for up to
another 30 days. An acquisition may be completed before the disapproval period
expires if the Federal Reserve issues written notice of its intent not to
disapprove the action. Under a rebuttable presumption established by the Federal
Reserve, the acquisition of 10 percent or more of a class of voting stock of a
bank holding company with a class of securities registered under Section 12 of
the Securities Exchange Act of 1934, as amended, would constitute the
acquisition of control. In addition, any "company" would be required to obtain
the approval of the Federal Reserve under the BHCA before acquiring 25 percent
(or 5 percent if the "company" is a bank holding company) or more of the
outstanding shares of the Company, or otherwise obtain control over the Company.
Affiliate Transactions. The Company and West Bank are deemed affiliates within
the meaning of the Federal Reserve Act, and transactions between affiliates are
subject to certain restrictions. Generally, the Federal Reserve Act: (1) limits
the extent to which the financial institution or its subsidiaries may engage in
"covered transactions" with an affiliate; and (2) requires all transactions with
an affiliate, whether or not "covered transactions", to be on terms
substantially the same, or at least as favorable to the institution or
subsidiary, as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
similar transactions.
State Law on Acquisitions. Iowa law permits bank holding companies to make
acquisitions throughout the state. However, Iowa currently has a deposit
concentration limit of 15 percent on the amount of deposits in the state that
any one banking organization can control and continue to acquire banks or bank
deposits (by acquisitions), which applies to all depository institutions doing
business in Iowa.
Banking Subsidiaries
Applicable federal and state statutes and regulations governing a bank's
operations relate, among other matters, to capital adequacy requirements,
required reserves against deposits, investments, loans, legal lending limits,
certain interest rates payable, mergers and consolidations, borrowings, issuance
of securities, payment of dividends, establishment of branches and dealings with
affiliated persons.
West Bank is a state bank subject to primary federal regulation and supervision
by the Federal Deposit Insurance Corporation (the "FDIC") and the Iowa Division
of Banking. The federal laws that apply to the bank regulate, among other
things, the scope of its business, its investments, its reserves against
deposits, the timing of the availability of deposited funds and the nature and
amount of and collateral for loans. The laws and regulations governing the bank
generally have been promulgated to protect depositors and the deposit insurance
fund of the FDIC and not to protect stockholders of such institutions or their
holding companies.
The FDIC has authority to prohibit banks under their supervision from engaging
in what it considers to be an unsafe and unsound practice in conducting their
business. The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires federal banking regulators to adopt regulations or
guidelines in a number of areas to ensure bank safety and soundness, including
internal controls, credit underwriting, asset growth, earnings, management
compensation and ratios of classified assets to capital. FDICIA also contains
provisions which are intended to change independent auditing requirements,
restrict the activities of state-chartered insured banks, amend various consumer
banking laws, limit the ability of "undercapitalized banks" to borrow from the
Federal Reserve's discount window, require regulators to perform periodic
on-site bank examinations and set standards for real estate lending.
9
Borrowing Limitations. West Bank is subject to limitations on the aggregate
amount of loans that it can make to any one borrower, including related
entities. Subject to numerous exceptions based on the type of loans and
collateral, applicable statutes and regulations generally limit loans to one
borrower of 15 percent of total equity and reserves. West Bank is in compliance
with applicable loans to one borrower requirements.
FDIC Insurance. Generally, customer deposit accounts in banks are insured by the
FDIC for up to a maximum amount of $100,000. The FDIC has adopted a risk-based
insurance assessment system under which depository institutions contribute funds
to the FDIC insurance fund based on their risk classification. The FDIC may
terminate the deposit insurance of any insured depository institution if it
determines after an administrative hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations or has violated any applicable law.
Capital Adequacy Requirements. The Federal Reserve, the FDIC and the Office of
the Comptroller of the Currency ("OCC") (collectively, the "Agencies") have
adopted risk-based capital guidelines for banks and bank holding companies that
are designed to make regulatory capital requirements more sensitive to
differences in risk profiles among banks and bank holding companies and account
for off-balance sheet items. Failure to achieve and maintain adequate capital
levels may give rise to supervisory action through the issuance of a capital
directive to ensure the maintenance of required capital levels. West Bank is in
compliance with applicable regulatory capital level requirements.
The current guidelines require all federal regulated banks to maintain a minimum
risk-based total capital ratio equal to 8 percent, of which at least 4 percent
must be Tier 1 capital. Tier 1 capital includes common shareholders' equity,
qualifying perpetual preferred stock and minority interests in equity accounts
of consolidated subsidiaries, but excludes goodwill and most other intangibles
and the allowance for loan and lease losses. Tier 2 capital includes the excess
of any preferred stock not included in Tier 1 capital, mandatory convertible
securities, hybrid capital instruments, subordinated debt and intermediate term
preferred stock, 20 percent of unrealized gain of equity securities and general
reserve for loan and lease losses up to 1.25 percent of risk weighted assets.
West Bank has not received any notice indicating that it will be subject to
higher capital requirements.
Under these guidelines, bank's assets are given risk weights of 0 percent, 20
percent, 50 percent or 100 percent. Most loans are assigned to the 100 percent
risk category, except for first mortgage loans fully secured by residential
property and, under certain circumstances, residential construction loans (both
carry a 50 percent rating). Most investment securities are assigned to the 20
percent category, except for municipal or state revenue bonds (which have a 50
percent rating) and direct obligations of or obligations guaranteed by the
United States Treasury or United States Government Agencies (which have a 0
percent rating).
The Agencies have also implemented a leverage ratio, which is equal to Tier 1
capital as a percentage of average total assets less intangibles, to be used as
a supplement to the risk based guidelines. The principal objective of the
leverage ratio is to limit the maximum degree to which a bank may leverage its
equity capital base. The minimum required leverage ratio for top rated
institutions is 3 percent, but most institutions are required to maintain an
additional cushion of at least 100 to 200 basis points. Any institution
operating at or near the 3 percent level is expected to be a strong banking
organization without any supervisory, financial or operational weaknesses or
deficiencies. Any institution experiencing or anticipating significant growth
would be expected to maintain capital ratios, including tangible capital
positions, well above the minimum levels.
10
Prompt Corrective Action. Regulations adopted by the Agencies impose even more
stringent capital requirements. The FDIC and other Agencies must take certain
"prompt corrective action" when a bank fails to meet capital requirements. The
regulations establish and define five capital levels: (1) "well-capitalized",
(2) "adequately capitalized", (3) "undercapitalized", (4) "significantly
undercapitalized" and (5) "critically undercapitalized". Increasingly severe
restrictions are imposed on the payment of dividends and management fees, asset
growth and other aspects of the operations of institutions that fall below the
category of being "adequately capitalized". Undercapitalized institutions are
required to develop and implement capital plans acceptable to the appropriate
federal regulatory agency. Such plans must require that any company that
controls the undercapitalized institution must provide certain guarantees that
the institution will comply with the plan until it is adequately capitalized. As
of the date of this Registration Statement, neither the Company or West Bank was
subject to any regulatory order, agreement or directive to meet and maintain a
specific capital level for any capital measure. Furthermore, as of that same
date, West Bank was categorized as "well capitalized" under regulatory prompt
corrective action provisions.
Restrictions on Dividends. Dividends paid to the Company by West Bank are the
major source of Company cash flow. Various federal and state statutory
provisions limit the amount of dividends banking subsidiaries are permitted to
pay to their holding companies without regulatory approval. Federal Reserve
policy further limits the circumstances under which bank holding companies may
declare dividends. For example, a bank holding company should not continue its
existing rate of cash dividends on its common stock unless its net income is
sufficient to fully fund each dividend and its prospective rate of earnings
retention appears consistent with its capital needs, asset quality and overall
financial condition. In addition, the Federal Reserve and the FDIC have issued
policy statements that provide that insured banks and bank holding companies
should generally pay dividends only out of current operating earnings. Federal
and state banking regulators may also restrict the payment of dividends by
order.
West Bank, as a state chartered bank, is restricted under Iowa law to paying
dividends only out of its undivided profits. Additionally, the payment of
dividends by West Bank is affected by the requirement to maintain adequate
capital pursuant to applicable capital adequacy guidelines and regulations, and
West Bank is generally prohibited from paying any dividends if, following
payment thereof, the bank would be undercapitalized. As of December 31, 2001,
approximately $ 25,000,000 was available to be paid as dividends by West Bank to
the Company without prior regulatory approval.
Reserves Against Deposits. The Federal Reserve requires all depository
institutions to maintain reserves against their transaction accounts (primarily
checking accounts) and non-personal time deposits. Generally reserves of 3
percent must be maintained against total transaction accounts of $42,800,000 or
less (subject to an exemption not in excess of the first $5,500,000 of
transaction accounts). A reserve of $1,119,000 plus 10 percent of amounts in
excess of $42,800,000 must be maintained in the event total transaction accounts
exceed $42,800,000. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve may be used to satisfy applicable liquidity
requirements. Because required reserves must be maintained in the form of vault
cash or a non-interest bearing account at a Federal Reserve Bank, the effect of
this reserve requirement is to reduce the earning assets of West Bank.
Bank Offices. Iowa law regulates the establishment of bank offices and thus may
affect the Company's future plans to establish additional offices of West Bank.
Pursuant to amendments to Iowa law effective February 21, 2001, current Iowa law
permits a state bank to establish up to three (3) offices anywhere in the state.
Until July 1, 2004, in addition to the three offices which may be established
anywhere in the state, a bank may only establish a bank office inside the
boundaries of the county in which the principal place of business of the state
bank is located and those counties contiguous to or cornering upon such county.
The number of offices a state bank may establish in a particular municipality or
urban complex may also be limited depending upon the population. Effective July
1, 2004, the geographical restrictions on bank office locations will be
repealed. Finally, until July 1, 2004, Iowa law restricts the ability of a bank
to establish a de novo office within the limits of a municipal corporation where
there is an already established state or national bank or bank office.
11
Regulatory Developments
In 1999, the Financial Services Modernization Act was enacted which: (1)
repealed historical restrictions on preventing banks from affiliating with
securities firms; (2) broadens the activities that may be conducted by bank
subsidiaries of holding companies; and (3) provides an enhanced framework for
protecting the privacy of consumers' information. In addition, bank holding
companies may be owned, controlled or acquired by any company engaged in
financially related activities, as long as such company meets regulatory
requirements. To the extent that this legislation permits banks to affiliate
with financial services companies, the banking industry may experience further
consolidation, although the impact of this legislation on the Company and West
Bank is unclear at this time.
Regulatory Enforcement Authority
The enforcement powers available to federal and state banking regulators are
substantial and include, among other things, the ability to assess civil
monetary penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties, as defined. In general, enforcement actions must be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions, or inactions, may provide the basis for enforcement action, including
misleading or untimely reports filed with regulatory authorities. Applicable law
also requires public disclosure on final enforcement actions by the federal
banking agencies.
National Monetary Policies
In addition to being affected by general economic conditions, the earnings and
growth of West Bank are affected by the regulatory authorities' policies,
including the Federal Reserve. An important function of the Federal Reserve is
to regulate the money supply, credit conditions and interest rates. Among the
instruments used to implement these objectives are open market operations in
U.S. Government securities, changes in reserve requirements against bank
deposits and the Federal Reserve Discount Rate, which is the rate charged banks
borrowing from the Federal Reserve Bank. These instruments are used in varying
combinations to influence overall growth and distribution of credit, bank loans,
investments and deposits, and their use may also affect interest rates charged
on loans or paid on deposits.
The monetary policies of the Federal Reserve have had a material impact on the
operating results of commercial banks in the past and are expected to do so in
the future. Also important in terms of effect on banks are controls on interest
rates paid by banks on deposits and types of deposits that may be offered by
banks. The Depository Institutions Deregulation Committee, created by Congress
in 1980, phased out ceilings on the rate of interest that may be paid on
deposits by commercial banks and savings and loan associations, with the result
that the differentials between the maximum rates banks and savings and loans can
pay on deposit accounts have been eliminated. The effect of deregulation of
deposit interest rates has been to increase banks' cost of funds and to make
banks more sensitive to fluctuations in market rates.
12
ITEM 2. FINANCIAL INFORMATION
SELECTED FINANCIAL DATA
The following financial data of the Company for the five years ended December
31, 2001 is derived from the Company's historical audited financial statements
and related footnotes. The information set forth below should be read in
conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operation" and the consolidated financial statements
and related notes contained elsewhere in this Registration Statement.
