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

FORM 10-Q

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 20162017
  
or
  
oTRANSITION 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)

IOWA42-1230603
(State of Incorporation)(I.R.S. Employer Identification No.)

 1601 22nd Street, West Des Moines, Iowa50266 
 (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 or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company”company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filero 
Accelerated filerx 
Non-accelerated filero(Do not check if a smaller reporting company)
Smaller reporting companyo 
Emerging growth companyo

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



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

Yes  o                      No  x


As of October 26, 2016,25, 2017, there were 16,137,99916,215,672 shares of common stock, no par value, outstanding.



WEST BANCORPORATION, INC.

INDEX
  Page
PART I. 
   
Item 1.
   
 
Consolidated Balance Sheets as of September 30, 20162017 and December 31, 20152016
   
 
Consolidated Statements of Income for the three and nine months ended September 30, 20162017 and 20152016
   
 
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 20162017 and 20152016
   
 Consolidated Statements of Stockholders' Equity for the nine months ended September 30, 20162017 and 20152016
   
 
Consolidated Statements of Cash Flows for the nine months ended September 30, 20162017 and 20152016
   
 
   
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

23


Table of Contents


PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
West Bancorporation, Inc. and Subsidiary    
Consolidated Balance Sheets    
(unaudited)    
     
(dollars in thousands) September 30, 2016 December 31, 2015
ASSETS    
Cash and due from banks $44,526
 $57,329
Federal funds sold 6,324
 15,322
Cash and cash equivalents 50,850
 72,651
Investment securities available for sale, at fair value 278,411
 320,714
Investment securities held to maturity, at amortized cost (fair value of $49,943 and $51,918 at September 30, 2016 and December 31, 2015, respectively) 48,405
 51,259
Federal Home Loan Bank stock, at cost 12,467
 12,447
Loans 1,382,895
 1,246,688
Allowance for loan losses (15,958) (14,967)
Loans, net 1,366,937
 1,231,721
Premises and equipment, net 21,023
 11,562
Accrued interest receivable 5,230
 4,688
Bank-owned life insurance 32,956
 32,834
Deferred tax assets, net 4,843
 6,670
Other assets 3,708
 3,850
Total assets $1,824,830
 $1,748,396
LIABILITIES AND STOCKHOLDERS' EQUITY    
LIABILITIES    
Deposits:    
Noninterest-bearing demand $483,434
 $486,707
Interest-bearing demand 264,640
 267,824
Savings 637,044
 570,391
Time of $250,000 or more 10,818
 14,749
Other time 95,720
 101,058
Total deposits 1,491,656
 1,440,729
Federal funds purchased 920
 2,760
Short-term borrowings 34,500
 19,000
Subordinated notes, net of discount 20,395
 20,385
Federal Home Loan Bank advances, net of discount 99,509
 98,385
Long-term debt, net of discount 5,952
 8,405
Accrued expenses and other liabilities 7,034
 6,355
Total liabilities 1,659,966
 1,596,019
COMMITMENTS AND CONTINGENCIES (NOTE 8)    
STOCKHOLDERS' EQUITY    
Preferred stock, $0.01 par value; authorized 50,000,000 shares; no shares issued and outstanding at September 30, 2016 and December 31, 2015 
 
Common stock, no par value; authorized 50,000,000 shares; 16,137,999 and 16,064,435 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively 3,000
 3,000
Additional paid-in capital 21,056
 20,067
Retained earnings 138,668
 129,740
Accumulated other comprehensive income (loss) 2,140
 (430)
Total stockholders' equity 164,864
 152,377
Total liabilities and stockholders' equity $1,824,830
 $1,748,396
See Notes to Consolidated Financial Statements.

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Table of Contents


West Bancorporation, Inc. and Subsidiary        
Consolidated Statements of Income        
(unaudited)        
  Three Months Ended September 30, Nine Months Ended September 30,
(dollars in thousands, except per share data) 2016 2015 2016 2015
Interest income:        
Loans, including fees $14,898
 $13,313
 $42,667
 $38,934
Investment securities:        
Taxable 991
 1,017
 3,222
 3,184
Tax-exempt 780
 789
 2,482
 2,309
Federal funds sold 27
 28
 58
 60
Total interest income 16,696
 15,147
 48,429
 44,487
Interest expense:      
  
Deposits 872
 500
 2,401
 1,622
Federal funds purchased 1
 2
 4
 6
Short-term borrowings 8
 5
 39
 32
Subordinated notes 169
 179
 533
 526
Federal Home Loan Bank advances 894
 698
 2,645
 2,095
Long-term debt 31
 57
 114
 183
Total interest expense 1,975
 1,441
 5,736
 4,464
Net interest income 14,721
 13,706
 42,693
 40,023
Provision for loan losses 200
 200
 900
 400
Net interest income after provision for loan losses 14,521
 13,506
 41,793
 39,623
Noninterest income:      
  
Service charges on deposit accounts 632
 663
 1,847
 1,934
Debit card usage fees 450
 463
 1,372
 1,367
Trust services 355
 302
 946
 944
Increase in cash value of bank-owned life insurance 160
 183
 492
 550
Gain from bank-owned life insurance 
 
 443
 
Realized investment securities gains, net 
 
 60
 47
Other income 322
 324
 892
 875
Total noninterest income 1,919
 1,935
 6,052
 5,717
Noninterest expense:      
  
Salaries and employee benefits 4,154
 4,056
 12,644
 12,051
Occupancy 1,038
 1,031
 2,972
 3,090
Data processing 643
 595
 1,849
 1,738
FDIC insurance 272
 209
 714
 620
Professional fees 189
 194
 619
 575
Director fees 202
 226
 672
 642
Other expenses 1,495
 1,238
 4,141
 3,722
Total noninterest expense 7,993
 7,549
 23,611
 22,438
Income before income taxes 8,447
 7,892
 24,234
 22,902
Income taxes 2,634
 2,466
 7,249
 7,101
Net income $5,813
 $5,426
 $16,985
 $15,801
         
Basic earnings per common share $0.36
 $0.34
 $1.05
 $0.98
Diluted earnings per common share $0.36
 $0.34
 $1.05
 $0.98
Cash dividends declared per common share $0.17
 $0.16
 $0.50
 $0.46
West Bancorporation, Inc. and Subsidiary    
Consolidated Balance Sheets    
(unaudited)    
     
(in thousands, except share and per share data) September 30, 2017 December 31, 2016
ASSETS    
Cash and due from banks $33,560
 $40,943
Federal funds sold 5,937
 35,893
Cash and cash equivalents 39,497
 76,836
Investment securities available for sale, at fair value 418,374
 260,637
Investment securities held to maturity, at amortized cost (fair value of $46,356 and $47,789 at September 30, 2017 and December 31, 2016, respectively) 45,597
 48,386
Federal Home Loan Bank stock, at cost 12,256
 10,771
Loans 1,456,905
 1,399,870
Allowance for loan losses (16,358) (16,112)
Loans, net 1,440,547
 1,383,758
Premises and equipment, net 23,173
 23,314
Accrued interest receivable 6,636
 5,321
Bank-owned life insurance 33,451
 33,111
Deferred tax assets, net 5,861
 6,957
Other assets 4,956
 5,113
Total assets $2,030,348
 $1,854,204
     
LIABILITIES AND STOCKHOLDERS' EQUITY    
LIABILITIES    
Deposits:    
Noninterest-bearing demand $384,625
 $479,311
Interest-bearing demand 328,156
 282,592
Savings 776,921
 668,688
Time of $250 or more 16,539
 10,446
Other time 145,025
 105,568
Total deposits 1,651,266
 1,546,605
Federal funds purchased 925
 9,690
Short-term borrowings 48,000
 
Subordinated notes, net 20,408
 20,398
Federal Home Loan Bank advances, net 101,005
 99,886
Long-term debt, net 24,195
 5,126
Accrued expenses and other liabilities 6,462
 7,123
Total liabilities 1,852,261
 1,688,828
COMMITMENTS AND CONTINGENCIES (NOTE 9) 
 
STOCKHOLDERS' EQUITY    
Preferred stock, $0.01 par value; authorized 50,000,000 shares; no shares issued and outstanding at September 30, 2017 and December 31, 2016 
 
Common stock, no par value; authorized 50,000,000 shares; 16,215,672
    and 16,137,999 shares issued and outstanding at September 30, 2017
    and December 31, 2016, respectively
 3,000
 3,000
Additional paid-in capital 22,763
 21,462
Retained earnings 152,252
 141,956
Accumulated other comprehensive income (loss) 72
 (1,042)
Total stockholders' equity 178,087
 165,376
Total liabilities and stockholders' equity $2,030,348
 $1,854,204
See Notes to Consolidated Financial Statements.

