Document

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

FORM 10-Q

(Mark One)

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2018
 
 
or
 
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from __________ to __________

Commission File Number:  0-49677

WEST BANCORPORATION, INC.
(Exact Name of Registrant as Specified in its Charter)

IOWA
42-1230603
(State of Incorporation)
(I.R.S. Employer Identification No.)

 
1601 22nd Street, West Des Moines, Iowa
50266
 
 
(Address of principal executive offices)
(Zip Code)
 

Registrant's telephone number, including area code:  (515) 222-2300

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x                      No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  x                      No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer
o
 
 
 
 
Accelerated filer
x
 
 
 
 
Non-accelerated filer
o
(Do not check if a smaller reporting company)
Smaller reporting company
o
 
 
 
 
Emerging growth company
o
 
 
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o                      No  x


As of July 25, 2018, there were 16,295,494 shares of common stock, no par value, outstanding.



WEST BANCORPORATION, INC.
INDEX
 
 
Page
PART I.
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II.
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 

3


Table of Contents


PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
West Bancorporation, Inc. and Subsidiary
 
 
 
 
Consolidated Balance Sheets
 
 
 
 
(unaudited)
 
 
 
 
 
 
 
 
 
(in thousands, except share and per share data)
 
June 30, 2018
 
December 31, 2017
ASSETS
 
 
 
 
Cash and due from banks
 
$
36,964

 
$
34,952

Federal funds sold
 
28,139

 
12,997

Cash and cash equivalents
 
65,103

 
47,949

Investment securities available for sale, at fair value
 
526,793

 
444,219

Investment securities held to maturity, at amortized cost (fair value $45,890 at December 31, 2017)
 

 
45,527

Federal Home Loan Bank stock, at cost
 
9,202

 
9,174

Loans
 
1,534,404

 
1,510,500

Allowance for loan losses
 
(16,518
)
 
(16,430
)
Loans, net
 
1,517,886

 
1,494,070

Premises and equipment, net
 
22,053

 
23,022

Accrued interest receivable
 
7,864

 
7,344

Bank-owned life insurance
 
33,928

 
33,618

Deferred tax assets, net
 
5,826

 
4,645

Other assets
 
8,511

 
4,809

Total assets
 
$
2,197,166

 
$
2,114,377

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
LIABILITIES
 
 
 
 
Deposits:
 
 
 
 
Noninterest-bearing demand
 
$
381,281

 
$
395,888

Interest-bearing demand
 
326,567

 
395,052

Savings
 
1,004,926

 
850,216

Time of $250 or more
 
29,382

 
16,965

Other time
 
149,773

 
152,692

Total deposits
 
1,891,929

 
1,810,813

Federal funds purchased
 
860

 
545

Subordinated notes, net
 
20,418

 
20,412

Federal Home Loan Bank advances, net
 
77,124

 
76,382

Long-term debt
 
19,611

 
22,917

Accrued expenses and other liabilities
 
4,872

 
5,210

Total liabilities
 
2,014,814

 
1,936,279

COMMITMENTS AND CONTINGENCIES (NOTE 8)
 

 

STOCKHOLDERS' EQUITY
 
 
 
 
Preferred stock, $0.01 par value; authorized 50,000,000 shares; no shares issued and outstanding at June 30, 2018 and December 31, 2017
 

 

Common stock, no par value; authorized 50,000,000 shares; 16,295,494
    and 16,215,672 shares issued and outstanding at June 30, 2018
    and December 31, 2017, respectively
 
3,000

 
3,000

Additional paid-in capital
 
23,653

 
23,463

Retained earnings
 
161,867

 
153,527

Accumulated other comprehensive loss
 
(6,168
)
 
(1,892
)
Total stockholders' equity
 
182,352

 
178,098

Total liabilities and stockholders' equity
 
$
2,197,166

 
$
2,114,377

See Notes to Consolidated Financial Statements.

4


Table of Contents


West Bancorporation, Inc. and Subsidiary
 
 
 
 
 
 
 
 
Consolidated Statements of Income
 
 
 
 
 
 
 
 
(unaudited)
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands, except per share data)
 
2018
 
2017
 
2018
 
2017
Interest income:
 
 
 
 
 
 
 
 
Loans, including fees
 
$
17,168

 
$
16,042

 
$
33,642

 
$
31,011

Investment securities:
 
 
 
 
 
 
 
 
Taxable
 
1,886

 
1,239

 
3,699

 
2,266

Tax-exempt
 
1,306

 
815

 
2,668

 
1,593

Federal funds sold
 
177

 
70

 
258

 
87

Total interest income
 
20,537

 
18,166

 
40,267

 
34,957

Interest expense:
 
 
 
 
 
 

 
 

Deposits
 
3,798

 
1,781

 
6,810

 
2,976

Federal funds purchased
 
52

 
23

 
79

 
69

Subordinated notes
 
284

 
223

 
532

 
435

Federal Home Loan Bank advances
 
907

 
948

 
1,739

 
1,865

Long-term debt
 
197

 
98

 
392

 
130

Total interest expense
 
5,238

 
3,073

 
9,552

 
5,475

Net interest income
 
15,299

 
15,093

 
30,715

 
29,482

Provision for loan losses
 

 

 
150

 

Net interest income after provision for loan losses
 
15,299

 
15,093

 
30,565

 
29,482

Noninterest income:
 
 
 
 
 
 

 
 

Service charges on deposit accounts
 
627

 
631

 
1,276

 
1,231

Debit card usage fees
 
433

 
458

 
832

 
898

Trust services
 
575

 
436

 
1,020

 
828

Increase in cash value of bank-owned life insurance
 
152

 
163

 
310

 
317

Gain from bank-owned life insurance
 

 

 

 
307

Realized investment securities gains (losses), net
 
(25
)
 
229

 
(25
)
 
226

Other income
 
261

 
399

 
523

 
669

Total noninterest income
 
2,023

 
2,316

 
3,936

 
4,476

Noninterest expense:
 
 
 
 
 
 

 
 

Salaries and employee benefits
 
4,775

 
4,449

 
9,288

 
8,786

Occupancy
 
1,258

 
1,131

 
2,481

 
2,228

Data processing
 
674

 
708

 
1,350

 
1,396

FDIC insurance
 
165

 
150

 
327

 
363

Professional fees
 
178

 
248

 
412

 
541

Director fees
 
261

 
246

 
510

 
457

Write-down of premises
 
333

 

 
333

 

Other expenses
 
1,314

 
1,240

 
2,544

 
2,444

Total noninterest expense
 
8,958

 
8,172

 
17,245

 
16,215

Income before income taxes
 
8,364

 
9,237

 
17,256

 
17,743

Income taxes
 
1,600

 
2,872

 
3,108

 
5,272

Net income
 
$
6,764

 
$
6,365

 
$
14,148

 
$
12,471

 
 
 
 
 
 
 
 
 
Basic earnings per common share
 
$
0.42

 
$
0.39

 
$
0.87

 
$
0.77

Diluted earnings per common share
 
$
0.41

 
$
0.39

 
$
0.86

 
$
0.76

Cash dividends declared per common share
 
$
0.20

 
$
0.18

 
$
0.38

 
$
0.35

See Notes to Consolidated Financial Statements.

5


Table of Contents


West Bancorporation, Inc. and Subsidiary
 
 
 
 
 
 
 
 
Consolidated Statements of Comprehensive Income
 
 
 
 
 
 
(unaudited)
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands)
 
2018
 
2017
 
2018
 
2017
Net income
 
$
6,764

 
$
6,365

 
$
14,148

 
$
12,471

Other comprehensive income (loss) :
 
 
 
 
 
 

 
 

Unrealized gains (losses) on investment securities:
 
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during the period
 
(1,226
)
 
2,218

 
(8,191
)
 
3,825

Unrealized gains on investment securities transferred from held to maturity to available for sale
 

 

 
363

 

Plus: reclassification adjustment for net (gains) losses realized in net income
 
25

 
(229
)
 
25

 
(226
)
Less: other reclassification adjustment
 

 
(193
)
 
(36
)
 
(200
)
Income tax benefit (expense)
 
301

 
(683
)
 
1,962

 
(1,292
)
Other comprehensive income (loss) on investment securities
 
(900
)
 
1,113

 
(5,877
)
 
2,107

Unrealized gains (losses) on derivatives:
 
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during the period
 
1,003

 
(356
)
 
2,548

 
(347
)
Plus: reclassification adjustment for net (gain) loss on derivatives realized in net income
 
(2
)
 
79

 
35

 
169

Plus: reclassification adjustment for amortization of derivative termination costs
 
24

 
27

 
47

 
54

Income tax benefit (expense)
 
(257
)
 
95

 
(659
)
 
47

Other comprehensive income (loss) on derivatives
 
768

 
(155
)
 
1,971

 
(77
)
Total other comprehensive income (loss)
 
(132
)
 
958

 
(3,906
)

2,030

Comprehensive income
 
$
6,632

 
$
7,323

 
$
10,242

 
$
14,501


See Notes to Consolidated Financial Statements.
 

6


Table of Contents


West Bancorporation, Inc. and Subsidiary
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Statements of Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
 
Additional
 
 
 
Other
 
 
 
 
Preferred
 
Common Stock
 
Paid-In
 
Retained
 
Comprehensive
 
 
(in thousands, except share and per share data)
 
Stock
 
Shares
 
Amount
 
Capital
 
Earnings
 
Income (Loss)
 
Total
Balance, December 31, 2016
 
$

 
16,137,999

 
$
3,000

 
$
21,462

 
$
141,956

 
$
(1,042
)
 
$
165,376

Net income
 

 

 

 

 
12,471

 

 
12,471

Other comprehensive income, net of tax
 

 

 

 

 

 
2,030

 
2,030

Cash dividends declared, $0.35 per common share
 

 

 

 

 
(5,661
)
 

 
(5,661
)
Stock-based compensation costs
 

 

 

 
1,223

 

 

 
1,223

Issuance of common stock upon vesting of restricted
 


 


 


 


 


 


 
 
stock units, net of shares withheld for payroll taxes
 

 
73,162

 

 
(553
)
 

 

 
(553
)
Balance, June 30, 2017
 
$

 
16,211,161

 
$
3,000

 
$
22,132

 
$
148,766

 
$
988

 
$
174,886

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
 
$

 
16,215,672

 
$
3,000

 
$
23,463

 
$
153,527

 
$
(1,892
)
 
$
178,098

Reclassification of stranded tax effects of rate change
 

 

 

 

 
370

 
(370
)
 

Net income
 

 

 

 

 
14,148

 

 
14,148

Other comprehensive loss, net of tax
 

 

 

 

 

 
(3,906
)
 
(3,906
)
Cash dividends declared, $0.38 per common share
 

 

 

 

 
(6,178
)
 

 
(6,178
)
Stock-based compensation costs
 

 

 

 
1,266

 

 

 
1,266

Issuance of common stock upon vesting of restricted
 


 


 


 


 


 


 
 
stock units, net of shares withheld for payroll taxes
 

 
79,822

 

 
(1,076
)
 

 

 
(1,076
)
Balance, June 30, 2018
 
$

 
16,295,494


$
3,000

 
$
23,653

 
$
161,867

 
$
(6,168
)
 
$
182,352


See Notes to Consolidated Financial Statements.


7


Table of Contents


West Bancorporation, Inc. and Subsidiary
 
 
 
 
Consolidated Statements of Cash Flows
 
 
 
 
(unaudited)
 
 
 
 
 
 
Six Months Ended June 30,
(in thousands)
 
2018
 
2017
Cash Flows from Operating Activities:
 
 
 
 
Net income
 
$
14,148

 
$
12,471

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Provision for loan losses
 
150

 

Net amortization and accretion
 
2,528

 
1,835

Investment securities (gains) losses, net
 
25

 
(226
)
Stock-based compensation
 
1,266

 
1,223

Increase in cash value of bank-owned life insurance
 
(310
)
 
(317
)
Gain from bank-owned life insurance
 

 
(307
)
Depreciation
 
703

 
673

Write-down of premises
 
333

 

Deferred income taxes
 
122

 
690

Change in assets and liabilities:
 
 
 
 
Increase in accrued interest receivable
 
(520
)
 
(72
)
Increase in other assets
 
(1,204
)
 
(257
)
Decrease in accrued expenses and other liabilities
 
(254
)
 
(1,114
)
Net cash provided by operating activities
 
16,987

 
14,599

Cash Flows from Investing Activities:
 
 

 
 

Proceeds from sales of securities available for sale
 
9,216

 
53,020

Proceeds from maturities and calls of investment securities
 
20,937

 
28,122

Purchases of securities available for sale
 
(76,796
)
 
(138,436
)
Purchases of Federal Home Loan Bank stock
 
(6,854
)
 
(12,074
)
Proceeds from redemption of Federal Home Loan Bank stock
 
6,826

 
11,764

Net increase in loans
 
(23,966
)
 
(35,135
)
Purchases of premises and equipment
 
(67
)
 
(431
)
Proceeds of principal and earnings from bank-owned life insurance
 

 
451

Net cash used in investing activities
 
(70,704
)
 
(92,719
)
Cash Flows from Financing Activities:
 
 

 
 

Net increase in deposits
 
81,116

 
28,470

Net increase in federal funds purchased
 
315

 
5,470

Proceeds from long-term debt
 

 
22,000

Principal payments on long-term debt
 
(3,306
)
 
(1,656
)
Common stock dividends paid
 
(6,178
)
 
(5,661
)
Restricted stock units withheld for payroll taxes
 
(1,076
)
 
(553
)
Net cash provided by financing activities
 
70,871

 
48,070

Net increase (decrease) in cash and cash equivalents
 
17,154

 
(30,050
)
Cash and Cash Equivalents:
 
 
 
 
Beginning
 
47,949

 
76,836

Ending
 
$
65,103

 
$
46,786

 
 
 
 
 
Supplemental Disclosures of Cash Flow Information:
 
 
 
 
Cash payments for:
 
 
 
 
Interest
 
$
9,457

 
$
5,361

Income taxes
 
2,020

 
3,780

 
 
 
 
 
Supplemental Disclosure of Noncash Investing Activities:
 
 
 
 
Transfer of investment securities held to maturity to available for sale
 
$
45,527

 
$

See Notes to Consolidated Financial Statements.

8


Table of Contents

West Bancorporation, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
(dollars in thousands, except per share data)


1.  Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared by West Bancorporation, Inc. (the Company) pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).  Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to such rules and regulations. Although management believes that the disclosures are adequate to make the information presented understandable, it is suggested that these interim consolidated financial statements be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2017.  In the opinion of management, the accompanying consolidated financial statements of the Company contain all adjustments necessary to fairly present its financial position as of June 30, 2018 and December 31, 2017, net income and comprehensive income for the three and six months ended June 30, 2018 and 2017, and changes in stockholders' equity and cash flows for the six months ended June 30, 2018 and 2017.  The results for these interim periods may not be indicative of results for the entire year or for any other period.

The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (GAAP) established by the Financial Accounting Standards Board (FASB).  References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification™, sometimes referred to as the Codification or ASC.  In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses for the reporting period.  Actual results could differ from those estimates.  Material estimates that are particularly susceptible to significant change in the near term are the fair value of financial instruments and the allowance for loan losses.

The accompanying unaudited consolidated financial statements include the accounts of the Company, West Bank and West Bank's wholly-owned subsidiary WB Funding Corporation (which was liquidated in March 2018).  All significant intercompany transactions and balances have been eliminated in consolidation.  In accordance with GAAP, West Bancorporation Capital Trust I is recorded on the books of the Company using the equity method of accounting and is not consolidated.