(dollars in thousands, except per share amounts)
Years Ended December 31
----------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
----------------------------------------------------------------------------------------------------------
Operating Results
-----------------
Interest income ..................... $ 54,614 $ 61,199 $ 52,192 $ 45,848 $ 39,631
Interest expense .................... 24,952 33,639 23,820 20,844 16,681
---------------------------------------------------------------------
Net interest income ................. 29,662 27,560 28,372 25,004 22,950
Provision for loan losses ........... 1,063 1,190 290 420 340
---------------------------------------------------------------------
Net interest income after provision
for loan losses 28,599 26,370 28,082 24,584 22,610
---------------------------------------------------------------------
Noninterest income .................. 6,314 5,678 4,852 4,502 3,915
Noninterest expense ................. 10,480 9,596 9,515 8,802 8,314
---------------------------------------------------------------------
Income before income taxes .......... 24,433 22,452 23,419 20,284 18,211
Income taxes ........................ 8,697 8,036 8,466 6,834 6,200
---------------------------------------------------------------------
Net income .......................... $ 15,736 $ 14,416 $ 14,953 $ 13,450 $ 12,011
=====================================================================
Dividends and Per Share Data
----------------------------
Cash dividends ...................... $ 9,636 $ 9,315 $ 8,566 $ 7,923 $ 7,495
Cash dividends per share ............ 0.60 0.58 0.53 0.49 0.47
Basic earnings per share ............ 0.98 0.90 0.93 0.84 0.75
---------------------------------------------------------------------
Average common shares outstanding ... 16,060,271 16,060,271 16,060,271 16,060,271 16,060,271
=====================================================================
Year End Balances
-----------------
Total assets ........................ $ 815,970 $ 827,876 $ 775,718 $ 723,905 $ 569,375
Net loans ........................... 489,158 495,884 470,036 392,838 359,029
Deposits ............................ 571,730 547,283 541,962 485,604 403,107
Stockholders' equity ................ 79,012 70,845 61,125 61,044 55,364
=====================================================================
Equity to assets ratio .............. 9.68% 8.56% 7.88% 8.43% 9.72%
=====================================================================
(dollars in thousands)
Years Ended December 31
-------------------------------------------------------------------
2001 2000 1999 1998 1997
-------------------------------------------------------------------
Net income.................................... $ 15,736 $ 14,416 $ 14,953 $ 13,450 $ 12,011
Average assets................................ 837,798 812,411 729,090 622,685 517,716
Average stockholders' equity ................. 74,977 63,872 61,033 57,161 52,703
==================================================================
Return on assets (net income divided
by average assets) 1.88% 1.77% 2.05% 2.16% 2.32%
Return on equity (net income divided
by average equity) 20.99% 22.57% 24.50% 23.53% 22.79%
Efficiency ratio (noninterest expense
divided by noninterest income plus taxable
equivalent net interest income) 28.23% 27.98% 27.96% 28.73% 29.59%
Dividend payout ratio (dividends per share
divided by net income per share) 61.22% 64.44% 56.99% 58.33% 62.67%
Equity to assets ratio(average equity
divided by average assets) 8.95% 7.86% 8.37% 9.18% 10.18%
===================================================================
13
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 Des Moines
State Bank. The purpose of this discussion is to focus on significant factors
affecting the Company's financial condition and results of operations.
FORWARD-LOOKING INFORMATION
This Registration Statement contains forward-looking statements about the
Company, its business and its prospects. Forward-looking statements can be
identified by the fact that they do not relate strictly to historical or current
facts. They often include use of the words "believe", "expect", "anticipate",
"intend", "plan" "estimate" or words of similar meaning, or future or
conditional verbs such as "will", "would", "should", "could" or "may".
Forward-looking statements, by their nature, are subject to risks and
uncertainties. A number of factors, many of which are beyond the Company's
control, could cause actual conditions, events or results to differ
significantly from those described in the forward-looking statements. Such risks
and uncertainties with respect to the Company include those related to the
economic environment, particularly in the areas in which the Company and West
Bank operates, competitive products and pricing, fiscal and monetary policies of
the U.S. government, changes in governmental regulations affecting financial
institutions, including regulatory fees and capital requirements, changes in
prevailing interest rates, credit risk management and asset/liability
management, the financial and securities markets and the availability of and
costs associated with sources of liquidity.
RESULTS OF OPERATIONS - 2001 COMPARED TO 2000
Net Income
For the year ended December 31, 2001, the Company recorded net income of
$15,736,440, an increase of 9.16 percent from net income of $14,416,442 in 2000.
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 $.98 in 2001 compared to $.90 in 2000.
The Company's return on average assets (ROA) was 1.88 percent in 2001, compared
to 1.77 percent in 2000. The return on average equity (ROE) was 20.99 percent,
compared to 22.57 percent for the prior year. The Company's ROE declined even
though net income was higher because the Company's average equity grew at a
faster rate than net income. A component of equity includes the market value
adjustment on available for sale securities. Because interest rates were
declining throughout 2001, the market value of the available for sale securities
increased causing equity to increase also.
Net Interest Income
Net interest income increased 7.63 percent to $29,661,830 for 2001 as favorable
interest rate variances offset smaller unfavorable volume changes. The net
interest spread, which is the difference between the yield earned on assets and
the rate paid on liabilities, increased to 2.94 percent from 2.59 percent a year
earlier. The average yield on earning assets decreased 102 basis points, while
the average rate on interest bearing liabilities declined 137 basis points. Net
interest margin, which is tax-equivalent net interest income as a percent of
average earning assets, was 3.81 percent in 2001 up from 3.62 percent in 2000.
Loan Growth/Loan Quality
At December 31, 2001, total loans declined approximately $6.7 million, or 1.35
percent to $493,506,930 from $500,247,969 a year earlier. Growth came in real
estate construction, land and land development, up $17.7 million. Real estate
mortgages on 1-4 family residences declined $10.4 million and commercial loans
were down $7.9 million. The decline in real estate loans was attributable to the
lower interest rates during the year. Many borrowers refinanced their mortgages.
The Bank sold some of those mortgages because of the interest rate risk
associated with keeping those lower fixed-rate, long-term mortgages in the
portfolio. The lower rate environment is also a reason commercial loans
declined. Some competing financial institutions were willing to offer interest
rates at levels lower than West Bank believed was prudent. In some cases,
borrowers chose to refinance with another institution. Loan quality remained
good with nonperforming loans at December 31, 2001 totaling $1,274,000 or .26
percent of total loans. This compares to $1,171,000 or .23 percent of total
loans at December 31, 2000. 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.
14
The allowance for loan losses, which totaled $4,239,990, represented 232.8
percent of nonaccrual loans and loans past due more than 90 days at the end of
2001, compared to 258.2 percent for 2000. The provision for loan losses totaled
$1,062,500 for 2001, down slightly from $1,190,000 for 2000. The Company's net
charge-offs as a percent of average loans were .21 percent for 2001, the same as
2000. Net charge-offs for 2001 were slightly lower than 2000 and represented
more, but individually smaller loans. One large commercial loan accounted for
the majority of the charge-offs in 2000.
The allowance for loan losses represents a reserve available to absorb probable
loan losses within the loan portfolio as of December 31, 2001. 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, 2001
sufficient to absorb probable loan losses within the portfolio.
Efficiency Ratio
The Company utilizes 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, 2001, the Company's
efficiency ratio was 28.23 percent, virtually unchanged from the prior year's
ratio of 27.98 percent. This ratio for both years is significantly better than
any peer group average, which is generally around 60%.
Noninterest Income
Noninterest income (excluding securities transactions) for 2001 was $6,314,056,
an 11.20 percent increase over 2000.
Service charges on deposit accounts were 9.19 percent higher than the prior
year. Improvement was due to an increase in fees.
Fees for trust services increased $42,438 or 8.68 percent in 2001 compared to
2000. This increase in income was due to an increase in the number of trust
accounts and a slight increase in the amount of assets under management.
Other income increased 19.76 percent to $1,318,640 for 2001, primarily due to an
increase in fees from the sale of real estate loans with servicing released,
exchange fees and safe deposit box rental income.
Noninterest Expense
Total noninterest expense increased 9.21 percent to $10,479,907 in 2001 from
$9,595,998 in 2000.
Salaries and employee benefits expense increased .32 percent in 2001 to
$6,044,441 from $6,025,351 in 2000. The number of full time equivalent employees
increased by one from 2000 to 2001.
Occupancy expense for the year 2001 was $1,225,553, an increase of $72,108 or
6.25 percent over 2000. This increase is primarily attributable to depreciation
on leasehold improvements and other operating costs associated with maintaining
the branch locations, such as utilities, repairs and property taxes.
Data processing expense increased 15.2% primarily due to the outsourcing in
mid-year of certain item processing functions.
Other expenses were $661,694 or 42.55 percent higher in 2001 than 2000. This
increase is due to an increase in Trust Department expenses ($172,000),
advertising ($95,000) and audits and examinations ($51,000). In addition, 2000
expense reflected a one-time reduction in expense of $183,000 due to an
adjustment to accrued expense due to an amendment to an employment contract.
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,
disallowed interest, meals and entertainment expenses and state income taxes.
The effective rate of income tax expense as a percent of income before income
taxes was 35.6 percent for 2001, compared to 35.8 percent for 2000.
15
RESULTS OF OPERATIONS - 2000 COMPARED TO 1999
Net Income
For the year ended December 31, 2000, the Company recorded net income of
$14,416,442, a decline of 3.59 percent from net income of $14,953,366 in 1999.
Lower net interest income and an increase in the provision for loan losses were
the primary reasons for the reduction. Net interest income declined
approximately $800,000 as the cost of interest-bearing liabilities rose faster
than the yield on interest-earning assets. Due to higher loan charge-offs, the
provision for loan losses was $900,000 higher. Earnings per share were $ .90 in
2000 compared to $.93 in 1999.
The Company's return on average assets (ROA) was 1.77 percent in 2000, compared
to 2.05 percent in 1999. The return on average equity (ROE) was 22.57 percent,
compared to 24.50 percent for the prior year.
Net Interest Income
Net interest income declined 2.86 percent to $27,560,114 for 2000 as favorable
volume variances were offset by unfavorable changes in interest rates. The net
interest spread declined to 2.59 percent from 3.24 percent a year earlier. The
average yield on earning assets increased 35 basis points, while the average
rate on interest bearing liabilities increased 100 basis points. Net interest
margin was 3.62 percent in 2000 compared to 4.17 percent in 1999.
Loan Growth/Loan Quality
At December 31, 2000, total loans had grown approximately $26 million, or 5.46
percent to $500,247,969 from $474,331,161 a year earlier. Most of the growth
came in three areas: commercial up $6.2 million; real estate construction, land
and land development up $6.1 million and commercial real estate loans were $13.2
million higher. Loan quality remained good with nonperforming loans at December
31, 2000, totaling $1,171,000 or .23 percent of total loans. This compares to
$1,019,000 or .21 percent of total loans at December 31, 1999. 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 $4,194,498, represented 258.20
percent of nonaccrual loans and loans past due more than 90 days at the end of
2000, compared to 296.5 percent for 1999. The provision for loan losses totaled
$1,190,000 for 2000, up from $290,000 for 1999. The Company's net charge-offs as
a percent of average loans were .21 percent for 2000 compared to .03 percent for
1999. The increase in net charge-offs for 2000 is attributable to one specific
commercial loan.
The allowance for loan losses represents a reserve available to absorb probable
loan losses within the loan portfolio as of December 31, 2000. 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, 2000
sufficient to absorb probable loan losses within the portfolio.
Efficiency Ratio
For the year ended December 31, 2000, the Company's efficiency ratio was 27.98
percent, virtually unchanged from the prior year's ratio of 27.96 percent. This
ratio for both years is significantly better than any peer group averages.
Noninterest Income
Noninterest income (excluding securities transactions) for 2000 was $5,677,392,
a 17.02 percent increase over 1999.
Service charges on deposit accounts were 26.04 percent higher than the prior
year. Improvement was due to an increase in fees.
Fees for trust services declined $108,473 or 18.15 percent from 1999 to 2000.
This drop in income was due to the decline in market values of trust assets and
some account attrition.
Other income increased 8.93 percent to $1,101,092 for 2000. The following areas
showed increased income: wire transfer fees, letter of credit fees and exchange
fees.
16
Noninterest Expense
Total noninterest expense increased .85 percent to $9,595,998 in 2000 from
$9,514,940 in 1999.
Salaries and employee benefits expense increased 6.99 percent in 2000 to
$6,025,351 from $5,631,895 in 1999. Most of the increase is attributable to
annual salary increases for employees and officers.
Occupancy expense for the year 2000 was $1,153,445, an increase of $82,399 or
7.69 percent over 1999. This increase is primarily attributable to the Urbandale
branch that was opened in mid-1999.
Other expenses were $362,124, or 18.89 percent lower in 2000 than 1999. This
decline is due to an adjustment to accrued expense due to an amendment to an
employment contract ($183,000), lower advertising expense ($53,000), lower
supplies expense ($40,000) and a reduction in business development and public
relations expense ($40,000).
