WTBA-2015.06.30-10Q

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, 2015
 
 
 
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, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
o
 
Accelerated filer
x
 
Non-accelerated filer
o
 
Smaller reporting company
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 23, 2015, there were 16,058,769 shares of common stock, no par value, outstanding.



WEST BANCORPORATION, INC.

INDEX
 
 
Page
PART I.
 
 
 
 
Item 1.
 
 
 
 
Consolidated Balance Sheets at June 30, 2015 and December 31, 2014
 
 
 
 
Consolidated Statements of Income for the three and six months ended June 30, 2015 and 2014
 
 
 
 
Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2015 and 2014
 
 
 
 
Consolidated Statements of Stockholders' Equity for the six months ended June 30, 2015 and 2014
 
 
 
 
Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014
 
 
 
 
 
 
 
Item 2.
 
 
 
 
"Safe Harbor" Concerning Forward-Looking Statements
 
 
 
 
Critical Accounting Policies
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II.
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 
 
 
 
 
Exhibit Index

2

Table of Contents


PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
West Bancorporation, Inc. and Subsidiary
 
 
 
 
Consolidated Balance Sheets
 
 
 
 
(unaudited)
 
 
 
 
 
 
 
 
 
(in thousands, except share data)
 
June 30, 2015
 
December 31, 2014
ASSETS
 
 
 
 
Cash and due from banks
 
$
61,682

 
$
27,936

Federal funds sold
 
20,386

 
11,845

Cash and cash equivalents
 
82,068

 
39,781

Investment securities available for sale, at fair value
 
245,201

 
272,790

Investment securities held to maturity, at amortized cost (fair value of $50,448
 
 
 
 
and $51,501 at June 30, 2015 and December 31, 2014, respectively)
 
51,302

 
51,343

Federal Home Loan Bank stock, at cost
 
12,168

 
15,075

Loans
 
1,217,378

 
1,184,045

Allowance for loan losses
 
(14,364
)
 
(13,607
)
Loans, net
 
1,203,014

 
1,170,438

Premises and equipment, net
 
10,921

 
9,988

Accrued interest receivable
 
4,386

 
4,425

Bank-owned life insurance
 
32,474

 
32,107

Deferred tax assets, net
 
6,697

 
6,333

Other assets
 
6,230

 
13,553

Total assets
 
$
1,654,461

 
$
1,615,833

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
LIABILITIES
 
 
 
 
Deposits:
 
 
 
 
Noninterest-bearing demand
 
$
424,558

 
$
362,827

Interest-bearing demand
 
225,442

 
241,722

Savings
 
593,369

 
527,277

Time of $250,000 or more
 
14,179

 
18,985

Other time
 
109,062

 
119,651

Total deposits
 
1,366,610

 
1,270,462

Federal funds purchased
 
6,910

 
2,975

Short-term borrowings
 

 
66,000

Subordinated notes
 
20,619

 
20,619

Federal Home Loan Bank advances, net of discount
 
97,631

 
96,888

Long-term debt
 
11,046

 
12,676

Accrued expenses and other liabilities
 
6,254

 
6,038

Total liabilities
 
1,509,070

 
1,475,658

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, 2015 and December 31, 2014
 

 

Common stock, no par value; authorized 50,000,000 shares; 16,058,769 and
 
 
 
 
16,018,734 shares issued and outstanding at June 30, 2015 and
 
 
 
 
December 31, 2014, respectively
 
3,000

 
3,000

Additional paid-in capital
 
19,412

 
18,971

Retained earnings
 
123,513

 
117,950

Accumulated other comprehensive income (loss)
 
(534
)
 
254

Total stockholders' equity
 
145,391

 
140,175

Total liabilities and stockholders' equity
 
$
1,654,461

 
$
1,615,833

See Notes to Consolidated Financial Statements.

3

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)
 
2015
 
2014
 
2015
 
2014
Interest income:
 
 
 
 
 
 
 
 
Loans, including fees
 
$
12,999

 
$
11,672

 
$
25,621

 
$
23,002

Investment securities:
 
 
 
 
 
 
 
 
Taxable
 
1,042

 
1,272

 
2,167

 
2,602

Tax-exempt
 
756

 
698

 
1,520

 
1,374

Federal funds sold
 
22

 
19

 
32

 
29

Total interest income
 
14,819

 
13,661

 
29,340

 
27,007

Interest expense:
 
 
 
 
 
 

 
 

Deposits
 
551

 
637

 
1,122

 
1,259

Federal funds purchased
 
2

 
2

 
4

 
6

Short-term borrowings
 
1

 
3

 
27

 
12

Subordinated notes
 
176

 
173

 
347

 
346

Federal Home Loan Bank advances
 
673

 
652

 
1,397

 
1,299

Long-term debt
 
62

 
78

 
126

 
161

Total interest expense
 
1,465

 
1,545

 
3,023

 
3,083

Net interest income
 
13,354

 
12,116

 
26,317

 
23,924

Provision for loan losses
 
200

 
150

 
200

 
150

Net interest income after provision for loan losses
 
13,154

 
11,966

 
26,117

 
23,774

Noninterest income:
 
 
 
 
 
 

 
 

Service charges on deposit accounts
 
651

 
714

 
1,271

 
1,393

Debit card usage fees
 
469

 
453

 
904

 
863

Trust services
 
317

 
332

 
642

 
650

Revenue from residential mortgage banking
 
52

 
376

 
87

 
602

Increase in cash value of bank-owned life insurance
 
178

 
182

 
367

 
336

Realized investment securities gains, net
 
36

 

 
47

 
506

Other income
 
219

 
261

 
464

 
521

Total noninterest income
 
1,922

 
2,318

 
3,782

 
4,871

Noninterest expense:
 
 
 
 
 
 

 
 

Salaries and employee benefits
 
4,005

 
3,987

 
7,995

 
8,098

Occupancy
 
1,010

 
1,024

 
2,059

 
2,035

Data processing
 
569

 
558

 
1,143

 
1,080

FDIC insurance
 
209

 
190

 
411

 
371

Other real estate owned
 

 
109

 

 
395

Professional fees
 
177

 
221

 
381

 
485

Director fees
 
228

 
189

 
416

 
342

Other expenses
 
1,245

 
1,086

 
2,484

 
2,560

Total noninterest expense
 
7,443

 
7,364

 
14,889

 
15,366

Income before income taxes
 
7,633

 
6,920

 
15,010

 
13,279

Income taxes
 
2,361

 
2,181

 
4,635

 
4,140

Net income
 
$
5,272

 
$
4,739

 
$
10,375

 
$
9,139

 
 
 
 
 
 
 
 
 
Basic earnings per common share
 
$
0.33

 
$
0.30

 
$
0.65

 
$
0.57

Diluted earnings per common share
 
$
0.33

 
$
0.30

 
$
0.65

 
$
0.57

Cash dividends declared per common share
 
$
0.16

 
$
0.12

 
$
0.30

 
$
0.23

See Notes to Consolidated Financial Statements.

4

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)
 
2015
 
2014
 
2015
 
2014
Net income
 
$
5,272

 
$
4,739

 
$
10,375

 
$
9,139

Other comprehensive income:
 
 
 
 
 
 

 
 

Unrealized gains on securities for which a portion
 
 
 
 
 
 
 
 
of an other than temporary impairment has
 
 
 
 
 
 
 
 
been recorded in earnings:
 
 
 
 
 
 
 
 
Unrealized holding gains arising during the
 
 
 
 
 
 
 
 
period
 

 
40

 

 
358

Less: reclassification adjustment for impairment
 
 
 
 
 
 
 
 
losses realized in net income
 

 

 

 

Income tax (expense)
 

 
(15
)
 

 
(136
)
Other comprehensive income on available
 
 
 
 
 
 
 
 
for sale securities with other than temporary
 
 
 
 
 
 
 
 
impairment
 

 
25

 

 
222

Unrealized gains (losses) on securities without
 
 
 
 
 
 

 
 

other than temporary impairment:
 
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising
 
 
 
 
 
 
 
 
during the period
 
(2,589
)
 
4,043

 
(560
)
 
7,385

Less: reclassification adjustment for net (gains)
 
 
 
 
 
 
 
 
realized in net income
 
(36
)
 

 
(47
)
 
(506
)
Less: reclassification adjustment for amortization
 
 
 
 
 
 
 
 
of net unrealized gains on securities transferred
 
 
 
 
 
 
 
 
from available for sale to held to maturity,
 
 
 
 
 
 
 
 
realized in interest income
 
(9
)
 

 
(19
)
 

Income tax benefit (expense)
 
1,001

 
(1,537
)
 
238

 
(2,614
)
Other comprehensive income (loss) on
 
 
 
 
 
 
 
 
available for sale securities without other
 
 
 
 
 
 
 
 
than temporary impairment
 
(1,633
)
 
2,506

 
(388
)
 
4,265

Unrealized gains (losses) on derivatives arising
 
 
 
 
 
 
 
 
during the period
 
378

 
(1,594
)
 
(735
)
 
(2,773
)
Less: reclassification adjustment for net loss on
 
 
 
 
 
 
 
 
derivatives realized in net income
 

 

 
74

 

Less: reclassification adjustment for amortization
 
 
 
 
 
 
 
 
of derivative termination costs
 
14

 

 
16

 

Income tax benefit (expense)
 
(149
)
 
607

 
245

 
1,054

Other comprehensive income (loss) on
 
 
 
 
 
 
 
 
derivatives
 
243

 
(987
)
 
(400
)
 
(1,719
)
Total other comprehensive income (loss)
 
(1,390
)
 
1,544

 
(788
)
 
2,768

Comprehensive income
 
$
3,882

 
$
6,283

 
$
9,587

 
$
11,907


See Notes to Consolidated Financial Statements.
 

5

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, 2013
 
$

 
15,976,204

 
$
3,000

 
$
18,411

 
$
105,752

 
$
(3,538
)
 
$
123,625

Net income
 

 

 

 

 
9,139

 

 
9,139

Other comprehensive income, net of tax
 

 

 

 

 

 
2,768

 
2,768

Cash dividends declared, $0.23 per common share
 

 

 

 

 
(3,678
)
 

 
(3,678
)
Stock-based compensation costs
 

 

 

 
279

 

 

 
279

Issuance of common stock upon vesting of restricted
 
 
 
 
 
 
 
 
 
 
 
 
 
 
stock units, net of shares withheld for payroll taxes
 

 
37,081

 

 
(154
)
 

 

 
(154
)
Excess tax benefits from vesting of restricted stock units
 

 

 

 
98

 

 

 
98

Balance, June 30, 2014
 
$

 
16,013,285

 
$
3,000

 
$
18,634

 
$
111,213

 
$
(770
)
 
$
132,077

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2014
 
$

 
16,018,734

 
$
3,000

 
$
18,971

 
$
117,950

 
$
254

 
$
140,175

Net income
 

 

 

 

 
10,375

 

 
10,375

Other comprehensive (loss), net of tax
 

 

 

 

 

 
(788
)
 
(788
)
Cash dividends declared, $0.30 per common share
 

 

 

 

 
(4,812
)
 

 
(4,812
)
Stock-based compensation costs
 

 

 

 
496

 

 

 
496

Issuance of common stock upon vesting of restricted
 
 
 
 
 
 
 
 
 
 
 
 
 
 
stock units, net of shares withheld for payroll taxes
 

 
40,035

 

 
(179
)
 

 

 
(179
)
Excess tax benefits from vesting of restricted stock units
 

 

 

 
124

 

 

 
124

Balance, June 30, 2015
 
$

 
16,058,769

 
$
3,000

 
$
19,412

 
$
123,513

 
$
(534
)
 
$
145,391


See Notes to Consolidated Financial Statements.