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Table of Contents


West Bancorporation, Inc. and Subsidiary        
Consolidated Statements of Comprehensive Income      
(unaudited)        
  Three Months Ended September 30, Nine Months Ended September 30,
(dollars in thousands) 2016 2015 2016 2015
Net income $5,813
 $5,426
 $16,985
 $15,801
Other comprehensive income (loss):      
  
Unrealized gains on available for sale securities:        
Unrealized holding gains arising during the period 301
 1,765
 4,771
 1,205
Less: reclassification adjustment for net gains realized in net income 
 
 (60) (47)
Less: reclassification adjustment for amortization of net unrealized gains to interest income on securities transferred from available for sale to held to maturity (7) (10) (122) (29)
Income tax (expense) (112) (667) (1,744) (429)
Other comprehensive income on available for sale securities 182
 1,088
 2,845
 700
Unrealized gains (losses) on derivatives:        
Unrealized holding gains (losses) arising during the period 248
 (735) (889) (1,470)
Less: reclassification adjustment for net loss on derivatives realized in net income 118
 
 362
 74
Less: reclassification adjustment for amortization of derivative termination costs 28
 28
 82
 44
Income tax benefit (expense) (149) 269
 170
 514
Other comprehensive income (loss) on derivatives 245
 (438) (275) (838)
Total other comprehensive income (loss) 427
 650
 2,570

(138)
Comprehensive income $6,240
 $6,076
 $19,555
 $15,663

West Bancorporation, Inc. and Subsidiary        
Consolidated Statements of Income        
(unaudited)        
  Three Months Ended September 30, Nine Months Ended September 30,
(in thousands, except per share data) 2017 2016 2017 2016
Interest income:        
Loans, including fees $15,854
 $14,898
 $46,865
 $42,667
Investment securities:        
Taxable 1,489
 991
 3,755
 3,222
Tax-exempt 1,081
 780
 2,674
 2,482
Federal funds sold 136
 27
 223
 58
Total interest income 18,560
 16,696
 53,517
 48,429
Interest expense:      
  
Deposits 2,108
 872
 5,084
 2,401
Federal funds purchased 4
 1
 24
 4
Short-term borrowings 9
 8
 58
 39
Subordinated notes 232
 169
 667
 533
Federal Home Loan Bank advances 972
 894
 2,837
 2,645
Long-term debt 204
 31
 334
 114
Total interest expense 3,529
 1,975
 9,004
 5,736
Net interest income 15,031
 14,721
 44,513
 42,693
Provision for loan losses 
 200
 
 900
Net interest income after provision for loan losses 15,031
 14,521
 44,513
 41,793
Noninterest income:      
  
Service charges on deposit accounts 715
 632
 1,946
 1,847
Debit card usage fees 435
 450
 1,333
 1,372
Trust services 436
 355
 1,264
 946
Increase in cash value of bank-owned life insurance 167
 160
 484
 492
Gain from bank-owned life insurance 
 
 307
 443
Realized investment securities gains, net 197
 
 423
 60
Other income 314
 322
 983
 892
Total noninterest income 2,264
 1,919
 6,740
 6,052
Noninterest expense:      
  
Salaries and employee benefits 4,430
 4,154
 13,216
 12,644
Occupancy 1,087
 1,038
 3,315
 2,972
Data processing 635
 643
 2,031
 1,849
FDIC insurance 151
 272
 514
 714
Professional fees 184
 189
 725
 619
Director fees 240
 202
 697
 672
Other expenses 1,293
 1,495
 3,737
 4,141
Total noninterest expense 8,020
 7,993
 24,235
 23,611
Income before income taxes 9,275
 8,447
 27,018
 24,234
Income taxes 2,870
 2,634
 8,142
 7,249
Net income $6,405
 $5,813
 $18,876
 $16,985
         
Basic earnings per common share $0.40
 $0.36
 $1.17
 $1.05
Diluted earnings per common share $0.39
 $0.36
 $1.16
 $1.05
Cash dividends declared per common share $0.18
 $0.17
 $0.53
 $0.50
See Notes to Consolidated Financial Statements.

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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, 2014 $
 16,018,734
 $3,000
 $18,971
 $117,950
 $254
 $140,175
Net income 
 
 
 
 15,801
 
 15,801
Other comprehensive (loss), net of tax 
 
 
 
 
 (138) (138)
Cash dividends declared, $0.46 per common share 
 
 
 
 (7,382) 
 (7,382)
Stock-based compensation costs 
 
 
 831
 
 
 831
Issuance of common stock upon vesting of restricted 

 

 

 

 

 

  
stock units, net of shares withheld for payroll taxes 
 45,701
 
 (225) 
 
 (225)
Excess tax benefits from vesting of restricted stock units 
 
 
 155
 
 
 155
Balance, September 30, 2015 $
 16,064,435
 $3,000
 $19,732
 $126,369
 $116
 $149,217
               
Balance, December 31, 2015 $
 16,064,435
 $3,000
 $20,067
 $129,740
 $(430) $152,377
Net income 
 
 
 
 16,985
 
 16,985
Other comprehensive income, net of tax 
 
 
 
 
 2,570
 2,570
Cash dividends declared, $0.50 per common share 
 
 
 
 (8,057) 
 (8,057)
Stock-based compensation costs 
 
 
 1,278
 
 
 1,278
Issuance of common stock upon vesting of restricted 

 

 

 

 

 

  
stock units, net of shares withheld for payroll taxes 
 73,564
 
 (394) 
 
 (394)
Excess tax benefits from vesting of restricted stock units 
 
 
 105
 
 
 105
Balance, September 30, 2016 $
 16,137,999

$3,000
 $21,056
 $138,668
 $2,140
 $164,864
West Bancorporation, Inc. and Subsidiary        
Consolidated Statements of Comprehensive Income      
(unaudited)        
  Three Months Ended September 30, Nine Months Ended September 30,
(in thousands) 2017 2016 2017 2016
Net income $6,405
 $5,813
 $18,876
 $16,985
Other comprehensive income:      
  
Unrealized gains (losses) on investment securities:        
Unrealized holding gains (losses) arising during the period (1,316) 301
 2,509
 4,771
Less: reclassification adjustment for net gains realized in net income (197) 
 (423) (60)
Less: reclassification adjustment for amortization of net unrealized gains to interest income on securities transferred from available for sale to
   held to maturity
 (34) (7) (234) (122)
Income tax (expense) benefit 588
 (112) (704) (1,744)
Other comprehensive income (loss) on investment securities (959) 182
 1,148
 2,845
Unrealized gains (losses) on derivatives:        
Unrealized holding gains (losses) arising during the period (29) 248
 (376) (889)
Less: reclassification adjustment for net loss on derivatives realized in net income 70
 118
 239
 362
Less: reclassification adjustment for amortization of derivative termination costs 28
 28
 82
 82
Income tax (expense) benefit (26) (149) 21
 170
Other comprehensive income (loss) on derivatives 43
 245
 (34) (275)
Total other comprehensive income (loss) (916) 427
 1,114

2,570
Comprehensive income $5,489
 $6,240
 $19,990
 $19,555

See Notes to Consolidated Financial Statements.