Current accounting developments:  In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance in this update supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the industry topics of the Codification. The core principle is that a company should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. For public companies, this update was effective for interim and annual periods beginning after December 15, 2017. The Company adopted the guidance effective January 1, 2018, using the modified retrospective method. The implementation of the new standard did not result in a change to the accounting for any in-scope revenue streams; as such, no cumulative effect adjustment to opening retained earnings was recorded. The Company's revenue is primarily composed of interest income on financial instruments, including investment securities and loans, which are excluded from the scope of Topic 606. Also excluded from the scope of Topic 606 is revenue from bank-owned life insurance, loan fees and letter of credit fees. Approximately 90 percent of the Company's revenue is outside the scope of this update. Topic 606 is applicable to deposit account related fees, including general service fees charged for deposit account maintenance and activity and transaction-based fees charged for certain services, such as debit card, wire transfer or overdraft activities. Revenue is recognized when the performance obligation is completed, which is generally after a transaction is completed or monthly for account maintenance services. Topic 606 is also applicable to trust services, which include periodic fees earned from trusts and investment management agency accounts, estate administration, custody accounts, individual retirement accounts, and other related services. Fees are charged based on standard agreements or by statute and are recognized over the period of time the Company provides the contracted services.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The update enhances the reporting model for financial instruments to provide users of financial statements with more decision-useful information by updating certain aspects of recognition, measurement, presentation and disclosure of financial instruments. Among other changes, the update requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, and clarifies that entities should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entities' other deferred tax assets. For public companies, this update was effective for interim and annual periods beginning after December 15, 2017. The Company adopted the guidance effective January 1, 2018, using the modified retrospective method. Upon adoption, the fair value of the Company's loan portfolio is now presented using an exit price method. Also, the Company is no longer required to disclose the methodologies used for estimating fair value of financial assets and liabilities that are not measured at fair value on a recurring or nonrecurring basis. The remaining requirements of this update did not have a material impact on the Company's consolidated financial statements.

9


Table of Contents

West Bancorporation, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
(dollars in thousands, except per share data)


In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The guidance in the update supersedes the requirements in ASC Topic 840, Leases. The guidance is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for leases with terms of more than 12 months. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2018, and is to be applied on a modified retrospective basis. The Company currently leases its main location and space for six other branch offices and operational departments under operating leases that will result in recognition of lease assets and lease liabilities on the consolidated balance sheets under the update. The amount of assets and liabilities added to the balance sheet are estimated to be approximately $10,000 which does not have a material impact on the Company's consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326). The amendments in this update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net carrying value at the amount expected to be collected on the financial assets. Under the updates, the income statement will reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount of financial assets. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. The allowance for credit losses for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination that are measured at amortized cost basis will be determined in a similar manner to other financial assets measured at amortized cost basis; however, the initial allowance for credit losses will be added to the purchase price rather than being reported as a credit loss expense. Only subsequent changes in the allowance for credit losses will be recorded as a credit loss expense for these assets. Off-balance-sheet arrangements such as commitments to extend credit, guarantees and standby letters of credit that are not considered derivatives under ASC 815 and are not unconditionally cancellable are also within the scope of this update. Credit losses relating to available for sale debt securities should be recorded through an allowance for credit losses. For public companies, the update is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. All entities may adopt the amendments in this update earlier as of fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. An entity will apply the amendments in this update on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company does not plan to early adopt this standard, but is currently planning for the implementation. It is too early to assess the impact that this guidance will have on the Company's consolidated financial statements.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The amendments in this update make targeted changes to the existing hedge accounting model to better align the accounting rules with a company’s risk management activities, and to simplify the application of the hedge accounting model. The update expands the types of transactions eligible for hedge accounting, eliminates the requirement to separately measure and present hedge ineffectiveness, and simplifies the way assessments of hedge ineffectiveness may be performed. The update also permits a one-time reclassification of prepayable debt securities from held to maturity classification to available for sale. For public companies, the update is effective for annual periods beginning after December 15, 2018, with early adoption permitted, including in an interim period. The amendments' presentation and disclosure guidance is required on a prospective basis. The Company adopted the guidance effective January 1, 2018. The requirements of this update related to the Company's hedging activities did not have any impact on the Company's consolidated financial statements. Upon adoption, the Company elected to transfer all its held to maturity securities portfolio to available for sale. The transferred securities had an amortized cost basis of $45,527 and a fair value of $45,890. Upon transfer, the Company recorded an adjustment of $273 to accumulated other comprehensive income, net of deferred income taxes, for the unrealized gains and losses related to the transferred securities.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendment in this update allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the December 22, 2017, enactment of the reduced federal corporate income tax rate, which became effective in 2018. For public companies, the update is effective for annual periods beginning after December 15, 2018, with early adoption permitted. The amendment can be adopted at the beginning of the period or on a retrospective basis. The Company adopted the amendment effective January 1, 2018, using the beginning of period method. The reclassified amount was $370.


10


Table of Contents

West Bancorporation, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
(dollars in thousands, except per share data)


2.  Earnings per Common Share

Basic earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding for the period.  Diluted earnings per common share reflect the potential dilution that could occur if the Company's outstanding restricted stock units were vested. The dilutive effect was computed using the treasury stock method, which assumes all stock-based awards were exercised and the hypothetical proceeds from exercise were used by the Company to purchase common stock at the average market price during the period.  The incremental shares, to the extent they would have been dilutive, were included in the denominator of the diluted earnings per common share calculation.  The calculations of earnings per common share and diluted earnings per common share for the three and six months ended June 30, 2018 and 2017 are presented in the following table.

 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands, except per share data)
2018
 
2017
 
2018
 
2017
Net income
$
6,764

 
$
6,365

 
$
14,148

 
$
12,471

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
16,289

 
16,204

 
16,254

 
16,173

Weighted average effect of restricted stock units outstanding
102

 
106

 
146

 
131

Diluted weighted average common shares outstanding
16,391

 
16,310

 
16,400

 
16,304

 
 

 
 

 
 

 
 

Basic earnings per common share
$
0.42

 
$
0.39

 
$
0.87

 
$
0.77

Diluted earnings per common share
$
0.41

 
$
0.39

 
$
0.86

 
$
0.76

Number of anti-dilutive common stock equivalents excluded from diluted earnings per share computation
130

 
1

 
69

 
8



11


Table of Contents

West Bancorporation, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
(dollars in thousands, except per share data)


3.  Investment Securities

The following tables show the amortized cost, gross unrealized gains and losses, and fair value of investment securities, by investment security type as of June 30, 2018 and December 31, 2017.
 
June 30, 2018
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
(Losses)
 
Fair
Value
Securities available for sale:
 
 
 
 
 
 
 
U.S. Treasuries
$
39,535

 
$

 
$
(31
)
 
$
39,504

State and political subdivisions
179,445

 
281

 
(3,822
)
 
175,904

Collateralized mortgage obligations (1)
167,778

 
11

 
(4,950
)
 
162,839

Mortgage-backed securities (1)
56,421

 

 
(1,391
)
 
55,030

Asset-backed securities (2)
42,071

 

 
(609
)
 
41,462

Trust preferred security
2,144

 

 
(144
)
 
2,000

Corporate notes
50,852

 
135

 
(933
)
 
50,054

 
$
538,246

 
$
427

 
$
(11,880
)
 
$
526,793

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
(Losses)
 
Fair
Value
Securities available for sale:
 
 
 
 
 
 
 
State and political subdivisions
$
146,331

 
$
928

 
$
(946
)
 
$
146,313

Collateralized mortgage obligations (1)
162,631

 
28

 
(2,727
)
 
159,932

Mortgage-backed securities (1)
60,956

 
20

 
(547
)
 
60,429

Asset-backed securities (2)
45,539

 
8

 
(352
)
 
45,195

Trust preferred security
2,134

 

 
(128
)
 
2,006

Corporate notes
30,278

 
331

 
(265
)
 
30,344

 
$
447,869

 
$
1,315

 
$
(4,965
)
 
$
444,219

 
 
 
 
 
 
 
 
Securities held to maturity:
 
 
 
 
 
 
 
State and political subdivisions
$
45,527

 
$
460

 
$
(97
)
 
$
45,890

(1)
All collateralized mortgage obligations and mortgage-backed securities consist of residential mortgage pass-through securities guaranteed by FHLMC or FNMA, real estate mortgage investment conduits guaranteed by FNMA, FHLMC or GNMA, and commercial mortgage pass-through securities guaranteed by the SBA.
(2)
Pass-through asset-backed securities guaranteed by the SBA, representing participating interests in pools of long-term debentures issued by state and local development companies certified by the SBA.

On January 1, 2018, the Company adopted the amendments of ASU No. 2017-12 and, as a result, elected to transfer all securities classified as held to maturity to available for sale. At the date of reclassification, the held to maturity securities portfolio was carried at an amortized cost of $45,527. The reclassification of securities between categories was accounted for at fair value. At the date of reclassification, the securities had a fair value of $45,890 and net unrealized holding gains of $273, which were recorded net of tax in other comprehensive income. The transfer enhanced liquidity and increased flexibility with regard to asset-liability management and balance sheet composition.

Investment securities with an amortized cost of approximately $142,522 and $120,338 as of June 30, 2018 and December 31, 2017, respectively, were pledged to secure access to the Federal Reserve discount window, for public fund deposits, and for other purposes as required or permitted by law or regulation.

12


Table of Contents

West Bancorporation, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
(dollars in thousands, except per share data)


The amortized cost and fair value of investment securities available for sale as of June 30, 2018, by contractual maturity, are shown below. Certain securities have call features that allow the issuer to call the securities prior to maturity.  Expected maturities may differ from contractual maturities for collateralized mortgage obligations, mortgage-backed securities and asset-backed securities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.  Therefore, collateralized mortgage obligations, mortgage-backed securities and asset-backed securities are not included in the maturity categories within the following maturity summary.
 
June 30, 2018
 
Amortized Cost
 
Fair Value
Due in one year or less
$
19,904

 
$
19,889

Due after one year through five years
22,887

 
22,853

Due after five years through ten years
86,692

 
85,373

Due after ten years
142,493

 
139,347

 
271,976

 
267,462

Collateralized mortgage obligations, mortgage-backed securities and asset-backed securities
266,270

 
259,331

 
$
538,246

 
$
526,793

The details of the sales of investment securities available for sale for the three and six months ended June 30, 2018 and 2017 are summarized in the following table.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Proceeds from sales
$
9,216

 
$
44,021

 
$
9,216

 
$
53,020

Gross gains on sales
34

 
291

 
34

 
330

Gross losses on sales
59

 
62

 
59

 
104


13


Table of Contents

West Bancorporation, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
(dollars in thousands, except per share data)


The following tables show the fair value and gross unrealized losses, aggregated by investment type and length of time that individual securities have been in a continuous loss position, as of June 30, 2018 and December 31, 2017.
 
June 30, 2018
 
Less than 12 months
 
12 months or longer
 
Total
 
Fair
Value
 
Gross
Unrealized
(Losses)
 
Fair
Value
 
Gross
Unrealized
(Losses)
 
Fair
Value
 
Gross
Unrealized
(Losses)
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasuries
$
39,504

 
$
(31
)
 
$

 
$

 
$
39,504

 
$
(31
)
State and political subdivisions
141,075

 
(3,520
)
 
8,983

 
(302
)
 
150,058

 
(3,822
)
Collateralized mortgage obligations
99,125

 
(2,650
)
 
55,565

 
(2,300
)
 
154,690

 
(4,950
)
Mortgage-backed securities
46,113

 
(1,305
)
 
8,015

 
(86
)
 
54,128

 
(1,391
)
Asset-backed securities
33,110

 
(305
)
 
8,352

 
(304
)
 
41,462

 
(609
)
Trust preferred security

 

 
2,000

 
(144
)
 
2,000

 
(144
)
Corporate notes
36,823

 
(745
)
 
2,312

 
(188
)
 
39,135

 
(933
)
 
$
395,750

 
$
(8,556
)
 
$
85,227

 
$
(3,324
)
 
$
480,977

 
$
(11,880
)
 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
Less than 12 months
 
12 months or longer
 
Total
 
Fair
Value
 
Gross
Unrealized
(Losses)
 
Fair
Value
 
Gross
Unrealized
(Losses)
 
Fair
Value
 
Gross
Unrealized
(Losses)
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
State and political subdivisions
$
86,750

 
$
(946
)
 
$

 
$

 
$
86,750

 
$
(946
)
Collateralized mortgage obligations
107,526

 
(1,583
)
 
46,396

 
(1,144
)
 
153,922

 
(2,727
)
Mortgage-backed securities
53,974

 
(547
)
 

 

 
53,974

 
(547
)
Asset-backed securities
38,652

 
(352
)
 

 

 
38,652

 
(352
)
Trust preferred security

 

 
2,006

 
(128
)
 
2,006

 
(128
)
Corporate notes
14,735

 
(265
)
 

 

 
14,735

 
(265
)
 
$
301,637

 
$
(3,693
)
 
$
48,402

 
$
(1,272
)
 
$
350,039

 
$
(4,965
)
 
 
 
 
 
 
 
 
 
 
 
 
Securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
State and political subdivisions
$
12,611

 
$
(70
)
 
$
1,740

 
$
(27
)
 
$
14,351

 
$
(97
)
As of June 30, 2018, the available for sale securities with unrealized losses included two U.S. Treasuries, 204 state and political subdivision securities, 44 collateralized mortgage obligation securities, 16 mortgage-backed securities, seven asset-backed securities, one trust preferred security and 15 corporate notes. The Company believed the unrealized losses on investments available for sale as of June 30, 2018 were due to market conditions rather than reduced estimated cash flows. The Company does not intend to sell these securities, does not anticipate that these securities will be required to be sold before anticipated recovery, and expects full principal and interest to be collected. Therefore, the Company did not consider these investments to have other than temporary impairment as of June 30, 2018.



14


Table of Contents

West Bancorporation, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
(dollars in thousands, except per share data)


4. Loans and Allowance for Loan Losses

Loans consisted of the following segments as of June 30, 2018 and December 31, 2017.
 
June 30, 2018
 
December 31, 2017
Commercial
$
326,820

 
$
347,482

Real estate:
 
 
 
Construction, land and land development
182,681

 
207,451

1-4 family residential first mortgages
49,679

 
51,044

Home equity
13,859

 
13,811

Commercial
956,810

 
886,114

Consumer and other
6,524

 
6,363

 
1,536,373

 
1,512,265

Net unamortized fees and costs
(1,969
)
 
(1,765
)
 
$
1,534,404

 
$
1,510,500

Real estate loans of approximately $750,000 and $810,000 were pledged as security for Federal Home Loan Bank (FHLB) advances as of June 30, 2018 and December 31, 2017, respectively.

Loans are stated at the principal amounts outstanding, net of unamortized loan fees and costs, with interest income recognized on the interest method based upon the terms of the loan.  Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. Loans are reported by the portfolio segments identified above and are analyzed by management on this basis. All loan policies identified below apply to all segments of the loan portfolio.

Delinquencies are determined based on the payment terms of the individual loan agreements. The accrual of interest on past due and other impaired loans is generally discontinued at 90 days past due or when, in the opinion of management, the borrower may be unable to make all payments pursuant to contractual terms.  Unless considered collectible, all interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income, if accrued in the current year, or charged to the allowance for loan losses, if accrued in the prior year.  Generally, all payments received while a loan is on nonaccrual status are applied to the principal balance of the loan. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. 

A loan is classified as a troubled debt restructured (TDR) loan when the Company separately concludes that a borrower is experiencing financial difficulties and a concession is granted that would not otherwise be considered. Concessions may include a restructuring of the loan terms to alleviate the burden of the borrower's cash requirements, such as an extension of the payment terms beyond the original maturity date or a change in the interest rate charged.  TDR loans with extended payment terms are accounted for as impaired until performance is established. A change to the interest rate would change the classification of a loan to a TDR loan if the restructured loan yields a rate that is below a market rate for that of a new loan with comparable risk. TDR loans with below-market rates are considered impaired until fully collected. TDR loans may also be reported as nonaccrual or 90 days past due if they are not performing per the restructured terms.