6

Table of Contents


West Bancorporation, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(unaudited)
 
 
Six Months Ended June 30,
(in thousands)
 
2015
 
2014
Cash Flows from Operating Activities:
 
 
 
 
Net income
 
$
10,375

 
$
9,139

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Provision for loan losses
 
200

 
150

Net amortization and accretion
 
1,808

 
1,869

(Gain) loss on disposition of premises and equipment
 
4

 
(10
)
Investment securities gains, net
 
(47
)
 
(506
)
Stock-based compensation
 
496

 
279

Gain on sale of loans
 
(14
)
 
(555
)
Proceeds from sales of loans held for sale
 
840

 
28,519

Originations of loans held for sale
 

 
(27,713
)
Gain on sales of other real estate owned
 

 
(10
)
Write-down of other real estate owned
 

 
346

Increase in cash value of bank-owned life insurance
 
(367
)
 
(336
)
Depreciation
 
460

 
412

Deferred income taxes
 
119

 
886

Excess tax benefits from vesting of restricted stock units
 
(124
)
 
(98
)
Change in assets and liabilities:
 
 
 
 
Decrease (increase) in accrued interest receivable
 
39

 
(340
)
Decrease in other assets
 
3,018

 
1,640

(Decrease) in accrued expenses and other liabilities
 
(382
)
 
(86
)
Net cash provided by operating activities
 
16,425

 
13,586

Cash Flows from Investing Activities:
 
 

 
 

Proceeds from sales of securities available for sale
 
16,946

 
29,238

Proceeds from maturities and calls of securities available for sale
 
24,724

 
32,185

Purchases of securities available for sale
 
(15,180
)
 
(47,138
)
Purchases of Federal Home Loan Bank stock
 
(10,586
)
 
(9,211
)
Proceeds from redemption of Federal Home Loan Bank stock
 
13,493

 
8,930

Net increase in loans
 
(32,776
)
 
(85,356
)
Proceeds from sales of other real estate owned
 

 
765

Proceeds from sales of premises and equipment
 

 
13

Purchases of premises and equipment
 
(1,397
)
 
(2,406
)
Purchase of bank-owned life insurance
 

 
(5,000
)
Proceeds from settlement of other assets
 
3,593

 

Net (used in) investing activities
 
(1,183
)
 
(77,980
)
Cash Flows from Financing Activities:
 
 

 
 

Net increase in deposits
 
96,148

 
98,590

Net increase (decrease) in federal funds purchased
 
3,935

 
(12,682
)
Net decrease in short-term borrowings
 
(66,000
)
 

Principal payments on long-term debt
 
(1,630
)
 
(1,630
)
Interest rate swap termination costs paid
 
(541
)
 

Common stock dividends paid
 
(4,812
)
 
(3,678
)
Restricted stock units withheld for payroll taxes
 
(179
)
 
(154
)
Excess tax benefits from vesting of restricted stock units
 
124

 
98

Net cash provided by financing activities
 
27,045

 
80,544

Net increase in cash and cash equivalents
 
42,287

 
16,150

Cash and Cash Equivalents:
 
 
 
 
Beginning
 
39,781

 
42,425

Ending
 
$
82,068

 
$
58,575

 
 
 
 
 

7

Table of Contents


West Bancorporation, Inc. and Subsidiary
Consolidated Statements of Cash Flows (continued)
(unaudited)
 
 
Six Months Ended June 30,
(in thousands)
 
2015
 
2014
Supplemental Disclosures of Cash Flow Information:
 
 
 
 
Cash payments for:
 
 
 
 
Interest
 
$
3,023

 
$
3,026

Income taxes
 
1,340

 
1,350

Supplemental Disclosure of Noncash Investing and Financing Activities:
 
 
 
 
Purchase of security available for sale, pending settlement
 
$
475

 
$

Transfer of loans to other real estate owned
 

 
313

See Notes to Consolidated Financial Statements.

8

Table of Contents

West Bancorporation, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
(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.  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, 2014.  In the opinion of management, the accompanying consolidated financial statements contain all adjustments necessary to fairly present the financial position as of June 30, 2015 and December 31, 2014, and net income and comprehensive income for the three and six months ended June 30, 2015 and 2014, and cash flows for the six months ended June 30, 2015 and 2014.  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 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 and other than temporary impairment (OTTI) 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 owns an interest in a limited liability company). West Bank's 99.99 percent owned subsidiary ICD IV, LLC (a community development entity) was liquidated during the third quarter of 2014 because the underlying loan matured.  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 January 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-04, Receivables—Troubled Debt Restructuring by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure. The update clarifies when an in substance foreclosure occurs, that is, when a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan. This is the point when the consumer mortgage loan should be derecognized and the real property recognized. For public companies, this update was effective for interim and annual periods beginning after December 31, 2014. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 660): Summary and Amendments that Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs—Contracts with Customers (Subtopic 340-40). 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. For public companies, this update was originally effective for interim and annual periods beginning after December 15, 2016. In July 2015, the FASB voted to delay the effective date of this ASU by one year. The Company is currently assessing the impact that this guidance will have on its consolidated financial statements, but does not expect the guidance to have a material impact on the Company's consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The update simplifies the presentation of debt issuance costs by requiring that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2015, and is to be applied retrospectively. Early adoption is permitted. The Company has determined that this guidance will 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)
(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, 2015 and 2014 are presented in the following table. 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
5,272

 
$
4,739

 
$
10,375

 
$
9,139

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
16,054

 
16,002

 
16,037

 
15,990

Weighted average effect of restricted stock units
 
 
 
 
 
 
 
   outstanding
39

 
37

 
52

 
46

Diluted weighted average common shares outstanding
16,093

 
16,039

 
16,089

 
16,036

 
 

 
 

 
 

 
 

Basic earnings per common share
$
0.33

 
$
0.30

 
$
0.65

 
$
0.57

Diluted earnings per common share
$
0.33

 
$
0.30

 
$
0.65

 
$
0.57




10

Table of Contents

West Bancorporation, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
(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, 2015 and December 31, 2014.  
 
June 30, 2015
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
(Losses)
 
Fair
Value
Securities available for sale:
 
 
 
 
 
 
 
U.S. government agencies and corporations
$
2,565

 
$
185

 
$

 
$
2,750

State and political subdivisions
54,710

 
924

 
(591
)
 
55,043

Collateralized mortgage obligations (1)
116,901

 
815

 
(1,215
)
 
116,501

Mortgage-backed securities (1)
59,507

 
635

 
(405
)
 
59,737

Trust preferred security
1,768

 

 
(728
)
 
1,040

Corporate notes and equity securities
10,162

 
48

 
(80
)
 
10,130

 
$
245,613

 
$
2,607

 
$
(3,019
)
 
$
245,201

 
 
 
 
 
 
 
 
Securities held to maturity:
 
 
 
 
 
 
 
State and political subdivisions
$
51,302

 
$
15

 
$
(869
)
 
$
50,448

 
 

 
 

 
 

 
 

 
December 31, 2014
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
(Losses)
 
Fair
Value
Securities available for sale:
 
 
 
 
 
 
 
U.S. government agencies and corporations
$
12,626

 
$
204

 
$
(10
)
 
$
12,820

State and political subdivisions
51,234

 
1,286

 
(161
)
 
52,359

Collateralized mortgage obligations (1)
126,430

 
856

 
(1,416
)
 
125,870

Mortgage-backed securities (1)
65,813

 
624

 
(284
)
 
66,153

Trust preferred security
1,763

 

 
(845
)
 
918

Corporate notes and equity securities
14,729

 
66

 
(125
)
 
14,670

 
$
272,595

 
$
3,036

 
$
(2,841
)
 
$
272,790

 
 
 
 
 
 
 
 
Securities held to maturity:
 
 
 
 
 
 
 
State and political subdivisions
$
51,343

 
$
344

 
$
(186
)
 
$
51,501

(1)
All collateralized mortgage obligations and mortgage-backed securities consist of residential mortgage pass-through securities guaranteed by GNMA or issued by FNMA and real estate mortgage investment conduits guaranteed by FHLMC or GNMA.

Investment securities with an amortized cost of approximately $80,658 and $4,805 as of June 30, 2015 and December 31, 2014, 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. The increase in the amount of pledged investment securities at June 30, 2015 compared to December 31, 2014 was primarily due to an increase in public fund deposits. 


11

Table of Contents

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


The amortized cost and fair value of investment securities available for sale as of June 30, 2015, 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 and mortgage-backed securities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.  Therefore, collateralized mortgage obligations and mortgage-backed securities are not included in the maturity categories within the following maturity summary. Equity securities have no maturity date.
 
June 30, 2015
 
Amortized Cost
 
Fair Value
Due in one year or less
$
1,337

 
$
1,359

Due after one year through five years
18,914

 
19,363

Due after five years through ten years
16,378

 
16,592

Due after ten years
31,092

 
30,239

 
67,721

 
67,553

Collateralized mortgage obligations and mortgage-backed securities
176,408

 
176,238

Equity securities
1,484

 
1,410

 
$
245,613

 
$
245,201

The amortized cost and fair value of investment securities held to maturity as of June 30, 2015, by contractual maturity, are shown below.  Certain securities have call features that allow the issuer to call the securities prior to maturity.  
 
June 30, 2015
 
Amortized Cost
 
Fair Value
Due after one year through five years
$
278

 
$
274

Due after five years through ten years
14,398

 
14,276

Due after ten years
36,626

 
35,898

 
$
51,302

 
$
50,448

The details of the sales of investment securities for the three and six months ended June 30, 2015 and 2014 are summarized in the following table.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Proceeds from sales
$
6,889

 
$

 
$
16,946

 
$
29,238

Gross gains on sales
43

 

 
54

 
716

Gross losses on sales
7

 

 
7

 
210


12

Table of Contents

West Bancorporation, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
(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, 2015 and December 31, 2014.
 
June 30, 2015
 
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. government agencies and corporations
$

 
$

 
$

 
$

 
$

 
$

State and political subdivisions
27,759

 
(591
)
 

 

 
27,759

 
(591
)
Collateralized mortgage obligations
19,117

 
(151
)
 
45,771

 
(1,064
)
 
64,888

 
(1,215
)
Mortgage-backed securities
21,967

 
(239
)
 
7,842

 
(166
)
 
29,809

 
(405
)
Trust preferred security

 

 
1,040

 
(728
)
 
1,040

 
(728
)
Corporate notes and equity securities
3,039

 
(26
)
 
938

 
(54
)
 
3,977

 
(80
)
 
$
71,882

 
$
(1,007
)
 
$
55,591

 
$
(2,012
)
 
$
127,473

 
$
(3,019
)
 
 

 
 

 
 

 
 

 
 

 
 

Securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
State and political subdivisions
$
46,975

 
$
(869
)
 
$

 
$

 
$
46,975

 
$
(869
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
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. government agencies and corporations
$
10,039

 
$
(10
)
 
$

 
$

 
$
10,039

 
$
(10
)
State and political subdivisions
6,614

 
(90
)
 
5,887

 
(71
)
 
12,501

 
(161
)
Collateralized mortgage obligations
17,283

 
(87
)
 
53,318

 
(1,329
)
 
70,601

 
(1,416
)
Mortgage-backed securities
15,184

 
(101
)
 
17,126

 
(183
)
 
32,310

 
(284
)
Trust preferred security

 

 
918

 
(845
)
 
918

 
(845
)
Corporate notes and equity securities
4,581

 
(23
)
 
2,881

 
(102
)
 
7,462

 
(125
)
 
$
53,701

 
$
(311
)
 
$
80,130

 
$
(2,530
)
 
$
133,831

 
$
(2,841
)
 
 
 
 
 
 
 
 
 
 
 
 
Securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
State and political subdivisions
$
13,048

 
$
(186
)
 
$

 
$

 
$
13,048

 
$
(186
)
As of June 30, 2015, the available for sale securities with unrealized losses that have existed for longer than one year included 12 collateralized mortgage obligation securities, two mortgage-backed securities, one trust preferred security and two equity securities.

The Company believes the unrealized losses on investments available for sale and held to maturity as of June 30, 2015, 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 does not consider these investments to have OTTI as of June 30, 2015.

    

13

Table of Contents

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


4. Loans and Allowance for Loan Losses

Loans consisted of the following segments as of June 30, 2015 and December 31, 2014.
 
June 30, 2015
 
December 31, 2014
Commercial
$
334,933

 
$
316,908

Real estate:
 
 
 
Construction, land and land development
148,786

 
154,490

1-4 family residential first mortgages
51,938

 
53,497

Home equity
21,091

 
24,500

Commercial
652,487

 
625,938

Consumer and other loans
8,905

 
9,318

 
1,218,140

 
1,184,651

Net unamortized fees and costs
(762
)
 
(606
)
 
$
1,217,378

 
$
1,184,045

Real estate loans of approximately $610,000 and $590,000 were pledged as security for Federal Home Loan Bank (FHLB) advances as of June 30, 2015 and December 31, 2014, 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 those outstanding loan balances.  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. 

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 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.

A loan is classified as a troubled debt restructured (TDR) loan when the Company concludes that a borrower is experiencing financial difficulties and a concession was granted that would not otherwise be considered. Concessions may include a restructuring of the loan terms to alleviate the burden on 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 past due 90 days if they are not performing per the restructured terms.


14

Table of Contents

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


The table below presents the TDR loans by segment as of June 30, 2015 and December 31, 2014.
 