Income Taxes
The effective income tax rate for 2000 was 35.8 percent compared to 36.1 percent
for 1999.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES;
AND INTEREST DIFFERENTIAL
17
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)
2001 2000 1999
-------------------------------- ---------------------------- --------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------------------------------------------------------------------------------------------
Assets
------
Interest-earning assets:
Loans: (2) (3)
Commercial ........................ $ 252,921 $ 19,891 7.86% $ 240,842 $22,221 9.23% $214,227 $17,859 8.34%
Real estate ....................... 204,557 16,557 8.09% 210,468 17,503 8.32% 186,915 15,639 8.37%
Consumer........................... 20,697 1,915 9.25% 21,461 2,034 9.48% 20,539 1,931 9.40%
Other (1).......................... 17,650 1,328 7.53% 16,827 1,215 7.22% 12,450 967 7.77%
---------------------------------------------------------------------------------------
Total loans ....................... 495,825 39,691 8.01% 489,598 42,973 8.78% 434,131 36,396 8.38%
---------------------------- ---------------------------------------------------------
Investment securities:
Taxable ............................. 177,217 10,608 5.99% 260,233 16,970 6.52% 237,457 14,837 6.25%
Tax-exempt (1)....................... 25,920 1,771 6.83% 22,713 1,501 6.61% 21,236 1,438 6.77%
---------------------------- ---------------------------------------------------------
Total investment securities ......... 203,137 12,379 6.09% 282,946 18,471 6.53% 258,693 16,275 6.29%
---------------------------- ---------------------------------------------------------
Interest bearing deposits ........... 488 23 4.71% 633 39 6.16% 650 35 5.38%
Federal funds sold .................. 101,937 3,381 3.32% 6,012 391 6.50% 3,473 177 5.10%
---------------------------- ----------------------------------------------------------
Total interest-earning assets (1).... 801,387 $ 55,474 6.92% 779,189 $61,874 7.94% 696,947 $52,883 7.59%
-----------==========------- ------------================--------------================
Noninterest-earning assets:
Cash and due from banks.............. 31,438 21,850 23,802
Premises and equipment, net.......... 1,066 1,061 1,035
Other, less allowance for loan losses 3,907 10,311 7,306
---------- ---------- ---------
Total noninterest-earning assets.... 36,411 33,222 32,143
---------- ----------- ---------
Total assets........................ $ 837,798 $ 812,411 $729,090
========== =========== =========
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 of 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.
18
(dollars in thousands)
2001 2000 1999
------------------------------------------------------------------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------------------------------------------------------------------------------------------
Liabilites and Stockholders' Equity
-----------------------------------
Interest-bearing liabilities:
Deposits:
Savings, checking with interest, and
money markets....................... $253,293 $ 7,069 2.79% $210,965 $ 8,177 3.88% $218,602 $ 6,922 3.17%
Time deposits ...................... 162,223 9,008 5.55% 186,135 11,177 6.00% 161,699 8,540 5.28%
------------------------- ---------------------------- ---------------------------
Total deposits ....................... 415,516 16,077 3.87% 397,100 19,354 4.87% 380,301 15,462 4.07%
Other borrowed funds ................ 210,876 8,875 4.21% 231,506 14,285 6.17% 166,912 8,358 5.01%
-----------------------------------------------------------------------------------------
Total interest-bearing liabilities .. 626,392 24,952 3.98% 628,606 33,639 5.35% 547,213 23,820 4.35%
--------------------======---------------------------======-------------------------======
Noninterest-bearing liabilities:
Demand deposits ..................... 131,731 116,196 116,990
Other liabilities ................... 4,698 3,737 3,854
Stockholders' equity ................ 74,977 63,872 61,033
-------- -------- ---------
Total Liabilities and Stockholders'
Equity.............................. $837,798 $812,411 $729,090
======== ======== =========
Net interest income (1) ............ $ 30,522 $ 28,235 $ 29,063
======== ======== ========
Margin Analysis
---------------
Interest income/yield on interest-
earnings asset(1).................. $ 55,474 6.92% $ 61,874 7.94% $ 52,883 7.59%
Interest expense/rate on interest-
bearing liabilities ............... 24,952 3.98% 33,639 5.35% 23,820 4.35%
---------------- ----------------- --------------
Net interest income/net interest
spread (1) ........................ $ 30,522 2.94% $ 28,235 2.59% $ 29,063 3.24%
=============== ================= ===============
Net interest margin (1) ...........
3.81% 3.62% 4.17%
==== ===== =====
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 of owning tax-exempt investments.
19
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 is also affected by general economic conditions, particularly changes in
market interest rates, and by 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, 2001, 2000 and
1999, the Company's net interest margin was 3.81 percent, 3.62 percent and 4.17
percent, respectively.
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
(in thousands and on a tax equivalent basis)
2001 Compared to 2000 2000 Compared to 1999
------------------------------------------------------------
Volume Rate Total Volume Rate Total
------------------------------------------------------------
Interest Income
---------------
Loans:
Commercial ..................... $ 1,199 $(3,529) $(2,330) $ 2,346 $ 2,016 $ 4,362
Real estate .................... (485) (461) (946) 1,958 (94) 1,864
Consumer ....................... (71) (48) (119) 87 16 103
Other .......................... 61 53 114 309 (62) 247
---------------------------------------------------------------
Total loans (including fees) ... 704 (3,985) (3,281) 4,700 1,876 6,576
--------------------------------------------------------------
Investment securities:
Taxable ........................ (5,060) (1,303) (6,363) 1,467 667 2,134
Tax-exempt ..................... 217 53 270 96 (33) 63
--------------------------------------------------------------
Total investment securities .... (4,843) (1,250) (6,093) 1,563 634 2,197
--------------------------------------------------------------
Interest bearing deposits ...... (8) (8) (16) (1) 5 4
Federal funds sold ............. 3,085 (95) 2,990 155 59 214
--------------------------------------------------------------
Total interest income .......... (1,062) (5,338) (6,400) 6,417 2,574 8,991
--------------------------------------------------------------
Interest Expense
----------------
Deposits:
Savings, checking with interest,
and money markets .............. 2,802 (3,910) (1,108) (232) 1,487 1,255
Time deposits .................. (1,368) (801) (2,169) 1,383 1,254 2,637
--------------------------------------------------------------
Total deposits ................. 1,434 (4,711) (3,277) 1,151 2,741 3,892
Other borrowed funds ........... (1,184) (4,226) (5,410) 3,704 2,223 5,927
--------------------------------------------------------------
Total interest expense ......... 250 (8,937) (8,687) 4,855 4,964 9,819
-------------------------------------------------------------
Net interest income ............ $(1,312) $ 3,599 $ 2,287 $ 1,562 $(2,390) $ (828)
==============================================================
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% adjusted for the effect of the nondeductible
interest expense associated with owning tax-exempt investments.
20
INVESTMENT PORTFOLIO
The investments below are presented at carrying value and reported by
contractual maturity. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without prepayment penalties.
After one After five
year but years but
Within one within five within ten After ten
year years years years Total
----------------------------------------------------------------
U.S. Treasury ........................................ $ 1,998 $ -- $ -- $ -- $ 1,998
U.S. government agencies and corporations ............ 18,231 106,638 6,533 2,002 133,404
States of the United States and political
subdivisions 6,564 15,701 3,265 8,963 34,493
Corporate notes and other investments ................ 734 11,839 -- 3,876 16,449
----------------------------------------------------------------
Total ................................................ $ 27,527 $ 134,178 $ 9,798 $ 14,841 $186,344
================================================================
Weighted average yield:
U.S. Treasury ........................................ 6.71% -- -- --
U.S. government agencies and corporations ............ 4.80% 4.59% 5.22% 6.45%
States of the United States and political
subdivisions 6.23% 6.44% 6.30% 7.88%
Corporate notes and other investments ................ 5.23% 4.94% -- 8.17%
---------------------------------------------------
Total ................................................ 5.29% 4.84% 5.58% 7.76%
====================================================
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 of owning tax-exempt
investments.
Investments in States of the United States and political subdivisions represent
purchases of municipal bonds 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, 2001, 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.
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, 2001 (dollars in thousands).
As of December 31
-------------------------------------------------
2001 2000 1999 1998 1997
-------------------------------------------------
Commercial.................................... $226,183 $ 234,089 $ 227,887 $ 162,763 $ 149,995
Real Estate
Construction, land and land development.. 33,954 16,250 10,121 12,007 8,877
1-4 family residential................... 71,628 81,983 79,581 77,682 76,239
Commercial............................... 138,409 138,705 125,518 105,515 99,985
Consumer and other loans...................... 23,333 29,221 31,224 39,012 27,836
-------------------------------------------------
Total loans................................... 493,507 500,248 474,331 396,979 362,932
Deferred loan fees, net....................... 108 169 255 269 220
-------------------------------------------------
Total loans, net of deferred fees............ $493,399 $ 500,079 $ 474,076 $ 396,710 $ 362,712
==================================================
21
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, 2001, gross loans totaled
approximately $494 million, which equals approximately 86 percent of total
deposits and 60 percent of total assets. As of December 31, 2001, the vast
majority of the loans were originated directly by West Bank to borrowers within
the Bank's principal market area. 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,
household appliances and 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 one borrower are limited by
applicable state banking laws. Credit limits generally vary according to the
type of loan and 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.
Loans as of December 31, 2001 (dollars in thousands)
After one but
Within one within five After five
year years years Total
---------------------------------------------
Commercial.................................. $140,833 $ 56,976 $ 28,374 $226,183
Real Estate
Construction, land and land development 15,773 17,848 333 33,954
1-4 family residential................. 8,539 44,077 19,012 71,628
Commercial............................. 10,433 80,284 47,692 138,409
Consumer and other loans.................... 13,376 9,835 122 23,333
---------------------------------------------
Total Loans................................. $188,954 $209,020 $ 95,533 $493,507
=============================================
After one but
within five After five
years years
------------------------
Loan maturities after one year with:
Fixed rates........................................... $ 180,411 $ 92,042
Variable rates........................................ 28,609 3,491
-------------------------
$ 209,020 $ 95,533
=========================
22
Risk Elements
The following table sets forth information concerning the Company's
non-performing assets for the past five years ending December 31, 2001 (dollars
in thousands).
Years Ended December 31
-------------------------------------------
2001 2000 1999 1998 1997
-------------------------------------------
Nonaccrual loans ....................$ 878 $ 705 $ 582 $1,914 $2,182
Other real estate owned ............. 1,089 1,363 2,194 2,237 2,493
------------------------------------------
Total non-performing assets .........$1,967 $2,068 $ 2,776 $4,151 $4,675
===========================================
Non-performing assets to total loans 0.40% 0.41% 0.59% 1.05% 1.29%
Non-performing assets to total assets 0.24% 0.25% 0.36% 0.57% 0.82%
Loans past due 90 days and still
accruing interest ............. $ 396 $ 466 $ 437 $ 537 $ 410
===========================================
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. For the
periods shown, there were no restructured loans. 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.
Outstanding loans of approximately $2,426,000 were placed on non-accrual status
during 2001 with total nonaccrual loans equaling $878,000 as of December 31,
2001. The average balance of nonaccrual loans during 2001 was approximately
$696,000. The total amount of loans on nonaccrual status as of December 31, 2000
was $705,000. Loans are placed on a 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, 2001, 2000 and 1999, interest income, which would have been recorded under
the original terms of such loans, was an immaterial amount. Additional potential
problem loans and leases that are not included in the amounts reported above
totaled $1,484,000 as of December 31, 2001.
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 allowance for loan losses is evaluated quarterly by management
and 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 are sufficient to repay the
loan; delinquent status; the loan has been criticized in a regulatory
examination; the accrual of interest has been suspended; 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.
23
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):
Analysis of the Allowance for Loan Losses for the Years
Ended December 31
-----------------------------------------------------
2001 2000 1999 1998 1997
----------------------------------------------------
Balance at beginning of period.................... $ 4,194 $ 4,040 $ 3,872 $ 3,683 $ 3,479
Charge-offs:
Commercial........................................ 926 1,027 108 288 224
Real Estate
Construction, land and land development..... - - - - -
1-4 family residential...................... - 2 31 - -
Commercial.................................. - - - - -
Consumer and other loans.......................... 157 147 61 173 270
----------------------------------------------------
1,083 1,176 200 461 494
----------------------------------------------------
Recoveries:
Commercial........................................ 40 85 64 182 317
Real Estate
Construction, land and land development..... - - - - -
1-4 family residential...................... - - - - -
Commercial.................................. - - - - -
Consumer and other loans ......................... 26 55 14 48 41
----------------------------------------------------
66 140 78 230 358
----------------------------------------------------
Net charge-offs (recoveries)...................... 1,017 1,036 122 231 136
Additions charged to operations................... 1,063 1,190 290 420 340
----------------------------------------------------
Balance at end of period ......................... $ 4,240 $ 4,194 $ 4,040 $ 3,872 $ 3,683
====================================================
Average loans outstanding......................... $495,825 $489,598 $434,131 $ 371,322 $346,827
=====================================================
Ratio of net charge-offs during the period to
average loans outstanding ........................ 0.21% 0.21% 0.03% 0.06% 0.04%
=====================================================
Ratio of allowance for loan losses to average
loans outstanding ................................ 0.86% 0.86% 0.93% 1.04% 1.06%
=====================================================
As the previous table indicates, the additional loan provision each year is 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, 1998 and
1997 were .03 percent, .06 percent and .04 percent respectively, 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 charge-off ratio in 2001 was also .21 percent, but was caused by loans with
individually smaller loan balances. The charge-off ratio for 2001 and 2000 is
comparable to the Bank's peer group. It is felt that the increase in the number
of loans charged off in 2001 is attributable to the slow down in the economy
experienced during the year.
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. Due to a general slowing in the economy, and the
resulting slow down in state revenues, lay-offs are anticipated in the State of
Iowa workforce. This action is not expected to have a significant impact on the
Bank.