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Table of Contents


West Bancorporation, Inc. and Subsidiary    
Consolidated Statements of Cash Flows    
(unaudited)    
  Nine Months Ended September 30,
(dollars in thousands) 2016 2015
Cash Flows from Operating Activities:    
Net income $16,985
 $15,801
Adjustments to reconcile net income to net cash provided by operating activities:    
Provision for loan losses 900
 400
Net amortization and accretion 3,293
 2,718
Loss on disposition of premises and equipment 
 4
Investment securities gains, net (60) (47)
Stock-based compensation 1,278
 831
Increase in cash value of bank-owned life insurance (492) (550)
Gain from bank-owned life insurance (443) 
Depreciation 740
 700
Deferred income taxes 253
 (295)
Excess tax benefits from vesting of restricted stock units (105) (155)
Change in assets and liabilities:    
(Increase) in accrued interest receivable (542) (616)
Decrease in other assets 248
 3,728
Increase (decrease) in accrued expenses and other liabilities 152
 (95)
Net cash provided by operating activities 22,207
 22,424
Cash Flows from Investing Activities:  
  
Proceeds from sales of securities available for sale 1,544
 16,946
Proceeds from maturities and calls of investment securities 46,190
 36,899
Purchases of securities available for sale 
 (106,971)
Purchases of Federal Home Loan Bank stock (16,907) (15,827)
Proceeds from redemption of Federal Home Loan Bank stock 16,887
 16,692
Net increase in loans (136,116) (55,340)
Purchases of premises and equipment (10,201) (1,831)
Proceeds of principal and earnings from bank-owned life insurance 812
 
Proceeds from settlement of other assets 
 3,593
Net cash used in investing activities (97,791) (105,839)
Cash Flows from Financing Activities:  
  
Net increase in deposits 50,927
 116,674
Net (decrease) in federal funds purchased (1,840) (315)
Net increase (decrease) in short-term borrowings 15,500
 (7,000)
Principal payments on long-term debt (2,458) (2,946)
Interest rate swap termination costs paid 
 (541)
Common stock dividends paid (8,057) (7,382)
Restricted stock units withheld for payroll taxes (394) (225)
Excess tax benefits from vesting of restricted stock units 105
 155
Net cash provided by financing activities 53,783
 98,420
Net increase (decrease) in cash and cash equivalents (21,801) 15,005
Cash and Cash Equivalents:    
Beginning 72,651
 39,781
Ending $50,850
 $54,786
     
Supplemental Disclosures of Cash Flow Information:    
Cash payments for:    
Interest $5,742
 $4,493
Income taxes 5,160
 4,110
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, 2015 $
 16,064,435
 $3,000
 $20,067
 $129,740
 $(430) $152,377
Net income 
 
 
 
 16,985
 
 16,985
Other comprehensive income, net of tax 
 
 
 
 
 2,570
 2,570
Cash dividends declared, $0.50 per common share 
 
 
 
 (8,057) 
 (8,057)
Stock-based compensation costs 
 
 
 1,278
 
 
 1,278
Issuance of common stock upon vesting of restricted 

 

 

 

 

 

  
stock units, net of shares withheld for payroll taxes 
 73,564
 
 (394) 
 
 (394)
Excess tax benefits from vesting of restricted stock units 
 
 
 105
 
 
 105
Balance, September 30, 2016 $
 16,137,999
 $3,000
 $21,056
 $138,668
 $2,140
 $164,864
               
Balance, December 31, 2016 $
 16,137,999
 $3,000
 $21,462
 $141,956
 $(1,042) $165,376
Net income 
 
 
 
 18,876
 
 18,876
Other comprehensive income, net of tax 
 
 
 
 
 1,114
 1,114
Cash dividends declared, $0.53 per common share 
 
 
 
 (8,580) 
 (8,580)
Stock-based compensation costs 
 
 
 1,932
 
 
 1,932
Issuance of common stock upon vesting of restricted 

 

 

 

 

 

  
stock units, net of shares withheld for payroll taxes 
 77,673
 
 (631) 
 
 (631)
Balance, September 30, 2017 $
 16,215,672

$3,000
 $22,763
 $152,252
 $72
 $178,087

See Notes to Consolidated Financial Statements.


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Table of Contents


West Bancorporation, Inc. and Subsidiary    
Consolidated Statements of Cash Flows    
(unaudited)    
  Nine Months Ended September 30,
(in thousands) 2017 2016
Cash Flows from Operating Activities:    
Net income $18,876
 $16,985
Adjustments to reconcile net income to net cash provided by operating activities:    
Provision for loan losses 
 900
Net amortization and accretion 2,921
 3,293
Investment securities gains, net (423) (60)
Stock-based compensation 1,932
 1,278
Increase in cash value of bank-owned life insurance (484) (492)
Gain from bank-owned life insurance (307) (443)
Depreciation 1,007
 740
Deferred income taxes 413
 253
Change in assets and liabilities:    
(Increase) in accrued interest receivable (1,315) (542)
(Increase) decrease in other assets (125) 248
Increase (decrease) in accrued expenses and other liabilities (516) 152
Net cash provided by operating activities 21,979
 22,312
Cash Flows from Investing Activities:  
  
Proceeds from sales of securities available for sale 74,224
 1,544
Proceeds from maturities and calls of investment securities 38,529
 46,190
Purchases of securities available for sale (267,133) 
Purchases of Federal Home Loan Bank stock (16,794) (16,907)
Proceeds from redemption of Federal Home Loan Bank stock 15,309
 16,887
Net increase in loans (56,789) (136,116)
Purchases of premises and equipment (866) (10,201)
Proceeds of principal and earnings from bank-owned life insurance 451
 812
Net cash used in investing activities (213,069) (97,791)
Cash Flows from Financing Activities:  
  
Net increase in deposits 104,661
 50,927
Net (decrease) in federal funds purchased (8,765) (1,840)
Net increase in short-term borrowings 48,000
 15,500
Proceeds from long-term debt 22,000
 
Principal payments on long-term debt (2,934) (2,458)
Common stock dividends paid (8,580) (8,057)
Restricted stock units withheld for payroll taxes (631) (394)
Net cash provided by financing activities 153,751
 53,678
Net (decrease) in cash and cash equivalents (37,339) (21,801)
Cash and Cash Equivalents:    
Beginning 76,836
 72,651
Ending $39,497
 $50,850
     
Supplemental Disclosures of Cash Flow Information:    
Cash payments for:    
Interest $8,667
 $5,742
Income taxes 6,410
 5,160
See Notes to Consolidated Financial Statements.

8


Table of Contents

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


1.  Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared by West Bancorporation, Inc. (the Company) pursuant to the rules and regulations of the Securities and Exchange Commission.  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, 20152016.  In the opinion of management, the accompanying consolidated financial statements of the Company contain all adjustments necessary to fairly present its financial position as of September 30, 20162017 and December 31, 20152016, net income and comprehensive income for the three and nine months ended September 30, 20162017 and 2015,2016, and cash flows for the nine months ended September 30, 20162017 and 2015.2016.  The results for these interim periods may not be indicative of results for the entire year or for any other period.

The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (GAAP) established by the Financial Accounting Standards Board (FASB).  References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification™, sometimes referred to as the Codification or ASC.  In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses for the reporting period.  Actual results could differ from those estimates.  Material estimates that are particularly susceptible to significant change in the near term are the fair value 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 owned an interest in a limited liability company that was sold in the fourth quarter of 2015).Corporation.  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.