Based upon its ongoing assessment of credit quality within the loan portfolio, the Company maintains a Watch List, which includes loans classified as Doubtful, Substandard and Watch according to the Company's classification criteria. These loans involve the anticipated potential for payment defaults or collateral inadequacies. A loan on the Watch List is considered impaired when management believes it is probable the Company 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.

  





15


Table of Contents

West Bancorporation, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
(dollars in thousands, except per share data)


TDR loans totaled $724 and $220 as of June 30, 2018 and December 31, 2017, respectively, and were included in the nonaccrual category. There was one loan modification considered to be TDR, with a pre- and post-modification recorded investment of $560, that occurred during the three and six months ended June 30, 2018. There were no loan modifications considered to be TDR that occurred during the three and six months ended June 30, 2017. No TDR loans that were modified within the twelve months preceding June 30, 2018 and June 30, 2017 have subsequently had a payment default. A TDR loan is considered to have a payment default when it is past due 30 days or more.

The following table summarizes the recorded investment in impaired loans by segment, broken down by loans with no related allowance for loan losses and loans with a related allowance and the amount of that allowance as of June 30, 2018 and December 31, 2017.
 
June 30, 2018
 
December 31, 2017
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
990

 
$
990

 
$

 
$

 
$

 
$

Real estate:
 
 
 
 
 
 
 
 
 
 
 
Construction, land and land development

 

 

 

 

 

1-4 family residential first mortgages
116

 
116

 

 
91

 
91

 

Home equity
172

 
172

 

 
172

 
172

 

Commercial
724

 
724

 

 
220

 
220

 

Consumer and other

 

 

 

 

 

 
2,002

 
2,002

 

 
483

 
483

 

With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Commercial

 

 

 

 

 

Real estate:
 
 
 
 
 
 
 
 
 
 
 
Construction, land and land development

 

 

 

 

 

1-4 family residential first mortgages

 

 

 

 

 

Home equity
16

 
16

 
16

 
21

 
21

 
21

Commercial
109

 
109

 
109

 
118

 
118

 
118

Consumer and other

 

 

 

 

 

 
125

 
125

 
125

 
139

 
139

 
139

Total:
 
 
 
 
 
 
 
 
 
 
 
Commercial
990

 
990

 

 

 

 

Real estate:
 
 
 
 
 
 
 
 
 
 
 
Construction, land and land development

 

 

 

 

 

1-4 family residential first mortgages
116

 
116

 

 
91

 
91

 

Home equity
188

 
188

 
16

 
193

 
193

 
21

Commercial
833

 
833

 
109

 
338

 
338

 
118

Consumer and other

 

 

 

 

 

 
$
2,127

 
$
2,127

 
$
125

 
$
622

 
$
622

 
$
139

   
The balance of impaired loans at June 30, 2018 and December 31, 2017 was composed of seven and five different borrowers, respectively. The Company has no commitments to advance additional funds on any of the impaired loans.



16


Table of Contents

West Bancorporation, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
(dollars in thousands, except per share data)


The following table summarizes the average recorded investment and interest income recognized on impaired loans by segment for the three and six months ended June 30, 2018 and 2017.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded Investment
 
Interest Income Recognized
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
902

 
$

 
$
35

 
$

 
$
543

 
$

 
$
35

 
$

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction, land and land development

 

 

 

 

 

 

 

1-4 family residential first mortgages
119

 

 
101

 

 
117

 

 
104

 

Home equity
172

 

 
29

 

 
172

 

 
34

 

Commercial
768

 

 
290

 

 
529

 

 
305

 

Consumer and other

 

 

 

 

 

 

 

 
1,961

 

 
455

 

 
1,361

 

 
478

 

With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial

 

 
85

 

 

 

 
87

 

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction, land and land development

 

 

 

 

 

 

 

1-4 family residential first mortgages

 

 

 

 

 

 

 

Home equity
17

 

 
247

 

 
18

 

 
258

 

Commercial
112

 

 
130

 

 
114

 

 
132

 

Consumer and other

 

 

 

 

 

 

 

 
129

 

 
462

 

 
132

 

 
477

 

Total:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
902

 

 
120

 

 
543

 

 
122

 

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction, land and land development

 

 

 

 

 

 

 

1-4 family residential first mortgages
119

 

 
101

 

 
117

 

 
104

 

Home equity
189

 

 
276

 

 
190

 

 
292

 

Commercial
880

 

 
420

 

 
643

 

 
437

 

Consumer and other

 

 

 

 

 

 

 

 
$
2,090

 
$

 
$
917

 
$

 
$
1,493

 
$

 
$
955

 
$




17


Table of Contents

West Bancorporation, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
(dollars in thousands, except per share data)


The following tables provide an analysis of the payment status of the recorded investment in loans as of June 30, 2018 and December 31, 2017.
 
June 30, 2018
 
30-59
Days Past
Due
 
60-89
Days Past
Due
 
90 Days
or More
Past Due
 
Total
Past Due
 
Current
 
Nonaccrual Loans
 
Total Loans
Commercial
$
65

 
$

 
$

 
$
65

 
$
325,765

 
$
990

 
$
326,820

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction, land and
 
 
 
 
 
 
 
 
 
 
 
 
 
land development

 

 

 

 
182,681

 

 
182,681

1-4 family residential
 
 
 
 
 
 
 
 
 
 
 
 
 
first mortgages

 

 

 

 
49,563

 
116

 
49,679

Home equity
30

 

 

 
30

 
13,641

 
188

 
13,859

Commercial

 

 

 

 
955,977

 
833

 
956,810

Consumer and other

 

 

 

 
6,524

 

 
6,524

Total
$
95

 
$

 
$

 
$
95

 
$
1,534,151

 
$
2,127

 
$
1,536,373

 
December 31, 2017
 
30-59
Days Past
Due
 
60-89
Days Past
Due
 
90 Days
or More
Past Due
 
Total
Past Due
 
Current
 
Nonaccrual Loans
 
Total
Loans
Commercial
$
40

 
$
20

 
$

 
$
60

 
$
347,422

 
$

 
$
347,482

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction, land and
 
 
 
 
 
 
 
 
 
 
 
 
 
land development

 

 

 

 
207,451

 

 
207,451

1-4 family residential
 
 
 
 
 
 
 
 
 
 
 
 
 
first mortgages

 
75

 

 
75

 
50,878

 
91

 
51,044

Home equity

 

 

 

 
13,618

 
193

 
13,811

Commercial

 

 

 

 
885,776

 
338

 
886,114

Consumer and other

 

 

 

 
6,363

 

 
6,363

Total
$
40

 
$
95

 
$

 
$
135

 
$
1,511,508

 
$
622

 
$
1,512,265



18


Table of Contents

West Bancorporation, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
(dollars in thousands, except per share data)


The following tables present the recorded investment in loans by credit quality indicator and loan segment as of June 30, 2018 and December 31, 2017.
 
June 30, 2018
 
Pass
 
Watch
 
Substandard
 
Doubtful
 
Total
Commercial
$
321,507

 
$
3,307

 
$
2,006

 
$

 
$
326,820

Real estate:
 
 
 
 
 
 
 
 
 
Construction, land and land development
181,452

 
1,229

 

 

 
182,681

1-4 family residential first mortgages
48,692

 
791

 
196

 

 
49,679

Home equity
13,491

 
80

 
288

 

 
13,859

Commercial
928,223

 
19,374

 
9,213

 

 
956,810

Consumer and other
6,493

 

 
31

 

 
6,524

Total
$
1,499,858

 
$
24,781

 
$
11,734

 
$

 
$
1,536,373

 
December 31, 2017
 
Pass
 
Watch
 
Substandard
 
Doubtful
 
Total
Commercial
$
344,586

 
$
901

 
$
1,995

 
$

 
$
347,482

Real estate:
 
 
 
 
 
 
 
 
 
Construction, land and land development
206,719

 
732

 

 

 
207,451

1-4 family residential first mortgages
49,905

 
890

 
249

 

 
51,044

Home equity
13,466

 
54

 
291

 

 
13,811

Commercial
856,789

 
20,574

 
8,751

 

 
886,114

Consumer and other
6,327

 
36

 

 

 
6,363

Total
$
1,477,792

 
$
23,187

 
$
11,286

 
$

 
$
1,512,265

All loans are subject to the assessment of a credit quality indicator. Risk ratings are assigned for each loan at the time of approval, and they change as circumstances dictate during the term of the loan. The Company utilizes a 9-point risk rating scale as shown below, with ratings 1 - 5 included in the Pass column, rating 6 included in the Watch column, ratings 7 - 8 included in the Substandard column and rating 9 included in the Doubtful column. All loans classified as impaired that are included in the specific evaluation of the allowance for loan losses are included in the Substandard column along with all other loans with ratings of 7 - 8.

Risk rating 1: The loan is secured by cash equivalent collateral.

Risk rating 2: The loan is secured by properly margined marketable securities, bonds or cash surrender value of life insurance.

Risk rating 3: The borrower is in strong financial condition and has strong debt service capacity. The loan is performing as agreed, and the financial characteristics and trends of the borrower exceed industry statistics.

Risk rating 4: The borrower's financial condition is satisfactory and stable.  The borrower has satisfactory debt service capacity, and the loan is well secured. The loan is performing as agreed, and the financial characteristics and trends fall in line with industry statistics.

Risk rating 5: The borrower's financial condition is less than satisfactory. The loan is still generally paying as agreed, but strained cash flows may cause some slowness in payments. The collateral values adequately preclude loss on the loan. Financial characteristics and trends lag industry statistics. There may be noncompliance with loan covenants.

Risk rating 6: The borrower's financial condition is deficient. Payment delinquencies may be more common. Collateral values still protect from loss, but margins are narrow. The loan may be reliant on secondary sources of repayment, including liquidation of collateral and guarantor support.


19


Table of Contents

West Bancorporation, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
(dollars in thousands, except per share data)


Risk rating 7: The loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Well-defined weaknesses exist that jeopardize the liquidation of the debt. The Company is inadequately protected by the valuation or paying capacity of the collateral pledged. If deficiencies are not corrected, there is a distinct possibility that a loss will be sustained.

Risk rating 8: All the characteristics of rating 7 exist with the added condition that the loan is past due more than 90 days or there is reason to believe the Company will not receive its principal and interest according to the terms of the loan agreement.

Risk rating 9: All the weaknesses inherent in risk ratings 7 and 8 exist with the added condition that collection or liquidation, on the basis of currently known facts, conditions and values, is highly questionable and improbable. A loan reaching this category would most likely be charged off.

Credit quality indicators for all loans and the Company's risk rating process are dynamic and updated on a continuous basis. Risk ratings are updated as circumstances that could affect the repayment of an individual loan are brought to management's attention through an established monitoring process. Individual lenders initiate changes as appropriate for ratings 1 through 5, and changes for ratings 6 through 9 are initiated via communications with management. The likelihood of loss increases as the risk rating increases and is generally preceded by a loan appearing on the Watch List, which consists of all loans with a risk rating of 6 or worse. Written action plans with firm target dates for resolution of identified problems are maintained and reviewed on a quarterly basis for all segments of loans included on the Watch List.

In addition to the Company's internal credit monitoring practices and procedures, an outsourced independent credit review function is in place to further assess assigned internal risk classifications and monitor compliance with internal lending policies and procedures.

In all portfolio segments, the primary risks are that a borrower's income stream diminishes to the point that the borrower is not able to make scheduled principal and interest payments and any collateral securing the loan declines in value. The risk of declining collateral values is present for most types of loans.

Commercial loans consist primarily of loans to businesses for various purposes, including revolving lines to finance current operations, inventory and accounts receivable, and capital expenditure loans to finance equipment and other fixed assets.  These loans generally have short maturities, have either adjustable or fixed interest rates, and are either unsecured or secured by inventory, accounts receivable and/or fixed assets. For commercial loans, the primary source of repayment is from the operation of the business.

Real estate loans include various types of loans for which the Company holds real property as collateral, and consist of loans on commercial properties and single and multifamily residences.  Real estate loans are typically structured to mature or reprice every five to ten years with payments based on amortization periods up to 30 years.  The majority of construction loans are to contractors and developers for construction of commercial buildings or residential real estate. These loans typically have maturities of up to 24 months. The Company's loan policy includes minimum appraisal and other credit guidelines.

Consumer loans include loans extended to individuals for household, family and other personal expenditures not secured by real estate.  The majority of the Company's consumer lending is for vehicles, consolidation of personal debts and household improvements. The repayment source for consumer loans, including 1-4 family residential and home equity loans, is typically wages.

The allowance for loan losses is established through a provision for loan losses charged to expense.  The allowance is an amount that management believes will be adequate to absorb probable 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, the review of specific problem loans, and the current economic conditions that may affect the borrower's ability to pay.  Loans are charged-off against the allowance for loan losses when management believes that collectability of the principal is unlikely. While management uses the best information available to make its evaluations, future adjustments to the allowance may be necessary if there are significant changes in economic conditions or the other factors relied upon.


20


Table of Contents

West Bancorporation, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
(dollars in thousands, except per share data)


The allowance for loan losses consists of specific and general components.  The specific component relates to loans that meet the definition of impaired.  The general component covers the remaining loans and is based on historical loss experience adjusted for qualitative factors such as delinquency trends, loan growth, economic elements and local market conditions.  These same policies are applied to all segments of loans. In addition, regulatory agencies, as an integral part of their examination processes, periodically review the Company's allowance for loan losses, and may require the Company to make additions to the allowance based on their judgment about information available to them at the time of their examinations.

The following tables detail the changes in the allowance for loan losses by segment for the three and six months ended June 30, 2018 and 2017.
 
Three Months Ended June 30, 2018
 
 
 
Real Estate
 
 
 
 
 
Commercial
 
Construction and Land
 
1-4 Family Residential
 
Home Equity
 
Commercial
 
Consumer and Other
 
Total
Beginning balance
$
3,582

 
$
1,853

 
$
320

 
$
186

 
$
10,442

 
$
82

 
$
16,465

Charge-offs
(13
)
 

 

 

 

 

 
(13
)
Recoveries
51

 

 
3

 
5

 
4

 
3

 
66

Provision (1)
53

 
58

 
(19
)
 
(9
)
 
(77
)
 
(6
)
 

Ending balance
$
3,673

 
$
1,911

 
$
304

 
$
182

 
$
10,369

 
$
79

 
$
16,518

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2017
 
 
 
Real Estate
 
 
 
 
 
Commercial
 
Construction and Land
 
1-4 Family Residential
 
Home Equity
 
Commercial
 
Consumer and Other
 
Total
Beginning balance
$
3,800

 
$
2,914

 
$
315

 
$
447

 
$
8,848

 
$
103

 
$
16,427

Charge-offs
(133
)
 

 

 

 

 

 
(133
)
Recoveries
81

 
95

 
1

 
7

 
3

 
5

 
192

Provision (1)
54

 
(457
)
 
34

 
(82
)
 
456

 
(5
)
 

Ending balance
$
3,802

 
$
2,552

 
$
350

 
$
372

 
$
9,307

 
$
103

 
$
16,486

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2018
 
 
 
Real Estate
 
 
 
 
 
Commercial
 
Construction and Land
 
1-4 Family Residential
 
Home Equity
 
Commercial
 
Consumer and Other
 
Total
Beginning balance
$
3,866

 
$
2,213

 
$
319

 
$
186

 
$
9,770

 
$
76

 
$
16,430

Charge-offs
(208
)
 

 

 
(1
)
 

 

 
(209
)
Recoveries
110

 

 
7

 
11

 
7

 
12

 
147

Provision (1)
(95
)
 
(302
)
 
(22
)
 
(14
)
 
592

 
(9
)
 
150

Ending balance
$
3,673

 
$
1,911

 
$
304

 
$
182

 
$
10,369

 
$
79

 
$
16,518

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2017
 
 
 
Real Estate
 
 
 
 
 
Commercial
 
Construction and Land
 
1-4 Family Residential
 
Home Equity
 
Commercial
 
Consumer and Other
 
Total
Beginning balance
$
3,881

 
$
2,639

 
$
317

 
$
478

 
$
8,697

 
$
100

 
$
16,112

Charge-offs
(193
)
 

 

 

 

 

 
(193
)
Recoveries
140

 
398

 
2

 
15

 
6

 
6

 
567

Provision (1)
(26
)
 
(485
)
 
31

 
(121
)
 
604

 
(3
)
 

Ending balance
$
3,802

 
$
2,552

 
$
350

 
$
372

 
$
9,307

 
$
103

 
$
16,486

(1)
The negative provisions for the various segments are related to the decline in outstanding balances in each of those portfolio segments during the time periods disclosed and/or improvement in the credit quality factors related to those portfolio segments.