June 30, 2015
 
December 31, 2014
Troubled debt restructured loans(1):
 
 
 
Commercial
$
109

 
$

Real estate:
 
 
 
Construction, land and land development
351

 
376

1-4 family residential first mortgages
98

 
86

Home equity

 

Commercial
501

 
557

Consumer and other loans

 

Total troubled debt restructured loans
$
1,059

 
$
1,019


(1)
There were three TDR loans as of June 30, 2015 and two TDR loans as of December 31, 2014, with balances of $688 and $643, respectively, categorized as nonaccrual.

There was one loan modification considered to be TDR that occurred during the three months ended June 30, 2015, and two loan modifications considered to be TDR that occurred during the six months ended June 30, 2015 with pre- and post-modification recorded investments of $20 and $130, respectively. There were no loan modifications considered to be TDR during the three and six months ended June 30, 2014.

One TDR loan that was modified within the twelve months preceding June 30, 2015, with a recorded investment of $110, has subsequently had a payment default. No TDR loans that were modified within the twelve months preceding June 30, 2014 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.


15

Table of Contents

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


The following table summarizes the recorded investment in impaired loans by segment, broken down by loans with no related allowance and loans with a related allowance and the amount of that allowance as of June 30, 2015 and December 31, 2014.
 
June 30, 2015
 
December 31, 2014
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
163

 
$
309

 
$

 
$
164

 
$
310

 
$

Real Estate:
 
 
 
 
 
 
 
 
 
 
 
Construction, land and land development
351

 
954

 

 
376

 
978

 

1-4 family residential first mortgages
300

 
300

 

 
257

 
257

 

Home equity

 

 

 

 

 

Commercial
1,938

 
1,938

 

 
557

 
557

 

Consumer and other loans
4

 
4

 

 

 

 

 
2,756

 
3,505

 

 
1,354

 
2,102

 

With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Commercial
109

 
109

 
109

 
292

 
292

 
150

Real Estate:
 
 
 
 
 
 
 
 
 
 
 
Construction, land and land development

 

 

 
825

 
825

 
200

1-4 family residential first mortgages

 

 

 

 

 

Home equity
220

 
220

 
220

 
229

 
229

 
229

Commercial
164

 
164

 
164

 
172

 
172

 
172

Consumer and other loans

 

 

 

 

 

 
493

 
493

 
493

 
1,518

 
1,518

 
751

Total:
 
 
 
 
 
 
 
 
 
 
 
Commercial
272

 
418

 
109

 
456

 
602

 
150

Real Estate:
 
 
 
 
 
 
 
 
 
 
 
Construction, land and land development
351

 
954

 

 
1,201

 
1,803

 
200

1-4 family residential first mortgages
300

 
300

 

 
257

 
257

 

Home equity
220

 
220

 
220

 
229

 
229

 
229

Commercial
2,102

 
2,102

 
164

 
729

 
729

 
172

Consumer and other loans
4

 
4

 

 

 

 

 
$
3,249

 
$
3,998

 
$
493

 
$
2,872

 
$
3,620

 
$
751

   
The balance of impaired loans at June 30, 2015 and December 31, 2014 was composed of 13 and 11 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)
(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, 2015 and 2014.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
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
$
164

 
$

 
$
483

 
$

 
$
164

 
$

 
$
362

 
$

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction, land and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   land development
354

 
4

 
402

 
4

 
360

 
7

 
408

 
8

1-4 family residential first
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   mortgages
307

 

 
366

 
7

 
284

 

 
414

 
7

Home equity

 

 

 

 

 

 

 

Commercial
1,229

 

 
688

 
1

 
937

 

 
732

 
3

Consumer and other loans
4

 

 

 

 
2

 

 

 

 
2,058

 
4

 
1,939

 
12

 
1,747

 
7

 
1,916

 
18

With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
245

 

 
387

 
3

 
265

 
2

 
565

 
5

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction, land and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   land development

 

 
1,631

 
19

 
353

 
6

 
1,786

 
41

1-4 family residential first
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   mortgages

 

 
231

 

 

 

 
267

 

Home equity
222

 

 
59

 

 
224

 

 
34

 

Commercial
165

 

 

 

 
168

 

 

 

Consumer and other loans

 

 

 

 

 

 

 

 
632

 

 
2,308

 
22

 
1,010

 
8

 
2,652

 
46

Total:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
409

 

 
870

 
3

 
429

 
2

 
927

 
5

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction, land and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   land development
354

 
4

 
2,033

 
23

 
713

 
13

 
2,194

 
49

1-4 family residential first
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   mortgages
307

 

 
597

 
7

 
284

 

 
681

 
7

Home equity
222

 

 
59

 

 
224

 

 
34

 

Commercial
1,394

 

 
688

 
1

 
1,105

 

 
732

 
3

Consumer and other loans
4

 

 

 

 
2

 

 

 

 
$
2,690

 
$
4

 
$
4,247

 
$
34

 
$
2,757

 
$
15

 
$
4,568

 
$
64




17

Table of Contents

West Bancorporation, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
(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, 2015 and December 31, 2014.
 
June 30, 2015
 
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
$
176

 
$

 
$

 
$
176

 
$
334,485

 
$
272

 
$
334,933

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction, land and
 
 
 
 
 
 
 
 
 
 
 
 
 
land development

 

 

 

 
148,786

 

 
148,786

1-4 family residential
 
 
 
 
 
 
 
 
 
 
 
 
 
first mortgages
205

 

 

 
205

 
51,453

 
280

 
51,938

Home equity

 

 

 

 
20,871

 
220

 
21,091

Commercial

 

 

 

 
650,385

 
2,102

 
652,487

Consumer and other
17

 
1

 

 
18

 
8,883

 
4

 
8,905

Total
$
398

 
$
1

 
$

 
$
399

 
$
1,214,863

 
$
2,878

 
$
1,218,140

 
December 31, 2014
 
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
$
34

 
$

 
$

 
$
34

 
$
316,528

 
$
346

 
$
316,908

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction, land and
 
 
 
 
 
 
 
 
 
 
 
 
 
land development

 

 

 

 
154,490

 

 
154,490

1-4 family residential
 
 
 
 
 
 
 
 
 
 
 
 
 
first mortgages

 

 

 

 
53,240

 
257

 
53,497

Home equity
14

 

 

 
14

 
24,257

 
229

 
24,500

Commercial
1,500

 

 

 
1,500

 
623,709

 
729

 
625,938

Consumer and other

 

 

 

 
9,318

 

 
9,318

Total
$
1,548

 
$

 
$

 
$
1,548

 
$
1,181,542

 
$
1,561

 
$
1,184,651



18

Table of Contents

West Bancorporation, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
(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, 2015 and December 31, 2014.
 
June 30, 2015
 
Pass
 
Watch
 
Substandard
 
Doubtful
 
Total
Commercial
$
329,389

 
$
4,906

 
$
638

 
$

 
$
334,933

Real estate:
 
 
 
 
 
 
 
 
 
Construction, land and land development
145,802

 
900

 
2,084

 

 
148,786

1-4 family residential first mortgages
50,981

 
529

 
428

 

 
51,938

Home equity
20,756

 
23

 
312

 

 
21,091

Commercial
645,297

 
4,020

 
3,170

 

 
652,487

Consumer and other
8,883

 

 
22

 

 
8,905

Total
$
1,201,108

 
$
10,378

 
$
6,654

 
$

 
$
1,218,140

 
December 31, 2014
 
Pass
 
Watch
 
Substandard
 
Doubtful
 
Total
Commercial
$
309,704

 
$
6,268

 
$
936

 
$

 
$
316,908

Real estate:
 
 
 
 
 
 
 
 
 
Construction, land and land development
151,258

 
993

 
2,239

 

 
154,490

1-4 family residential first mortgages
52,574

 
536

 
387

 

 
53,497

Home equity
23,958

 
218

 
324

 

 
24,500

Commercial
614,974

 
7,467

 
3,497

 

 
625,938

Consumer and other
9,318

 

 

 

 
9,318

Total
$
1,161,786

 
$
15,482

 
$
7,383

 
$

 
$
1,184,651

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 is in satisfactory financial condition and has satisfactory debt service capacity. The loan is performing as agreed, and the financial characteristics and trends of the borrower 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)
(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 criticized loans.

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 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.  Loans are charged-off against the allowance for loan losses when management believes that collectability of the principal is unlikely.  The allowance is an amount that management believes will be adequate to absorb 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.  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)
(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, 2015 and 2014.
 
Three Months Ended June 30, 2015
 
 
 
Real Estate
 
 
 
 
 
Commercial
 
Construction and Land
 
1-4 Family Residential
 
Home Equity
 
Commercial
 
Consumer and Other
 
Total
Beginning balance
$
4,498

 
$
1,744

 
$
433

 
$
505

 
$
6,669

 
$
29

 
$
13,878

Charge-offs
(18
)
 

 
(15
)
 

 

 

 
(33
)
Recoveries
303

 

 
1

 
10

 
3

 
2

 
319

Provision (1)
(47
)
 
(44
)
 
26

 
(41
)
 
310

 
(4
)
 
200

Ending balance
$
4,736

 
$
1,700

 
$
445

 
$
474

 
$
6,982

 
$
27

 
$
14,364

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2014
 
 
 
Real Estate
 
 
 
 
 
Commercial
 
Construction and Land
 
1-4 Family Residential
 
Home Equity
 
Commercial
 
Consumer and Other
 
Total
Beginning balance
$
4,006

 
$
2,892

 
$
590

 
$
365

 
$
5,378

 
$
52

 
$
13,283

Charge-offs
(167
)
 

 
(23
)
 
(63
)
 

 

 
(253
)
Recoveries
23

 

 
1

 
9

 

 

 
33

Provision (1)
36

 
(352
)
 
(15
)
 
252

 
231

 
(2
)
 
150

Ending balance
$
3,898

 
$
2,540

 
$
553

 
$
563

 
$
5,609

 
$
50

 
$
13,213

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2015
 
 
 
Real Estate
 
 
 
 
 
Commercial
 
Construction and Land
 
1-4 Family Residential
 
Home Equity
 
Commercial
 
Consumer and Other
 
Total
Beginning balance
$
4,415

 
$
2,151

 
$
466

 
$
534

 
$
6,013

 
$
28

 
$
13,607

Charge-offs
(56
)
 

 
(15
)
 

 

 

 
(71
)
Recoveries
327

 
250

 
2

 
35

 
6

 
8

 
628

Provision (1)
50

 
(701
)
 
(8
)
 
(95
)
 
963

 
(9
)
 
200

Ending balance
$
4,736

 
$
1,700

 
$
445

 
$
474

 
$
6,982

 
$
27

 
$
14,364

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2014
 
 
 
Real Estate
 
 
 
 
 
Commercial
 
Construction and Land
 
1-4 Family Residential
 
Home Equity
 
Commercial
 
Consumer and Other
 
Total
Beginning balance
$
4,199

 
$
3,032

 
$
613

 
$
403

 
$
5,485

 
$
59

 
$
13,791

Charge-offs
(577
)
 

 
(63
)
 
(63
)
 
(112
)
 

 
(815
)
Recoveries
52

 
8

 
2

 
24

 

 
1

 
87

Provision (1)
224

 
(500
)
 
1

 
199

 
236

 
(10
)
 
150

Ending balance
$
3,898

 
$
2,540

 
$
553

 
$
563

 
$
5,609

 
$
50

 
$
13,213

(1)
The negative provisions for the various segments are related to either the decline 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)
(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, 2015 and December 31, 2014.
 
June 30, 2015
 
 
 
Real Estate
 
 
 
 
 
Commercial
 
Construction and Land
 
1-4 Family Residential
 
Home Equity
 
Commercial
 
Consumer and Other
 
Total
Ending balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
109

 
$

 
$

 
$
220

 
$
164

 
$

 
$
493

Collectively evaluated for impairment
4,627

 
1,700

 
445

 
254

 
6,818

 
27

 
13,871

Total
$
4,736

 
$
1,700

 
$
445

 
$
474

 
$
6,982

 
$
27

 
$
14,364

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
Real Estate
 
 
 
 
 
Commercial
 
Construction and Land
 
1-4 Family Residential
 
Home Equity
 
Commercial
 
Consumer and Other
 
Total
Ending balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
150

 
$
200

 
$

 
$
229

 
$
172

 
$

 
$
751

Collectively evaluated for impairment
4,265

 
1,951

 
466

 
305

 
5,841

 
28

 
12,856

Total
$
4,415

 
$
2,151

 
$
466

 
$
534

 
$
6,013

 
$
28

 
$
13,607

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, 2015 and December 31, 2014.
 