Reclassification: Certain amounts in prior year consolidated financial statements have been reclassified, with no effect on net income, comprehensive income or stockholders' equity, to conform with current period presentation.

Current accounting developments:developments:  In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606): 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 will be effective for interim and annual periods beginning after December 15, 2017. The CompanyCompany's revenue is currently assessingprimarily comprised of interest income on financial instruments, including investment securities and loans, which are excluded from the impact that this guidance will have on its consolidated financial statements, butscope of ASU 2014-09. The Company does not expect the guidance to have a material impact on the Company's consolidated financial statements.

In April 2015, The most significant impact of the FASB issued ASU No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifyingupdate for the Presentation of Debt Issuance Costs. The update simplifies the presentation of debt issuance costs by requiring that debt issuance costsCompany may 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 was effective for interim and annual periods beginning after December 15, 2015, and was applied retrospectively. The adoption of this guidance required a balance sheet reclassification of unamortized debt issuance costs, which did not have a material impact on the Company's consolidated financial statements.additional noninterest income disclosure requirements.


8


Table of Contents

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


In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The update enhances the reporting model for financial instruments to provide users of financial statements with more decision-useful information by updating certain aspects of recognition, measurement, presentation and disclosure of financial instruments. Among other changes, the update requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, and clarifies that entities should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entities' other deferred tax assets. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2017, and is to be applied on a modified retrospective basis. Upon the effective date, the fair value of the Company's loan portfolio will be presented using an exit price method. The Company is currently assessinghas concluded that the impact thatremaining requirements of this guidance will have on its consolidated financial statements, but doesupdate are not expect the guidanceexpected to have a material impact on the Company's consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The guidance in the update supersedes the requirements in ASC Topic 840, Leases. The update will require business entitiesguidance is intended to recognizeincrease transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and to disclose key information about leasing arrangements. A lessee would recognize a liability to makefor leases with lease payments and a right-of-use asset representing its right to use the leased asset for the lease term.terms of more than 12 months. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2018, and is to be applied on a modified retrospective basis. The Company is currently assessingleases its main location and space for six other branch offices and operational departments under operating leases that will result in recognition of lease assets and lease liabilities on the impact that this guidance will have on its consolidated financial statements, but doesbalance sheets under the ASU. The amount of assets and liabilities added to the balance sheet are not expect the guidanceexpected to have a material impact on the Company's consolidated financial statements.statements per preliminary estimates.

9


Table of Contents

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


In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718). The guidance in this update simplifies several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance also allows an entity to make an entity-wide accounting policy election to either estimate expected forfeitures or account for forfeitures as they occur. For public companies, the update iswas effective for annual periods beginning after December 15, 2016. Portions of the amended guidance arewere to be applied using a modified retrospective transition method, and others require prospective application. TheUpon adoption of this update on January 1, 2017, the Company is currently assessingmade the impact that this guidance will have on its consolidated financial statements, but does not expect the guidanceaccounting policy election to have a material impactaccount for forfeitures as they occur. This resulted in no effect on the Company's consolidated financial statements.statements, as prior stock-based compensation expense assumed no expected forfeitures. Also upon adoption, the Company changed the calculation of the assumed proceeds of the treasury stock method on a prospective basis to eliminate deferred taxes from the calculation. The net impact on the income statement is dependent upon the change in the Company's stock price from grant date to vesting date and cannot be predicted with any certainty. The requirement to report the excess tax benefit or shortfall related to settlements of share-based payment awards in earnings as an increase or decrease to tax expense has been applied to settlements occurring on or after January 1, 2017, and the impact of applying that guidance reduced reported income tax expense $285 for the nine months ended September 30, 2017.

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

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230).: Classification of Certain Cash Receipts and Cash Payments. The amendments in this update provide guidance for eight specific cash flow classification issues for which current guidance is unclear or does not exist, thereby reducing diversity in practice. For public companies, the update is effective for annual periods beginning after December 15, 2017.2017, with early adoption permitted. The Company is currently assessingCompany's early adoption of the update as of January 1, 2017, did not have a material impact that this guidance will have on itsthe Company's consolidated financial statements, butstatements.

In March 2017, the FASB issued ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The amendments in this update shorten the amortization period for certain purchased callable debt securities held at a premium. The amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. For public companies, the update is effective for annual periods beginning after December 15, 2018, and is to be applied on a modified retrospective basis with a cumulative-effect adjustment directly to retained earnings as of the beginning of the adoption period. Early adoption is permitted, including adoption in an interim period. The Company does not expect the guidance to have a material impact on the Company's consolidated financial statements.

910


Table of Contents

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


In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The amendments in this update better align an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. For public companies, the update is effective for annual periods beginning after December 15, 2018, with early adoption permitted, including in an interim period. The amendments' presentation and disclosure guidance is required on a prospective basis. The Company is currently assessing the impact of this guidance, but does not expect the guidance to have a material impact on the Company's consolidated financial statements.

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 nine months ended September 30, 20162017 and 20152016 are presented in the following table.
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended September 30, Nine Months Ended September 30,
(in thousands, except per share data)2016 2015 2016 20152017 2016 2017 2016
Net income$5,813
 $5,426
 $16,985
 $15,801
$6,405
 $5,813
 $18,876
 $16,985
              
Weighted average common shares outstanding16,135
 16,062
 16,110
 16,045
16,213
 16,135
 16,186
 16,110
Weighted average effect of restricted stock units       
outstanding51
 38
 47
 47
Weighted average effect of restricted stock units outstanding118
 51
 127
 47
Diluted weighted average common shares outstanding16,186
 16,100
 16,157
 16,092
16,331
 16,186
 16,313
 16,157
 
  
  
  
 
  
  
  
Basic earnings per common share$0.36
 $0.34
 $1.05
 $0.98
$0.40
 $0.36
 $1.17
 $1.05
Diluted earnings per common share$0.36
 $0.34
 $1.05
 $0.98
$0.39
 $0.36
 $1.16
 $1.05
Number of anti-dilutive common stock equivalents excluded from diluted earnings per share computation24
 88
 14
 106

Restricted stock units totaling 87,600 and 106,231 were anti-dilutive and therefore excluded from the computation of diluted earnings per common share for the three and nine months ended September 30, 2016, respectively. Restricted stock units totaling 139,500 and 95,157 were anti-dilutive for the three and nine months ended September 30, 2015, respectively.

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


3.  Investment Securities

The following tables show the amortized cost, gross unrealized gains and losses, and fair value of investment securities, by investment security type as of September 30, 20162017 and December 31, 2015.2016.
September 30, 2017
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
(Losses)
 
Fair
Value
Securities available for sale:       
U.S. government agencies and corporations$2,500
 $
 $(11) $2,489
State and political subdivisions133,300
 1,442
 (486) 134,256
Collateralized mortgage obligations (1)
150,298
 150
 (1,081) 149,367
Mortgage-backed securities (1)
54,622
 288
 (123) 54,787
Asset-backed securities (2)
46,351
 61
 (139) 46,273
Trust preferred securities2,130
 
 (430) 1,700
Corporate notes29,288
 306
 (92) 29,502
$418,489
 $2,247
 $(2,362) $418,374
       
Securities held to maturity:       
State and political subdivisions$45,597
 $807
 $(48) $46,356
 
  
  
  
September 30, 2016December 31, 2016
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
(Losses)
 
Fair
Value
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
(Losses)
 
Fair
Value
Securities available for sale:              
U.S. government agencies and corporations$2,531
 $89
 $
 $2,620
$2,524
 $69
 $
 $2,593
State and political subdivisions64,590
 2,590
 
 67,180
64,551
 376
 (591) 64,336
Collateralized mortgage obligations (1)
110,200
 1,053
 (56) 111,197
103,038
 255
 (1,343) 101,950
Mortgage-backed securities (1)
86,136
 1,713
 