21


Table of Contents

West Bancorporation, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
(dollars in thousands, except per share data)


The following tables present a breakdown of the allowance for loan losses disaggregated on the basis of impairment analysis method by segment as of June 30, 2018 and December 31, 2017.
 
June 30, 2018
 
 
 
Real Estate
 
 
 
 
 
Commercial
 
Construction and Land
 
1-4 Family Residential
 
Home Equity
 
Commercial
 
Consumer and Other
 
Total
Ending balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

 
$
16

 
$
109

 
$

 
$
125

Collectively evaluated for impairment
3,673

 
1,911

 
304

 
166

 
10,260

 
79

 
16,393

Total
$
3,673

 
$
1,911

 
$
304

 
$
182

 
$
10,369

 
$
79

 
$
16,518

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
Real Estate
 
 
 
 
 
Commercial
 
Construction and Land
 
1-4 Family Residential
 
Home Equity
 
Commercial
 
Consumer and Other
 
Total
Ending balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

 
$
21

 
$
118

 
$

 
$
139

Collectively evaluated for impairment
3,866

 
2,213

 
319

 
165

 
9,652

 
76

 
16,291

Total
$
3,866

 
$
2,213

 
$
319

 
$
186

 
$
9,770

 
$
76

 
$
16,430

The following tables present the recorded investment in loans, exclusive of unamortized fees and costs, disaggregated on the basis of impairment analysis method by segment as of June 30, 2018 and December 31, 2017.
 
June 30, 2018
 
 
 
Real Estate
 
 
 
 
 
Commercial
 
Construction and Land
 
1-4 Family Residential
 
Home Equity
 
Commercial
 
Consumer and Other
 
Total
Ending balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
990

 
$

 
$
116

 
$
188

 
$
833

 
$

 
$
2,127

Collectively evaluated for impairment
325,830

 
182,681

 
49,563

 
13,671

 
955,977

 
6,524

 
1,534,246

Total
$
326,820

 
$
182,681

 
$
49,679

 
$
13,859

 
$
956,810

 
$
6,524

 
$
1,536,373

 
December 31, 2017
 
 
 
Real Estate
 
 
 
 
 
Commercial
 
Construction and Land
 
1-4 Family Residential
 
Home Equity
 
Commercial
 
Consumer and Other
 
Total
Ending balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$
91

 
$
193

 
$
338

 
$

 
$
622

Collectively evaluated for impairment
347,482

 
207,451

 
50,953

 
13,618

 
885,776

 
6,363

 
1,511,643

Total
$
347,482

 
$
207,451

 
$
51,044

 
$
13,811

 
$
886,114

 
$
6,363

 
$
1,512,265



22


Table of Contents

West Bancorporation, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
(dollars in thousands, except per share data)


5. Derivatives

The Company uses interest rate swap agreements to manage the interest rate risk related to the variability in interest payments due to changes in interest rates. The Company entered into two forward-starting interest rate swap transactions to effectively convert variable rate debt instruments to fixed rate instruments. These two swap transactions are designated as cash flow hedges of the changes in LIBOR, the benchmark interest rate being hedged, associated with the interest payments on $50,000 of debt instruments. In January 2018, the Company entered into an interest rate swap agreement that effectively converts certain customer deposits with variable rates based on the federal funds upper target rate to fixed rate instruments. This swap transaction has a notional amount of $60,000 with a forward-starting date in December 2018 and is designated as a cash flow hedge of the risk of changes in total cash flows paid on certain customer deposits. The Company is exposed to credit risk in the event of nonperformance by counterparties to the interest rate swaps, which is minimized by collateral-pledging provisions in the agreements. Derivative contracts are executed with a Credit Support Annex, which is a bilateral ratings-sensitive agreement that requires collateral postings at established credit threshold levels. These agreements protect the interests of the Company and its counterparties should either party suffer a credit rating deterioration. As of June 30, 2018 and December 31, 2017, the Company pledged $0 and $210, respectively, of collateral to the counterparty in the form of cash on deposit with a third party. The Company's counterparty was required to pledge $3,160 and $980 at June 30, 2018 and December 31, 2017, respectively. The Company estimates there will be approximately $37 of cash receipts and reclassification from accumulated other comprehensive income to interest expense through the 12 months ending June 30, 2019. Interest rate swaps with a total notional amount of $70,000 were terminated in 2015, subject to termination fees totaling $541. The termination fees are being reclassified from accumulated other comprehensive income to interest expense over the remaining life of the underlying cash flows through June 2020. Approximately $95 of termination fees will be reclassified to interest expense through the 12 months ended June 30, 2019.

The table below identifies the balance sheet category and fair values of the Company's derivative instruments designated as cash flow hedges as of June 30, 2018 and December 31, 2017.
 
 
Notional
Amount
 
Fair Value
 
Balance Sheet
Category
 
Weighted Average Receive Rate
 
Weighted Average Pay Rate
 
Maturity
June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap
 
$
30,000

 
$
360

 
Other Assets
 
2.64
%
 
2.52
%
 
9/21/2020
Interest rate swap(1)
 
20,000

 
1,625

 
Other Assets
 

 
4.81
%
 
9/30/2026
Interest rate swap(2)
 
60,000

 
1,408

 
Other Assets
 

 
2.31
%
 
12/31/2025
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap
 
$
30,000

 
$
(86
)
 
Other Liabilities
 
1.95
%
 
2.52
%
 
9/21/2020
Interest rate swap(1)
 
20,000

 
895

 
Other Assets
 

 
4.81
%
 
9/30/2026
(1)
This swap is a forward-starting swap with a weighted average pay rate of 4.81 percent beginning September 30, 2018. No interest payments are required related to this swap until December 30, 2018.
(2)
This swap is a forward-starting swap with a weighted average pay rate of 2.31 percent beginning December 31, 2018. No interest payments are required related to this swap until January 31, 2019.

The following table identifies the pre-tax gains or losses recognized on the Company's derivative instruments designated as cash flow hedges for the six months ended June 30, 2018 and 2017.
 
 
 
 
 
 
Reclassified from AOCI into Income
 
 
Amount of Pre-tax Gain (Loss) Recognized in OCI
 
 
 
 
 
 
Amount of Loss
 
 
Six Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
2018
 
2017
 
Category
 
2018
 
2017
Interest rate swaps
 
$
2,548

 
(347
)
 
Interest Expense
 
$
(82
)
 
(223
)


23


Table of Contents

West Bancorporation, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
(dollars in thousands, except per share data)


6.  Income Taxes

On December 22, 2017, Public Law 115-97, commonly known as the Tax Cuts and Jobs Act (Tax Act), was signed into law. The Tax Act reduced the federal corporate income tax rate from the previous maximum rate of 35 percent to 21 percent. The lower federal corporate income tax rate became effective for the Company on January 1, 2018. The enactment of the legislation and the reduction in the federal income tax rate resulted in a revaluation of deferred tax assets and liabilities in December 2017.

Net deferred tax assets consisted of the following as of June 30, 2018 and December 31, 2017.  
 
June 30, 2018
 
December 31, 2017
Deferred tax assets:
 
 
 
Allowance for loan losses
$
4,129

 
$
4,108

Net unrealized losses on securities available for sale
2,864

 
902

Intangibles

 
101

Accrued expenses
260

 
176

Restricted stock compensation
335

 
544

State net operating loss carryforward
1,458

 
1,379

Other
76

 
86

 
9,122

 
7,296

Deferred tax liabilities:
 
 
 
Net deferred loan fees and costs
186

 
193

Net unrealized gains on interest rate swaps
798

 
139

Premises and equipment
711

 
792

Other
143

 
148

 
1,838

 
1,272

Net deferred tax assets before valuation allowance
7,284

 
6,024

Valuation allowance
(1,458
)
 
(1,379
)
Net deferred tax assets
$
5,826

 
$
4,645

The Company has recorded a valuation allowance against the tax effect of state net operating loss carryforwards, as management believes it is more likely than not that these carryforwards will expire without being utilized. The state net operating loss carryforwards expire in 2019 and thereafter.


24


Table of Contents

West Bancorporation, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
(dollars in thousands, except per share data)


7.  Accumulated Other Comprehensive Income (Loss)

The following table summarizes the changes in the balances of each component of accumulated other comprehensive income (loss), net of tax, for the six months ended June 30, 2018 and 2017.

 
 
Unrealized
 
Unrealized
 
Accumulated
 
 
Gains
 
Gains
 
Other
 
 
(Losses) on
 
(Losses) on
 
Comprehensive
 
 
Securities
 
Derivatives
 
Income (Loss)
Balance, December 31, 2016
 
$
(1,172
)
 
$
130

 
$
(1,042
)
Other comprehensive income (loss) before reclassifications
 
2,372

 
(215
)
 
2,157

Amounts reclassified from accumulated other comprehensive income
 
(265
)
 
138

 
(127
)
Net current period other comprehensive income (loss)
 
2,107

 
(77
)
 
2,030

Balance, June 30, 2017
 
$
935

 
$
53

 
$
988

 
 
 
 
 
 
 
Balance, December 31, 2017
 
$
(2,237
)
 
$
345

 
$
(1,892
)
Transfer of securities held to maturity to securities available for sale
 
273

 

 
273

Other comprehensive income (loss) before reclassifications
 
(6,143
)
 
1,911

 
(4,232
)
Amounts reclassified from accumulated other comprehensive income
 
(7
)
 
60

 
53

Net current period other comprehensive income (loss)
 
(5,877
)
 
1,971

 
(3,906
)
Reclassification of stranded tax effects
 
(475
)
 
105

 
(370
)
Balance, June 30, 2018
 
$
(8,589
)
 
$
2,421

 
$
(6,168
)
8.  Commitments and Contingencies

Financial instruments with off-balance-sheet risk: The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit.  These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations that it uses for on-balance-sheet instruments.  The Company's commitments consisted of the following approximate amounts as of June 30, 2018 and December 31, 2017
 
June 30, 2018
 
December 31, 2017
Commitments to extend credit
$
657,434

 
$
617,949

Standby letters of credit
4,848

 
5,996

 
$
662,282

 
$
623,945

West Bank previously executed Mortgage Partnership Finance (MPF) Master Commitments (Commitments) with the FHLB of Des Moines to deliver residential mortgage loans and to guarantee the payment of any realized losses that exceed the FHLB's first loss account for mortgages delivered under the Commitments. West Bank receives credit enhancement fees from the FHLB for providing this guarantee and continuing to assist with managing the credit risk of the MPF Program residential mortgage loans. At June 30, 2018, the liability represented by the present value of the credit enhancement fees less any expected losses in the mortgages delivered under the Commitments was approximately $41. The outstanding balance of mortgage loans sold under the MPF Program was $86,651 and $94,292 at June 30, 2018 and December 31, 2017, respectively.

Contractual commitments: The Company had remaining commitments to invest in qualified affordable housing projects totaling $4,707 and $6,130 as of June 30, 2018 and December 31, 2017, respectively.

Contingencies: Neither the Company nor West Bank is a party, and no property of these entities is subject, to any material pending legal proceedings, other than ordinary routine litigation incidental to West Bank's business. The Company does not know of any proceeding contemplated by a governmental authority against the Company or West Bank.

25


Table of Contents

West Bancorporation, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
(dollars in thousands, except per share data)



9. Fair Value Measurements

Accounting guidance on fair value measurements and disclosures defines fair value and establishes a framework for measuring the fair value of assets and liabilities using a hierarchy system.  Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts business.

The Company's balance sheet contains investment securities available for sale and derivative instruments that are recorded at fair value on a recurring basis.  The three-level valuation hierarchy for disclosure of fair value is as follows:

Level 1 uses quoted market prices in active markets for identical assets or liabilities.

Level 2 uses observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3 uses unobservable inputs that are not corroborated by market data.

The Company's policy is to recognize transfers between Levels at the end of each reporting period, if applicable. There were no transfers between Levels of the fair value hierarchy during the six months ended June 30, 2018.

The following is a description of valuation methodologies used for financial assets and liabilities recorded at fair value on a recurring basis.

Investment securities available for sale: When available, quoted market prices are used to determine the fair value of investment securities (Level 1). If quoted market prices are not available, the Company determines fair value based on various sources and may apply matrix pricing with observable prices for similar bonds where a price for the identical bond is not observable (Level 2). The fair values of these securities are determined by pricing models that consider observable market data such as interest rate volatilities, LIBOR yield curve, credit spreads, prices from market makers and live trading systems.

Generally, management obtains the fair value of investment securities at the end of each reporting period via a third-party pricing service. Management reviewed the valuation process used by the third party and believed that process was valid. On a quarterly basis, management corroborates the fair values of a randomly selected sample of investment securities by obtaining pricing from an independent investment portfolio management firm and comparing the two sets of fair values. Any significant variances are reviewed and investigated. For a sample of securities, prices are further validated by management, with assistance from an independent investment portfolio management firm, by obtaining details of the inputs used by the pricing service. Those inputs were independently tested, and management concluded the fair values were consistent with GAAP requirements and the investment securities were properly classified in the fair value hierarchy.

Derivative instruments: The Company's derivative instruments consist of interest rate swaps, which are accounted for as cash flow hedges. The Company's derivative positions are classified within Level 2 of the fair value hierarchy and are valued using models generally accepted in the financial services industry and that use actively quoted or observable market input values from external market data providers and/or non-binding broker-dealer quotations. The fair value of the derivatives is determined using discounted cash flow models. These models’ key assumptions include the contractual terms of the respective contract along with significant observable inputs, including interest rates, yield curves, nonperformance risk and volatility.


26


Table of Contents

West Bancorporation, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
(dollars in thousands, except per share data)


The following tables present the balances of financial assets and liabilities measured at fair value on a recurring basis by level as of June 30, 2018 and December 31, 2017.