24
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):
2001 2000 1999 1998 1997
Amount % * Amount % * Amount % * Amount % * Amount % *
-------------------------------------------------------------------------
Balance at end of period applicable to:
Commercial ..................................... $2,315 45.83% $2,154 46.79% $2,056 48.04% $1,632 41.00% $1,652 41.32%
Real Estate
Construction, land and land developmment 286 6.88% 141 3.25% 85 2.13% 119 3.02% 72 2.45%
1-4 family residential .................... 130 14.51% 134 16.39% 178 16.78% 158 19.57% 137 21.01%
Commercial ................................ 856 28.05% 980 27.73% 863 26.46% 768 26.58% 1,116 27.55%
Consumer and other loans ....................... 653 4.73% 785 5.84% 858 6.58% 1,195 9.83% 705 7.67%
----------------------------------------------------------------------------
$4,240 100.00% $4,194 100.00% $4,040 100.00% $3,872 100.00% $3,682 100.00%
============================================================================
* 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 non-interest-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
nearly 57 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 are subject to 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 operation 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, 2001, 2000 and 1999 (dollars in thousands).
Average Deposits by Type
--------------------------------------------------------------------------------------
2001 2000 1999
--------------------------------------------------------------------------------------
Amount Rate Amount Rate Amount Rate
------- ----- -------- ----- -------- -----
Noninterest bearing demand
deposits ........................ $131,731 -- $116,196 -- $116,990 --
Interest bearing demand deposits.. 28,752 0.77% 27,966 1.05% 26,035 0.97%
Money market deposits ............ 161,815 3.20% 133,301 4.65% 146,777 3.71%
Savings deposits ................. 62,726 1.32% 49,698 3.36% 45,790 2.64%
Time certificates ................ 162,223 5.55% 186,135 6.00% 161,699 5.28%
-------- -------- --------
$547,247 $513,296 $497,291
======== ======== ========
25
Certificates of Deposit
The following table shows the amounts and remaining maturities of time
certificates of deposit that had balances of $100,000 or more at December 31,
2001, 2000 and 1999 (in thousands).
As of December 31
------------------------------
2001 2000 1999
------------------------------
3 months or less ....... $ 31,253 $ 59,003 $ 34,467
Over 3 through 6 months 10,956 30,815 12,733
Over 6 through 12 months 7,673 17,167 14,253
Over 12 months ......... 52,997 42,831 67,921
------------------------------
$102,879 $149,816 $129,374
==============================
BORROWED FUNDS
The following table summarizes the outstanding amount of and the average rate on
borrowed funds as of December 31, 2001, 2000 and 1999.
As of December 31
---------------------------------------------------
2001 2000 1999
---------------------------------------------------
Balance Rate Balance Rate Balance Rate
----------------------------------------------------
Long-term borrowings $ 48,000 5.57% $ 48,000 5.57% $ 33,000 5.17%
Federal funds purchased and securities sold
under 107,832 1.51% 54,117 6.39% 131,803 4.97%
Short-term borrowings 6,000 1.41% 3,612 6.45% 4,843 5.34%
------------------------------------- --------------
$161,832 2.71% $205,729 6.20% $169,646 5.09%
====================================================
Long-term borrowings consisted entirely of Federal Home Loan Bank advances. The
short-term borrowings as of the end of each year are Treasury, Tax and Loan
option notes. Average balances for short-term borrowings for the years shown
below also include an occassional borrowing from the Federal Reserve Bank
discount window and overnight borrowings from the Federal Home Loan Bank.
The following table sets forth the average amount of, the average rate paid and
maximum outstanding balance on borrowed funds for the years ended December 31,
2001, 2000 and 1999.
Years Ended December 31
------------------------------------------------------
2001 2000 1999
------------------------------------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
-------------------------------------------------------
Long-term borrowings .................. $ 50,466 5.58% $ 45,978 5.60% $ 36,619 5.25%
Federal funds purchased and securities
sold under agreements to repurchase.... 157,800 3.78% 181,771 6.32% 123,599 4.96%
Short-term borrowings ................. 2,610 3.45% 3,757 6.02% 6,694 4.60%
-------------------------------------------------------
$210,876 4.21% $231,506 6.17% $166,912 5.01%
========================================================
2001 2000 1999
------------------------------
Maximum amount outstanding during the year:
Long-term borrowings ....................... $ 58,000 $ 53,000 $ 38,000
Federal funds purchased and securities sold
under agreements to repurchase.............. 176,103 211,201 148,040
Short-term borrowings ...................... 6,000 25,000 55,000
======= ======== ========
26
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
deposits. 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, money market mutual funds and interest-bearing deposits in
financial institutions increased from $26,510,756 in 2000 to $128,450,240 in
2001. The Company had additional borrowing capacity available from the Federal
Home Loan Bank ("FHLB") of approximately $16 million at December 31, 2001. The
Company has additional eligible collateral that could be pledged to the FHLB
that would result in a borrowing capacity of an additional $70,000,000. Net cash
from operating activities contributed $19,070,231, $14,813,909 and $14,887,552
to liquidity for the years 2001, 2000 and 1999, 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, 2001.
The Company's total stockholders' equity increased to $79,012,261 at December
31, 2001, from $70,845,344 at December 31, 2000. At December 31, 2001,
stockholders' equity was 9.68 percent of total assets, compared to 8.56 percent
at December 31, 2000. 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 currently exceed
applicable regulatory guidelines as of December 31, 2001.
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 control interest rate
risk and to ensure predictable and 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, net interest 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 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.
27
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 2001 changed
compared to 2000.
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 3.1%
100 basis points rising 1.5%
Base ................... 0.0%
100 basis points falling -4.7%
200 basis points falling -7.3%
As shown above, at December 31, 2001, the estimated effect of an immediate 200
basis point increase in interest rates would increase the Company's net interest
income by 3.1 percent or approximately $900,000 in 2002. The estimated effect of
an immediate 200 basis point decrease in rates would decrease the Company's net
interest income by 7.3 percent or approximately $2,200,000. 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 rates 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, 2001. 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.
Three Over 3 Over 1
Months Through 12 Through Over
or Less Months 5 Years 5 Years Total
--------- ---------- ---------- -------- ------
Interest earning assets:
Loans ............................... $ 218,076 $ 42,517 $ 173,249 $ 59,557 $ 493,399
Investment securities:
Available for sale ............... 2,004 8,227 16,463 6,266 32,960
Held to maturity ................. 1,705 15,591 117,716 18,372 153,384
Federal funds sold .................. 36,489 -- -- -- 36,489
Other short-term investments ........ 57,500 -- -- -- 57,500
Federal Home Loan Bank stock ........ -- -- -- 3,130 3,130
-----------------------------------------------------
Total interest earning assets .... 315,774 66,335 307,428 87,325 776,862
-----------------------------------------------------
Interest-bearing liabilities
Interest-bearing deposits:
Savings, money market and
interest-bearing demand ....... 281,300 -- -- -- 281,300
Time ............................. 39,483 43,105 63,329 -- 145,917
Federal funds purchased and
securities sold under agreement to
repurchase ....................... 107,832 -- -- -- 107,832
Other short-term borrowings ......... 6,000 -- -- -- 6,000
Long-term borrowings ................ -- -- -- 48,000 48,000
------------------------------------------------------
Total interest-bearing liabilities 434,615 43,105 63,329 48,000 589,049
------------------------------------------------------
Interest sensitivity gap per period ...... $(118,841) $ 23,230 $ 244,099 $ 39,325 $ 187,813
======================================================
Cumulative interest sensitivity gap ...... $(118,841) $ (95,611)$ 148,488 $ 187,813 $ 187,813
======================================================
Interest sensitivity gap ratio ........... 0.73 1.54 4.85 1.82 1.32
======================================================
Cumulative interest sensitivity gap ratio 0.73 0.80 1.27 1.32 1.32
======================================================
28
Investments with maturities over 5 years include the market values of equity
securities of $3,130,000.
As of December 31, 2001, the Company's cumulative gap ratios for assets and
liabilities re-pricing within three months and within one year were .72 and .80
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 July 2001, the Financial Accounting Standards Board ("FASB") issued two
statements, Statement 141, Business Combinations and Statement 142, Goodwill and
Other Intangible Assets. Statement 141 eliminates the pooling method for
accounting for business combinations and requires that intangible assets that
meet certain criteria be reported separately from goodwill. Statement 142
eliminates the amortization of goodwill and other intangibles that are
determined to have an indefinite life. It also requires, at a minimum, annual
impairment tests for goodwill and other intangible assets that are determined to
have an indefinite life, and requires the carrying value of goodwill that
exceeds its implied fair value to be recognized as an impairment loss.
The provisions of FASB Statement 141 apply to all business combinations
initiated after June 30, 2001, and all business combinations accounted for by
the purchase method for which the date of acquisition is July 1, 2001, or later.
The provisions of FASB Statement 142 are required to be implemented by the
Company in the first quarter of its 2002 fiscal year. The Company does not
expect the adoption of these Statements to have a material effect on the
Company.
The FASB has also issued Statement 143, Accounting for Asset Retirement
Obligations and Statement 144, Accounting for the Impairment or Disposal of
Long-Lived Assets relating to long-lived assets. The Company does not expect the
adoption of these Statements to have an effect on the Company.
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.
ITEM 3. PROPERTIES
The Company's office is housed in the main office of West Bank located at 1601
22nd Street in West Des Moines, Iowa. The space is leased and consists of
approximately 300 square feet with annual rent of $5,000. West Bank's main
office is also located in the leased facility at 1601 22nd Street in West Des
Moines. The Bank rents 13,786 square feet and pays annual rent of $303,946 for a
full-service banking location that includes drive-in facilities and an automated
teller machine. The bank also leases buildings and space for six other locations
located within the Des Moines metropolitan area. These offices are full-service
banking locations while five of these offices have drive in facilities and all
six locations have automated teller machines. Lease payments for these six
offices totaled $357,645 for the year ended December 31, 2001. The Bank owns one
other full-service banking location in Des Moines. This location also includes a
drive-in facility and an automatic teller machine.
29
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
DIRECTORS AND NAMED EXECUTIVE OFFICERS
The following table sets forth the shares of common stock of the Company (the
"Common Stock") beneficially owned as of December 31, 2001 by each director of
the Company and each executive officer of the Company or West Bank for whom
disclosure is required (the "named executive officer") and by all directors and
executive officers (including the named executive officers) as a group.
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) 662,430 4.12%
David R. Milligan 24,500 *
Robert G. Pulver 66,076 *
Jack G. Wahlig - -
Connie Wimer 28,800 *
Joyce A. Chapman 112,616 *
Sharen K. Surber (6) 39,650 *
Brad L. Winterbottom 7,614 *
Executive officers and directors
as a group (14 persons) 1,163,098 7.24%
* Indicates less than 1% ownership of outstanding shares.
Notes:
(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) Includes 900 shares held in trust for Mrs. Surber's granddaughter for
which she is the trustee.
30
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 December 31, 2001 of more than 5
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
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth summary information about the directors and
executive officers of the Company and certain executive officers of West Bank.
Name Age Position with Company or West Bank
-------------------------------------------------------------------------------
Frank W. Berlin 56 Director of Company and Bank
Steven G. Chapman 50 Director of Company and Bank
Michael A. Coppola 45 Director of Company and Bank
Orville E. Crowley 75 Director of Company and Bank
Raymond G. Johnston 73 Director of Company and Bank; Vice
Chairman of Bank
David L. Miller 69 Director and Chief Executive Officer
of Company; Director and Vice Chairman
of Bank
David R. Milligan 54 Director and Executive Vice President
of Company; Director, Chairman and
Chief Executive Officer of Bank
Robert G. Pulver 54 Director of Company and Bank
Jack G. Wahlig 69 Director of Company and Bank
Connie Wimer 69 Director of Company and Bank
Joyce A. Chapman 57 Vice President and Treasurer of Company;
Director and Executive Vice President
of Bank
Sharen K. Surber 57 Executive Vice President of Bank
Brad L. Winterbottm 45 Director & President of Bank
Douglas R. Gulling 48 Chief Financial Officer of Company and
Bank
The Board of Directors of the Company currently consists of 10 members.
Directors are elected at each annual meeting of shareholders to hold office
until the next annual meeting of shareholders after their election and until
their successor shall be elected and shall qualify or until their earlier
resignation, removal from office, death or incapacitation. The shareholders may
at any time remove any director, with or without cause, by majority vote of the
outstanding shares and elect a successor to fill the vacancy. The executive
officers of the Company are elected on an annual basis by the Board of Directors
of the Company. An executive officer may be removed by the Board of Directors
whenever in its judgment the best interest of the Company will be served
thereby.
The principal occupation or business and experience of the directors and
executive officers of the Company and certain executive officers of West Bank
for the past five years are set forth below:
FRANK W. BERLIN is president of Frank W. Berlin & Associates, an insurance
broker. Mr. Berlin has served as a director of the Company and the Bank since
1995.
STEVEN G. CHAPMAN is president and chief executive officer of ITA Group, Inc., a
performance marketing group headquartered in West Des Moines, Iowa. He has
served as a director of the Company since 1994 and the Bank since 1993.
MICHAEL A. COPPOLA is president of Coppola Enterprises, Inc. a fully integrated
real estate development and management company. He has been a director of the
Company and the Bank since 1996.