 87,849
80,614
 341
 (797) 80,158
Trust preferred security1,781
 
 (600) 1,181
1,784
 
 (534) 1,250
Corporate notes8,346
 38
 
 8,384
10,326
 25
 (1) 10,350
$273,584
 $5,483
 $(656) $278,411
$262,837
 $1,066
 $(3,266) $260,637
              
Securities held to maturity:              
State and political subdivisions$48,405
 $1,719
 $(181) $49,943
$48,386
 $70
 $(667) $47,789
 
  
  
  
December 31, 2015
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
(Losses)
 
Fair
Value
Securities available for sale:       
U.S. government agencies and corporations$2,551
 $141
 $
 $2,692
State and political subdivisions71,431
 1,669
 (21) 73,079
Collateralized mortgage obligations (1)
133,414
 491
 (1,290) 132,615
Mortgage-backed securities (1)
101,299
 485
 (696) 101,088
Trust preferred security1,773
 
 (668) 1,105
Corporate notes and equity securities10,130
 61
 (56) 10,135
$320,598
 $2,847
 $(2,731) $320,714
       
Securities held to maturity:       
State and political subdivisions$51,259
 $883
 $(224) $51,918
(1)All collateralized mortgage obligations and mortgage-backed securities consist of residential mortgage pass-through securities guaranteed by GNMAFHLMC or issued by FNMA, and real estate mortgage investment conduits guaranteed by FNMA, FHLMC or GNMA.GNMA, and commercial mortgage pass-through securities guaranteed by the SBA.
(2)Pass-through asset-backed securities guaranteed by the SBA, representing participating interests in pools of long-term debentures issued by state and local development companies certified by the SBA.

Investment securities with an amortized cost of approximately $133,770123,457 and $78,553141,995 as of September 30, 20162017 and December 31, 20152016, 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 as of September 30, 2016 compared to December 31, 2015 was primarily due to an increase in public fund deposits.


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


The amortized cost and fair value of investment securities available for sale as of September 30, 2016,2017, by contractual maturity, are shown below. Certain securities have call features that allow the issuer to call the securities prior to maturity.  Expected maturities may differ from contractual maturities for collateralized mortgage obligations, mortgage-backed securities and mortgage-backedasset-backed securities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.  Therefore, collateralized mortgage obligations, mortgage-backed securities and mortgage-backedasset-backed securities are not included in the maturity categories within the following maturity summary.
September 30, 2016September 30, 2017
Amortized Cost Fair ValueAmortized Cost Fair Value
Due in one year or less$4,517
 $4,530
$2,117
 $2,121
Due after one year through five years14,764
 15,054
5,633
 5,660
Due after five years through ten years31,747
 33,020
43,213
 43,819
Due after ten years26,220
 26,761
116,255
 116,347
77,248
 79,365
167,218
 167,947
Collateralized mortgage obligations and mortgage-backed securities196,336
 199,046
Collateralized mortgage obligations, mortgage-backed and asset-backed securities251,271
 250,427
$273,584
 $278,411
$418,489
 $418,374
The amortized cost and fair value of investment securities held to maturity as of September 30, 20162017, by contractual maturity, are shown below.  Certain securities have call features that allow the issuer to call the securities prior to maturity.  
September 30, 2016September 30, 2017
Amortized Cost Fair ValueAmortized Cost Fair Value
Due in one year or less$
 $
$
 $
Due after one year through five years486
 484
1,595
 1,600
Due after five years through ten years19,375
 19,850
24,936
 25,364
Due after ten years28,544
 29,609
19,066
 19,392
$48,405
 $49,943
$45,597
 $46,356
The details of the sales of investment securities available for sale for the three and nine months ended September 30, 20162017 and 20152016 are summarized in the following table.
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended September 30, Nine Months Ended September 30,
2016 2015 2016 20152017 2016 2017 2016
Proceeds from sales$
 $
 $1,544
 $16,946
$21,204
 $
 $74,224
 $1,544
Gross gains on sales
 
 60
 54
197
 
 527
 60
Gross losses on sales
 
 
 7

 
 104
 

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Table of Contents

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


The following tables show the fair value and gross unrealized losses, aggregated by investment type and length of time that individual securities have been in a continuous loss position, as of September 30, 20162017 and December 31, 2015.2016.
September 30, 2016September 30, 2017
Less than 12 months 12 months or longer TotalLess than 12 months 12 months or longer Total
Fair
Value
 
Gross
Unrealized
(Losses)
 
Fair
Value
 
Gross
Unrealized
(Losses)
 
Fair
Value
 
Gross
Unrealized
(Losses)
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$
 $
 $
 $
 $
 $
$2,489
 $(11) $
 $
 $2,489
 $(11)
State and political subdivisions
 
 
 
 
 
54,004
 (486) 
 
 54,004
 (486)
Collateralized mortgage obligations2,098
 (1) 5,922
 (55) 8,020
 (56)102,016
 (830) 18,001
 (251) 120,017
 (1,081)
Mortgage-backed securities
 
 
 
 
 
27,500
 (123) 
 
 27,500
 (123)
Trust preferred security
 
 1,181
 (600) 1,181
 (600)
Asset-backed securities20,217
 (139) 
 
 20,217
 (139)
Trust preferred securities
 
 1,700
 (430) 1,700
 (430)
Corporate notes
 
 
 
 
 
7,410
 (92) 
 
 7,410
 (92)
$2,098
 $(1) $7,103
 $(655) $9,201
 $(656)$213,636
 $(1,681) $19,701
 $(681) $233,337
 $(2,362)
 
  
  
  
  
  
 
  
  
  
  
  
Securities held to maturity:                      
State and political subdivisions$621
 $(7) $4,009
 $(174) $4,630
 $(181)$1,658
 $(7) $1,755
 $(41) $3,413
 $(48)
                      
                      
December 31, 2015December 31, 2016
Less than 12 months 12 months or longer TotalLess than 12 months 12 months or longer Total
Fair
Value
 
Gross
Unrealized
(Losses)
 
Fair
Value
 
Gross
Unrealized
(Losses)
 
Fair
Value
 
Gross
Unrealized
(Losses)
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 subdivisions321
 (1) 2,053
 (20) 2,374
 (21)$34,903
 $(591) $
 $
 $34,903
 $(591)
Collateralized mortgage obligations53,043
 (449) 38,286
 (841) 91,329
 (1,290)75,771
 (1,255) 2,538
 (88) 78,309
 (1,343)
Mortgage-backed securities67,662
 (600) 7,200
 (96) 74,862
 (696)60,221
 (797) 
 
 60,221
 (797)
Trust preferred security
 
 1,105
 (668) 1,105
 (668)
 
 1,250
 (534) 1,250
 (534)
Corporate notes and equity securities4,500
 (56) 
 
 4,500
 (56)
Corporate notes1,499
 (1) 
 
 1,499
 (1)
$125,526
 $(1,106) $48,644
 $(1,625) $174,170
 $(2,731)$172,394
 $(2,644) $3,788
 $(622) $176,182
 $(3,266)
                      
Securities held to maturity:                      
State and political subdivisions$2,832
 $(42) $7,341
 $(182) $10,173
 $(224)$32,976
 $(458) $3,968
 $(209) $36,944
 $(667)
As of September 30, 2016,2017, the available for sale and held to maturity securities with unrealized losses that have existed for longer thanincluded one year included 11U.S. government agency security, 89 state and political subdivision securities, two30 collateralized mortgage obligation securities, andeight mortgage-backed securities, three asset-backed securities, one trust preferred security.security and two corporate notes. The Company believesbelieved the unrealized losses on investments available for sale and held to maturity as of September 30, 20162017 were due to market conditions rather than reduced estimated cash flows. The Company does not intend to sell these securities, does not anticipate that these securities will be required to be sold before anticipated recovery, and expects full principal and interest to be collected. Therefore, the Company did not consider these investments to have OTTI as of September 30, 20162017.