June 30, 2015
 
 
 
Real Estate
 
 
 
 
 
Commercial
 
Construction and Land
 
1-4 Family Residential
 
Home Equity
 
Commercial
 
Consumer and Other
 
Total
Ending balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
272

 
$
351

 
$
300

 
$
220

 
$
2,102

 
$
4

 
$
3,249

Collectively evaluated for impairment
334,661

 
148,435

 
51,638

 
20,871

 
650,385

 
8,901

 
1,214,891

Total
$
334,933

 
$
148,786

 
$
51,938

 
$
21,091

 
$
652,487

 
$
8,905

 
$
1,218,140

 
December 31, 2014
 
 
 
Real Estate
 
 
 
 
 
Commercial
 
Construction and Land
 
1-4 Family Residential
 
Home Equity
 
Commercial
 
Consumer and Other
 
Total
Ending balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
456

 
$
1,201

 
$
257

 
$
229

 
$
729

 
$

 
$
2,872

Collectively evaluated for impairment
316,452

 
153,289

 
53,240

 
24,271

 
625,209

 
9,318

 
1,181,779

Total
$
316,908

 
$
154,490

 
$
53,497

 
$
24,500

 
$
625,938

 
$
9,318

 
$
1,184,651



22

Table of Contents

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


5. Derivatives

The Company uses interest rate swap agreements to assist in its interest rate risk management. The notional amounts of the interest rate swaps do not represent amounts exchanged by the counterparties, but rather, the notional amount is used to determine, along with other terms of the derivative, the amounts to be exchanged between the counterparties.

The Company has variable rate FHLB advances, which create exposure to variability in interest payments due to changes in interest rates. In December 2012, to manage the interest rate risk related to the variability of interest payments, the Company entered into three forward-starting interest rate swap transactions, with a total notional amount of $80,000. The interest rate swaps effectively convert $80,000 of variable rate FHLB advances to fixed rate debt as of the forward-starting dates. The three swap transactions were designated as cash flow hedges of the changes in cash flows attributable to changes in LIBOR, the benchmark interest rate being hedged, associated with the interest payments made on the underlying FHLB advances with quarterly interest rate reset dates. One interest rate swap, with a notional amount of $25,000, became effective in December 2014 and was subsequently terminated in March 2015, subject to a termination fee of $158. A second interest rate swap, with a notional amount of $25,000, was terminated in June 2015, prior to its effective date and subject to a termination fee of $383. The third interest rate swap, with a notional amount of $30,000, will become effective in December 2015. The termination fees will be reclassified from accumulated other comprehensive income to interest expense over the remaining life of the underlying cash flows, through December 2019 and June 2020.

In June 2013, the Company entered into a forward-starting interest rate swap transaction with a total notional amount of $20,000, to effectively convert its $20,000 variable rate junior subordinated notes to fixed rate debt as of the forward-starting date of the swap transaction. The effective date of this swap was June 30, 2014, and it was terminated in September 2014, when the fair value was $0.

At the inception of each hedge transaction, the Company represented that the underlying principal balance would remain outstanding throughout the hedge transaction, making it probable that sufficient LIBOR-based interest payments would exist through the maturity date of the swaps. The cash flow hedges were determined to be fully effective during the remaining terms of the swaps. Therefore, the aggregate fair value of the remaining swap is recorded in other assets or other liabilities with changes in market value recorded in other comprehensive income, net of deferred taxes. See Note 9 for additional fair value information and disclosures. The amount included in accumulated other comprehensive income for the remaining hedge will be reclassified to interest expense should the hedge no longer be considered effective. No amount of ineffectiveness was included in net income for the six months ended June 30, 2015 or 2014, and the Company estimates there will be approximately $304 of cash payments and reclassification from accumulated other comprehensive income (loss) to interest expense through June 30, 2016. The Company will continue to assess the effectiveness of the remaining hedge on a quarterly basis.

The Company is exposed to credit risk in the event of nonperformance by the interest rate swap counterparty. The Company minimizes this risk by entering into derivative contracts with only large, stable financial institutions, and the Company has not experienced, and does not expect, any losses from counterparty nonperformance on the interest rate swaps. The Company monitors counterparty risk in accordance with the provisions of FASB ASC 815. In addition, the interest rate swap agreements contain language outlining collateral-pledging requirements for each counterparty. Collateral must be posted when the market value exceeds certain threshold limits. As of June 30, 2015, the Company pledged to the counterparty $200 of required collateral in the form of cash on deposit with a third party.



23

Table of Contents

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


The tables below identify the balance sheet category and fair values of the Company's derivative instruments designated as cash flow hedges as of June 30, 2015 and December 31, 2014.
June 30, 2015
Swap
Number
 
Notional
Amount
 
Fair Value
 
Balance Sheet
Category
 
Receive Rate
 
Pay Rate
 
Maturity
Interest rate swap
(3)
 
$
30,000

 
$
(381
)
 
Other Liabilities
 
0.59
%
 
2.52
%
 
9/21/2020
December 31, 2014
Swap
Number
 
Notional
Amount
 
Fair Value
 
Balance Sheet
Category
 
Receive Rate
 
Pay Rate
 
Maturity
Interest rate swap
(1)
 
$
25,000

 
$
(97
)
 
Other Liabilities
 
0.54
%
 
2.10
%
 
12/23/2019
Interest rate swap
(2)
 
25,000

 
(87
)
 
Other Liabilities
 
0.56
%
 
2.34
%
 
6/22/2020
Interest rate swap
(3)
 
30,000

 
(77
)
 
Other Liabilities
 
0.56
%
 
2.52
%
 
9/21/2020
The following tables identify the pre-tax losses recognized on the Company's derivative instruments designated as cash flow hedges for the six months ended June 30, 2015 and 2014.
 
 
 
Six Months Ended June 30, 2015
 
 
 
Effective Portion
 
Ineffective Portion
 
 
 
Amount of
 
Reclassified from AOCI into
Income
 
Recognized in Income on
Derivatives
 
 
 
Pre-tax (Loss)
 
 
 
Swap
Number
 
Recognized in
 
 
 
Amount of
 
 
 
Amount of
 
 
OCI
 
Category
 
Gain (Loss)
 
Category
 
Gain (Loss)
Interest rate swap
(1)
 
$
(134
)
 
Interest Expense
 
$
(72
)
 
Other Income
 
$

Interest rate swap
(2)
 
(297
)
 
Interest Expense
 

 
Other Income
 

Interest rate swap
(3)
 
(304
)
 
Interest Expense
 

 
Other Income
 

 
 
 
Six Months Ended June 30, 2014
 
 
 
Effective Portion
 
Ineffective Portion
 
 
 
Amount of
 
Reclassified from AOCI into
Income
 
Recognized in Income on
Derivatives
 
 
 
Pre-tax (Loss)
 
 
 
Swap
Number
 
Recognized in
 
 
 
Amount of
 
 
 
Amount of
 
 
OCI
 
Category
 
Gain (Loss)
 
Category
 
Gain (Loss)
Interest rate swap
(1)
 
$
(660
)
 
Interest Expense
 
$

 
Other Income
 
$

Interest rate swap
(2)
 
(736
)
 
Interest Expense
 

 
Other Income
 

Interest rate swap
(3)
 
(937
)
 
Interest Expense
 

 
Other Income
 

Interest rate swap
(4)
 
(440
)
 
Interest Expense
 

 
Other Income
 



24

Table of Contents

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


6.  Deferred Income Taxes

Net deferred tax assets consisted of the following as of June 30, 2015 and December 31, 2014.  
 
June 30, 2015
 
December 31, 2014
Deferred tax assets:
 
 
 
Allowance for loan losses
$
5,458

 
$
5,171

Intangibles
925

 
1,079

Other real estate owned
367

 
367

Accrued expenses
758

 
891

Restricted stock compensation
130

 
184

Net unrealized losses on interest rate swaps
344

 
99

State net operating loss carryforward
1,148

 
1,100

Capital loss carryforward
797

 
797

Other
44

 
46

 
9,971

 
9,734

Deferred tax liabilities:
 
 
 
Net deferred loan fees and costs
327

 
334

Premises and equipment
472

 
565

Net unrealized gains on securities available for sale
17

 
255

Other
513

 
350

 
1,329

 
1,504

Net deferred tax assets before valuation allowance
8,642

 
8,230

Valuation allowance
(1,945
)
 
(1,897
)
Net deferred tax assets
$
6,697

 
$
6,333

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


25

Table of Contents

West Bancorporation, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
(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, 2015 and 2014.
 
Noncredit-related
 
 
 
 
 
 
 
Unrealized
 
Unrealized
 
Unrealized
 
Accumulated
 
Gains (Losses)
 
Gains (Losses)
 
Gains
 
Other
 
on Securities
 
on Securities
 
(Losses) on
 
Comprehensive
 
with OTTI
 
without OTTI
 
Derivatives
 
Income (Loss)
Balance, December 31, 2013
$
(1,439
)
 
$
(4,217
)
 
$
2,118

 
$
(3,538
)
Other comprehensive income (loss) before
 
 
 
 
 
 
 
reclassifications
222

 
4,579

 
(1,719
)
 
3,082

Amounts reclassified from accumulated other
 
 
 
 
 
 
 
comprehensive income

 
(314
)
 

 
(314
)
Net current period other comprehensive income (loss)
222

 
4,265

 
(1,719
)
 
2,768

Balance, June 30, 2014
$
(1,217
)
 
$
48

 
$
399

 
$
(770
)
 
 
 
 
 
 
 
 
Balance, December 31, 2014
$

 
$
416

 
$
(162
)
 
$
254

Other comprehensive (loss) before
 
 
 
 
 
 
 
reclassifications

 
(347
)
 
(456
)
 
(803
)
Amounts reclassified from accumulated other
 
 
 
 
 
 
 
comprehensive income

 
(41
)
 
56

 
15

Net current period other comprehensive (loss)

 
(388
)
 
(400
)
 
(788
)
Balance, June 30, 2015
$

 
$
28

 
$
(562
)
 
$
(534
)
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, 2015 and December 31, 2014
 
June 30, 2015
 
December 31, 2014
Commitments to extend credit
$
463,723

 
$
441,124

Standby letters of credit
5,876

 
14,595

 
$
469,599

 
$
455,719

West Bank previously had executed Mortgage Partnership Finance (MPF) Master Commitments (Commitments) with the FHLB of Des Moines to deliver 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 mortgage loans.  The term of the most recent Commitment was through January 16, 2015 and was not renewed.  At June 30, 2015, 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 $412.

Contractual commitments: The Company has remaining commitments to invest in four qualified affordable housing projects totaling $4,444 as of June 30, 2015.

26

Table of Contents

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


Contingencies: On September 29, 2010, West Bank was sued in a class action lawsuit that, as amended, asserts nonsufficient funds fees charged by West Bank to Iowa resident customers on debit card transactions are usurious under the Iowa Consumer Credit Code, rather than allowable fees, and that the sequence in which West Bank formerly posted debit card transactions for payment violated various alleged duties of good faith and ordinary care. Plaintiffs are seeking alternative remedies that include injunctive relief, damages (including treble damages), punitive damages, refund of fees and attorney fees. The case is currently being brought by Darla and Jason T. Legg, on behalf of themselves and all others similarly situated, in the Iowa District Court for Polk County, Iowa. West Bank believes it has substantial defenses and is vigorously defending the action. The trial court entered orders on preliminary motions on March 4, 2014. It dismissed one of the plaintiffs’ claims and found that factual disputes precluded summary judgment in West Bank’s favor on the remaining claims. In addition, the court certified two classes for further proceedings. West Bank appealed the adverse rulings to the Iowa Supreme Court. The Iowa Supreme Court has indicated that the appeal will be heard during the 2015-2016 court term. The appeals have not yet been assigned a date for oral argument. The amount of potential loss, if any, cannot be reasonably estimated now because of the unresolved legal issues and because, among other things, the multiple alternative claims involve different time periods, burdens of proof, defenses and potential remedies.
Except as described above, neither the Company nor West Bank is a party, and no property of these entities is subject, to any other 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.


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 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, 2015.

The following is a description of valuation methodologies used for 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. 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. 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. Level 1 securities include certain corporate bonds and preferred stocks, and would include U.S. Treasuries, if any were held. Level 2 securities include U.S. government and agency securities, collateralized mortgage obligations, mortgage-backed securities, state and political subdivision securities, and a trust preferred security. The Company currently holds no investment securities classified as Level 3.