 
 
June 30, 2018
 
 
Total
 
Level 1
 
Level 2
 
Level 3
Financial assets:
 
 
 
 
 
 
 
 
Investment securities available for sale:
 
 
 
 
 
 
 
 
U.S. Treasuries
 
$
39,504

 
$
39,504

 
$

 
$

State and political subdivisions
 
175,904

 

 
175,904

 

Collateralized mortgage obligations
 
162,839

 

 
162,839

 

Mortgage-backed securities
 
55,030

 

 
55,030

 

Asset-backed securities
 
41,462

 

 
41,462

 

Trust preferred security
 
2,000

 

 
2,000

 

Corporate notes
 
50,054

 

 
50,054

 

Derivative instruments, interest rate swaps
 
3,393

 

 
3,393

 

 
 
December 31, 2017
 
 
Total
 
Level 1
 
Level 2
 
Level 3
Financial assets:
 
 
 
 
 
 
 
 
Investment securities available for sale:
 
 

 
 

 
 

 
 

State and political subdivisions
 
$
146,313

 
$

 
$
146,313

 
$

Collateralized mortgage obligations
 
159,932

 

 
159,932

 

Mortgage-backed securities
 
60,429

 

 
60,429

 

Asset-backed securities
 
45,195

 

 
45,195

 

Trust preferred security
 
2,006

 

 
2,006

 

Corporate notes
 
30,344

 

 
30,344

 

Derivative instrument, interest rate swap
 
895

 

 
895

 

 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
 
Derivative instrument, interest rate swap
 
$
86

 
$

 
$
86

 
$

Certain assets are measured at fair value on a nonrecurring basis. That is, they are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).  As of both June 30, 2018 and December 31, 2017, impaired loans for which a fair value adjustment was recorded were recorded at a net value of $0.  Impaired loans are evaluated and valued at the lower of cost or fair value when the loan is identified as impaired.  Fair value is measured based on the value of the collateral securing these loans.  The types of collateral vary widely and could include accounts receivables, inventory, a variety of equipment and real estate.  Evaluations of the underlying assets are completed for each impaired loan with a specific reserve. Collateral evaluations are reviewed and discounted as appropriate based on knowledge of the specific type of collateral. In the case of real estate, an independent appraisal may be obtained. Types of discounts considered include aging of receivables, condition of the collateral, potential market for the collateral and estimated disposal costs. These discounts will vary from loan to loan and may be discounted based on management's opinions concerning market developments or the client's business.
 

27


Table of Contents

West Bancorporation, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
(dollars in thousands, except per share data)


GAAP requires disclosure of the fair value of financial assets and financial liabilities, including those that are not measured and reported at fair value on a recurring or nonrecurring basis.  The following table presents the carrying amounts and approximate fair values of financial assets and liabilities as of June 30, 2018 and December 31, 2017

 
 
 
June 30, 2018
 
December 31, 2017
 
Fair Value Hierarchy Level
 
Carrying Amount
 
Approximate Fair Value
 
Carrying Amount
 
Approximate Fair Value
Financial assets:
 
 
 
 
 
 
 
 
 
Cash and due from banks
Level 1
 
$
36,964

 
$
36,964

 
$
34,952

 
$
34,952

Federal funds sold
Level 1
 
28,139

 
28,139

 
12,997

 
12,997

Investment securities available for sale
See previous table
 
526,793

 
526,793

 
444,219

 
444,219

Investment securities held to maturity
Level 2
 

 

 
45,527

 
45,890

Federal Home Loan Bank stock
Level 1
 
9,202

 
9,202

 
9,174

 
9,174

Loans, net
Level 2
 
1,517,886

 
1,495,204

 
1,494,070

 
1,490,166

Accrued interest receivable
Level 1
 
7,864

 
7,864

 
7,344

 
7,344

Interest rate swaps
Level 2
 
3,393

 
3,393

 
895

 
895

Financial liabilities:
 
 
 
 
 
 
 
 
 
Deposits
Level 2
 
$
1,891,929

 
$
1,891,198

 
$
1,810,813

 
$
1,810,924

Federal funds purchased
Level 1
 
860

 
860

 
545

 
545

Subordinated notes, net
Level 2
 
20,418

 
15,141

 
20,412

 
15,357

Federal Home Loan Bank advances, net
Level 2
 
77,124

 
77,124

 
76,382

 
76,382

Long-term debt
Level 2
 
19,611

 
19,562

 
22,917

 
22,860

Accrued interest payable
Level 1
 
831

 
831

 
736

 
736

Interest rate swap
Level 2
 

 

 
86

 
86

Off-balance-sheet financial instruments:
 
 
 
 
 
 
 
 
 
Commitments to extend credit
Level 3
 

 

 

 

Standby letters of credit
Level 3
 

 

 

 




28


Table of Contents
West Bancorporation, Inc.
Management's Discussion and Analysis
(in thousands, except share and per share data)

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

"SAFE HARBOR" CONCERNING FORWARD-LOOKING STATEMENTS

Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to the Company’s business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meanings of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements may appear throughout this report. These forward-looking statements are generally identified by the words “believes,” “expects,” “intends,” “anticipates,” “projects,” “future,” “may,” “should,” “will,” “strategy,” “plan,” “opportunity,” “will be,” “will likely result,” “will continue” or similar references, or references to estimates, predictions or future events.  Such forward-looking statements are based upon certain underlying assumptions, risks and uncertainties.  Because of the possibility that the underlying assumptions are incorrect or do not materialize as expected in the future, actual results could differ materially from these forward-looking statements.  Risks and uncertainties that may affect future results include: interest rate risk; competitive pressures; pricing pressures on loans and deposits; changes in credit and other risks posed by the Company’s loan and investment portfolios, including declines in commercial or residential real estate values or changes in the allowance for loan losses dictated by new market conditions or regulatory requirements; actions of bank and nonbank competitors; changes in local, national and international economic conditions; changes in legal and regulatory requirements, limitations and costs; changes in customers’ acceptance of the Company’s products and services; cyber-attacks; unexpected outcomes of existing or new litigation involving the Company; and any other risks described in the “Risk Factors” sections of other reports filed by the Company with the SEC. The Company undertakes no obligation to revise or update such forward-looking statements to reflect current or future events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

CRITICAL ACCOUNTING POLICIES

The discussion and analysis of the Company's financial condition and results of operations are based upon the Company's consolidated financial statements that have been prepared in accordance with GAAP. The preparation of the Company's financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, income and expenses. These estimates are based upon historical experience and on various other assumptions that management believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The estimates and judgments that management believes involve the most complex and subjective estimates and judgments and have the most effect on the Company's reported financial position and results of operations are described as critical accounting policies in the Company's Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC on March 1, 2018. There have been no significant changes in the critical accounting policies or the assumptions and judgments utilized in applying these policies since the year ended December 31, 2017.


29


Table of Contents
West Bancorporation, Inc.
Management's Discussion and Analysis
(in thousands, except share and per share data)

NON-GAAP FINANCIAL MEASURES

This report contains references to financial measures that are not defined in GAAP. Such non-GAAP financial measures include the Company’s presentation of net interest income and net interest margin on a fully taxable equivalent (FTE) basis, and the presentation of the efficiency ratio on an adjusted and FTE basis, excluding certain income and expenses. Management believes these non-GAAP financial measures provide useful information to both management and investors to analyze and evaluate the Company’s financial performance. Both measures are considered standard measures of comparison within the banking industry. Limitations associated with non-GAAP financial measures include the risks that persons might disagree as to the appropriateness of items included in these measures and that different companies might calculate these measures differently. These non-GAAP disclosures should not be considered an alternative to the Company’s GAAP results. The following table reconciles the non-GAAP financial measures of net interest income and net interest margin on an FTE basis and efficiency ratio on an adjusted and FTE basis to GAAP.

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Reconciliation of net interest income and annualized net interest margin on an FTE basis to GAAP:
 
 
 
 
 
 
 
 
Net interest income (GAAP)
 
$
15,299

 
$
15,093

 
$
30,715

 
$
29,482

Tax-equivalent adjustment (1)
 
236

 
597

 
525

 
1,215

Net interest income on an FTE basis (non-GAAP)
 
$
15,535

 
$
15,690

 
$
31,240

 
$
30,697

Average interest-earning assets
 
$
2,044,821

 
$
1,832,132

 
$
2,028,846

 
$
1,789,565

Net interest margin on an FTE basis (non-GAAP)
 
3.05
%
 
3.44
%
 
3.11
%
 
3.46
%
 
 
 
 
 
 
 
 
 
Reconciliation of efficiency ratio on an FTE basis to GAAP:
 
 
 
 
 
 
 
 
Net interest income on an FTE basis (non-GAAP)
 
$
15,535

 
$
15,690

 
$
31,240

 
$
30,697

Noninterest income
 
2,023

 
2,316

 
3,936

 
4,476

Adjustment for realized investment securities (gains) losses, net
 
25

 
(229
)
 
25

 
(226
)
Plus: losses on disposal of premises and equipment, net
 

 
15

 

 
15

Adjusted income
 
$
17,583

 
$
17,792

 
$
35,201

 
$
34,962

Noninterest expense
 
$
8,958

 
$
8,172

 
$
17,245

 
$
16,215

Adjustment for write-down of premises
 
(333
)
 

 
(333
)
 

   Adjusted expense
 
$
8,625

 
$
8,172

 
$
16,912

 
$
16,215

Efficiency ratio on an adjusted and FTE basis (non-GAAP) (2)
 
49.05
%
 
45.93
%
 
48.05
%
 
46.38
%

(1)
Computed on a tax-equivalent basis using a federal income tax rate of 21 percent in 2018 and 35 percent in 2017, adjusted to reflect the effect of the nondeductible interest expense associated with owning tax-exempt securities and loans.
(2)
Efficiency ratio expresses noninterest expense as a percent of fully taxable equivalent net interest income and noninterest income, excluding specific noninterest income and expenses.


30


Table of Contents
West Bancorporation, Inc.
Management's Discussion and Analysis
(in thousands, except share and per share data)

THREE AND SIX MONTHS ENDED JUNE 30, 2018

OVERVIEW

The following discussion describes the consolidated operations and financial condition of the Company, West Bank and West Bank's wholly owned subsidiary WB Funding Corporation (which was liquidated in March 2018). Results of operations for the three and six months ended June 30, 2018 are compared to the results for the same periods in 2017, and the consolidated financial condition of the Company as of June 30, 2018 is compared to December 31, 2017. The Company operates in three markets: central Iowa, which is generally the greater Des Moines metropolitan area; eastern Iowa, which is the area including and surrounding Iowa City and Coralville, Iowa; and the Rochester, Minnesota area.

Net income for the three months ended June 30, 2018 was $6,764 or $0.41 per diluted common share, compared to $6,365, or $0.39 per diluted common share, for the three months ended June 30, 2017. The Company's annualized return on average assets and return on average equity for the three months ended June 30, 2018 were 1.27 percent and 15.15 percent, respectively, compared to 1.33 percent and 14.86 percent, respectively, for the three months ended June 30, 2017.

The increase in net income for the three months ended June 30, 2018 compared to the same period in 2017 was primarily due to higher net interest income and a decrease in income taxes, partially offset by an increase in noninterest expense and decrease in noninterest income. On December 22, 2017, the Tax Act was signed into law. The Tax Act reduced the federal corporate income tax rate from the previous maximum rate of 35 percent to 21 percent effective for 2018 and future years. The enactment of the legislation and the reduction in the federal income tax rate was the primary driver of the decrease in income taxes for the three months ended June 30, 2018 compared to the same period in 2017.

Net interest income for the three months ended June 30, 2018 grew $206 compared to the three months ended June 30, 2017. The increase in net interest income was primarily due to a $145,792 increase in average investments and a $55,543 increase in average loans outstanding for the three months ended June 30, 2018 compared to the three months ended June 30, 2017. During the three months ended June 30, 2018, interest expense on deposits increased $2,017 compared to the three months ended June 30, 2017, mainly due to a $210,885 increase in average deposit balances and increases to interest rates on various deposit products as a result of rising market rates. The Company recorded no provision for loan losses for each of the three months ended June 30, 2018 and 2017.

Noninterest income declined $293 during the three months ended June 30, 2018 compared to the three months ended June 30, 2017, mainly due to net realized investment securities gains in 2017. Noninterest expense grew $786 during the three months ended June 30, 2018 compared to the same time period in 2017, primarily due to a write-down of premises and an increase in salaries and benefits. To meet the changing needs of customers and improve the efficiency of resources, the Company will consolidate the Iowa City and Coralville branches in the fall of 2018. Accordingly, the Company recognized a write-down of premises of $333 during the three months ended June 30, 2018 related to the Iowa City branch facility. Eastern Iowa customers will continue to be served by our team at the Coralville branch and through our online and mobile banking platforms.

Net income for the six months ended June 30, 2018 was $14,148, or $0.86 per diluted common share, compared to $12,471, or $0.76 per diluted common share, for the six months ended June 30, 2017. The Company's annualized return on average assets and return on average equity for the six months ended June 30, 2018 were 1.34 percent and 15.96 percent, respectively, compared to 1.34 percent and 14.83 percent, respectively, for the first six months of 2017.

The increase in net income for the six months ended June 30, 2018 compared to the same period in 2017 was primarily due to higher net interest income and a decrease in income taxes, partially offset by increases in provision for loan losses and noninterest expense, and lower noninterest income.

Net interest income for the six months ended June 30, 2018 grew $1,233, or 4.2 percent, compared to the six months ended June 30, 2017. The increase in net interest income was primarily due to a $160,592 increase in average investments and a $66,635 increase in average loans outstanding for the first six months of 2018 compared to the first six months of 2017. During the six months ended June 30, 2018, interest expense on deposits increased $3,834 compared to the six months ended June 30, 2017, mainly due to a $270,637 increase in average deposit balances and increases to interest rates on various deposit products as a result of rising market rates. The Company recorded a $150 provision for loan losses for the six months ended June 30, 2018 compared to no provision in the six months ended June 30, 2017.


31


Table of Contents
West Bancorporation, Inc.
Management's Discussion and Analysis
(in thousands, except share and per share data)

Noninterest income declined $540 during the six months ended June 30, 2018 compared to the six months ended June 30, 2017, mainly due to a nonrecurring gain from bank-owned life insurance and net realized investment securities gains in 2017. Noninterest expense grew $1,030 during the six months ended June 30, 2018 compared to the same time period in 2017, primarily due to the write-down of premises in 2018 and an increase in salaries and benefits.

Total loans outstanding increased $23,904, or 1.6 percent, during the first six months of 2018. Management believes the loan pipeline is strong and that loan growth will continue in all three of our markets during the remainder of 2018. The credit quality of the loan portfolio remained strong, as evidenced by the Company's Texas ratio, which was 1.07 percent as of June 30, 2018. As of June 30, 2018, the allowance for loan losses was 1.08 percent of outstanding loans, and management believed the allowance was adequate to absorb any losses inherent in the loan portfolio as of that date.

Each quarter throughout the year, the Company's four key performance metrics are compared to those of our identified peer group of 16 Midwestern, publicly traded peer financial institutions. The peer group includes BankFinancial Corporation, Farmers Capital Bank Corporation, First Business Financial Services, Inc., First Defiance Financial Corp., First Internet Bancorp, First Mid-Illinois Bancshares, Inc., Hills Bancorporation, Horizon Bancorp, Isabella Bank Corporation, Mercantile Bank Corporation, MidWestOne Financial Group, Inc., MutualFirst Financial, Inc., Nicolet Bankshares, Inc., Peoples Bancorp, QCR Holdings, Inc. and Waterstone Financial, Inc. The members of the peer group are selected based on their business focus, scope and location of operations, size and other considerations. The Company is in the middle of the group in terms of asset size. The group is periodically reviewed, with changes made primarily to reflect merger and acquisition activity. Our goal is to perform at or near the top of these peers relative to what we consider to be four key metrics: return on average assets, return on average equity, efficiency ratio and Texas ratio. We believe these measures encompass the factors that define the performance of a community bank. When contrasted with the peer group's metrics for the three months ended March 31, 2018 (latest data available), the Company's metrics for the six months ended June 30, 2018 were better than those of each company in the peer group as shown in the table below, except for four peers that had a higher return on average assets.
 
West Bancorporation, Inc.
 