ORVILLE E. CROWLEY is president and chief operating officer of Linden Lane Farms
Company, a family farm corporation involved in growing row crops in Madison and
Warren counties in Iowa. Mr. Crowley has been a director of the Company since
1984 and the Bank since 1981.
31
RAYMOND G. JOHNSTON is vice chairman of the Board of Directors of the Bank and
has been a director of the Company and the Bank since 1986. Mr. Johnston is a
retired executive vice president of the Bank.
DAVID L. MILLER is chairman, president and chief executive officer of the
Company. He retired as chief executive officer of the Bank as of December 31,
2001 and currently serves as vice chairman of the Bank. Mr. Miller has been a
director of the Company since 1984 and the Bank since 1962. He joined the Bank
in 1961.
DAVID R. MILLIGAN is executive vice president of the Company. He was elected
chairman and chief executive officer of the Bank effective January 1, 2002.
Prior to that he was executive vice president and general counsel of the Bank.
Mr. Milligan has been a director of the Company since 2002 and the Bank since
2000. He started with the Bank in 1980.
ROBERT G. PULVER is president of All State Industries, Inc. an industrial rubber
products manufacturer. He has been a director of the Company since 1984 and the
Bank since 1981.
JACK G. WAHLIG is president of Integrus Financial, L.C. He is a retired partner
from the certified public accounting firm McGladrey & Pullen, LLP. Mr. Wahlig
has been a director of the Company since 2001 and the Bank since 1997.
CONNIE WIMER is owner/publisher of Business Publications Corporation and retired
November 1, 2001 as president of Iowa Title Company. She has been a director of
the Company and the Bank since 1985.
JOYCE A. CHAPMAN is vice president and treasurer of the Company. She was elected
executive vice president-administration of the Bank in 2001. Prior to that she
was senior vice president-administration. Mrs. Chapman has been a director of
the Bank since 1975 and served as a director of the Company from 1984 until
February 2002. She has been with the Bank since 1971, serving in a variety of
capacities, including cashier.
SHAREN K. SURBER was elected executive vice president-operations of the Bank in
2001. Prior to that she served as senior vice president-operations. She has been
with the Bank for 29 years. Ms. Surber's experience with the Bank includes
serving as cashier and human resource director.
BRAD L . WINTERBOTTOM is president of the Bank and has served as a director of
the Bank since 2000. Mr. Winterbottom has been president since 2000. He was
executive vice president - credit from 1998 to 2000. Prior to that he was senior
vice president - credit of the Bank. He joined the Bank in 1992.
DOUGLAS R. GULLING joined the Company in November 2001 as chief financial
officer and was elected chief financial officer of the Bank in February 2002.
From 1996 until 2001, Mr. Gulling served as senior vice president and corporate
controller of Brenton Bank in Des Moines, Iowa.
32
ITEM 6. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth all compensation paid to the named executive
officers for services rendered in the fiscal years ended December 31, 2001, 2000
and 1999. All compensation was paid by the Bank for services rendered as
executive officers of the Bank. No compensation was paid by the Company to these
named executive officers. Bonus amounts are shown in the year paid.
Name
and Current Base All Other
Position Year Salary Bonus Compensation(1)
-------- ---- ------- ------ ---------------
David L. Miller, Chairman, President and 2001 $126,000 $623,020 $16,496
Chief Executive Officer of the Company 2000 $124,500 $771,690 $15,300
and Vice Chairman of the Bank 1999 $120,000 $689,700 $16,566
Brad L. Winterbottom, President of the 2001 $157,500 $ 23,150 $15,884
Bank 2000 $139,837 $ 7,797 $12,995
1999 $120,000 $ 11,800 $12,113
David R. Milligan, Executive Vice President 2001 $142,000 $ 22,840 $14,462
of the Company and Chairman and Chief 2000 $122,327 $ 6,447 $11,476
Executive Officer of the Bank 1999 $105,000 $ 10,200 $10,734
Sharen K. Surber, Executive Vice President 2001 $ 98,000 $ 11,960 $10,061
of the Bank 2000 $ 91,819 $ 1,836 $ 8,640
1999 $ 84,000 $ 6,360 $ 8,641
Joyce A. Chapman, Executive Vice 2001 $ 96,000 $ 11,920 $ 9,844
President of the Bank 2000 $ 89,744 $ 1,795 $ 8,439
1999 $ 82,000 $ 6,280 $ 8,427
(1) Consists entirely of contributions made on behalf of the named
executive officer to the Company's 401(k) Profit Sharing Plan except
for the following amounts for 2001, 2000 and 1999, respectively, which
represent premiums on group term life insurance coverage: Miller -
$486, $471 and $566; Winterbottom - $130, $109 and $113; Milligan -
$254, $199 and $234; Surber - $253, $217 and $241; and Chapman - $237,
$206 and $227.
EMPLOYMENT CONTRACTS
The above named executives, with the exception of Mr. Miller, 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 one 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, except for termination by the Company. The above
executives may receive annual bonuses as recommended by the chief executive
officer and approved by the Bank's Board of Directors.
Mr. Miller's compensation arrangement is covered under a consulting agreement
discussed under Item 7 below.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company did not have a compensation committee during the last completed
fiscal year. All compensation, except for a minor amount, was paid by the Bank.
The Bank did have a compensation committee consisting of Directors Connie Wimer,
Robert G. Pulver, Orville E. Crowley and Harlan D. Hockenberg. All of the
members of the compensation committee of the Bank were outside directors and
there were no compensation committee interlocks.
EMPLOYEE BENEFIT PLANS
401(k) Profit Sharing Plan. The Company sponsors a 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 determined each year by the Board of
Directors. The plan provides for contributions by the Company as the Board of
Directors determines annually.
33
DIRECTOR COMPENSATION
Directors of the Company were not paid a fee during 2001. It is anticipated that
Company directors will be paid a fee during 2002. The specific amount is under
consideration. Regular meetings of the Board of Directors are held once each
quarter during the year.
Directors of the Company also serve as directors of West Bank and received fees
during 2001 of $350 for each meeting attended (ten meetings scheduled) plus
$2,400 per year, $400 for loan committee meeting(s) attended and $300 for other
committee meetings.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain directors and executive officers of the Company and/or the businesses
with which they are associated have had transactions with West Bank, including
loans and deposits. All such loans and deposits were made in the ordinary course
of business on substantially the same terms (including interest rates and
collateral) as those prevailing at the same time for comparable transactions
with unaffiliated persons, and did not involve more than the normal risk of
collectability or other unfavorable features. As of December 31, 2001, the
aggregate outstanding amount of all loans to directors of the Company and
executive officers of the Company and West Bank was approximately $15,287,000.
None of these loans are on nonaccrual status, are past due, restructured or
potential problem loans.
The Bank leases two branch facilities from a company that is 33 1/3% owned by
Mr. Coppola, a director of the Company and the Bank. Mr. Coppola also serves as
president of the lessor. Annual lease payments on those two branch facilities
total $148,912. One lease expires in 2004. The other lease 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.
Mr. Miller has entered into a consulting agreement with West Des Moines State
Bank whereby, in exchange for advisory services, he receives compensation of
$100,000 per year. In addition, under the agreement, Mr. Miller is entitled to
certain other benefits including 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 combined
value of these benefits is less than $50,000 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 was convicted of a felony, or by Mr. Miller for
material breach by the Bank. For the year 2002, the consulting agreement also
calls for Mr. Miller to receive compensation equal to 2% of the net income of
the Bank. In prior years, Mr. Miller was an employee with an employment contract
that provided for a bonus that was based on a percentage of the Bank's net
income.
ITEM 8. LEGAL PROCEEDINGS
West Bank from time to time is a party to various legal actions arising in the
normal course of business. The Company believes that there is no threatened or
pending proceeding against the Company or West Bank, which, if determined
adversely, would have a material adverse effect on the business or financial
position of the Company or West Bank.
34
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
NATURE OF TRADING MARKET
At December 31, 2001, the Company had approximately 420 shareholders of record.
The Common Stock is trading on the Over the Counter Bulletin Board market under
the symbol "WTBA". Howe, Barnes Investments, Inc., Herzog, Heine, Geduld, Inc.,
Keefe, Bruyette & Woods, Inc., and Monroe Securities, Inc. make a market in the
Common Stock. The Common Stock is traded although not considered actively
traded. It is the intent of the Company to list the Common Stock with the NASDAQ
National Market. No assurance can be given that listing with NASDAQ's National
Market will produce increased activity for the Common Stock. During 2001, there
were 57 transfers known to the Company. These transfers were believed to involve
a total of 582,000 shares. To the Company's knowledge, during 2001, sales prices
ranged from $9.75 to $13.00 per share. Such prices are inter-dealer prices and
the Company has no knowledge of any retail mark-ups, markdowns or commissions.
The last trade known to the Company occurred on February 28, 2002 at a price of
$12.45 per share. These prices are not necessarily indicative of the fair market
value of the Common Stock, nor is the Company necessarily aware of all transfers
or the price of those transfers. Common Stock of 3,954,258 shares is held by
CEDE, Inc., the street name for the Depository Trust Corporation. The Company
believes the number of shareholders for CEDE held shares is approximately 400.
As of the date of this Registration Statement: (1) there were no outstanding
options or warrants to purchase any Common Stock or any outstanding securities
of the Company convertible into Common Stock; (2) Rule 144 promulgated under the
Securities Act of 1933, as amended (the "Securities Act"), is not available for
resale of any Common Stock as the Company has not satisfied the public
information requirements of that regulation; (3) the Company has not agreed to
register any shares of Common Stock for resale under the Securities Act; and (4)
there are no shares of Common Stock that are being, or have been publicly
proposed to be, publicly offered by the Company.
DIVIDEND HISTORY
The Company initiated the payment of cash dividends to its shareholders in 1988.
Through 2001, the amount of dividends paid has increased every year except 1991
when the dividend amount remained the same as 1990. During 2001, the Company
paid a cash dividend of $.60 per share compared to cash dividends of $.58 in
2000 and $.53 in 1999. Dividend declarations are evaluated and determined by the
Board of Directors on a quarterly basis. Quarterly dividends paid during the
last two years were as follows:
2001 2000
------------------------------ --------------------------------
1st Quarter $0.15 per share 1st Quarter $0.14 per share
2nd Quarter 0.15 per share 2nd Quarter 0.14 per share
3rd Quarter 0.15 per share 3rd Quarter 0.15 per share
4th Quarter 0.15 per share 4th Quarter 0.15 per share
During 2002, the Company has continued its practice of quarterly dividend
payments with a dividend of $.15 per share paid on January 28, 2002.
The Company intends to continue its policy of paying cash dividends on its
Common Stock in amounts not less than those paid in recent periods. The ability
of the Company to continue to pay such dividends will depend primarily upon the
earnings of West Bank and its ability to pay dividends to the Company. It is
anticipated that West Bank will continue to pay dividends on a regular basis in
the future.
The ability of West Bank to pay dividends is governed by various statutes. West
Bank, as a state bank, is restricted under Iowa to from paying dividends only
out of undivided profits. These statutes provide that no bank shall declare or
pay any dividends in an amount greater than its retained earnings, without
approval from governing regulatory bodies. In addition, applicable bank
regulatory authorities have the power to require any bank to suspend the payment
of any and all dividends until the bank shall have complied with all
requirements that may have been imposed by such authorities.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
The Company has not engaged in any sales of its Common Stock during the past
three years.
35
ITEM 11. DESCRIPTION OF COMPANY'S SECURITIES TO BE REGISTERED
GENERAL
The Company's authorized capital stock consists of 50,000,000 shares of Common
Stock, No Par Value, which constitutes the class of securities being registered
pursuant to this Registration Statement. As of December 31, 2001, 16,060,271
shares of such Common Stock were issued and outstanding. There is no preferred
or other capital stock authorized. Each share of Common Stock has the same
relative rights as, and is identical in all other respects to, each other share
of Common Stock. The shares of Common Stock are non-assessable when issued upon
payment of the full consideration therefor as established by the Board of
Directors.
VOTING RIGHTS
Each share of common stock is entitled to one vote upon each matter submitted to
a vote of the shareholders, including the election of directors. There is no
right to cumulative voting in the election of directors. A majority of the
shares entitled to vote at any meeting, represented in person or by proxy,
constitutes a quorum for conducting business. The affirmative vote of the
majority of the shares represented at any meeting at which a quorum is present
shall be the act of the shareholders, unless a greater vote is required by law.
Shareholders are entitled to vote by proxy, provided that a proxy shall be valid
only if given in writing and for the meeting specified therein.
CLASSIFICATION OF BOARD OF DIRECTORS
The Board of Directors of the Company currently consists of ten (10) members.
Each member is elected at the annual shareholders' meeting to serve until the
next annual meeting of shareholders and until a successor is duly elected and
qualified.
DIVIDEND RIGHTS
The Company may pay dividends as declared from time to time by the Board of
Directors in its sole discretion out of funds legally available for the payment
of dividends. The holders of Common Stock will be entitled to receive and share
equally in all such dividends as may be declared by the Board of Directors. The
ability of the Company to pay dividends will depend on the amount of dividends
paid to it by West Bank. The dividend restrictions imposed on West Bank by
statute and regulation may effectively limit the amount of dividends the Company
can pay. See Item 5 of this Registration Statement. In addition, under Iowa
corporate law, the Board of Directors is barred from making any dividend payment
if, after giving effect to such payment, the Company is either unable to pay its
debts as they become due in the usual course of business, or the Company's total
assets would be less than the sum of its total liabilities.