27

Table of Contents

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


Generally, management obtains the fair value of investment securities at the end of each reporting period via a third party pricing service. Management, with the assistance of an independent investment advisory firm, reviewed the valuation process used by the third party and believes that process was valid. On a quarterly basis, management corroborates the fair values of investment securities by obtaining pricing from an independent investment advisory firm and compares the two sets of fair values. Any significant variances are reviewed and investigated. In addition, the Company has instituted a practice of further testing the fair values of a sample of securities. For that sample, the prices are further validated by management, with assistance from an independent investment advisory 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 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 position is classified within Level 2 of the fair value hierarchy and is 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 are 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. 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.

The following tables present the balances of assets and liabilities measured at fair value on a recurring basis by level as of June 30, 2015 and December 31, 2014.
 
 
June 30, 2015
Description
 
Total
 
Level 1
 
Level 2
 
Level 3
Financial assets:
 
 
 
 
 
 
 
 
Investment securities available for sale:
 
 
 
 
 
 
 
 
U.S. government agencies and corporations
 
$
2,750

 
$

 
$
2,750

 
$

State and political subdivisions
 
55,043

 

 
55,043

 

Collateralized mortgage obligations
 
116,501

 

 
116,501

 

Mortgage-backed securities
 
59,737

 

 
59,737

 

Trust preferred security
 
1,040

 

 
1,040

 

Corporate notes and equity securities
 
10,130

 
9,830

 
300

 


 


 


 


 


Financial liabilities:
 
 
 
 
 
 
 
 
Derivative instruments, interest rate swaps
 
$
(381
)
 
$

 
$
(381
)
 
$

 
 
December 31, 2014
Description
 
Total
 
Level 1
 
Level 2
 
Level 3
Financial assets:
 
 
 
 
 
 
 
 
Investment securities available for sale:
 
 

 
 

 
 

 
 

U.S. government agencies and corporations
 
$
12,820

 
$

 
$
12,820

 
$

State and political subdivisions
 
52,359

 

 
52,359

 

Collateralized mortgage obligations
 
125,870

 

 
125,870

 

Mortgage-backed securities
 
66,153

 

 
66,153

 

Trust preferred security
 
918

 

 
918

 

Corporate notes and equity securities
 
14,670

 
14,370

 
300

 

 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
 
Derivative instruments, interest rate swaps
 
$
(261
)
 
$

 
$
(261
)
 
$


28

Table of Contents

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


The following table presents changes in investment securities available for sale with significant unobservable inputs (Level 3) for the three and six months ended June 30, 2015 and 2014. The activity in the table consists of one pooled trust preferred security, which was considered to have OTTI and was sold in December 2014.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Beginning balance
$

 
$
2,168

 
$

 
$
1,850

Transfer into level 3

 

 

 

Total gains:
 
 
 
 
 
 
 
Included in earnings

 

 

 

Included in other comprehensive income

 
39

 

 
357

Sale of security

 

 

 

Principal payments

 

 

 

Ending balance
$

 
$
2,207

 
$

 
$
2,207

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).  The following tables present those assets carried on the balance sheet by caption and by level within the valuation hierarchy as of June 30, 2015 and December 31, 2014.
 
 
June 30, 2015
Description
 
Total
 
Level 1
 
Level 2
 
Level 3
Impaired loans
 
$
474

 
$

 
$

 
$
474

Other real estate owned
 
2,235

 

 

 
2,235

 
 
 

 
 

 
 

 
 

 
 
December 31, 2014
Description
 
Total
 
Level 1
 
Level 2
 
Level 3
Impaired loans
 
$
1,266

 
$

 
$

 
$
1,266

Other real estate owned
 
2,235

 

 

 
2,235

Loans in the previous tables consist of impaired loans for which a fair value adjustment was recorded.  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.  Collateral may be real estate or business assets such as equipment, inventory or accounts receivable. Fair value is determined by management evaluations or independent appraisals.  Appraised or reported values may be discounted based on management's opinions concerning market developments or the client's business.  Other real estate owned in the tables above consists of property acquired through foreclosures and loan settlements.  Property acquired is carried at fair value of the property less estimated disposal costs. Fair value of other real estate owned is determined by management by obtaining appraisals or other market value information at the time of acquisition, is updated at least annually, and may be discounted.


29

Table of Contents

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


The following tables present additional quantitative information about assets measured at fair value on a nonrecurring basis for which the Company has utilized Level 3 inputs to determine fair value as of June 30, 2015 and December 31, 2014.
 
 
June 30, 2015
 
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range (Average)
Impaired loans
 
$
474

 
Evaluation of collateral
 
Estimation of value
 
NM*
Other real estate owned
 
2,235

 
Appraisal
 
Appraisal adjustment
 
0.0% - 25.0% (25.0%)
 
 
December 31, 2014
 
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range (Average)
Impaired loans
 
$
1,266

 
Evaluation of collateral
 
Estimation of value
 
NM*
Other real estate owned
 
2,235

 
Appraisal
 
Appraisal adjustment
 
0.0% - 25.0% (25.0%)
* Not Meaningful. Evaluations of the underlying assets are completed for each impaired loan with a specific reserve. The types of collateral vary widely and could include accounts receivables, inventory, a variety of equipment and real estate. 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 included aging of receivables, condition of the collateral, potential market for the collateral and estimated disposal costs. These discounts will vary from loan to loan, thus providing a range would not be meaningful.
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 methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or nonrecurring basis are discussed above.  The methodologies for other financial assets and financial liabilities are discussed below.

Cash and due from banks:  The carrying amount approximates fair value.

Federal funds sold:  The carrying amount approximates fair value.

Investment securities held to maturity: The fair values of these securities, which are all state and political subdivisions, are determined by the same method described previously for investment securities available for sale.

FHLB stock:  The fair value of this restricted stock is estimated at its carrying value and redemption price of $100 per share.

Loans:  The fair values of fixed rate loans are estimated using discounted cash flow analysis based on observable market interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. The carrying values of variable rate loans approximate their fair values.

Deposits:  The carrying amounts for demand and savings deposits, which represent the amounts payable on demand, approximate their fair values.  The fair values for certificates of deposit are estimated using discounted cash flow analysis, based on observable market interest rates currently being offered on certificates with similar terms.

Accrued interest receivable and payable:  The fair values of both accrued interest receivable and payable approximate their carrying amounts.

Borrowings:  The carrying amounts of federal funds purchased, short-term borrowings and variable rate long-term borrowings approximate their fair values.  Fair values of fixed rate FHLB advances, subordinated notes and other long-term borrowings are estimated using discounted cash flow analysis, based on observable market interest rates currently being offered with similar terms.

Commitments to extend credit and standby letters of credit:  The approximate fair values of commitments and standby letters of credit are based on the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and creditworthiness of the counterparties.


30

Table of Contents

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


The following table presents the carrying amounts and approximate fair values of financial assets and liabilities as of June 30, 2015 and December 31, 2014
 
 
 
June 30, 2015
 
December 31, 2014
 
Fair Value Hierarchy Level
 
Carrying Amount
 
Approximate Fair Value
 
Carrying Amount
 
Approximate Fair Value
Financial assets:
 
 
 
 
 
 
 
 
 
Cash and due from banks
Level 1
 
$
61,682

 
$
61,682

 
$
27,936

 
$
27,936

Federal funds sold
Level 1
 
20,386

 
20,386

 
11,845

 
11,845

Investment securities available for sale
See previous table
 
245,201

 
245,201

 
272,790

 
272,790

Investment securities held to maturity
Level 2
 
51,302

 
50,448

 
51,343

 
51,501

Federal Home Loan Bank stock
Level 1
 
12,168

 
12,168

 
15,075

 
15,075

Loans, net(1)
Level 2
 
1,203,014

 
1,210,590

 
1,170,438

 
1,199,832

Accrued interest receivable
Level 1
 
4,386

 
4,386

 
4,425

 
4,425

Financial liabilities:
 
 
 
 
 
 
 
 
 
Deposits
Level 2
 
1,366,610

 
1,368,348

 
1,270,462

 
1,270,987

Federal funds purchased
Level 1
 
6,910

 
6,910

 
2,975

 
2,975

Short-term borrowings
Level 1
 

 

 
66,000

 
66,000

Subordinated notes
Level 2
 
20,619

 
13,044

 
20,619

 
13,330

Federal Home Loan Bank advances, net
Level 2
 
97,631

 
98,262

 
96,888

 
96,312

Long-term debt
Level 2
 
11,046

 
10,952

 
12,676

 
12,571

Accrued interest payable
Level 1
 
419

 
419

 
419

 
419

Interest rate swaps
See previous table
 
381

 
381

 
261

 
261

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

 

 

 

Standby letters of credit
Level 3
 

 

 

 


(1) All loans are Level 2 except impaired loans of $474 and $1,266 as of June 30, 2015 and December 31, 2014, respectively, which are Level 3.

31

Table of Contents


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 our 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 and Section 21E of the Securities Exchange Act of 1934. 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 and national economic conditions; changes in regulatory requirements, limitations and costs; changes in customers' acceptance of the Company's products and services; cyber-attacks; and any other risks described in the “Risk Factors” sections of this and other reports filed by the Company with the Securities and Exchange Commission. 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 our financial condition and results of operations are based upon our consolidated financial statements that have been prepared in accordance with GAAP. The preparation of these 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 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, 2014, as filed with the Securities and Exchange Commission on March 5, 2015. 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, 2014.


32

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, 2015

OVERVIEW

The following discussion describes the consolidated operations and financial condition of the Company, which includes West Bank and West Bank's wholly owned subsidiary WB Funding Corporation (which owns an interest in SmartyPig, LLC). West Bank's 99.99 percent owned subsidiary ICD IV, LLC, a community development entity, was liquidated during the third quarter of 2014 when the underlying loan matured. Results of operations for the three and six months ended June 30, 2015 are compared to the results for the same periods in 2014, and the consolidated financial condition of the Company as of June 30, 2015 is compared to balances as of December 31, 2014. 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, 2015 was $5,272, or $0.33 per diluted common share, compared to $4,739, or $0.30 per diluted common share, for the three months ended June 30, 2014. The Company's annualized return on average assets and return on average equity for the three months ended June 30, 2015 were 1.28 and 14.64 percent, respectively, compared to 1.26 and 14.62 percent, respectively, for the three months ended June 30, 2014.

The increase in net income for the three months ended June 30, 2015 compared to the same period in 2014 was primarily due to a $1,238 increase in net interest income. The 10.2 percent increase over the same three months of 2014 was primarily the result of loan growth and lower rates paid on time deposits. The increase in net interest income was partially offset by an increase of $50 in the provision for loan losses and a $324 reduction in revenue from residential mortgage banking. As previously disclosed, at the end of 2014, the Company changed its process for providing first mortgage loans to its customers. Starting in January 2015, residential mortgage underwriting and processing are outsourced, and funding for residential mortgages is provided by a third party. The Company now receives a fee from a third party for each residential mortgage loan initiated and closed by our retail staff. The reduction in this source of revenue was offset by lower associated operating costs.

Net income for the six months ended June 30, 2015 was $10,375, or $0.65 per diluted common share, compared to $9,139, or $0.57 per diluted common share, for the six months ended June 30, 2014. The Company's annualized return on average assets and return on average equity for the six months ended June 30, 2015 were 1.28 and 14.61 percent, respectively, compared to 1.24 and 14.40 percent, respectively, for the six months ended June 30, 2014.

The improvement in net income for first half of 2015 compared to the same period of 2014 was primarily due to a $2,393, or 10.0 percent, increase in net interest income for the same reasons mentioned above. Meanwhile, noninterest income for the first half of 2015 declined $1,089 compared to the first half of 2014 mainly due to the previously mentioned reduction in residential mortgage banking revenue as well as lower net gains on sales of investment securities. The Company recognized gains on sales of investment securities of $47 in the first half of 2015 compared to $506 in the first half of 2014. Noninterest expense declined $477 for the first half of 2015 compared to the first half of 2014 primarily due to the combination of lower costs associated with other real estate owned and the change in residential mortgage banking operations.

Total loans outstanding increased $33,333 during the first half of the year compared to December 31, 2014. Management believes the loan portfolio will continue to grow during the remainder of 2015 as the demand for commercial, construction and development, and commercial real estate loans remains strong in all three of the Company's markets. Credit quality remains strong as evidenced by the Company's Texas ratio, which was 3.43 percent as of June 30, 2015. As of June 30, 2015, the allowance for loan losses was 1.18 percent of loans outstanding, and management believes it was adequate to absorb any losses inherent in the loan portfolio.

As previously disclosed, the Company purchased land in Rochester, Minnesota during 2014, and the Company is finalizing the design of a permanent office in Rochester. The Company expects to break ground for the office during the third quarter of 2015.