Peer Group Range
 
Six Months Ended June 30, 2018
 
Three months ended March 31, 2018
Return on average assets
1.34%
 
0.77% - 1.58%
Return on average equity
15.96%
 
6.80% - 12.55%
Efficiency ratio(1) (2)
48.05%
 
53.84% - 77.67%
Texas ratio(2)
1.07%
 
1.82% - 19.34%
(1) The efficiency ratio is a non-GAAP financial measure. For further information, refer to the Non-GAAP Financial Measures section of this report.
(2) A lower ratio is more desirable.

At its meeting on July 25, 2018, the Board of Directors declared a quarterly cash dividend of $0.20 per common share. The dividend is payable on August 22, 2018, to stockholders of record on August 8, 2018.


32


Table of Contents
West Bancorporation, Inc.
Management's Discussion and Analysis
(in thousands, except share and per share data)

RESULTS OF OPERATIONS

The following table shows selected financial results and measures for the three and six months ended June 30, 2018 compared with the same periods in 2017
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
Change
 
Change %
 
2018
 
2017
 
Change
 
Change %
Net income
$
6,764

 
$
6,365

 
$
399

 
6.27
%
 
$
14,148

 
$
12,471

 
$
1,677

 
13.45
%
Average assets
2,140,649

 
1,923,893

 
216,756

 
11.27
%
 
2,121,867

 
1,881,831

 
240,036

 
12.76
%
Average stockholders' equity
179,100

 
171,786

 
7,314

 
4.26
%
 
178,748

 
169,549

 
9,199

 
5.43
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Return on average assets
1.27
%
 
1.33
%
 
(0.06
)%
 
 
 
1.34
%
 
1.34
%
 
 %
 
 

Return on average equity
15.15
%
 
14.86
%
 
0.29
 %
 
 
 
15.96
%
 
14.83
%
 
1.13
 %
 
 

Net interest margin (1)
3.05
%
 
3.44
%
 
(0.39
)%
 
 
 
3.11
%
 
3.46
%
 
(0.35
)%
 
 
Efficiency ratio (1) (2)
49.05
%
 
45.93
%
 
3.12
 %
 
 
 
48.05
%
 
46.38
%
 
1.67
 %
 
 
Dividend payout ratio
48.18
%
 
45.85
%
 
2.33
 %
 
 
 
43.67
%
 
45.40
%
 
(1.73
)%
 
 

Average equity to average assets ratio
8.37
%
 
8.93
%
 
(0.56
)%
 
 
 
8.42
%
 
9.01
%
 
(0.59
)%
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of June 30,
 
 
 
 
 
 
 
 
 
 
 
2018
 
2017
 
Change
 
 
Texas ratio (2)
 
 
 
 
 
 
 
 
1.07
%
 
0.43
%
 
0.64
 %
 
 
Equity to assets ratio
 
 
 
 
 
 
 
 
8.30
%
 
9.12
%
 
(0.82
)%
 
 

Tangible common equity ratio
 
 
 
 
 
 
 
8.30
%
 
9.12
%
 
(0.82
)%
 
 

(1) Amounts are presented on an FTE basis. These are non-GAAP financial measures. For further information, refer to the Non-GAAP Financial Measures section of this report.
(2) A lower ratio is more desirable.

Definitions of ratios:
Return on average assets - annualized net income divided by average assets.
Return on average equity - annualized net income divided by average stockholders' equity.
Net interest margin - annualized tax-equivalent net interest income divided by average interest-earning assets.
Efficiency ratio - noninterest expense (excluding other real estate owned expense and write-down of premises) divided by noninterest income (excluding net securities gains (losses) and gains/losses on disposition of premises and equipment) plus tax-equivalent net interest income.
Dividend payout ratio - dividends paid to common stockholders divided by net income.
Texas ratio - total nonperforming assets divided by tangible common equity plus the allowance for loan losses.
Equity to assets ratio - equity divided by assets.
Tangible common equity ratio - common equity less intangible assets (none held) divided by tangible assets.



33


Table of Contents
West Bancorporation, Inc.
Management's Discussion and Analysis
(in thousands, except share and per share data)

Net Interest Income

The following tables present average balances and related interest income or interest expense, with the resulting annualized average yield or rate by category of interest-earning assets or interest-bearing liabilities.  Interest income and the resulting net interest income are shown on an FTE basis.
Data for the three months ended June 30:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average Balance
 
Interest Income/Expense
 
Yield/Rate
 
2018
 
2017
 
Change
 
Change-
%
 
2018
 
2017
 
Change
 
Change-
%
 
2018
 
2017
 
Change
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans: (1) (2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
321,897

 
$
333,674

 
$
(11,777
)
 
(3.53
)%
 
$
3,821

 
$
3,626

 
$
195

 
5.38
 %
 
4.76
%
 
4.36
%
 
0.40
 %
Real estate (3)
1,186,686

 
1,117,973

 
68,713

 
6.15
 %
 
13,344

 
12,547

 
797

 
6.35
 %
 
4.51
%
 
4.50
%
 
0.01
 %
Consumer and other
6,854

 
8,247

 
(1,393
)
 
(16.89
)%
 
68

 
81

 
(13
)
 
(16.05
)%
 
3.98
%
 
3.98
%
 
 %
Total loans
1,515,437

 
1,459,894

 
55,543

 
3.80
 %
 
17,233

 
16,254

 
979

 
6.02
 %
 
4.56
%
 
4.47
%
 
0.09
 %
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 

Investment securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Taxable
306,983

 
223,795

 
83,188

 
37.17
 %
 
1,886

 
1,239

 
647

 
52.22
 %
 
2.46
%
 
2.21
%
 
0.25
 %
Tax-exempt (3)
184,142

 
121,538

 
62,604

 
51.51
 %
 
1,477

 
1,200

 
277

 
23.08
 %
 
3.21
%
 
3.95
%
 
(0.74
)%
Total investment securities
491,125

 
345,333

 
145,792

 
42.22
 %
 
3,363

 
2,439

 
924

 
37.88
 %
 
2.74
%
 
2.82
%
 
(0.08
)%
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Federal funds sold
38,259

 
26,905

 
11,354

 
42.20
 %
 
177

 
70

 
107

 
152.86
 %
 
1.85
%
 
1.04
%
 
0.81
 %
Total interest-earning assets (3)
$
2,044,821

 
$
1,832,132

 
$
212,689

 
11.61
 %
 
20,773

 
18,763

 
2,010

 
10.71
 %
 
4.07
%
 
4.11
%
 
(0.04
)%
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Deposits:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing demand,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
savings and money
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
market
$
1,245,738

 
$
1,070,180

 
$
175,558

 
16.40
 %
 
3,203

 
1,444

 
1,759

 
121.81
 %
 
1.03
%
 
0.54
%
 
0.49
 %
Time deposits
176,857

 
141,530

 
35,327

 
24.96
 %
 
595

 
337

 
258

 
76.56
 %
 
1.35
%
 
0.96
%
 
0.39
 %
Total deposits
1,422,595

 
1,211,710

 
210,885

 
17.40
 %
 
3,798

 
1,781

 
2,017

 
113.25
 %
 
1.07
%
 
0.59
%
 
0.48
 %
Other borrowed funds
128,646

 
141,558

 
(12,912
)
 
(9.12
)%
 
1,440

 
1,292

 
148

 
11.46
 %
 
4.49
%
 
3.66
%
 
0.83
 %
Total interest-bearing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
liabilities
$
1,551,241

 
$
1,353,268

 
$
197,973

 
14.63
 %
 
5,238

 
3,073

 
2,165

 
70.45
 %
 
1.35
%
 
0.91
%
 
0.44
 %
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Tax-equivalent net interest income (FTE) (4)
 
 

 
 

 
$
15,535

 
$
15,690

 
$
(155
)
 
(0.99
)%
 
 

 
 

 
 

Net interest spread (FTE)
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
2.72
%
 
3.20
%
 
(0.48
)%
Net interest margin (FTE) (4)
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
3.05
%
 
3.44
%
 
(0.39
)%

34


Table of Contents
West Bancorporation, Inc.
Management's Discussion and Analysis
(in thousands, except share and per share data)

Data for the six months ended June 30:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average Balance
 
Interest Income/Expense
 
Yield/Rate
 
2018
 
2017
 
Change
 
Change-
%
 
2018
 
2017
 
Change
 
Change-
%
 
2018
 
2017
 
Change
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans: (1) (2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
324,291

 
$
334,988

 
$
(10,697
)
 
(3.19
)%
 
$
7,501

 
$
7,104

 
$
397

 
5.59
 %
 
4.66
%
 
4.28
%
 
0.38
 %
Real estate (3)
1,175,093

 
1,096,198

 
78,895

 
7.20
 %
 
26,149

 
24,189

 
1,960

 
8.10
 %
 
4.49
%
 
4.45
%
 
0.04
 %
Consumer and other
6,702

 
8,265

 
(1,563
)
 
(18.91
)%
 
136

 
163

 
(27
)
 
(16.56
)%
 
4.08
%
 
3.99
%
 
0.09
 %
Total loans
1,506,086

 
1,439,451

 
66,635

 
4.63
 %
 
33,786

 
31,456

 
2,330

 
7.41
 %
 
4.52
%
 
4.41
%
 
0.11
 %
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 

Investment securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Taxable
305,780

 
215,236

 
90,544

 
42.07
 %
 
3,699

 
2,266

 
1,433

 
63.24
 %
 
2.42
%
 
2.11
%
 
0.31
 %
Tax-exempt (3)
187,135

 
117,087

 
70,048

 
59.83
 %
 
3,049

 
2,363

 
686

 
29.03
 %
 
3.26
%
 
4.04
%
 
(0.78
)%
Total investment securities
492,915

 
332,323

 
160,592

 
48.32
 %
 
6,748

 
4,629

 
2,119

 
45.78
 %
 
2.74
%
 
2.79
%
 
(0.05
)%
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Federal funds sold
29,845

 
17,791

 
12,054

 
67.75
 %
 
258

 
87

 
171

 
196.55
 %
 
1.74
%
 
0.98
%
 
0.76
 %
Total interest-earning assets (3)
$
2,028,846

 
$
1,789,565

 
$
239,281

 
13.37
 %
 
40,792

 
36,172

 
4,620

 
12.77
 %
 
4.05
%
 
4.08
%
 
(0.03
)%
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Deposits:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing demand,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
savings and money
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
market
$
1,229,604

 
$
1,004,105

 
$
225,499

 
22.46
 %
 
5,744

 
2,421

 
3,323

 
137.26
 %
 
0.94
%
 
0.49
%
 
0.45
 %
Time deposits
174,944

 
129,806

 
45,138

 
34.77
 %
 
1,066

 
555

 
511

 
92.07
 %
 
1.23
%
 
0.86
%
 
0.37
 %
Total deposits
1,404,548

 
1,133,911

 
270,637

 
23.87
 %
 
6,810

 
2,976

 
3,834

 
128.83
 %
 
0.98
%
 
0.53
%
 
0.45
 %
Other borrowed funds
127,156

 
144,567

 
(17,411
)
 
(12.04
)%
 
2,742

 
2,499

 
243

 
9.72
 %
 
4.35
%
 
3.49
%
 
0.86
 %
Total interest-bearing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
liabilities
$
1,531,704

 
$
1,278,478

 
$
253,226

 
19.81
 %
 
9,552

 
5,475

 
4,077

 
74.47
 %
 
1.26
%
 
0.86
%
 
0.40
 %
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net interest income (FTE) (4)
 
 

 
 

 
$
31,240

 
$
30,697

 
$
543

 
1.77
 %
 
 

 
 

 
 

Net interest spread (FTE)
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
2.79
%
 
3.22
%
 
(0.43
)%
Net interest margin (FTE) (4)
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
3.11
%
 
3.46
%
 
(0.35
)%

(1)
Average loan balances include nonaccrual loans.  Interest income recognized on nonaccrual loans has been included.
(2)
Interest income on loans includes amortization of loan fees and costs and prepayment penalties collected, which are not material.
(3)
Tax-exempt income has been adjusted to a tax-equivalent basis using a federal income tax rate of 21 percent in 2018 and 35 percent in 2017 and is adjusted to reflect the effect of the nondeductible interest expense associated with owning tax-exempt investment securities and loans.
(4)
Net interest income (FTE) and net interest margin (FTE) are non-GAAP financial measures. For further information, refer to the Non-GAAP Financial Measures section of this report.

The Company's largest component of net income is net interest income, which is the difference between interest earned on interest-earning assets, consisting primarily of loans and investment securities, and interest paid on interest-bearing liabilities, consisting of deposits and borrowings. Fluctuations in net interest income can result from the combination of changes in the average balances of asset and liability categories and changes in interest rates. Interest rates earned and paid are affected by general economic conditions, particularly changes in market interest rates, and by competitive factors, government policies and actions of regulatory authorities. The Board of Governors of the Federal Reserve System increased the targeted federal funds interest rate by 25 basis points in each of March and June 2018 and each of March, June and December 2017. We believe the Board of Governors of the Federal Reserve System will increase the targeted federal funds interest rate by 25 basis points at least one more time in 2018.


35


Table of Contents
West Bancorporation, Inc.
Management's Discussion and Analysis
(in thousands, except share and per share data)

Net interest margin is a measure of the net return on interest-earning assets and is computed by dividing annualized tax-equivalent net interest income by total average interest-earning assets for the period. The net interest margin for the three and six months ended June 30, 2018 declined 39 and 35 basis points, respectively, compared to the three and six months ended June 30, 2017. The primary drivers of the decline in the net interest margin were an increase in interest rates paid on deposits and an increase in the variable rates paid on other borrowed funds, partially offset by an increase in yield on loans. Also impacting the net interest margin was the decline in the federal income tax rate to 21 percent in 2018, from 35 percent in 2017, which is used in the calculation of the tax-equivalent interest income on tax-exempt loans and securities on a non-GAAP basis. The change in the federal income tax rate used in the tax-equivalent adjustment to net interest income accounted for approximately 10 basis points of the decline in net interest margin for the three and six months ended June 30, 2018 compared to the three and six months ended June 30, 2017. Despite the decline in the net interest margin, tax-equivalent net interest income for the six months ended June 30, 2018 increased $543 compared to the same time period in 2017. The increase in net interest income for the six months ended June 30, 2018 compared to the six months ended June 30, 2017 was largely due to an increase in average outstanding loans and securities, partially offset by an increase in average deposit balances and an increase in rates on deposits and other borrowed funds. Tax-equivalent net interest income for the three months ended June 30, 2018 declined $155 compared to the same time period in 2017. The decline in net interest income for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 was largely due to an increase in average deposit balances and an increase in rates on deposits and other borrowed funds that exceeded the impact of an increase in average outstanding loans and securities. Management expects the current interest rate environment to continue to put pressure on the net interest margin throughout the remainder of 2018, particularly if the U.S. Treasury yield curve continues to flatten.

Tax-equivalent interest income on loans increased $979 for the three months ended June 30, 2018 compared to the three months ended June 30, 2017. For the six months ended June 30, 2018, tax-equivalent interest income on loans increased $2,330 compared to the same time period in 2017. The improvement for both time periods was primarily due to the increase in average loan balances outstanding. The average yield on loans increased by 9 and 11 basis points, respectively, for the three and six months ended June 30, 2018 compared to the three and six months ended June 30, 2017, which is less than the increase in the cost of deposits due to the relatively flat yield curve. The Company continues to focus on expanding existing and entering into new customer relationships while maintaining strong credit quality. The yield on the Company's loan portfolio is affected by the portfolio's loan mix, the interest rate environment, the effects of competition, the level of nonaccrual loans and reversals of previously accrued interest on charged-off loans. The political and economic environments can also influence the volume of new loan originations and the mix of variable rate versus fixed rate loans.