NO PREEMPTIVE RIGHTS
The shareholders do not have any preemptive rights to acquire unissued shares of
Common Stock upon a decision by the Board of Directors to issue such shares.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Articles of Incorporation limit the liability of the directors to the
fullest extent permitted by Iowa law. As so limited, no director shall be
personally liable to the Company or the shareholders, for monetary damages for
breach of fiduciary duty as a director, except to the extent of any liability
arising from: (1) any breach of the director's duty of loyalty to the Company;
(2) any acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law; (3) any transaction from which the
director derives an improper personal benefit; or (4) for any distribution
(i.e., a dividend or repurchase of stock) in violation of the applicable
provision of the Iowa Business Corporation Act.
36
The Bylaws of the Company authorize the Company to indemnify its directors,
officers, employees and agents, and any person who is or was serving at the
request of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or enterprise, to the fullest
extent permitted by the Iowa Business Corporation Act (except to the extent
limited by any federal banking laws or regulations); provided: (1) no such
indemnified person shall be indemnified with respect to any action, suit or
proceeding in which such indemnified person is finally adjudged to have been
negligent in the performance of his or her duties or to have committed an act or
failed to perform a duty for which there is common law or statutory liability;
and (2) no such indemnified person shall be entitled to indemnification with
respect to any settlement of any action, suit or proceeding unless the Board of
Directors of the Company, by majority vote of the directors who were not parties
to such action, suit or proceeding, shall have first approved the proposed
settlement. Under the Iowa Business Corporation act, a corporation may indemnify
a director, officer, employee or agent if the person acted in good faith and if
the person reasonably believed: (1) in the case of conduct in the person's
official capacity with the corporation, that the person's conduct was in the
corporation's best interest; or (2) in all other cases, that the person's
conduct was at least not opposed to the corporation's best interest. To the
extent that the indemnification provisions of the Bylaws may provide
indemnification to directors, officers, employees and agents of the Company for
liabilities arising under the Securities Act, the Company has been informed that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable. The Bylaws authorize the Company to purchase and maintain
insurance on behalf of persons entitled to indemnification. The Company
currently has such insurance in force with a liability limit of $2,000,000 per
policy period.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements listed under Item 15 are filed as part of
this Registration Statement.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
The following consolidated financial statements of the Company are filed as part
of this Registration Statement:
1. Independent Auditors' Report dated January 14, 2002.
2. Consolidated Balance Sheets at December 31, 2001 and 2000.
3. Consolidated Statements of Income for Years Ended December 31, 2001, 2000
and 1999.
4. Consolidated Statements of Stockholders' Equity for Years Ended December
31, 2001, 2000 and 1999.
5. Consolidated Statements of Cash Flows for Years Ended December 31, 2001,
2000 and 1999.
6. Notes to Consolidated Financial Statements.
The Exhibits filed as a part of this Registration Statement are described in the
Exhibit Index immediately following the consolidated financial statements
included herein.
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, as amended, the Registrant has fully caused this Registration statement to
be signed on its behalf by the undersigned, thereunto duly authorized.
Dated this 10th day of April, 2002
WEST BANCORPORATION, INC.
By: /s/ David L. Miller
------------------------------------
David L. Miller, Chairman, President
and Chief Executive Officer
37
EXHIBIT INDEX
EXHIBIT
NUMBER
3.1 Restated Articles of Incorporation of the Company *
3.2 Bylaws of the Company *
10.1 Lease *
10.2 Supplemental *
10.3 Short-Term Lease *
10.4 Assignment *
10.5 Lease Modification Agreement No. 1 *
10.6 Memorandum of Real Estate Contract *
10.7 Affidavit *
10.8 Addendum to Lease *
10.9 Data Processing Contract *
10.10 Employment Contract *
10.11 Consulting Contract *
21 Subsidiaries of the Company *
* Incorporated herein by reference to the related exhibit filed with the Form
10 on March 11, 2002.
38
WEST BANCORPORATION, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 2001
F-1
Contents
--------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT ON THE
FINANCIAL STATEMENTS ............................................ F-3
--------------------------------------------------------------------------------
FINANCIAL STATEMENTS
Consolidated balance sheets ................................... F-4
Consolidated statements of income ............................. F-5
Consolidated statements of stockholders' equity ............. F-6
Consolidated statements of cash flows ......................... F-7 - F-8
Notes to consolidated financial statements ..................... F-9 - F-24
--------------------------------------------------------------------------------
F-2
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 subsidiary, as of December 31, 2001 and 2000, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 2001. 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 subsidiary, as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America.
/s/ McGladrey & Pullen, LLP
---------------------------
Des Moines, Iowa
January 14, 2002
F-3
WEST BANCORPORATION, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
ASSETS 2001 2000
-------------------------------------------------------------------------------------------
Cash and due from banks ................................... $ 34,461,369 $ 23,561,887
Federal funds sold and other short term investments ....... 93,988,871 2,948,869
-----------------------------
Cash and cash equivalents .......................... 128,450,240 26,510,756
Securities available for sale (Notes 2, 6, and 7) ......... 32,959,504 209,302,671
Securities held to maturity (Notes 2, 6, and 7) ........... 153,383,948 71,936,556
Federal Home Loan Bank stock, at cost (Note 7) ............ 3,129,700 11,131,900
Loans, net of allowance for loan losses (Notes 3, 6, and 7) 489,158,452 495,884,454
Premises and equipment, net (Note 4) ...................... 1,147,150 1,059,640
Accrued interest receivable ............................... 5,102,592 8,261,808
Other assets (Note 8) ..................................... 2,638,656 3,788,585
-----------------------------
$ 815,970,242 $ 827,876,370
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
-------------------------------------------------------------------------------------------
LIABILITIES
Deposits:
Noninterest bearing demand (Note 2) ................... $ 144,512,495 $ 122,575,073
Savings and interest bearing demand ................... 281,300,243 224,628,017
Time, in excess of $100,000 (Note 5) .................. 102,879,173 149,815,596
Other time (Note 5) ................................... 43,038,379 50,264,425
----------------------------
Total deposits ................................... 571,730,290 547,283,111
Federal funds purchased and securities sold under
agreements to repurchase ................................ 107,831,935 154,117,095
Other short-term borrowings (Notes 2 and 6) .............. 6,000,000 3,612,061
Accrued expenses and other liabilities ................... 3,395,756 4,018,759
Long-term borrowings (Note 2, 3, and 7) .................. 48,000,000 48,000,000
-----------------------------
Total liabilities ................................. 736,957,981 757,031,026
-----------------------------
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY
Common stock, no par value; authorized 25,000,000 shares;
shares issued and outstanding: 2001 and 2000, 16,060,27 3,000,000 3,000,000
Additional paid-in capital .............................. 32,000,000 32,000,000
Retained earnings ....................................... 43,374,281 37,274,004
Accumulated other comprehensive income (loss) ........... 637,980 (1,428,660)
-----------------------------
Total stockholders' equity ....................... 79,012,261 70,845,344
-----------------------------
$ 815,970,242 $ 827,876,370
=============================
See Notes to Consolidated Financial Statements.
F-4
WEST BANCORPORATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
--------------------------------------------------------------------------------------------------
Interest income:
Loans ................................................ $39,322,663 $42,671,003 $36,119,554
Securities:
U.S. Treasury, government agencies, and corporations 9,945,440 15,646,947 14,046,519
States and political subdivisions .................. 1,570,671 1,407,993 1,171,769
Other .............................................. 394,246 1,081,589 677,588
Federal funds sold and other short term investments .. 3,381,198 391,314 176,805
---------------------------------------
Total interest income ......................... 54,614,218 61,198,846 52,192,235
---------------------------------------
Interest expense:
Demand and savings deposits .......................... 7,069,318 8,177,360 6,922,467
Time deposits ........................................ 9,007,791 11,176,598 8,540,481
Federal funds purchased and securities sold under
agreements to repurchase ............................ 5,971,626 11,550,858 6,320,603
Other short-term borrowings .......................... 90,122 159,520 113,975
Long-term borrowings ................................. 2,813,531 2,574,396 1,922,601
---------------------------------------
Total interest expense ........................ 24,952,388 33,638,732 23,820,127
---------------------------------------
Net interest income ........................... 29,661,830 27,560,114 28,372,108
Provision for loan losses .............................. 1,062,500 1,190,000 290,00
---------------------------------------
Net interest income after provision for
loan losses .................................. 28,599,330 26,370,114 28,082,108
---------------------------------------
Noninterest income:
Service charges on deposit accounts .................. 4,463,921 4,088,052 3,243,449
Trust services ....................................... 531,495 489,057 597,530
Other income ......................................... 1,318,640 1,101,092 1,010,821
---------------------------------------
Total noninterest income ...................... 6,314,056 5,678,201 4,851,800
---------------------------------------
Noninterest expenses:
Salaries and employee benefits ....................... 6,044,441 6,025,351 5,631,895
Occupancy expenses ................................... 1,225,553 1,153,445 1,071,046
Data processing expenses ............................. 993,274 862,257 894,929
Other expenses ....................................... 2,216,639 1,554,945 1,917,070
---------------------------------------
Total noninterest expenses .................... 10,479,907 9,595,998 9,514,940
---------------------------------------
Income before income taxes .................... 24,433,479 22,452,317 23,418,968
Income taxes (Note 8) .................................. 8,697,039 8,035,875 8,465,602
---------------------------------------
Net income .................................... $15,736,440 $14,416,442 $14,953,366
=======================================
Basic earnings per share ............................... $ 0.98 $ 0.90 $ 0.93
=======================================
See Notes to Consolidated Financial Statements.
F-5
WEST BANCORPORATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2001, 2000 and 1999
Accumulated
Additional Other Total
Comprehensive Common Paid-In Retained Comprehensive Stockholders'
Income Stock Capital Earnings Income (Loss) Equity
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 ..................... $ 3,000,000 $ 22,000,000 $ 35,785,385 $ 258,341 $ 61,043,726
Comprehensive income:
Net income ................................. $ 14,953,366 -- -- 14,953,366 -- 14,953,366
Other comprehensive income, unrealized
gains on securities, net of reclassifica-
tion adjustment, net of tax (Note 2) ..... (6,305,922) -- -- -- (6,305,922) (6,305,922)
------------
Total comprehensive income ............ $ 8,647,444
============
Cash dividends ($.53 per share) .............. -- -- (8,566,232) -- (8,566,232)
Transfer of retained earnings to additional
paid-in capital -- 10,000,000 (10,000,000) -- --
-------------------------------------------------------------------
Balance, December 31, 1999 ..................... 3,000,000 32,000,000 32,172,519 (6,047,581) 61,124,938
Comprehensive income:
Net income ................................. $ 14,416,442 -- -- 14,416,442 -- 14,416,442
Other comprehensive income, unrealized
gains on securities, net of reclassifica-
tion adjustment, net of tax (Note 2) ...... 4,618,921 -- -- -- 4,618,921 4,618,921
------------
Total comprehensive income ............ $ 19,035,363
============
Cash dividends ($.58 per share) ............... -- -- (9,314,957) -- (9,314,957)
-------------------------------------------------------------------
Balance, December 31, 2000 ..................... 3,000,000 32,000,000 37,274,004 (1,428,660) 70,845,344
Comprehensive income:
Net income ................................. $ 15,736,440 -- -- 15,736,440 -- 15,736,440
Other comprehensive income, unrealized
gains on securities, net of reclassifica-
tion adjustment, net of tax (Note 2) ....... 2,066,640 -- -- -- 2,066,640 2,066,640
------------
Total comprehensive income ............ $ 17,803,080
============
Cash dividends ($.60 per share) ............... -- -- (9,636,163) -- (9,636,163)
--------------------------------------------------------------------
Balance, December 31, 2001 ..................... $ 3,000,000 $ 32,000,000 $ 43,374,281 $ 637,980 $ 79,012,261
====================================================================
See Notes to Consolidated Financial Statements
F-6
WEST BANCORPORATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ...................................................... $ 15,736,440 $ 14,416,442 $ 14,953,366
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses ....................................... 1,062,500 1,190,000 290,000
Amortization and accretion ...................................... 99,592 78,838 79,982
(Gain) on sale of securities .................................... -- (809) --
Proceeds from sales of loans held for sale ...................... 9,724,283 959,950 --
Originations of loans held for sale ............................. (10,018,283) (1,037,950) --
Depreciation .................................................... 153,429 131,937 124,355
Deferred income taxes ........................................... (145,943) (91,453) (103,597)
Change in assets and liabilities:
Decrease (increase) in accrued interest receivable ............ 3,159,216 (1,867,281) (494,234)
Increase (decrease) in accrued expenses and other liabilities . (623,003) 1,034,235 37,680
-----------------------------------------------
Net cash provided by operating activities .................. 19,148,231 14,813,909 14,887,552
-----------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales, calls, and maturities of securities
available for sale .............................................. 171,795,782 2,017,078 33,288,965
Purchase of securities available for sale ........................ -- -- (24,024,418)
Proceeds from maturities and calls of securities held to maturity 76,955,000 12,793,190 24,144,405
Purchases of securities held to maturity ......................... (151,012,328) (40,498,096) (26,688,183)
Proceeds from redemption (purchase) of Federal
Home Loan Bank stock ............................................ 8,002,200 1,330,900 (7,711,400)
Net decrease (increase) in loans ................................. 5,957,502 (26,960,913) (77,487,986)
Purchases of bank premises and equipment ......................... (240,939) (104,268) (202,601)
Change in other assets ........................................... 420,241 719,632 491,419
-----------------------------------------------
Net cash provided by (used in) investing activities ....... 111,877,458 (50,702,477) (78,189,799)
-----------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits ........................................ 24,447,179 5,320,874 56,384,699
Net change in federal funds purchased and securities
sold under agreements to repurchase ............................. (46,285,160) 22,314,181 (2,457,865)
Net change in other short-term borrowings ........................ 2,387,939 (1,231,313) 2,764,419
Proceeds from long-term borrowings ............................... 10,000,000 20,000,000 5,000,000
Principal payments on long-term borrowings ....................... (10,000,000) (5,000,000) (10,000,000)
Cash dividends ................................................... (9,636,163) (9,314,957) (8,566,232)
-----------------------------------------------
Net cash provided by (used in) financing activities ....... (29,086,205) 32,088,785 43,125,021
-----------------------------------------------
Net increase (decrease) in cash and cash equivalents ...... 101,939,484 (3,799,783) (20,177,226)
CASH AND CASH EQUIVALENTS
Beginning ........................................................ 26,510,756 30,310,539 50,487,765
-----------------------------------------------
Ending ........................................................... $ 128,450,240 $ 26,510,756 $ 30,310,539
===============================================
(Continued)
F-7
WEST BANCORPORATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
--------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash payments for:
Interest ........................... $26,416,080 $32,293,098 $22,046,599
Income taxes ....................... 8,393,795 8,635,910 8,698,001
See Notes to Consolidated Financial Statements.