1314


Table of Contents

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


4. Loans and Allowance for Loan Losses

Loans consisted of the following segments as of September 30, 20162017 and December 31, 20152016.
September 30, 2016 December 31, 2015September 30, 2017 December 31, 2016
Commercial$352,774
 $349,051
$316,716
 $334,014
Real estate:      
Construction, land and land development208,046
 174,602
249,453
 205,610
1-4 family residential first mortgages48,890
 51,370
49,369
 47,184
Home equity18,618
 21,749
14,558
 18,057
Commercial747,447
 644,176
820,144
 788,000
Consumer and other loans8,424
 6,801
8,235
 8,355
1,384,199
 1,247,749
1,458,475
 1,401,220
Net unamortized fees and costs(1,304) (1,061)(1,570) (1,350)
$1,382,895
 $1,246,688
$1,456,905
 $1,399,870
Real estate loans of approximately $640,000$710,000 and $590,000$680,000 were pledged as security for Federal Home Loan Bank (FHLB) advances as of September 30, 20162017 and December 31, 20152016, 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. 

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

Based upon its ongoing assessment of credit quality within the loan portfolio, the Company maintains a Watch List, which includes loans classified as Doubtful, Substandard and Watch according to the Company's classification criteria. These loans involve the anticipated potential for payment defaults or collateral inadequacies. A loan on the Watch List is considered impaired when management believes it is probable the Company will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement.  Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent.  The amount of impairment, if any, and any subsequent changes are included in the allowance for loan losses.

  


14


Table of Contents

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


The table below presents the TDR loans by segment as of September 30, 2016 and December 31, 2015.
 September 30, 2016 December 31, 2015
Troubled debt restructured loans(1):
   
Commercial$94
 $102
Real estate:   
Construction, land and land development
 60
1-4 family residential first mortgages
 86
Home equity
 
Commercial370
 445
Consumer and other loans
 
Total troubled debt restructured loans$464
 $693

(1)
Included in this table were two TDR loans as of September 30, 2016 and three TDR loans as of December 31, 2015, with balances of $464 and $613, respectively, categorized as nonaccrual.

There were no loan modifications considered to be TDR that occurred during the three and nine months ended September 30, 2016. There were no loan modifications considered to be TDR that occurred during the three months ended September 30, 2015, and two loan modifications considered to be TDR that occurred during the nine months ended September 30, 2015 with a pre- and post-modification recorded investment of $130.

The recorded investment in TDR loans that have been modified within the twelve months preceding September 30, 2016 and September 30, 2015, and that have subsequently had a payment default, totaled $0 and $107, respectively. 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)
(dollars in thousands, except per share data)


TDR loans totaled $247 and $426 as of September 30, 2017 and December 31, 2016, respectively, and were included in nonaccrual loans. There were no loan modifications considered to be TDR that occurred during the three and nine months ended September 30, 2017 and 2016. No TDR loans that were modified within the twelve months preceding September 30, 2017 and September 30, 2016 have subsequently had a payment default. A TDR loan is considered to have a payment default when it is past due 30 days or more.

The following table summarizes the recorded investment in impaired loans by segment, broken down by loans with no related allowance for loan losses and loans with a related allowance and the amount of that allowance as of September 30, 20162017 and December 31, 2015.2016.
September 30, 2016 December 31, 2015September 30, 2017 December 31, 2016
Recorded Investment Unpaid Principal Balance Related Allowance Recorded Investment Unpaid Principal Balance Related AllowanceRecorded Investment Unpaid Principal Balance Related Allowance Recorded Investment Unpaid Principal Balance Related Allowance
With no related allowance recorded:                      
Commercial$
 $
 $
 $
 $
 $
$
 $
 $
 $35
 $35
 $
Real estate:                      
Construction, land and land development
 
 
 60
 663
 

 
 
 
 
 
1-4 family residential first mortgages116
 116
 
 352
 360
 
94
 94
 
 108
 108
 
Home equity
 
 
 
 
 
30
 30
 
 41
 41
 
Commercial370
 370
 
 482
 482
 
247
 247
 
 335
 335
 
Consumer and other loans
 
 
 
 
 

 
 
 
 
 
486
 486
 
 894
 1,505
 
371
 371
 
 519
 519
 
With an allowance recorded:                      
Commercial127
 127
 127
 142
 142
 142

 
 
 91
 91
 91
Real estate:                      
Construction, land and land development
 
 
 
 
 

 
 
 
 
 
1-4 family residential first mortgages
 
 
 
 
 

 
 
 
 
 
Home equity249
 249
 249
 270
 270
 270
23
 23
 23
 276
 276
 276
Commercial141
 141
 141
 155
 155
 155
123
 123
 123
 136
 136
 136
Consumer and other loans
 
 
 
 
 

 
 
 
 
 
517
 517
 517
 567
 567
 567
146
 146
 146
 503
 503
 503
Total:                      
Commercial127
 127
 127
 142
 142
 142

 
 
 126
 126
 91
Real estate:                      
Construction, land and land development
 
 
 60
 663
 

 
 
 
 
 
1-4 family residential first mortgages116
 116
 
 352
 360
 
94
 94
 
 108
 108
 
Home equity249
 249
 249
 270
 270
 270
53
 53
 23
 317
 317
 276
Commercial511
 511
 141
 637
 637
 155
370
 370
 123
 471
 471
 136
Consumer and other loans
 
 
 
 
 

 
 
 
 
 
$1,003
 $1,003
 $517
 $1,461
 $2,072
 $567
$517
 $517
 $146
 $1,022
 $1,022
 $503
   
The balance of impaired loans at September 30, 20162017 and December 31, 20152016 was composed of 75 and 1310 different borrowers, respectively. The Company has no commitments to advance additional funds on any of the impaired loans.



16


Table of Contents

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


The following table summarizes the average recorded investment and interest income recognized on impaired loans by segment for the three and nine months ended September 30, 20162017 and 2015.2016.
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended September 30, Nine Months Ended September 30,
2016 2015 2016 20152017 2016 2017 2016
Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income RecognizedAverage 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:               
With no related allowance recorded:               
Commercial$
 $
 $132
 $
 $
 $
 $151
 $
$
 $
 $
 $
 $24
 $
 $
 $
Real estate:                              
Construction, land and               
land development
 
 255
 3
 11
 
 319
 10
1-4 family residential               
first mortgages124
 
 316
 
 242
 1
 295
 
Construction, land and land development
 
 
 
 
 
 11
 
1-4 family residential first mortgages97
 
 124
 
 101
 
 242
 1
Home equity
 
 
 
 
 
 
 
29
 
 
 
 33
 
 
 
Commercial377
 
 1,565
 
 407
 
 1,088
 
262
 
 377
 
 291
 
 407
 
Consumer and other loans
 
 3
 
 
 
 3
 

 
 
 
 
 
 
 
501
 
 2,271
 3
 660
 1
 1,856
 10
388
 
 501
 
 449
 
 660
 1
With an allowance recorded:                              
Commercial130
 
 146
 
 135
 
 222
 2
62
 
 130
 
 78
 
 135
 
Real estate:                              
Construction, land and               
land development
 
 
 
 
 
 247
 6
1-4 family residential               
first mortgages
 
 
 
 
 
 
 
Construction, land and land development
 
 
 
 
 
 
 
1-4 family residential first mortgages
 
 
 
 
 
 
 
Home equity254
 
 231
 
 261
 
 227
 
157
 
 254
 
 223
 
 261
 
Commercial143
 
 161
 
 148
 
 166
 
125
 
 143
 
 130
 
 148
 
Consumer and other loans
 
 
 