The average balance of investment securities was higher during the three and six months ended June 30, 2018 than during the same periods in 2017 as a result of significant investment purchase activity during the second half of 2017. The purchase activity in 2017 focused on higher yielding bonds within the existing risk profile and was the result of growth in deposits and the reinvestment of proceeds from sales and principal paydowns of investment securities. In certain cases, securities were sold and the funds were reinvested in securities with higher rates while slightly extending the duration of the portfolio. The change in the federal income tax rate used in the tax-equivalent adjustment of tax-exempt securities accounted for an approximately 78 basis point reduction in the yield on tax-exempt investment securities for the three and six months ended June 30, 2018 compared to the three and six months ended June 30, 2017. This was offset by improvements of 25 and 31 basis points, respectively, in the yield on taxable investment securities for the three and six months ended June 30, 2018 compared to the three and six months ended June 30, 2017.

The average balance of interest-bearing demand, savings and money market deposits increased for the three and six months ended June 30, 2018 compared to the three and six months ended June 30, 2017, primarily due to an increase in average balances of money market accounts. In addition, approximately $76,000 of noninterest-bearing accounts were reclassified to interest-bearing accounts in April 2017 as part of a retail deposit product restructuring in which we realigned and simplified the retail checking account products provided to our customers. The average rate paid on interest-bearing demand, savings and money market deposits for the three and six months ended June 30, 2018 increased 49 and 45 basis points, respectively, compared to the three and six months ended June 30, 2017. The increase in interest expense was primarily due to increasing interest rates on certain money market deposit products in response to increases in the targeted federal funds rate. The average balance of time deposits increased for the three and six months ended June 30, 2018 compared to the same periods in 2017. The increase was primarily due to the shift of demand and savings account balances to higher interest rate time deposits. Interest rates on time deposits increased 39 and 37 basis points, respectively, for the three and six months ended June 30, 2018 compared to the same periods in 2017, primarily due to higher market interest rates paid at the time new and renewed time deposits were issued.


36


Table of Contents
West Bancorporation, Inc.
Management's Discussion and Analysis
(in thousands, except share and per share data)

The average rate paid on other borrowed funds increased 83 and 86 basis points, respectively, for the three and six months ended June 30, 2018 compared to the three and six months ended June 30, 2017. The increase in the average rate paid was due to increases in rates for variable rate FHLB advances, subordinated notes and long-term debt. The average balance of other borrowed funds declined for the three and six months ended June 30, 2018 compared to the three and six months ended June 30, 2017, primarily due to lower average balances of federal funds purchased and the December 2017 payoff of a $25,000 FHLB advance, partially offset by a $22,000 increase in long-term debt in May 2017.

Provision for Loan Losses and the Related Allowance for Loan Losses

The provision for loan losses represents charges made to earnings to maintain an adequate allowance for loan losses.  The adequacy of the allowance for loan losses is evaluated quarterly by management and reviewed by the Board of Directors. The allowance for loan losses is management's best estimate of probable losses inherent in the loan portfolio as of the balance sheet date.  Based upon the most recent evaluation, no provision was recorded for the three months ended June 30, 2018. The provision recorded for the six months ended June 30, 2018 was $150. No provision was recorded for the three and six months ended June 30, 2017.

Factors considered in establishing an appropriate allowance include: the borrower's financial condition; the value and adequacy of loan collateral; the condition of the local economy and the borrower's specific industry; the levels and trends of loans by segment; and a review of delinquent and classified loans.  The quarterly evaluation focuses on factors such as specific loan reviews, changes in the components of the loan portfolio given the current and forecasted economic conditions, and historical loss experience.  Any one of the following conditions may result in the review of a specific loan: concern about whether the customer's cash flow or net worth is sufficient to repay the loan; delinquency status; criticism of the loan in a regulatory examination; the suspension of interest accrual; or other factors, including whether the loan has other special or unusual characteristics that suggest special monitoring is warranted. The Company's concentration risks include geographic concentration in central and eastern Iowa and southeastern Minnesota. The local economies are composed primarily of service industries and state and county governments.

West Bank has a significant portion of its loan portfolio in commercial real estate loans, commercial lines of credit, commercial term loans, and construction and land development loans.  West Bank's typical commercial borrower is a small- or medium-sized, privately owned business entity.  Compared to residential mortgages or consumer loans, commercial loans typically have larger balances, and repayment usually depends on the borrowers' successful business operations.  Commercial loans generally are not fully repaid over the loan period and, thus, may require refinancing or a large payoff at maturity.  When the economy turns downward, commercial borrowers may not be able to repay their loans, and the value of their assets, which are usually pledged as collateral, may decrease rapidly and significantly. 

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 circumstances, changes in the overall economy in the markets we currently serve, or later acquired information.  Identifiable sectors within the general economy are subject to additional volatility, which at any time may have a substantial impact on the loan portfolio.  In addition, regulatory agencies, as integral parts of their examination processes, periodically review the credit quality of the loan portfolio and the level of the allowance for loan losses.  Such agencies may require West Bank to recognize additional losses based on such agencies' review of information available to them at the time of their examinations.
  

37


Table of Contents
West Bancorporation, Inc.
Management's Discussion and Analysis
(in thousands, except share and per share data)

West Bank's policy is to charge off loans when, in management's opinion, a loan or a portion of a loan is deemed uncollectible. Concerted efforts are made to maximize subsequent recoveries.  The following table summarizes the activity in the Company's allowance for loan losses for the three and six months ended June 30, 2018 and 2017 and related ratios. 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Balance at beginning of period
$
16,465

 
$
16,427

 
$
38

 
$
16,430

 
$
16,112

 
$
318

Charge-offs
(13
)
 
(133
)
 
120

 
(209
)
 
(193
)
 
(16
)
Recoveries
66

 
192

 
(126
)
 
147

 
567

 
(420
)
Net (charge-offs) recoveries
53

 
59

 
(6
)
 
(62
)
 
374

 
(436
)
Provision for loan losses charged to operations

 

 

 
150

 

 
150

Balance at end of period
$
16,518

 
$
16,486

 
$
32

 
$
16,518

 
$
16,486

 
$
32

 
 
 
 
 
 
 
 
 
 
 
 
Average loans outstanding
$
1,515,437

 
$
1,459,894

 
 
 
$
1,506,086

 
$
1,439,451

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ratio of annualized net (charge-offs) recoveries during the period to average loans outstanding
0.01
%
 
0.02
%
 
 
 
(0.01
)%
 
0.05
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ratio of allowance for loan losses to average loans outstanding
1.09
%
 
1.13
%
 
 
 
1.10
 %
 
1.15
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ratio of allowance for loan losses to total loans at end of period
1.08
%
 
1.15
%
 
 
 
1.08
 %
 
1.15
%
 
 
In general, the U.S. economy is growing at a moderate pace. Average monthly job growth for the first six months of 2018 was approximately 215,000 based on preliminary estimates, while the national unemployment rate remained low at 4.0 percent as of June 30, 2018. Activity in the housing market continues at a moderate pace. Short-term interest rates are expected to continue to gradually rise. Based on the current economic indicators, the Company decided to maintain the economic factors within the allowance for loan losses evaluation at the same levels used in 2017. In the first six months of 2018, the Company continued to use experience factors based on the highest losses calculated over a rolling 12-, 16-, or 20-quarter period. The portion of the allowance for loan losses related to loans collectively evaluated for impairment increased $102 to a total of $16,393, or 1.07 percent, as of June 30, 2018 compared to $16,291, or 1.08 percent, as of December 31, 2017. Management believed the resulting allowance for loan losses as of June 30, 2018 was adequate to absorb any losses inherent in the loan portfolio at the end of the quarter.


38


Table of Contents
West Bancorporation, Inc.
Management's Discussion and Analysis
(in thousands, except share and per share data)

Noninterest Income

The following tables show the variance from the prior year in the noninterest income categories shown in the Consolidated Statements of Income.  In addition, accounts within the “Other income” category that represent a significant portion of the total or a significant variance are shown below.
 
Three Months Ended June 30,
Noninterest income:
2018
 
2017
 
Change
 
Change %
Service charges on deposit accounts
$
627

 
$
631

 
$
(4
)
 
(0.63
)%
Debit card usage fees
433

 
458

 
(25
)
 
(5.46
)%
Trust services
575

 
436

 
139

 
31.88
 %
Increase in cash value of bank-owned life insurance
152

 
163

 
(11
)
 
(6.75
)%
Realized investment securities gains (losses), net
(25
)
 
229

 
(254
)
 
(110.92
)%
Other income:
 
 
 
 
 

 
 

Discount on purchased income tax credits
15

 
65

 
(50
)
 
(76.92
)%
Gain on sale of other assets

 
88

 
(88
)
 
(100.00
)%
All other income
246

 
246

 

 
 %
Total other income
261

 
399

 
(138
)
 
(34.59
)%
Total noninterest income
$
2,023

 
$
2,316

 
$
(293
)
 
(12.65
)%
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
Noninterest income:
2018
 
2017
 
Change
 
Change %
Service charges on deposit accounts
$
1,276

 
$
1,231

 
$
45

 
3.66
 %
Debit card usage fees
832

 
898

 
(66
)
 
(7.35
)%
Trust services
1,020

 
828

 
192

 
23.19
 %
Increase in cash value of bank-owned life insurance
310

 
317

 
(7
)
 
(2.21
)%
Gain from bank-owned life insurance

 
307

 
(307
)
 
(100.00
)%
Realized investment securities gains (losses), net
(25
)
 
226

 
(251
)
 
(111.06
)%
Other income:
 
 
 
 
 

 
 

Discount on purchased income tax credits
27

 
81

 
(54
)
 
(66.67
)%
Gain on sale of other assets

 
88

 
(88
)
 
(100.00
)%
All other income
496

 
500

 
(4
)
 
(0.80
)%
Total other income
523

 
669

 
(146
)
 
(21.82
)%
Total noninterest income
$
3,936

 
$
4,476

 
$
(540
)
 
(12.06
)%
The increase in service charges on deposit accounts for the six months ended June 30, 2018 compared to the six months ended June 30, 2017 was driven primarily by the March and April 2017 realignment and simplification of the retail checking account products provided to our customers. During the three and six months ended June 30, 2018, nonsufficient funds fees declined $35 and $58, respectively, and debit card usage fees declined $25 and $66, respectively, compared to the same time periods in 2017. These declines are consistent with recent trends.

Revenue from trust services was higher during the three and six months ended June 30, 2018 compared to the three and six months ended June 30, 2017 due to the combination of higher amounts of one-time estate fees and asset growth.

Gain from bank-owned life insurance was recognized for the six months ended June 30, 2017 as the result of a single policy event.

The Company recognizes revenue from discounts on purchased transferable State of Iowa income tax credits. The Company reviews opportunities to acquire transferable State of Iowa income tax credits at favorable discounts as they are presented and as they are aligned with our projected ability to utilize them. The Company expects to recognize total income from discounts on purchased tax credits of approximately $50 for the year ended December 31, 2018.

Gain on sale of other assets for the three and six months ended June 30, 2017 included a nonrecurring gain related to the final payment received from the 2015 sale of SmartyPig, LLC.

39


Table of Contents
West Bancorporation, Inc.
Management's Discussion and Analysis
(in thousands, except share and per share data)

Noninterest Expense

The following tables show the variance from the prior year in the noninterest expense categories shown in the Consolidated Statements of Income. In addition, accounts within the “Other expenses” category that represent a significant portion of the total or a significant variance are shown below.
 
Three Months Ended June 30,
Noninterest expense:
2018
 
2017
 
Change
 
Change %
Salaries and employee benefits
$
4,775

 
$
4,449

 
$
326

 
7.33
 %
Occupancy
1,258

 
1,131

 
127

 
11.23
 %
Data processing
674

 
708

 
(34
)
 
(4.80
)%
FDIC insurance expense
165

 
150

 
15

 
10.00
 %
Professional fees
178

 
248

 
(70
)
 
(28.23
)%
Director fees
261

 
246

 
15

 
6.10
 %
Write-down of premises
333

 

 
333

 
N/A

Other expenses:
 
 
 
 
 

 
 

Marketing
50

 
51

 
(1
)
 
(1.96
)%
Business development
269

 
246

 
23

 
9.35
 %
Insurance expense
85

 
88

 
(3
)
 
(3.41
)%
Charitable contributions
75

 

 
75

 
N/A

Postage and courier
71

 
80

 
(9
)
 
(11.25
)%
Subscriptions
80

 
66

 
14

 
21.21
 %
Trust
96

 
110

 
(14
)
 
(12.73
)%
Consulting fees
60

 
92

 
(32
)
 
(34.78
)%
Low income housing projects amortization
130

 
104

 
26

 
25.00
 %
All other
398

 
403

 
(5
)
 
(1.24
)%
Total other
1,314

 
1,240

 
74

 
5.97
 %
Total noninterest expense
$
8,958

 
$
8,172

 
$
786

 
9.62
 %
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
Noninterest expense:
2018
 
2017
 
Change
 
Change %
Salaries and employee benefits
$
9,288

 
$
8,786

 
$
502

 
5.71
 %
Occupancy
2,481

 
2,228

 
253

 
11.36
 %
Data processing
1,350

 
1,396

 
(46
)
 
(3.30
)%
FDIC insurance
327

 
363

 
(36
)
 
(9.92
)%
Professional fees
412

 
541

 
(129
)
 
(23.84
)%
Director fees
510

 
457

 
53

 
11.60
 %
Write-down of premises
333

 

 
333

 
N/A

Other expenses:
 
 
 
 
 

 
 

Marketing
95

 
119

 
(24
)
 
(20.17
)%
Business development
487

 
418

 
69

 
16.51
 %
Insurance expense
177

 
178

 
(1
)
 
(0.56
)%
Charitable contributions
150

 

 
150

 
N/A

Postage and courier
140

 
166

 
(26
)
 
(15.66
)%
Subscriptions
171

 
131

 
40

 
30.53
 %
Trust
189

 
215

 
(26
)
 
(12.09
)%
Consulting fees
125

 
153

 
(28
)
 
(18.30
)%
Low income housing projects amortization
264

 
220

 
44

 
20.00
 %
All other
746

 
844

 
(98
)
 
(11.61
)%
Total other
2,544

 
2,444

 
100

 
4.09
 %
Total noninterest expense
$
17,245

 
$
16,215

 
$
1,030

 
6.35
 %

40


Table of Contents
West Bancorporation, Inc.
Management's Discussion and Analysis
(in thousands, except share and per share data)

Salaries and employee benefits increased for the three and six months ended June 30, 2018 when compared to the three and six months ended June 30, 2017, mainly as the result of increases in benefit costs, salaries and related payroll taxes, and additional payroll taxes related to the vesting of restricted stock units.

When compared with the three and six months ended June 30, 2017, occupancy costs increased for the three and six months ended June 30, 2018, partially due to a periodic indexed rent adjustment in accordance with the terms of the lease for the Company's main office.

Data processing primarily includes fees paid for our core applications systems, ongoing enhancement and monitoring tools for maintaining security, and one-time costs associated with implementation of new applications. Data processing expense declined for the three and six months ended June 30, 2018 compared to the same time periods in 2017, primarily because of varying one-time costs associated with the implementation of new applications in each period.

FDIC insurance expense declined for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. The FDIC assessment rate calculation includes a series of risk-based factors. As a result of the May 2017 capital injection of $40,000 into West Bank, our capital ratio component improved enough to reduce the assessment rate to the minimum base assessment level established by the FDIC. Management expects the assessment rate to remain at or near the minimum level during 2018. FDIC insurance expense increased for the three months ended June 30, 2018 compared to the same period in 2017 due to growth in average assets.

Professional fees declined for the three and six months ended June 30, 2018 compared to the same time periods in 2017, primarily due to lower legal fees at West Bank and one-time costs incurred in 2017 associated with the preparation and adoption of the West Bancorporation, Inc. 2017 Equity Incentive Plan.