F-8
WEST BANCORPORATION, INC. AND SUBSIDIARY
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 a wholly-owned subsidiary, West Des
Moines State Bank, (the Bank) (referred to collectively as the Company). The
Bank is state chartered and has its main office in West Des Moines, Iowa, and
seven branches located in the Des Moines metropolitan area.
Significant accounting policies:
Accounting estimates and assumptions: The consolidated financial statements
have been prepared in conformity with accounting principles generally
accepted in the United States of America. 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 Bank. 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 are carried at amortized cost and consist of debt
securities for which the Company has the positive intent and the ability to
hold to maturity. Securities held to maturity 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.
F-9
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.
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.
Loan origination fees and direct origination costs are capitalized and
recognized as an adjustment of the yield of the related loan.
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
collectability of the principal is unlikely. The allowance is an amount that
management believes will be adequate to absorb estimated losses on existing
loans, based on an evaluation of the collectability 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.
Bank premises and equipment: Bank premises and equipment are stated at cost
less accumulated depreciation. Depreciation is computed using straight-line
and accelerated methods 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.
Income taxes: The Company files a consolidated federal income tax return.
Income tax expense is generally allocated as if the Holding Company and Bank
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 bases. 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 defined tax assets will not be
realized.
F-10
Earnings per share: Earnings per share represents income available to common
shareholders divided by the weighted average number of shares outstanding
during the period.
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.)
2001 2000 1999
-------------------------------------
Numerator, income available to common
stockholders $15,736,440 $14,416,442 $14,953,366
=====================================
Denominator, weighted-average
shares outstanding 16,060,271 16,060,271 16,060,271
=====================================
Basic earnings per common share $ 0.98 $ 0.90 $ 0.93
=====================================
Reclassifications: Certain items in prior year financial statements have been
reclassified to conform to the current year's presentation, with no effect on
net income or stockholders' equity.
New accounting pronouncements: In July 2001, FASB issued two statements,
Statement 141, Business Combinations and Statement 142, Goodwill and Other
Intangible Assets. Statement 141 eliminates the pooling method for accounting
for business combinations and requires that intangible assets that meet certain
criteria be reported separately from goodwill. Statement 142 eliminates the
amortization of goodwill and other intangibles that are determined to have an
indefinite life. It also requires, at a minimum, annual impairment tests for
goodwill and other intangible assets that are determined to have an indefinite
life, and requires the carrying value of goodwill which exceeds its implied fair
value to be recognized as an impairment loss.
The provisions of FASB Statement 141 apply to all business combinations
initiated after June 30, 2001, and all business combinations accounted for by
the purchase method for which the date of acquisition is July 1, 2001, or later.
The provisions of FASB Statement 142 are required to be implemented by the
Company in the first quarter of its 2002 fiscal year. The Company does not
expect the adoption of these Statements to have a material effect on the
Company.
The FASB has also issued Statement 143, Accounting for Asset Retirement
Obligations and Statement 144, Accounting for the Impairment or Disposal of
Long-Lived Assets relating to long-lived assets. The Company does not expect the
adoption of these Statements to have an effect on the Company.
F-11
Securities available for sale are as follows as of December 31, 2001 and 2000:
2001
-------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------------
U.S. Government agencies
and corporations ................. $ 28,990,703 $ 885,504 $ -- $ 29,876,207
State and political subdivisions ... 2,872,963 143,996 -- 3,016,959
Mortgage-backed securities ........ 66,839 -- (501) 66,338
-------------------------------------------------------------
$ 31,930,505 $ 1,029,500 $ (501) $ 32,959,504
=============================================================
2000
-------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------------
U.S. Government agencies
and corporations ................. $210,729,564 $ 152,547 $(2,462,863) $208,419,248
State and political subdivisions ... 735,000 6,628 -- 741,628
Mortgage-backed securities ......... 117,400 -- (605) 116,795
Other .............................. 25,000 -- -- 25,000
------------------------------------------------------------
$211,606,964 $ 159,175 $(2,463,468) $209,302,671
============================================================
Securities held to maturity are as follows as of December 31, 2001 and 2000:
2001
------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------------------
U.S. Treasury ...................... $ 1,997,952 $ 35,798 $ -- $ 2,033,750
U.S. Government agencies
and corporations ................. 103,459,901 645,401 (182,819) 103,922,483
State and political subdivisions ... 31,475,879 403,924 (160,839) 31,718,964
Corporate notes and other
investments ...................... 16,450,216 51,205 (284,756) 16,216,665
------------------------------------------------------------
$153,383,948 $ 1,136,328 $ (628,414) $153,891,862
============================================================
2000
------------------------------------------------------------
Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------------------
U.S. Treasury ...................... $ 1,991,757 $ 28,243 $ -- $ 2,020,000
U.S. Government agencies
and corporations ................. 46,140,719 172,140 (73,125) 46,239,734
State and political subdivisions ... 23,804,080 101,485 (141,161) 23,764,404
------------------------------------------------------------
$ 71,936,556 $ 301,868 $ (214,286) $ 72,024,138
============================================================
F-12
The amortized cost and fair value of securities available for sale as of
December 31, 2001 and 2000, by contractual maturity are shown below:
2001 2000
---------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------------------------------------------------------
Due in one year or less .............. $ 10,000,000 $ 10,230,243 $ -- $ --
Due after one year through five years 15,792,542 16,462,813 150,086,394 149,138,632
Due after five years through ten years 2,000,000 2,002,976 45,495,570 44,626,320
Due after ten years .................. 4,137,963 4,263,472 16,025,000 15,537,719
---------------------------------------------------------
$ 31,930,505 $ 32,959,504 $211,606,964 $209,302,671
=========================================================
The amortized cost and fair value of securities held to maturity as of December
31, 2001 and 2000, by contractual maturity are shown below:
2001 2000
--------------------------- ---------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------------------------------------------------------
Due in one year or less .............. $ 17,296,404 $ 17,355,675 $ 7,245,431 $ 7,237,041
Due after one year through five years 117,716,291 118,170,854 55,527,696 55,728,791
Due after five years through ten years 7,794,542 7,825,903 5,130,944 5,024,850
Due after ten years .................. 10,576,711 10,539,430 4,032,485 4,033,456
---------------------------------------------------------
$153,383,948 $153,891,862 $ 71,936,556 $ 72,024,138
=========================================================
For the years ended December 31, 2001, 2000 and 1999, proceeds from sales of
securities available for sale amounted to $0, $1,103,015 and $0, respectively.
Security gains of $0, $809 and $0, were realized for the years ended December
31, 2001, 2000 and 1999, respectively.
Securities with a carrying amount amortized costs of approximately $105,453,000
and $217,633,500 as of December 31, 2001 and 2000, respectively, were pledged as
collateral on the treasury tax and loan option notes, repurchase agreements,
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, 2001, 2000 and 1999, are
as follows:
2001 2000 1999
--------------------------------------------
Unrealized holding gains (losses) arising during the period $ 3,333,292 $ 7,483,461 $(10,215,594)
Less reclassification adjustment for (gains) realized in net
income .................................................. -- (809) --
--------------------------------------------
Other comprehensive income, net unrealized
gains (losses) before tax benefit (expense) ...... 3,333,292 7,482,652 (10,215,594)
Tax benefit (expense) .................................... (1,266,652) (2,863,731) 3,909,672
--------------------------------------------
Other comprehensive income, net unrealized
gains (losses) on securities, net of tax .......... $ 2,066,640 $ 4,618,921 $ (6,305,922)
============================================
F-13
Loans are as follows, as of December 31, 2001 and 2000:
2001 2000
--------------------------------
Commercial $ 226,182,538 $234,088,689
Real estate:
Construction, land, and land development 33,954,098 16,249,532
1 - 4 family residential 71,628,342 81,982,902
Commercial 138,408,758 138,705,353
Consumer and other loans 23,333,194 29,221,493
--------------------------------
493,506,930 500,247,969
--------------------------------
Allowance for loan losses 4,239,990 4,194,498
Unearned discount and loan fees 108,488 169,017
--------------------------------
4,348,478 4,363,515
--------------------------------
$ 489,158,452 $495,884,454
================================
The loan portfolio includes approximately $305,571,000 and $324,525,000 of fixed
rate loans and $187,936,000 and $175,723,000 of variable rate loans as of
December 31, 2001 and 2000, respectively.
Loans of approximately $583,000 and $1,437,000 as of December 2001 and 2000,
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, 2001, 2000, and 1999:
2001 2000 1999
-----------------------------------------
Balance, at beginning of year $ 4,194,498 $ 4,040,450 $ 3,871,707
Provision for loan losses 1,062,500 1,190,000 290,000
Recoveries 66,316 140,307 78,596
Charge-offs (1,083,324) (1,176,259) (199,853)
-----------------------------------------
Balance, at end of year $ 4,239,990 $ 4,194,498 $ 4,040,450
=========================================
Impaired loans (nonaccrual loans) were approximately $878,000 and $705,000 as of
December 31, 2001 and 2000, respectively. The total allowance for loan losses
related to these loans was approximately $87,800 and $70,500 as of December 31,
2001 and 2000, respectively. The average recorded investment in impaired loans
during 2001 and 2000 was approximately $696,000 and $380,000, respectively.
Interest income on impaired loans was insignificant during 2001 and 2000.
F-14
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, 2001 and 2000:
2001 2000
---------------------------------
Balance, beginning of year $ 32,840,527 $31,754,723
New loans 2,900,184 10,572,962
Repayments (6,788,548) (9,487,158)
Reductions due to director retirements (13,664,735) -
---------------------------------
Balance, end of year $ 15,287,428 $32,840,527
=================================
Note 4. Bank Premises and Equipment
Bank premises and equipment are as follows as of December 31, 2001 and 2000:
2001 2000
-----------------------------
Land $ 56,000 $ 56,000
Building 195,793 195,793
Equipment 2,482,919 2,241,981
Leasehold improvements 832,129 832,129
-----------------------------
3,566,841 3,325,903
Accumulated depreciation 2,419,691 2,266,263
-----------------------------
$1,147,150 $1,059,640
=============================
Note 5. Deposits
At December 31, 2001, the approximate scheduled maturities of time deposits are
as follows:
2002 $ 82,485,779
2003 47,494,561
2004 15,460,623
2005 277,838
2006 and thereafter 198,751
-----------
$145,917,552
============
Note 6. Short-Term Borrowings
Short-term borrowings as of December 31, 2001 and 2000, and the related interest
expense for the years 2001, 2000, and 1999 consisted of Treasury, Tax, and Loan
option notes.
The notes are collateralized by certain loans and investment securities.
Note 7. Long-Term Borrowings
At December 31, 2001, long-term borrowings consist of the following Federal Home
Loan Bank (FHLB) advances:
Interest Next Call Call
Amount Rate Maturity Date Frequency
--------------------------------------------------------------------------------
$ 10,000,000 5.24% 01/28/2008 01/26/2002 Quarterly
10,000,000 5.39 03/31/2008 04/02/2002 Quarterly
3,000,000 5.63 03/31/2008 03/31/2003 Quarterly
5,000,000 4.99 09/11/2008 09/11/2002 Quarterly
20,000,000 5.96 03/10/2010 03/12/2002 Quarterly
------------
$ 48,000,000
============
F-15
The advances are collateralized by FHLB stock, investment securities, and real
estate loans as required by the FHLB's collateral policy.