The Board of Directors declared a quarterly dividend of $0.16 per common share at its meeting on July 22, 2015. The dividend is payable on August 19, 2015, to stockholders of record as of August 5, 2015.


33

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, 2015 compared with the same periods in 2014
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
Change
 
Change %
 
2015
 
2014
 
Change
 
Change %
Net income
$
5,272

 
$
4,739

 
$
533

 
11.2
%
 
$
10,375

 
$
9,139

 
$
1,236

 
13.5
%
Average assets
1,654,456

 
1,509,558

 
144,898

 
9.6
%
 
1,639,132

 
1,480,763

 
158,369

 
10.7
%
Average stockholders' equity
144,384

 
129,998

 
14,386

 
11.1
%
 
143,228

 
127,956

 
15,272

 
11.9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Return on average assets
1.28
%
 
1.26
%
 
0.02
 %
 
 
 
1.28
%
 
1.24
%
 
0.04
 %
 
 

Return on average equity
14.64
%
 
14.62
%
 
0.02
 %
 
 
 
14.61
%
 
14.40
%
 
0.21
 %
 
 

Net interest margin
3.59
%
 
3.55
%
 
0.04
 %
 
 
 
3.59
%
 
3.60
%
 
(0.01
)%
 
 
Efficiency ratio*
46.88
%
 
48.52
%
 
(1.64
)%
 
 
 
47.55
%
 
51.09
%
 
(3.54
)%
 
 
Dividend payout ratio
48.74
%
 
40.51
%
 
8.23
 %
 
 
 
46.38
%
 
40.25
%
 
6.13
 %
 
 

Average equity to average
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   assets ratio
8.73
%
 
8.61
%
 
0.12
 %
 
 
 
8.74
%
 
8.64
%
 
0.1
 %
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of June 30,
 
 
 
 
 
 
 
 
 
 
 
2015
 
2014
 
Change
 
 
Texas ratio*
 
 
 
 
 
 
 
 
3.43
%
 
6.54
%
 
(3.11
)%
 
 
Equity to assets ratio
 
 
 
 
 
 
 
 
8.79
%
 
8.60
%
 
0.19
 %
 
 

Tangible common equity ratio
 
 
 
 
 
 
 
8.79
%
 
8.60
%
 
0.19
 %
 
 

* 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) divided by noninterest income (excluding net securities gains 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 - average equity divided by average assets.
Tangible common equity ratio - common equity less intangible assets divided by tangible assets.



34

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 average yield or rate by category of interest-earning assets or interest-bearing liabilities.  Interest income and the resulting net interest income are shown on a fully taxable basis.
Data for the three months ended June 30:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average Balance
 
Interest Income/Expense
 
Yield/Rate
 
2015
 
2014
 
Change
 
Change-
%
 
2015
 
2014
 
Change
 
Change-
%
 
2015
 
2014
 
Change
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
329,414

 
$
262,338

 
$
67,076

 
25.57
 %
 
$
3,469

 
$
2,764

 
$
705

 
25.51
 %
 
4.22
%
 
4.23
%
 
(0.01
)%
Real estate
870,593

 
771,799

 
98,794

 
12.80
 %
 
9,697

 
8,977

 
720

 
8.02
 %
 
4.47
%
 
4.67
%
 
(0.20
)%
Consumer and other
8,413

 
9,217

 
(804
)
 
(8.72
)%
 
80

 
93

 
(13
)
 
(13.98
)%
 
3.81
%
 
4.05
%
 
(0.24
)%
Total loans
1,208,420

 
1,043,354

 
165,066

 
15.82
 %
 
13,246

 
11,834

 
1,412

 
11.93
 %
 
4.40
%
 
4.55
%
 
(0.15
)%
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 

Investment securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Taxable
216,954

 
261,957

 
(45,003
)
 
(17.18
)%
 
1,042

 
1,272

 
(230
)
 
(18.08
)%
 
1.92
%
 
1.94
%
 
(0.02
)%
Tax-exempt
102,256

 
91,809

 
10,447

 
11.38
 %
 
1,145

 
1,054

 
91

 
8.63
 %
 
4.48
%
 
4.59
%
 
(0.11
)%
Total investment securities
319,210

 
353,766

 
(34,556
)
 
(9.77
)%
 
2,187

 
2,326

 
(139
)
 
(5.98
)%
 
2.74
%
 
2.63
%
 
0.11
 %
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Federal funds sold
34,300

 
30,768

 
3,532

 
11.48
 %
 
22

 
20

 
2

 
10.00
 %
 
0.26
%
 
0.26
%
 
 %
Total interest-earning assets
$
1,561,930

 
$
1,427,888

 
$
134,042

 
9.39
 %
 
15,455

 
14,180

 
1,275

 
8.99
 %
 
3.97
%
 
3.98
%
 
(0.01
)%
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Deposits:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing demand,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
savings and money
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
market
$
835,119

 
$
753,388

 
$
81,731

 
10.85
 %
 
327

 
318

 
9

 
2.83
 %
 
0.16
%
 
0.17
%
 
(0.01
)%
Time deposits
142,826

 
155,153

 
(12,327
)
 
(7.95
)%
 
224

 
319

 
(95
)
 
(29.78
)%
 
0.63
%
 
0.82
%
 
(0.19
)%
Total deposits
977,945

 
908,541

 
69,404

 
7.64
 %
 
551

 
637

 
(86
)
 
(13.50
)%
 
0.23
%
 
0.28
%
 
(0.05
)%
Other borrowed funds
136,747

 
141,298

 
(4,551
)
 
(3.22
)%
 
915

 
908

 
7

 
0.77
 %
 
2.68
%
 
2.58
%
 
0.10
 %
Total interest-bearing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
liabilities
$
1,114,692

 
$
1,049,839

 
$
64,853

 
6.18
 %
 
1,466

 
1,545

 
(79
)
 
(5.11
)%
 
0.53
%
 
0.59
%
 
(0.06
)%
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Tax-equivalent net interest income
 
 

 
 

 
 

 
$
13,989

 
$
12,635

 
$
1,354

 
10.72
 %
 
 

 
 

 
 

Net interest spread
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
3.44
%
 
3.39
%
 
0.05
 %
Net interest margin
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
3.59
%
 
3.55
%
 
0.04
 %

35

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
 
2015
 
2014
 
Change
 
Change-
%
 
2015
 
2014
 
Change
 
Change-
%
 
2015
 
2014
 
Change
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
321,730

 
$
262,072

 
$
59,658

 
22.76
 %
 
$
6,668

 
$
5,544

 
$
1,124

 
20.27
 %
 
4.18
%
 
4.27
%
 
(0.09
)%
Real estate
866,728

 
756,384

 
110,344

 
14.59
 %
 
19,260

 
17,583

 
1,677

 
9.54
 %
 
4.48
%
 
4.69
%
 
(0.21
)%
Consumer and other
8,837

 
9,201

 
(364
)
 
(3.96
)%
 
168

 
190

 
(22
)
 
(11.58
)%
 
3.84
%
 
4.16
%
 
(0.32
)%
Total loans
1,197,295

 
1,027,657

 
169,638

 
16.51
 %
 
26,096

 
23,317

 
2,779

 
11.92
 %
 
4.40
%
 
4.58
%
 
(0.18
)%
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 

Investment securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Taxable
223,816

 
258,338

 
(34,522
)
 
(13.36
)%
 
2,167

 
2,602

 
(435
)
 
(16.72
)%
 
1.94
%
 
2.01
%
 
(0.07
)%
Tax-exempt
102,758

 
89,801

 
12,957

 
14.43
 %
 
2,300

 
2,074

 
226

 
10.90
 %
 
4.48
%
 
4.62
%
 
(0.14
)%
Total investment securities
326,574

 
348,139

 
(21,565
)
 
(6.19
)%
 
4,467

 
4,676

 
(209
)
 
(4.47
)%
 
2.74
%
 
2.69
%
 
0.05
 %
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Federal funds sold
24,818

 
23,073

 
1,745

 
7.56
 %
 
32

 
30

 
2

 
6.67
 %
 
0.26
%
 
0.26
%
 
 %
Total interest-earning assets
$
1,548,687

 
$
1,398,869

 
$
149,818

 
10.71
 %
 
30,595

 
28,023

 
2,572

 
9.18
 %
 
3.98
%
 
4.04
%
 
(0.06
)%
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Deposits:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing demand,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
savings and money
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
market
$
818,015

 
$
724,633

 
$
93,382

 
12.89
 %
 
651

 
597

 
54

 
9.05
 %
 
0.16
%
 
0.17
%
 
(0.01
)%
Time deposits
138,566

 
154,942

 
(16,376
)
 
(10.57
)%
 
471

 
662

 
(191
)
 
(28.85
)%
 
0.69
%
 
0.86
%
 
(0.17
)%
Total deposits
956,581

 
879,575

 
77,006

 
8.75
 %
 
1,122

 
1,259

 
(137
)
 
(10.88
)%
 
0.24
%
 
0.29
%
 
(0.05
)%
Other borrowed funds
153,448

 
146,882

 
6,566

 
4.47
 %
 
1,901

 
1,824

 
77

 
4.22
 %
 
2.50
%
 
2.50
%
 
 %
Total interest-bearing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
liabilities
$
1,110,029

 
$
1,026,457

 
$
83,572

 
8.14
 %
 
3,023

 
3,083

 
(60
)
 
(1.95
)%
 
0.55
%
 
0.61
%
 
(0.06
)%
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Tax-equivalent net interest income
 
 

 
 

 
 

 
$
27,572

 
$
24,940

 
$
2,632

 
10.55
 %
 
 

 
 

 
 

Net interest spread
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
3.43
%
 
3.43
%
 
 %
Net interest margin
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
3.59
%
 
3.60
%
 
(0.01
)%
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 the actions of regulatory authorities.  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 months ended June 30, 2015 increased four basis points to 3.59 percent compared to the three months ended June 30, 2014. For the six months ended June 30, 2015, the net interest margin declined one basis point to 3.59 percent compared to the same period in 2014. Management believes the net interest margin will remain at approximately the same level throughout the remainder of 2015 if the level of outstanding loans remains at similar levels and the Federal Reserve maintains its current monetary policy. Tax-equivalent net interest income for the three and six months ended June 30, 2015 increased $1,354 and $2,632, respectively, compared to the same time periods in 2014, primarily as the result of growth in loans and a decline in interest rates paid on time deposits.
   

36

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

Tax-equivalent interest income on loans increased $1,412 for the three months ended June 30, 2015 compared to the three months ended June 30, 2014. Tax-equivalent interest income on loans increased $2,779 for the six months ended June 30, 2015 compared to the same period in 2014. The improvement during both time periods was due to significant increases in average loan volume. The Company continues to focus on expanding existing and entering into new customer relationships while maintaining strong credit quality. The overall yield declined 15 and 18 basis points in the three and six months ended June 30, 2015, respectively, compared to the same periods in 2014. The yield on the Company's loan portfolio is affected by the mix of the loans in the portfolio, 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 $34,556 lower during the three months ended June 30, 2015 than during the same period last year, while the yield on the portfolio improved 11 basis points compared to the same period in 2014. For the six months ended June 30, 2015, the average balance of investment securities declined $21,565 compared to the first half of 2014, while the yield increased five basis points. The decline in average balances was primarily attributable to paydowns received on collateralized mortgage obligations and mortgage-backed securities. The Company also sold selected investment securities in the first half of both years to take advantage of available net gains and was able to reinvest the proceeds in higher yielding securities.

The average rate paid on deposits for the three months ended June 30, 2015 declined five basis points to 23 basis points compared to the three months ended June 30, 2014. The average rate paid on deposits for the first half of 2015 also declined five basis points compared to the same period in 2014.  A decline in rates and average balances outstanding on time deposits exceeded the effect of an increase in average interest-bearing deposit balances, resulting in an overall decrease in interest expense on deposits for the three and six months ended June 30, 2015 compared to the same periods in 2014. Average interest-bearing demand and money market account balances increased significantly during the three and six months ended June 30, 2015 due to higher customer demand for the Insured Cash Sweep products. These products are reciprocal programs that provide Federal Deposit Insurance Corporation (FDIC) insurance coverage for all participating deposits. The average balance of time deposits continues to decline as fewer customers are willing to lock in low rates in this extended period of historically low interest rates.

Provision for Loan Losses and the Related Allowance for Loan Losses

The provision for loan losses represents a charge 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 evaluations for the second quarters of 2015 and 2014, a provision for loan losses of $200 and $150, respectively, was recorded in each quarter. No provision was deemed necessary in the first quarter of either year.