Director fees increased for the three and six months ended June 30, 2018 when compared to the three and six months ended June 30, 2017, mainly due to higher stock-based compensation costs and an increase in annual retainer fees effective April 2018.

The Company recognized a $333 write-down of premises during the three and six months ended June 30, 2018 related to the Iowa City branch facility. The Company plans to consolidate the Iowa City and Coralville branches in the fall of 2018.

The increase in business development expense for the three and six months ended June 30, 2018 compared to the three and six months ended June 30, 2017 was the result of additional sponsorships of community events and efforts to cultivate new and expanded customer relationships.

Charitable contributions increased for the three and six months ended June 30, 2018 compared to the same time periods in 2017 due to the timing of contributions to the West Bancorporation Foundation.

Income Tax Expense

The Company recorded income tax expense of $1,600 (19.1 percent of pre-tax income) and $3,108 (18.0 percent of pre-tax income) for the three and six months ended June 30, 2018, respectively, compared with $2,872 (31.1 percent of pre-tax income) and $5,272 (29.7 percent of pre-tax income) for the three and six months ended June 30, 2017, respectively. The decline in the percentage of income tax expense to pre-tax income was the result of the enactment of the Tax Act on December 22, 2017. This legislation lowered the federal corporate income tax rate to 21 percent beginning in 2018 from a maximum rate of 35 percent in 2017. The Company's consolidated income tax rate differs from the federal statutory income tax rate in each respective period, primarily due to tax-exempt interest income, the tax-exempt increase in cash value of bank-owned life insurance, tax-exempt gain on bank-owned life insurance, disallowed interest expense, and state income taxes.

In addition, for the six months ended June 30, 2018 and 2017, a tax benefit of $261 and $244, respectively, was recorded as a result of the increase in fair value of restricted stock over the vesting period. The tax rate for the first six months of 2018 and 2017 was also impacted by year-to-date federal low income housing tax credits of approximately $250 and $205, respectively.


41


Table of Contents
West Bancorporation, Inc.
Management's Discussion and Analysis
(in thousands, except share and per share data)

FINANCIAL CONDITION

The Company had total assets of $2,197,166 as of June 30, 2018, an increase of 3.9 percent compared to total assets of $2,114,377 as of December 31, 2017. The most significant changes in the balance sheet were increases in investments, loans and deposits. A summary of changes in the balance sheet components is provided below.

Investment Securities

On January 1, 2018, the Company elected to transfer all securities classified as held to maturity to available for sale. At the date of reclassification, the held to maturity securities portfolio was carried at an amortized cost of $45,527. The reclassification of securities between categories was accounted for at fair value. At the date of reclassification, the securities had a fair value of $45,890 and unrealized holding gains of $273, which were recorded net of tax in other comprehensive income. The transfer enhanced liquidity and increased flexibility with regard to asset-liability management and balance sheet composition.

The balance of investment securities available for sale, subsequent to the transfer of held to maturity securities, increased by $37,047 during the six months ended June 30, 2018. U.S. Treasuries increased $39,504 and corporate notes increased $19,710 during the six months ended June 30, 2018, primarily due to purchases of securities, which were funded by growth in deposits and securities sales. State and political subdivision securities declined by $15,936 during the six months ended June 30, 2018, primarily due to the sale of securities for reinvestment in higher yielding bonds with minimal impact on the portfolio's risk profile and duration. Government agency guaranteed collateralized mortgage obligations, mortgage-backed securities and asset-backed securities declined by a total of $6,225 during the six months ended June 30, 2018, primarily due to normal principal paydowns. The market value of the investment portfolio declined $7,803 during the six months ended June 30, 2018. The Company believed the unrealized losses on investments available for sale as of June 30, 2018 were due to interest rate and market conditions rather than reduced estimated cash flows.

As of June 30, 2018, approximately 50 percent of the available for sale investment securities portfolio consisted of government agency guaranteed collateralized mortgage obligations, mortgage-backed securities and asset-backed securities. Management believes these securities provide relatively good yields, have little to no credit risk and provide fairly consistent cash flows.

Loans and Nonperforming Assets

Loans outstanding increased $23,904, from $1,510,500 as of December 31, 2017 to $1,534,404 as of June 30, 2018. Changes in the loan portfolio during the first six months of 2018 included an increase of $70,696 in commercial real estate loans, partially offset by reductions of $20,662 in commercial loans and $24,770 in construction real estate loans. The commercial and commercial real estate loan portfolios were impacted by a $28,568 payoff when a customer was acquired by an out-of-state buyer in the first quarter of 2018. The Company continues to focus on business development efforts in all its markets. Management believes loan growth will occur in all three of our markets during the remainder of 2018.

Credit quality of the Company's loan portfolio remains strong and stable. The Company's Texas ratio, which is computed by dividing total nonperforming assets by tangible common equity plus the allowance for loan losses, was 1.07 percent as of June 30, 2018, compared to 0.32 percent as of December 31, 2017. The increase in the Texas ratio was due to the increase in nonaccrual loans related to two customers. The ratio for both dates was significantly better than the March 31, 2018 peer group average (latest data available), which was approximately 8.03 percent, according to data in the March 2018 Bank Holding Company Performance Report prepared by the Division of Supervision and Regulation of the Federal Reserve.


42


Table of Contents
West Bancorporation, Inc.
Management's Discussion and Analysis
(in thousands, except share and per share data)

The following table sets forth the amount of nonperforming assets held by the Company and common ratio measurements of those assets as of the dates shown. 
 
June 30, 2018
 
December 31, 2017
 
Change
Nonaccrual loans
$
2,127

 
$
622

 
$
1,505

Loans past due 90 days and still accruing interest

 

 

Troubled debt restructured loans (1)

 

 

Total nonperforming loans
2,127

 
622

 
1,505

Other real estate owned

 

 

Total nonperforming assets
$
2,127

 
$
622

 
$
1,505

 
 

 
 

 
 

Nonperforming loans to total loans
0.14
%
 
0.04
%
 
0.10
%
Nonperforming assets to total assets
0.10
%
 
0.03
%
 
0.07
%

(1)
While TDR loans are commonly reported by the industry as nonperforming, those not classified in the nonaccrual category are accruing interest due to payment performance. TDR loans on nonaccrual status are categorized as nonaccrual. There were two TDR loans as of June 30, 2018 and one TDR loan as of December 31, 2017 with balances of $724 and $220, respectively, categorized as nonaccrual.

For additional information, refer to “Provision for Loan Losses and the Related Allowance for Loan Losses” in this section, and Note 4 to the financial statements.

Deposits

Deposits increased $81,116 during the first six months of 2018, or 4.5 percent, compared to December 31, 2017.  Interest-bearing demand accounts declined $68,485, while savings accounts, which include money market accounts, increased $154,710 from December 31, 2017 to June 30, 2018. Balance fluctuations were primarily due to normal customer activity, as corporate customers' liquidity needs vary at any given time. Total time deposits increased $9,498 during the first six months of 2018. As of June 30, 2018, a significant related party relationship maintained total deposit balances with West Bank of approximately $160,586.



43


Table of Contents
West Bancorporation, Inc.
Management's Discussion and Analysis
(in thousands, except share and per share data)

Liquidity and Capital Resources

The objectives of liquidity management are 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.  Other sources include loan principal repayments, proceeds from the maturity and sale of investment securities, principal payments on collateralized mortgage obligations, mortgage-backed and asset-backed securities, federal funds purchased, advances from the FHLB, and funds provided by operations.  Liquidity management is conducted on both a daily and a long-term basis.  Investments in liquid assets are adjusted based on expected loan demand, projected loan and investment securities maturities and payments, expected deposit flows and the objectives set by the Company's asset-liability management policy. The Company had liquid assets (cash and cash equivalents) of $65,103 as of June 30, 2018 compared with $47,949 as of December 31, 2017.

As of June 30, 2018, West Bank had additional borrowing capacity available from the FHLB of approximately $342,000, as well as approximately $67,000 through unsecured federal funds lines of credit with correspondent banks.  Net cash from operating activities contributed $16,987 to liquidity for the six months ended June 30, 2018.  Management believed that the combination of high levels of potentially liquid assets, cash flows from operations, and additional borrowing capacity provided the Company with strong liquidity as of June 30, 2018.

The Company's total stockholders' equity increased to $182,352 at June 30, 2018 from $178,098 at December 31, 2017.  The increase was primarily the result of net income less dividends paid, and was partially offset by a decline in accumulated other comprehensive income. At June 30, 2018, the Company's tangible common equity as a percent of tangible assets was 8.30 percent compared to 8.42 percent as of December 31, 2017.

The Company and West Bank are subject to various regulatory capital requirements administered by federal and state banking agencies.  Failure to meet minimum capital requirements (as shown in the following table) can result in certain mandatory and possibly additional discretionary actions by regulators, which, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and West Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's and West Bank's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Management believed the Company and West Bank met all capital adequacy requirements to which they were subject as of June 30, 2018.

44


Table of Contents
West Bancorporation, Inc.
Management's Discussion and Analysis
(in thousands, except share and per share data)

The Company's and West Bank's capital amounts and ratios are presented in the following table.
 
Actual
 
For Capital
Adequacy Purposes
 
For Capital
Adequacy Purposes With Capital Conservation Buffer
 
To Be Well-Capitalized
Under Prompt Corrective
Action Provisions
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
As of June 30, 2018:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Capital (to Risk-Weighted Assets)
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
$
225,038

 
12.08
%
 
$
149,072

 
8.00
%
 
$
184,010

 
9.875
%
 
N/A

 
N/A

West Bank
240,701

 
12.93
%
 
148,896

 
8.00
%
 
183,794

 
9.875
%
 
$
186,120

 
10.00
%
 
 

 
 

 
 
 
 
 
 

 
 

 
 

 
 

Tier 1 Capital (to Risk-Weighted Assets)
 
 
 
 
 
 

 
 

 
 

 
 

Consolidated
208,520

 
11.19
%
 
111,804

 
6.00
%
 
146,742

 
7.875
%
 
N/A

 
N/A

West Bank
224,183

 
12.05
%
 
111,672

 
6.00
%
 
146,570

 
7.875
%
 
148,896

 
8.00
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Equity Tier 1 Capital (to Risk-Weighted Assets)
 
 
 
 
 
 
 
 
 
 
Consolidated
188,520

 
10.12
%
 
83,853

 
4.50
%
 
118,791

 
6.375
%
 
N/A

 
N/A

West Bank
224,183

 
12.05
%
 
83,754

 
4.50
%
 
118,652

 
6.375
%
 
120,978

 
6.50
%
 
 

 
 

 
 
 
 
 
 

 
 

 
 

 
 

Tier 1 Capital (to Average Assets)
 
 
 
 
 
 

 
 

 
 

 
 

Consolidated
208,520

 
9.69
%
 
86,091

 
4.00
%
 
86,091

 
4.00
%
 
N/A

 
N/A

West Bank
224,183

 
10.42
%
 
86,018

 
4.00
%
 
86,018

 
4.00
%
 
107,522

 
5.00
%
 
 

 
 

 
 
 
 
 
 

 
 

 
 

 
 

As of December 31, 2017:
 

 
 

 
 
 
 
 
 

 
 

 
 

 
 

Total Capital (to Risk-Weighted Assets)
 
 
 
 
 
 

 
 

 
 

 
 

Consolidated
$
216,420

 
11.76
%
 
$
147,169

 
8.00
%
 
$
170,164

 
9.25
%
 
N/A

 
N/A

West Bank
235,570

 
12.82
%
 
147,049

 
8.00
%
 
170,026

 
9.25
%
 
$
183,812

 
10.00
%
 
 

 
 

 
 
 
 
 
 

 
 

 
 

 
 

Tier 1 Capital (to Risk-Weighted Assets)
 
 
 
 
 
 

 
 

 
 

 
 

Consolidated
199,990

 
10.87
%
 
110,377

 
6.00
%
 
133,372

 
7.25
%
 
N/A

 
N/A

West Bank
219,140

 
11.92
%
 
110,287

 
6.00
%
 
133,263

 
7.25
%
 
147,049

 
8.00
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Equity Tier 1 Capital (to Risk-Weighted Assets)
 
 
 
 
 
 
 
 
 
 
Consolidated
179,990

 
9.78
%
 
82,783

 
4.50
%
 
105,778

 
5.75
%
 
N/A

 
N/A

West Bank
219,140

 
11.92
%
 
82,715

 
4.50
%
 
105,692

 
5.75
%
 
119,478

 
6.50
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 Capital (to Average Assets)
 
 
 
 
 
 

 
 

 
 

 
 

Consolidated
199,990

 
9.60
%
 
83,326

 
4.00
%
 
83,326

 
4.00
%
 
N/A

 
N/A

West Bank
219,140

 
10.52
%
 
83,287

 
4.00
%
 
83,287

 
4.00
%
 
104,109

 
5.00
%

On January 1, 2015, the Company and West Bank became subject to the rules of the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act changes. The new rules included the implementation of a capital conservation buffer that is added to the minimum requirements for capital adequacy purposes. The capital conservation buffer is subject to a three year phase-in period that began on January 1, 2016 and will be fully phased-in on January 1, 2019 at 2.5 percent. The required phase-in capital conservation buffer during 2018 is 1.875 percent and was 1.25 percent in 2017. A banking organization with a conservation buffer of less than the required amount will be subject to limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. At June 30, 2018, the ratios for the Company and West Bank were sufficient to meet the fully phased-in conservation buffer.


45


Table of Contents


Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of earnings volatility that results from adverse changes in interest rates and market prices. The Company's market risk is primarily interest rate risk arising from its core banking activities of lending and deposit taking. Interest rate risk is the risk that the change in market interest rates may adversely affect the Company's net interest income. Management continually develops and implements strategies to mitigate this risk. The analysis of the Company's interest rate risk as of December 31, 2017 was presented in the Company's Form 10-K filed with the SEC on March 1, 2018. The Company has not experienced any material changes to its interest rate risk position since December 31, 2017. Management does not believe that the Company's primary market risk exposure and management of that exposure in the first six months of 2018 materially changed compared to those in the year ended December 31, 2017.

Item 4. Controls and Procedures

a. Evaluation of disclosure controls and procedures. As of the end of the period covered by this report, an evaluation of the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) was performed under the supervision, and with the participation, of the Company's Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.

b. Changes in internal controls over financial reporting. There were no changes in the Company's internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Part II - OTHER INFORMATION

Item 1. Legal Proceedings

Neither the Company nor West Bank is a party, and no property of these entities is subject, to any material pending legal proceedings, other than ordinary routine litigation incidental to West Bank's business. The Company does not know of any proceeding contemplated by a governmental authority against the Company or West Bank.

Item 1A. Risk Factors

Management does not believe there have been any material changes in the risk factors that were disclosed in the Company's Form 10-K filed with the Securities and Exchange Commission on March 1, 2018.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.


46


Table of Contents



Item 6. Exhibits

The following exhibits are filed as part of this report:
Exhibits
Description
31.1
31.2
32.1
32.2
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document


47


Table of Contents


SIGNATURES

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

West Bancorporation, Inc.
 
 
 
(Registrant)
 
 
 
 
 
 
 
 
 
 
 
July 26, 2018
By:
/s/ David D. Nelson
 
Date
 
David D. Nelson
 
 
 
Chief Executive Officer and President
 
 
 
(Principal Executive Officer)
 
 
 
 
 
July 26, 2018
By:
/s/ Douglas R. Gulling
 
Date
 
Douglas R. Gulling
 
 
 
Executive Vice President, Treasurer and Chief Financial Officer
 
 
 
(Principal Financial Officer)
 
 
 
 
 
July 26, 2018
By:
/s/ Marie I. Roberts
 
Date
 
Marie I. Roberts
 
 
 
Senior Vice President and Chief Accounting Officer
 
 
 
(Principal Accounting Officer)
 


48