At December 31, 2001, the Bank had arrangements to borrow $60 million in
unsecured federal funds lines of credit at correspondent banks which are
available under the correspondent bank's normal terms. These lines expire at
various times through December 2002. There were no amounts outstanding under
these arrangements at December 31, 2001.
Note 8. Income Taxes
The components of income tax expense are as follow for the years ended December
31, 2001, 2000 and 1999:
2001 2000 1999
-------------------------------------------------
Current:
Federal $ 7,603,709 $ 7,002,528 $ 7,390,099
State 1,239,273 1,124,800 1,179,100
Deferred (145,943) (91,453) (103,597)
--------------------------------------------------
$ 8,697,039 $ 8,035,875 $ 8,465,602
==================================================
Total income tax expense differed from the amounts computed by applying the U.
S. Federal income tax rates of 35% to income before income taxes s a result of
the following:
Years Ended December 31,
------------------------------------------------------------
2001 2000 1999
------------------------------------------------------------
Percent Percent Percent
of Pretax of Pretax of Pretax
Amount Income Amount Income Amount Income
------------------------------------------------------------
Computed "expected" tax
expense .................. $8,551,719 35.0% $7,858,310 35.0% $8,196,639 35.0%
State income tax, net of
federal income tax benefit 796,055 3.3% 731,120 3.3% 766,415 3.3%
Tax-exempt interest income (784,765) (3.2)% (715,874) (3.2)% (602,248) (2.6)%
Non-deductible interest
expense to own
tax-exempt securities 121,249 0.5% 148,557 0.7% 80,626 0.4%
Other, net ............... 12,781 0.0% 13,762 0.0% 24,170 0.1%
----------------------------------------------------------
$8,697,039 35.6% $8,035,875 35.8% $8,465,602 36.2%
==========================================================
F-16
Note 8. Income Taxes
Net deferred tax assets consist of approximately the following as of December
31, 2001 and 2000.
2001 2000
-----------------------
Deferred tax assets:
Allowance for loan losses $1,611,000 $ 1,594,000
Net unrealized loss on securities available for sale - 875,630
State net operating loss carryforward 56,900 77,200
Other 140,000 119,000
----------------------
1,807,900 2,665,830
----------------------
Deferred income tax liabilities:
Deferred loan fees 368,000 419,000
Net unrealized gain on securities available for sale 391,019 -
Other 158,058 215,000
-----------------------
917,077 634,000
-----------------------
Net deferred tax asset before valuation allowance 890,823 2,031,830
Valuation allowance for deferred tax asset (56,900) (77,200)
-----------------------
Net deferred tax asset $ 833,923 $1,954,630
=======================
The net deferred tax asset is included on the consolidated Balance Sheet in
other assets.
The Company has approximately $949,000 of operating loss carryforwards available
to the Holding Company 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:
2002 $ 277,000
2003 217,000
2004 209,000
2005 84,000
2006 and thereafter 162,000
---------
$ 949,000
=========
Note 9. 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 Bank to maintain minimum amounts and ratios (set forth in the
following table) of total and Tier I capital to risk-weighted assets and of Tier
I capital to average assets. Management believes as of December 31, 2001, the
Company and Bank met all capital adequacy requirements to which they are
subject.
As of December 31, 2001, 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
as set forth in the following table. There are no conditions or events since
that notification that management believes have changed the institution's
category.
F-17
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, 2001:
Total Capital (to Risk-
Weighted Assets) $ 82,534,000 13.6% $ 48,737,000 8.0% $ 60,921,000 10.0%
Tier I Capital (to Risk-
Weighted Assets) 78,294,000 12.9 24,368,000 4.0 36,552,000 6.0
Tier I Capital (to
Average Assets) 78,294,000 9.3 33,795,000 4.0 42,244,000 5.0
As of December 31, 2000:
Total Capital (to Risk-
Weighted Assets) $ 76,351,000 13.6% $ 44,942,000 8.0% $ 56,177,000 10.0%
Tier I Capital (to Risk-
Weighted Assets) 72,157,000 12.8 22,471,000 4.0 33,706,000 6.0
Tier I Capital (to
Average Assets) 72,157,000 8.6 33,434,000 4.0 41,792,000 5.0
The Bank is restricted as to the amount of dividends which may be paid without
prior regulatory approval. The Bank may not pay dividends that would result in
its capital levels being reduced below the minimum requirements shown above. As
of December 31, 2001, the Bank had approximately $25 million of retained
earnings available for dividends.
Note 10. Commitments and Contingencies and Related-Party Leases
The Company leases real estate under several noncancelable operating lease
agreements. Rent expense was approximately $666,000, $670,000 and $619,000 for
the years ended December 31, 2001, 2000, and 1999, respectively.
The Company leases certain real estate from a director of the Company. Terms of
the noncancelable operating leases were consummated prior to the director being
named by the Company in 1996. Rent expense to the related party was
approximately $149,000, $155,000, and $137,000 for the years ended December 31,
2001, 2000, and 1999, respectively.
The approximate total minimum rental commitments as of December 31, 2001, are as
follows:
Related Party Total
-----------------------------
2002 $ 149,000 $ 463,000
2003 149,000 344,000
2004 122,000 318,000
2005 55,000 236,000
2006 55,000 221,000
Thereafter 649,000 2,011,000
-----------------------------
$1,179,000 $ 3,593,000
=============================
Required reserve balances: The Bank is required to maintain an average reserve
balance with the Federal Reserve Bank. Required reserve balances were
approximately $698,000 and $655,000 as of December 31, 2001 and 2000,
respectively.
Financial instruments with off-balance-sheet risk: The Company is party to
financial instruments with off-balance-sheet risk in the normal course of
business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit and standby letters of credit.
These instruments involve, to varying degrees, elements of credit risk in excess
of the amount recognized in the consolidated balance sheets.
F-18
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, 2001 and 2000, are approximately as
follows:
2001 2000
--------------------------------
Commitments to extend credit $ 131,302,000 $113,176,000
Standby letters of credit 8,172,000 10,188,000
--------------------------------
$ 139,474,000 $123,364,000
================================
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.
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.
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). 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 3. The
distribution of commitments to extend credit approximates the distribution of
loans outstanding. Standby letters of credit were granted primarily to
commercial borrowers.
Contingencies: In the normal course of business, the Company is involved in
various legal proceedings. In the opinion of management, any liability resulting
from such proceedings would not have a material adverse effect on the
consolidated financial statements.
Note 11. 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, 2001, 2000,
and 1999, was approximately $224,000, $220,000, and $278,000, respectively.
During 2000, the Company added a 401(k) feature to this plan. 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, 2001 and
2000 was approximately $98,000 and $70,000, respectively.
F-19
Note 12. Estimated Fair Values of Financial Instruments
FASB 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.
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 analyses
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 analyses 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 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.
F-20
The approximate carrying amounts and fair values are as follows as of
December 31, 2001 and 2000:
2001 2000
-----------------------------------------------------------
Carrying Approximate Carrying Approximate
Amount Fair Value Amount Fair Value
-----------------------------------------------------------
Financial assets:
Cash and due from banks ................ $ 34,461,000 $ 34,461,000 $ 23,562,000 $ 23,562,000
Federal funds sold and other short-
term investments ..................... 93,989,000 93,989,000 2,949,000 2,949,000
Securities available for sale .......... 32,960,000 32,960,000 209,303,000 209,303,000
Securities held to maturity ............ 153,384,000 153,892,000 71,937,000 72,024,000
Federal Home Loan Bank stock ........... 3,130,000 3,130,000 11,132,000 11,132,000
Loans, net ............................. 489,158,000 494,200,000 495,884,000 493,178,000
Accrued interest receivable ............ 5,103,000 5,103,000 8,262,000 8,262,000
Financial liabilities:
Deposits ............................... 571,730,000 574,220,000 547,283,000 547,277,000
Federal funds purchased and
securities sold under agreements
to repurchase ........................ 107,832,000 107,832,000 154,117,000 154,117,000
Other short-term borrowings ............ 6,000,000 6,000,000 3,612,000 3,612,000
Accrued interest payable ............... 1,660,000 1,660,000 3,139,000 3,139,000
Long-term borrowings ................... 48,000,000 47,181,000 48,000,000 49,198,000
Off-balance-sheet financial instruments:
Commitments to extend credit ........... -- -- -- --
Standby letters of credit .............. -- -- -- --
Note 13. West Bancorporation Inc. (Parent Company Only) Condensed Financial
Statements
STATEMENTS OF FINANCIAL CONDITION
December 31, 2001 and 2000
2001 2000
--------------------------
ASSETS
Cash $ 70,177 $ 93,787
Investment in West Des Moines State Bank 78,932,712 70,748,422
Other assets 9,372 3,135
--------------------------
Total assets $79,012,261 $70,845,344
===========================
LIABILITIES AND EQUITY
LIABILITIES $ - $ -
--------------------------
EQUITY
Common stock 3,000,000 3,000,000
Additional paid-in capital 32,000,000 32,000,000
Retained earnings 43,374,281 37,274,004
Accumulated other comprehensive income (loss) 637,980 (1,428,660)
--------------------------
Total equity 79,012,261 70,845,344
--------------------------
Total liabilities and equity $79,012,261 $70,845,344
==========================
F-21
STATEMENTS OF INCOME
Years Ended December 31, 2001, 2000, 1999
2001 2000 1999
--------------------------------------
Operating income:
Equity in net income of subsidiary $ 15,753,812 $14,422,235 $15,001,489
Interest income 1,806 2,792 3,992
--------------------------------------
15,755,618 14,425,027 15,005,481
--------------------------------------
Operating expenses:
Salaries and employee benefits 15,537 - -
Other 12,997 11,710 77,456
--------------------------------------
28,534 11,710 77,456
--------------------------------------
Income before income taxes 15,727,084 14,413,317 14,928,025
Provision for income taxes (9,356) (3,125) (25,341)
--------------------------------------
Net income $ 15,736,440 $14,416,442 $14,953,366
======================================
F-22
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
----------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .................................... $ 15,736,440 $ 14,416,442 $ 14,953,366
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in net income of West Des Moines
State Bank .................................... (15,753,812) (14,422,235) (15,001,489)
Dividends received from West Des Moines
State Bank .................................... 9,636,163 9,314,957 8,566,232
Changes in other assets ........................ (6,238) 22,572 30,303
---------------------------------------
Net cash provided by
operating activities .................. 9,612,553 9,331,736 8,548,412
---------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES
Net decrease in loans .......................... -- -- 44,000
---------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid ................................. (9,636,163) (9,314.957) (8,566,232)
---------------------------------------
Net increase (decrease) in cash ........... (23,610) 16,779 26,180
CASH
Beginning ...................................... 93,787 77,008 50,828
---------------------------------------
Ending ......................................... $ 70,177 $ 93,787 $ 77,008
=======================================
F-23
Note 14. Selected Quarterly Financial Data (Unaudited)
2001
------------------------------------------------
Quarter ended ................................ March 31 June 30 September 30 December 31
------------------------------------------------
(In thousands, except per share data)
Interest income .............................. $15,016 $14,060 $13,428 $12,110
Interest expense ............................. 8,126 6,753 5,749 4,324
-----------------------------------------------
Net interest income .......................... 6,890 7,307 7,679 7,786
Provision for loan losses .................... 193 270 300 300
-----------------------------------------------
Net interest income after provision for
loan losses .................................. 6,697 7,037 7,379 7,486
Noninterest income ........................... 1,377 1,640 1,615 1,682
Noninterest expense .......................... 2,644 2,665 2,714 2,457
-----------------------------------------------
Income before income taxes ................... 5,430 6,012 6,280 6,711
Income taxes ................................. 1,933 2,142 2,233 2,389
-----------------------------------------------
Net income ................................... $ 3,497 $ 3,870 $ 4,047 $ 4,322
===============================================
Net income per common share - basic .......... $ 0.22 $ 0.24 $ 0.25 $ 0.27
===============================================
2000
-----------------------------------------------
Quarter ended ................................. March 31 June 30 September 30 December 31
-----------------------------------------------
(In thousands, except per share data)
Interest income ............................... $14,467 $15,212 $15,659 $15,861
Interest expense .............................. 7,295 8,245 9,018 9,081
-----------------------------------------------
Net interest income ........................... 7,172 6,967 6,641 6,780
Provision for loan losses ..................... 85 90 90 925
-----------------------------------------------
Net interest income after provision for-
loan losses ................................... 7,087 6,877 6,551 5,855
Noninterest income ............................ 1,234 1,507 1,428 1,509
Noninterest expense ........................... 2,570 2,444 2,445 2,137
----------------------------------------------
Income before income taxes .................... 5,751 5,940 5,534 5,227
Income taxes .................................. 2,068 2,137 1,972 1,859
-----------------------------------------------
Net income .................................... $ 3,683 $ 3,803 $ 3,562 $ 3,368
===============================================
Net income per common share - basic ........... $ 0.23 $ 0.24 $ 0.22 $ 0.21
===============================================
F-24