 
 
 
 

 
 
 
 
 
 
 
527
 
 538
 
 544
 
 862
 8
344
 
 527
 
 431
 
 544
 
Total:                              
Commercial130
 
 278
 
 135
 
 373
 2
62
 
 130
 
 102
 
 135
 
Real estate:                              
Construction, land and               
land development
 
 255
 3
 11
 
 566
 16
1-4 family residential               
first mortgages124
 
 316
 
 242
 1
 295
 
Construction, land and land development
 
 
 
 
 
 11
 
1-4 family residential first mortgages97
 
 124
 
 101
 
 242
 1
Home equity254
 
 231
 
 261
 
 227
 
186
 
 254
 
 256
 
 261
 
Commercial520
 
 1,726
 
 555
 
 1,254
 
387
 
 520
 
 421
 
 555
 
Consumer and other loans
 
 3
 
 
 
 3
 

 
 
 
 
 
 
 
$1,028
 $
 $2,809
 $3
 $1,204
 $1
 $2,718
 $18
$732
 $
 $1,028
 $
 $880
 $
 $1,204
 $1



17


Table of Contents

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


The following tables provide an analysis of the payment status of the recorded investment in loans as of September 30, 20162017 and December 31, 20152016.
September 30, 2016September 30, 2017
30-59
Days Past
Due
 
60-89
Days Past
Due
 
90 Days
or More
Past Due
 
Total
Past Due
 Current Nonaccrual Loans Total Loans
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$137
 $40
 $
 $177
 $352,470
 $127
 $352,774
$
 $
 $
 $
 $316,716
 $
 $316,716
Real estate:                          
Construction, land and                          
land development
 
 
 
 208,046
 
 208,046

 
 
 
 249,453
 
 249,453
1-4 family residential                          
first mortgages65
 
 
 65
 48,709
 116
 48,890

 
 
 
 49,275
 94
 49,369
Home equity
 
 
 
 18,369
 249
 18,618
3
 
 
 3
 14,502
 53
 14,558
Commercial
 
 
 
 746,936
 511
 747,447

 
 
 
 819,774
 370
 820,144
Consumer and other
 
 
 
 8,424
 
 8,424

 
 
 
 8,235
 
 8,235
Total$202
 $40
 $
 $242
 $1,382,954
 $1,003
 $1,384,199
$3
 $
 $
 $3
 $1,457,955
 $517
 $1,458,475
December 31, 2015December 31, 2016
30-59
Days Past
Due
 
60-89
Days Past
Due
 
90 Days
or More
Past Due
 
Total
Past Due
 Current Nonaccrual Loans 
Total
Loans
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$1
 $38
 $
 $39
 $348,870
 $142
 $349,051
$109
 $
 $
 $109
 $333,779
 $126
 $334,014
Real estate:                          
Construction, land and                          
land development
 
 
 
 174,602
 
 174,602

 
 
 
 205,610
 
 205,610
1-4 family residential                          
first mortgages317
 
 
 317
 50,721
 332
 51,370
64
 
 
 64
 47,012
 108
 47,184
Home equity
 
 
 
 21,479
 270
 21,749

 
 
 
 17,740
 317
 18,057
Commercial
 
 
 
 643,539
 637
 644,176

 
 
 
 787,529
 471
 788,000
Consumer and other
 
 
 
 6,801
 
 6,801

 
 
 
 8,355
 
 8,355
Total$318
 $38
 $
 $356
 $1,246,012
 $1,381
 $1,247,749
$173
 $
 $
 $173
 $1,400,025
 $1,022
 $1,401,220


18


Table of Contents

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


The following tables present the recorded investment in loans by credit quality indicator and loan segment as of September 30, 20162017 and December 31, 2015.2016.
September 30, 2016September 30, 2017
Pass Watch Substandard Doubtful TotalPass Watch Substandard Doubtful Total
Commercial$347,894
 $3,635
 $1,245
 $
 $352,774
$314,078
 $560
 $2,078
 $
 $316,716
Real estate:                  
Construction, land and land development207,007
 
 1,039
 
 208,046
249,308
 145
 
 
 249,453
1-4 family residential first mortgages48,050
 724
 116
 
 48,890
48,564
 552
 253
 
 49,369
Home equity18,278
 
 340
 
 18,618
14,377
 56
 125
 
 14,558
Commercial726,265
 20,541
 641
 
 747,447
800,622
 18,246
 1,276
 
 820,144
Consumer and other8,412
 
 12
 
 8,424
8,196
 39
 
 
 8,235
Total$1,355,906
 $24,900
 $3,393
 $
 $1,384,199
$1,435,145
 $19,598
 $3,732
 $
 $1,458,475
December 31, 2015December 31, 2016
Pass Watch Substandard Doubtful TotalPass Watch Substandard Doubtful Total
Commercial$344,650
 $2,936
 $1,465
 $
 $349,051
$329,366
 $3,303
 $1,345
 $
 $334,014
Real estate:                  
Construction, land and land development173,373
 
 1,229
 
 174,602
204,572
 
 1,038
 
 205,610
1-4 family residential first mortgages50,375
 517
 478
 
 51,370
46,278
 798
 108
 
 47,184
Home equity21,401
 68
 280
 
 21,749
17,646
 
 411
 
 18,057
Commercial619,608
 22,977
 1,591
 
 644,176
769,010
 18,392
 598
 
 788,000
Consumer and other6,786
 
 15
 
 6,801
8,355
 
 
 
 8,355
Total$1,216,193
 $26,498
 $5,058
 $
 $1,247,749
$1,375,227
 $22,493
 $3,500
 $
 $1,401,220
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 satisfactoryborrower's financial condition is satisfactory and stable.  The borrower has satisfactory debt service capacity.capacity, and the loan is well secured. 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)
(dollars in thousands, except per share data)


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

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

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

Credit quality indicators for all loans and the Company's risk rating process are dynamic and updated on a continuous basis. Risk ratings are updated as circumstances that could affect the repayment of an individual loan are brought to management's attention through an established monitoring process. Individual lenders initiate changes as appropriate for ratings 1 through 5, and changes for ratings 6 through 9 are initiated via communications with management. The likelihood of loss increases as the risk rating increases and is generally preceded by a loan appearing on the Watch List, which consists of all loans with a risk rating of 6 or worse. Written action plans with firm target dates for resolution of identified problems are maintained and reviewed on a quarterly basis for all segments of 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.  The allowance is an amount that management believes will be adequate to absorb probable losses on existing loans based on an evaluation of the collectability of loans and prior loss experience.  This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, the review of specific problem loans, and the current economic conditions that may affect the borrower's ability to pay.  Loans are charged-off against the allowance for loan losses when management believes that collectability of the principal is unlikely. While management uses the best information available to make its evaluations, future adjustments to the allowance may be necessary if there are significant changes in economic conditions or the other factors relied upon.