Factors considered in establishing an appropriate allowance include: an assessment of the financial condition of the borrowers; the value and adequacy of loan collateral; the condition of the local economy and the condition of the specific industries of the borrowers; 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.  West Bank's commercial loans typically have greater credit risks than residential mortgages or consumer loans because they often have larger balances and repayment usually depends on the borrowers' successful business operations.  Commercial loans also involve additional risks because they 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. 


37

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

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 estimated losses on loans.  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.
  
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, 2015 and 2014 and related ratios. 
 
Analysis of the Allowance for Loan Losses for the
 
Analysis of the Allowance for Loan Losses for the
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
Change
 
2015
 
2014
 
Change
Balance at beginning of period
$
13,878

 
$
13,283

 
$
595

 
$
13,607

 
$
13,791

 
$
(184
)
Charge-offs
(33
)
 
(253
)
 
220

 
(71
)
 
(815
)
 
744

Recoveries
319

 
33

 
286

 
628

 
87

 
541

Net (charge-offs) recoveries
286

 
(220
)
 
506

 
557

 
(728
)
 
1,285

Provision for loan losses charged to
 
 
 
 
 
 
 
 
 
 
 
   operations
200

 
150

 
50

 
200

 
150

 
50

Balance at end of period
$
14,364

 
$
13,213

 
$
1,151

 
$
14,364

 
$
13,213

 
$
1,151

 
 
 
 
 
 
 
 
 
 
 
 
Average loans outstanding, excluding loans
 
 
 
 
 
 
 
 
 
 
 
   held for sale
$
1,208,420

 
$
1,040,929

 
 
 
$
1,197,245

 
$
1,025,818

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ratio of annualized net charge-off (recoveries)
 
 
 
 
 
 
 
 
 
 
 
during the period to average loans outstanding
(0.09
)%
 
0.08
%
 
 
 
(0.09
)%
 
0.14
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ratio of allowance for loan losses to
 
 
 
 
 
 
 
 
 
 
 
   average loans outstanding
1.19
 %
 
1.27
%
 
 
 
1.20
 %
 
1.29
%
 
 
In general the economy has shown signs of improvement, but the economic indicators remain mixed. The U.S. unemployment rate has declined to 5.3 percent as of June 30, 2015, but part of that improvement is due to people dropping out of the workforce. Personal income and spending are up. The housing market is mixed with sales slowing but prices holding steady. The economic environments in Iowa and Minnesota continue to slowly improve. Based on the mixed economic indicators, the Company decided to maintain the economic factors within the allowance for loan losses evaluation at the same level used in 2014. In the first six months of 2015, the Company continued to use experience factors based on the highest losses calculated over a rolling 12-, 16-, or 20-quarter period. As the experience factors continued to decline, management decided to increase the factors for other considerations in the first quarter of 2015 for commercial and commercial real estate loans to maintain an adequate allowance for loan losses. This increased the portion of the allowance for loan losses related to loans collectively evaluated for impairment to 1.14 percent of loans collectively evaluated as of June 30, 2015 from 1.09 percent as of December 31, 2014. Management believes the resulting allowance for loan losses of $14,364 as of June 30, 2015 was adequate to absorb the 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:
2015
 
2014
 
Change
 
Change %
Service charges on deposit accounts
$
651

 
$
714

 
$
(63
)
 
(8.82
)%
Debit card usage fees
469

 
453

 
16

 
3.53
 %
Trust services
317

 
332

 
(15
)
 
(4.52
)%
Revenue from residential mortgage banking
52

 
376

 
(324
)
 
(86.17
)%
Increase in cash value of bank-owned life insurance
178

 
182

 
(4
)
 
(2.20
)%
Realized investment securities gains, net
36

 

 
36

 
N/A

Other income:
 
 
 
 
 

 
 

Loan fees
16

 
26

 
(10
)
 
(38.46
)%
Letter of credit fees
17

 
32

 
(15
)
 
(46.88
)%
Gain (loss) on disposition of premises and equipment
(3
)
 

 
(3
)
 
N/A

All other income
189

 
203

 
(14
)
 
(6.90
)%
Total other income
219

 
261

 
(42
)
 
(16.09
)%
Total noninterest income
$
1,922

 
$
2,318

 
$
(396
)
 
(17.08
)%
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
Noninterest income:
2015
 
2014
 
Change
 
Change %
Service charges on deposit accounts
$
1,271

 
$
1,393

 
$
(122
)
 
(8.76
)%
Debit card usage fees
904

 
863

 
41

 
4.75
 %
Trust services
642

 
650

 
(8
)
 
(1.23
)%
Revenue from residential mortgage banking
87

 
602

 
(515
)
 
(85.55
)%
Increase in cash value of bank-owned life insurance
367

 
336

 
31

 
9.23
 %
Realized investment securities gains, net
47

 
506

 
(459
)
 
(90.71
)%
Other income:
 
 
 
 
 

 
 

Loan fees
37

 
56

 
(19
)
 
(33.93
)%
Letter of credit fees
48

 
50

 
(2
)
 
(4.00
)%
Gain (loss) on disposition of premises and equipment
(4
)
 
10

 
(14
)
 
(140.00
)%
All other income
383

 
405

 
(22
)
 
(5.43
)%
Total other income
464

 
521

 
(57
)
 
(10.94
)%
Total noninterest income
$
3,782

 
$
4,871

 
$
(1,089
)
 
(22.36
)%
The decline in service charges on deposit accounts for the three and six months ended June 30, 2015 compared to the same periods in 2014 was caused by lower instances of nonsufficient funds and lower fees from commercial accounts.

Revenue from residential mortgage banking declined $324 and $515, respectively, for the three and six months ended June 30, 2015 compared to the three and six months ended June 30, 2014. As discussed earlier, starting in January 2015, the Company changed its process for providing first mortgage loans to its customers, which has caused not only the reduction in revenue but also the reduction in operating costs. West Bank currently receives a fee from a third party for each loan initiated and closed by our retail staff. The volume of residential loan activity for the remainder of 2015 is expected to be lower than it was in 2014.

The Company invested an additional $5,000 in bank-owned life insurance in the second quarter of 2014, resulting in a higher level of increases in cash value of bank-owned life insurance for the six months ended June 30, 2015 compared to the six months ended June 30, 2014.


39

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

The Company recognized net gains on sales of investment securities of $36 in the second quarter of 2015, while no sales occurred in the second quarter of 2014. During the first half of 2015, the Company was able to recognize net gains of an aggregate of $47 on sales of several securities. During the first quarter of 2014, the Company also sold select investment securities and recognized net gains of $506. In both years, the sales were undertaken in order to capitalize on available net gains while being able to reinvest the proceeds in investment securities with higher yields.

Loan fees were lower for the three and six months ended June 30, 2015 compared to the same periods in 2014 as the prior year included a higher level of amortization of commitment fees for two customers. A reduction in the level of outstanding letters of credit caused the reduction in revenue for both the three and six months ended June 30, 2015 compared to the same periods in 2014. Volumes of letters of credit fluctuate based upon the needs of our commercial customers.



40

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:
2015
 
2014
 
Change
 
Change %
Salaries and employee benefits
$
4,005

 
$
3,987

 
$
18

 
0.45
 %
Occupancy
1,010

 
1,024

 
(14
)
 
(1.37
)%
Data processing
569

 
558

 
11

 
1.97
 %
FDIC insurance expense
209

 
190

 
19

 
10.00
 %
Other real estate owned expense

 
109

 
(109
)
 
(100.00
)%
Professional fees
177

 
221

 
(44
)
 
(19.91
)%
Director fees
228

 
189

 
39

 
20.63
 %
Other expenses:
 
 
 
 
 

 
 

Marketing
64

 
42

 
22

 
52.38
 %
Business development
194

 
221

 
(27
)
 
(12.22
)%
Consulting fees
57

 
56

 
1

 
1.79
 %
Insurance expense
87

 
96

 
(9
)
 
(9.38
)%
Bank service charges and investment advisory fees
170

 
124

 
46

 
37.10
 %
Postage and courier
78

 
82

 
(4
)
 
(4.88
)%
Supplies
75

 
65

 
10

 
15.38
 %
Low income housing projects amortization
76

 
45

 
31

 
68.89
 %
All other
444

 
355

 
89

 
25.07
 %
Total other
1,245

 
1,086

 
159

 
14.64
 %
Total noninterest expense
$
7,443

 
$
7,364

 
$
79

 
1.07
 %
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
Noninterest expense:
2015
 
2014
 
Change
 
Change %
Salaries and employee benefits
$
7,995

 
$
8,098

 
$
(103
)
 
(1.27
)%
Occupancy
2,059

 
2,035

 
24

 
1.18
 %
Data processing
1,143

 
1,080

 
63

 
5.83
 %
FDIC insurance expense
411

 
371

 
40

 
10.78
 %
Other real estate owned expense

 
395

 
(395
)
 
(100.00
)%
Professional fees
381

 
485

 
(104
)
 
(21.44
)%
Director fees
416

 
342

 
74

 
21.64
 %
Other expenses:
 
 
 
 
 

 
 

Marketing
127

 
94

 
33

 
35.11
 %
Business development
368

 
405

 
(37
)
 
(9.14
)%
Consulting fees
121

 
112

 
9

 
8.04
 %
Insurance expense
169

 
198

 
(29
)
 
(14.65
)%
Bank service charges and investment advisory fees
343

 
244

 
99

 
40.57
 %
Postage and courier
166

 
169

 
(3
)
 
(1.78
)%
Supplies
152

 
131

 
21

 
16.03
 %
Low income housing projects amortization
122

 
91

 
31

 
34.07
 %
All other
916

 
1,116

 
(200
)
 
(17.92
)%
Total other
2,484

 
2,560

 
(76
)
 
(2.97
)%
Total noninterest expense
$
14,889

 
$
15,366

 
$
(477
)
 
(3.10
)%

41

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

Salaries and employee benefits for the three months ended June 30, 2015 held steady, compared to the three months ended June 30, 2014 while those costs for the six months ended June 30, 2015 declined $103 compared to the same period in 2014. The staff reductions related to residential mortgage loan origination decreased salaries and employee benefits by approximately $303 and $622, respectively, for the three and six months ended June 30, 2015 compared to the same periods in 2014. Partially offsetting these reductions were increases in stock-based compensation costs of $97 and $134, respectively, for the three and six months ended June 30, 2015 compared to the same periods in 2014 and normal annual salary increases.

Data processing expense increased for the three and six months ended June 30, 2015 compared to the same periods of 2014 because of the addition of mobile banking technology, the continued strengthening of security measures and an annual contractual increase in fees paid to our core processor.

FDIC insurance expense increased for the three and six months ended June 30, 2015 due to growth in total assets. On June 16, 2015, the FDIC issued a Notice of Proposed Rulemaking on proposed refinements to the deposit insurance assessment system for small insured depository institutions (generally, those institutions with less than $10 billion in total assets). The refinements would become effective the quarter after the reserve ratio of the Deposit Insurance Fund reaches 1.15 percent. The Company's initial analysis projects that the proposal would increase our annual cost of FDIC insurance by approximately $180 based on our current balance sheet size.

Other real estate owned expense declined $109 and $395, respectively, for the three and six months ended June 30, 2015 compared to the same periods of 2014. The Company held only one parcel of land in other real estate owned throughout the first six months of 2015 and incurred a negligible amount of real estate tax expense.

Professional fees declined for the three and six months ended June 30, 2015 compared to the same time periods in 2014 due to lower legal fees. Director fees increased for the three and six months ended June 30, 2015 as a result of increased stock-based compensation costs.

Marketing expenses increased in 2015 compared to the same time periods in 2014 due to additional advertising efforts including our commitment as the lead sponsor of a local farmers market.

Insurance expense declined for the three and six months ended June 30, 2015 compared to the same time periods in 2014 primarily due to a 2013 experience-based refund received from the Company's carrier in the first quarter of 2015.

The increase in bank service charges and investment advisory fees for the three and six months ended June 30, 2015 compared to the same periods in 2014 resulted from the administrative fee charged by an investment management firm for assisting with the purchase and administration of public company floating rate commercial loans. This arrangement began in the second quarter of 2014. As of June 30, 2015, approximately $42,000 of these loans were outstanding. The Company plans to keep the balance of this portfolio around $50,000.

The increase in the cost of low income housing project amortization was related to the Company investing in additional projects during 2014.

Income Tax Expense

The Company recorded income tax expense of $2,361 (30.9 percent of pre-tax income) and $4,635 (30.9 percent of pre-tax income), respectively, for the three and six months ended June 30, 2015 compared with $2,181 (31.5 percent of pre-tax income) and $4,140 (31.2 percent of pre-tax income), respectively, for the three and six months ended June 30, 2014.  The Company's consolidated income tax rate differs from the federal statutory income tax rate primarily due to tax-exempt interest income, the tax-exempt increase in cash value of bank-owned life insurance, disallowed interest expense, state income taxes, changes in the valuation allowance and tax credits. The tax rate for both years was impacted by year-to-date federal low income housing tax credits of approximately $150 and $80, respectively.

FINANCIAL CONDITION

The Company had total assets of $1,654,461 as of June 30, 2015, an increase of 2.39 percent compared to total assets as of December 31, 2014. The most significant changes in the balance sheet were increases in deposits, loans and cash and cash equivalents, and a decrease in short-term borrowings.  A summary of changes in the components of the balance sheet is described below.


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

Investment Securities

The balance of investment securities available for sale declined $27,589 during the six months ended June 30, 2015. The decrease in investment securities available for sale was primarily the result of pay downs on mortgage-backed securities and collateralized mortgage obligations.

As of June 30, 2015, approximately 72 percent of the available for sale investment securities portfolio consisted of government agency guaranteed collateralized mortgage obligations and mortgage-backed securities. In the current low interest rate environment, management believes both provide relatively good yields, have little to no credit risk and provide fairly consistent cash flows.

Loans and Nonperforming Assets

Loans outstanding increased $33,333 from $1,184,045 as of December 31, 2014 to $1,217,378 as of June 30, 2015. Growth in the loan portfolio during the first six months of 2015 was primarily in the commercial and commercial real estate segments. The Company continues to focus on business development efforts in all of its markets. Management believes the loan pipelines are good in all three of our markets, and loan growth is expected over the next several quarters.

Credit quality of the Company's loan portfolio remains strong as nonperforming loans remained at less than half a percent of total loans outstanding as of June 30, 2015, as shown in the table below. The Company's Texas ratio, which is computed by dividing total nonperforming assets by tangible common equity plus the allowance for loan losses, was 3.43 percent as of June 30, 2015, compared to 2.71 percent as of December 31, 2014. The ratio for both dates was significantly better than the peer group average, which was approximately 12 percent, according to data in the March 2015 Bank Holding Company Performance Report, which is prepared by the Federal Reserve Board's Division of Supervision and Regulation. Management believes that it continues to devote appropriate resources to monitor and maintain a low level of nonperforming assets.

The following table sets forth the amount of nonperforming loans and assets held by the Company and common ratio measurements of those items as of the dates shown. 
 
June 30, 2015
 
December 31, 2014
 
Change
Nonaccrual loans
$
2,878

 
$
1,561

 
$
1,317

Loans past due 90 days and still accruing interest

 

 

Troubled debt restructured loans (1)
371

 
376

 
(5
)
Total nonperforming loans
3,249

 
1,937

 
1,312

Other real estate owned
2,235

 
2,235

 

Total nonperforming assets
$
5,484

 
$
4,172

 
$
1,312

 
 

 
 

 
 

Nonperforming loans to total loans
0.27
%
 
0.16
%
 
0.11
%
Nonperforming assets to total assets
0.33
%
 
0.26
%
 
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 three TDR loans as of June 30, 2015 and two TDR loans as of December 31, 2014, with balances of $688 and $643, respectively, categorized as nonaccrual.

For additional information, refer to the “Provision for Loan Losses and the Related Allowance for Loan Losses” in this section, and Notes 4 and 9 to the financial statements.

Other Assets

Other assets declined $7,323 from $13,553 as of December 31, 2014 to $6,230 as of June 30, 2015. A receivable of $3,953, related to the sale of an investment security in December 2014, was collected during 2015, and income taxes receivable declined by $2,375.


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

Deposits

Deposits increased $96,148 during the first six months of 2015, or 7.57 percent, compared to December 31, 2014.  Approximately $27,000 of the increase was due to an increase in deposits from a significant related party depositor. As of June 30, 2015, this significant related party depositor maintained total deposit balances with West Bank of approximately $157,000.

Savings deposits, which includes money market and insured cash sweep money market accounts, increased $66,092 from December 31, 2014 to June 30, 2015. Interest-bearing demand accounts declined $16,280 and noninterest-bearing demand accounts increased $61,731 from December 31, 2014 to June 30, 2015. These are considered normal fluctuations, as corporate customers' liquidity needs vary at any given time.

Time deposits as of June 30, 2015 and December 31, 2014 included $47,276 and $52,114, respectively, of Certificate of Deposit Account Registry Service deposits, which is a program that coordinates, on a reciprocal basis, a network of banks to spread deposits exceeding the FDIC insurance coverage limits out to numerous institutions in order to provide insurance coverage for all participating deposits. Total time deposits declined $15,395 during the first six months of 2015, as fewer customers were willing to lock in low rates for extended time periods in the current low interest rate environment.

Borrowings

There were no short-term borrowings as of June 30, 2015. As of December 31, 2014, the Company had borrowed $66,000 of overnight funds from the FHLB. Overnight funds were repaid during the first six months of 2015 as a result of the increase in deposits. Long-term debt declined $1,630 during the first six months of 2015 in accordance with the repayment terms.
 
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 and mortgage-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 $82,068 as of June 30, 2015 compared with $39,781 as of December 31, 2014.

As of June 30, 2015, West Bank had additional borrowing capacity available from the FHLB of approximately $200,000, as well as $67,000 through unsecured federal funds lines of credit with correspondent banks.  The Company also has a $5,000 secured line of credit with a commercial bank that expires on August 5, 2015. The Company was not drawing on the secured line of credit as of June 30, 2015 and has decided not to renew it when it expires.  Net cash from operating activities contributed $16,425 and $13,586 to liquidity for the six months ended June 30, 2015 and 2014, respectively.  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, 2015.

The Company's total stockholders' equity increased to $145,391 at June 30, 2015 from $140,175 at December 31, 2014.  The increase was primarily the result of net income less dividends paid and a decrease in accumulated other comprehensive income.

At June 30, 2015, the Company's tangible common equity as a percent of tangible assets was 8.79 percent compared to 8.68 percent as of December 31, 2014.

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 believes the Company and West Bank met all capital adequacy requirements to which they were subject as of June 30, 2015.

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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
 
To Be Well-Capitalized
Under Prompt Corrective
Action Provisions
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
As of June 30, 2015:
 
 
 
 
 
 
 
 
 
 
 
Total Capital (to Risk-Weighted Assets)
 
 
 
 
 
 
 
 
 
 
 
Consolidated
$
180,243

 
12.09
%
 
$
119,302

 
8.00
%
 
N/A

 
N/A

West Bank
168,089

 
11.35
%
 
118,486

 
8.00
%
 
$
148,108

 
10.00
%
 
 

 
 

 
 

 
 

 
 

 
 

Tier I Capital (to Risk-Weighted Assets)
 

 
 

 
 

 
 

 
 

 
 

Consolidated
165,879

 
11.12
%
 
89,477

 
6.00
%
 
N/A

 
N/A

West Bank
153,725

 
10.38
%
 
88,865

 
6.00
%
 
118,486

 
8.00
%
 
 
 
 
 
 
 
 
 
 
 
 
Common Equity Tier I Capital (to
 
 
 
 
 
 
 
 
 
 
 
Risk-Weighted Assets)
 
 
 
 
 
 
 
 
 
 
 
Consolidated
145,879

 
9.78
%
 
67,107

 
4.50
%
 
N/A

 
N/A

West Bank
153,725

 
10.38
%
 
66,648

 
4.50
%
 
96,270

 
6.50
%
 
 

 
 

 
 

 
 

 
 

 
 

Tier I Leverage
 

 
 

 
 

 
 

 
 

 
 

Consolidated
165,879

 
10.04
%
 
66,117

 
4.00
%
 
N/A

 
N/A

West Bank
153,725

 
9.36
%
 
65,707

 
4.00
%
 
82,133

 
5.00
%
 
 

 
 

 
 

 
 

 
 

 
 

As of December 31, 2014:
 

 
 

 
 

 
 

 
 

 
 

Total Capital (to Risk-Weighted Assets)
 

 
 

 
 

 
 

 
 

 
 

Consolidated
$
173,448

 
12.81
%
 
$
108,281

 
8.00
%
 
N/A

 
N/A

West Bank
163,253

 
12.19
%
 
107,099

 
8.00
%
 
$
133,874

 
10.00
%
 
 

 
 

 
 

 
 

 
 

 
 

Tier I Capital (to Risk-Weighted Assets)
 

 
 

 
 

 
 

 
 

 
 

Consolidated
159,841

 
11.81
%
 
54,140

 
4.00
%
 
N/A

 
N/A

West Bank
149,646

 
11.18
%
 
53,549

 
4.00
%
 
80,324

 
6.00
%
 
 

 
 

 
 

 
 

 
 

 
 

Tier I Leverage
 

 
 

 
 

 
 

 
 

 
 

Consolidated
159,841

 
10.17
%
 
62,848

 
4.00
%
 
N/A

 
N/A

West Bank
149,646

 
9.62
%
 
62,203

 
4.00
%
 
77,754

 
5.00
%

As disclosed in the Company's Form 10-K filed with the Securities and Exchange Commission on March 5, 2015, in July 2013, the Federal Reserve Board and the FDIC issued final rules implementing the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act changes. The rules revise minimum capital requirements and adjust prompt corrective action thresholds. The final rules revise the regulatory capital elements, add a new common equity Tier I capital ratio, increase the minimum Tier I capital ratio requirements and implement a new capital conservation buffer. The rules also permit certain banking organizations to retain, through a one-time election, the existing treatment for accumulated other comprehensive income (loss). The Company and West Bank have made the election to retain the existing treatment, which excludes accumulated other comprehensive income (loss) from regulatory capital amounts. The final rules took effect for the Company and West Bank on January 1, 2015, subject to a transition period for certain parts of the rules.
The table above includes the new regulatory capital ratio requirements that became effective on January 1, 2015. Beginning in 2016, an additional capital conservation buffer will be added to the minimum requirements for capital adequacy purposes, subject to a three year phase-in period. The capital conservation buffer will be fully phased-in on January 1, 2019 at 2.5 percent. A banking organization with a conservation buffer of less than 2.5 percent (or the required phase-in amount in years prior to 2019) will be subject to limitations on capital distributions, including dividend payments, and certain discretionary bonus payments to executive officers. At June 30, 2015, 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 was presented in the Company's Form 10-K filed with the Securities and Exchange Commission on March 5, 2015 and is incorporated herein by reference.  The Company has not experienced any material changes to its market risk position since December 31, 2014.  Management does not believe that the Company's primary market risk exposure and management of that exposure in the first six months of 2015 materially changed compared to those as of December 31, 2014.

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 are 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 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.

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

Part II - OTHER INFORMATION

Item 1.  Legal Proceedings

Information required by this item is set forth in Note 8 of the Notes to Consolidated Financial Statements included in Part I Item 1 of this report and incorporated herein by reference.

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 5, 2015.

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

During the second quarter of 2015, there were no purchases of the Company's common shares under the existing stock repurchase plan, which was extended by the Board of Directors on April 22, 2015.  Under the stock repurchase plan, management is authorized by the Board of Directors to purchase up to $2 million of the Company's common stock over a twelve month period.  The authorization does not require such purchases and is subject to certain restrictions.  Shares of Company common stock may be repurchased on the open market or in privately negotiated transactions.  The extent to which the shares are repurchased and the timing of such repurchase will depend on market conditions and other corporate considerations. The previous authorization of the stock repurchase plan expired on April 23, 2015, and the current authorization of the stock repurchase plan expires on April 22, 2016.

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

Not applicable.


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Table of Contents


Item 5.  Other Information

None.


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Table of Contents


Item 6.  Exhibits

The following exhibits are filed as part of this report:
Exhibits
Description
31.1
Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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


48

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 24, 2015
By:
/s/ David D. Nelson
 
Date
 
David D. Nelson
 
 
 
Chief Executive Officer and President
 
 
 
(Principal Executive Officer)
 
 
 
 
 
July 24, 2015
By:
/s/ Douglas R. Gulling
 
Date
 
Douglas R. Gulling
 
 
 
Executive Vice President, Treasurer and Chief Financial Officer
 
 
 
(Principal Financial Officer)
 
 
 
 
 
July 24, 2015
By:
/s/ Marie I. Roberts
 
Date
 
Marie I. Roberts
 
 
 
Senior Vice President, Controller and Chief Accounting Officer
 
 
 
(Principal Accounting Officer)
 


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Table of Contents


EXHIBIT INDEX

The following exhibits are filed herewith:
Exhibit No.
Description
31.1
Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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
 

50