20


Table of Contents

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


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

The following tables detail the changes in the allowance for loan losses by segment for the three and nine months ended September 30, 20162017 and 2015.2016.
Three Months Ended September 30, 2016Three Months Ended September 30, 2017
  Real Estate      Real Estate    
Commercial Construction and Land 1-4 Family Residential Home Equity Commercial Consumer and Other TotalCommercial Construction and Land 1-4 Family Residential Home Equity Commercial Consumer and Other Total
Beginning balance$4,441
 $2,804
 $393
 $483
 $7,606
 $102
 $15,829
$3,802
 $2,552
 $350
 $372
 $9,307
 $103
 $16,486
Charge-offs(25) (140) 
 
 
 (6) (171)(3) 
 
 (176) 
 
 (179)
Recoveries53
 
 37
 6
 4
 
 100
34
 
 8
 5
 3
 1
 51
Provision (1)
(318) 8
 (84) (25) 621
 (2) 200
(165) 170
 (24) 16
 1
 2
 
Ending balance$4,151
 $2,672
 $346
 $464
 $8,231
 $94
 $15,958
$3,668
 $2,722
 $334
 $217
 $9,311
 $106
 $16,358
                          
Three Months Ended September 30, 2015Three Months Ended September 30, 2016
  Real Estate      Real Estate    
Commercial Construction and Land 1-4 Family Residential Home Equity Commercial Consumer and Other TotalCommercial Construction and Land 1-4 Family Residential Home Equity Commercial Consumer and Other Total
Beginning balance$4,736
 $1,700
 $445
 $474
 $6,982
 $27
 $14,364
$4,441
 $2,804
 $393
 $483
 $7,606
 $102
 $15,829
Charge-offs(152) 
 
 
 
 (2) (154)(25) (140) 
 
 
 (6) (171)
Recoveries201
 
 2
 43
 3
 1
 250
53
 
 37
 6
 4
 
 100
Provision (1)
(327) 189
 (30) (16) 388
 (4) 200
(318) 8
 (84) (25) 621
 (2) 200
Ending balance$4,458
 $1,889
 $417
 $501
 $7,373
 $22
 $14,660
$4,151
 $2,672
 $346
 $464
 $8,231
 $94
 $15,958
                          
Nine Months Ended September 30, 2016Nine Months Ended September 30, 2017
  Real Estate      Real Estate    
Commercial Construction and Land 1-4 Family Residential Home Equity Commercial Consumer and Other TotalCommercial Construction and Land 1-4 Family Residential Home Equity Commercial Consumer and Other Total
Beginning balance$4,369
 $2,338
 $508
 $481
 $7,254
 $17
 $14,967
$3,881
 $2,639
 $317
 $478
 $8,697
 $100
 $16,112
Charge-offs(25) (140) (93) 
 
 (6) (264)(196) 
 
 (176) 
 
 (372)
Recoveries194
 56
 58
 30
 10
 7
 355
174
 398
 10
 20
 9
 7
 618
Provision (1)
(387) 418
 (127) (47) 967
 76
 900
(191) (315) 7
 (105) 605
 (1) 
Ending balance$4,151
 $2,672
 $346
 $464
 $8,231
 $94
 $15,958
$3,668
 $2,722
 $334
 $217
 $9,311
 $106
 $16,358
                          
Nine Months Ended September 30, 2015Nine Months Ended September 30, 2016
  Real Estate      Real Estate    
Commercial Construction and Land 1-4 Family Residential Home Equity Commercial Consumer and Other TotalCommercial 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
$4,369
 $2,338
 $508
 $481
 $7,254
 $17
 $14,967
Charge-offs(208) 
 (15) 
 
 (2) (225)(25) (140) (93) 
 
 (6) (264)
Recoveries528
 250
 4
 78
 9
 9
 878
194
 56
 58
 30
 10
 7
 355
Provision (1)
(277) (512) (38) (111) 1,351
 (13) 400
(387) 418
 (127) (47) 967
 76
 900
Ending balance$4,458
 $1,889
 $417
 $501
 $7,373
 $22
 $14,660
$4,151
 $2,672
 $346
 $464
 $8,231
 $94
 $15,958
(1)The negative provisions for the various segments are either related to the decline in balance foroutstanding balances in each of those portfolio segments during the time periods disclosed and/or improvement in the credit quality factors related to those portfolio segments.

21


Table of Contents

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


The following tables present a breakdown of the allowance for loan losses disaggregated on the basis of impairment analysis method by segment as of September 30, 20162017 and December 31, 2015.2016.
September 30, 2016September 30, 2017
  Real Estate      Real Estate    
Commercial Construction and Land 1-4 Family Residential Home Equity Commercial Consumer and Other TotalCommercial Construction and Land 1-4 Family Residential Home Equity Commercial Consumer and Other Total
Ending balance:                          
Individually evaluated for impairment$127
 $
 $
 $249
 $141
 $
 $517
$
 $
 $
 $23
 $123
 $
 $146
Collectively evaluated for impairment4,024
 2,672
 346
 215
 8,090
 94
 15,441
3,668
 2,722
 334
 194
 9,188
 106
 16,212
Total$4,151
 $2,672
 $346
 $464
 $8,231
 $94
 $15,958
$3,668
 $2,722
 $334
 $217
 $9,311
 $106
 $16,358
                          
December 31, 2015December 31, 2016
  Real Estate      Real Estate    
Commercial Construction and Land 1-4 Family Residential Home Equity Commercial Consumer and Other TotalCommercial Construction and Land 1-4 Family Residential Home Equity Commercial Consumer and Other Total
Ending balance:                          
Individually evaluated for impairment$142
 $
 $
 $270
 $155
 $
 $567
$91
 $
 $
 $276
 $136
 $
 $503
Collectively evaluated for impairment4,227
 2,338
 508
 211
 7,099
 17
 14,400
3,790
 2,639
 317
 202
 8,561
 100
 15,609
Total$4,369
 $2,338
 $508
 $481
 $7,254
 $17
 $14,967
$3,881
 $2,639
 $317
 $478
 $8,697
 $100
 $16,112
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 September 30, 20162017 and December 31, 20152016.
September 30, 2016September 30, 2017
  Real Estate      Real Estate    
Commercial Construction and Land 1-4 Family Residential Home Equity Commercial Consumer and Other TotalCommercial Construction and Land 1-4 Family Residential Home Equity Commercial Consumer and Other Total
Ending balance:                          
Individually evaluated for impairment$127
 $
 $116
 $249
 $511
 $
 $1,003
$
 $
 $94
 $53
 $370
 $
 $517
Collectively evaluated for impairment352,647
 208,046
 48,774
 18,369
 746,936
 8,424
 1,383,196
316,716
 249,453
 49,275
 14,505
 819,774
 8,235
 1,457,958
Total$352,774
 $208,046
 $48,890
 $18,618
 $747,447
 $8,424
 $1,384,199
$316,716
 $249,453
 $49,369
 $14,558
 $820,144
 $8,235
 $1,458,475
December 31, 2015December 31, 2016
  Real Estate      Real Estate    
Commercial Construction and Land 1-4 Family Residential Home Equity Commercial Consumer and Other TotalCommercial Construction and Land 1-4 Family Residential Home Equity Commercial Consumer and Other Total
Ending balance:                          
Individually evaluated for impairment$142
 $60
 $352
 $270
 $637
 $
 $1,461
$126
 $
 $108
 $317
 $471
 $
 $1,022
Collectively evaluated for impairment348,909
 174,542
 51,018
 21,479
 643,539
 6,801
 1,246,288
333,888
 205,610
 47,076
 17,740
 787,529
 8,355
 1,400,198
Total$349,051
 $174,602
 $51,370
 $21,749
 $644,176
 $6,801
 $1,247,749
$334,014
 $205,610
 $47,184
 $18,057
 $788,000
 $8,355
 $1,401,220


22


Table of Contents

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


5.  Long-Term Debt

On May 25, 2017, the Company entered into a credit agreement with a commercial bank and borrowed $25,000. This credit agreement replaced a prior credit agreement with the same commercial bank that had a remaining outstanding principal balance of $3,000. The additional borrowing was used to make a capital injection into the Company's subsidiary, West Bank. Principal and interest under the term note are payable quarterly over five years. Required quarterly principal payments are $625, with the balance due at maturity. The Company may make additional principal payments without penalty. The interest rate is variable at 1.95 percent over the 30-day LIBOR rate. The interest rate was 3.18 percent at September 30, 2017. In the case of an event of default, the unaffiliated commercial bank may accelerate the payment of the loan. The loan is secured by 100 percent of the stock of West Bank.

6. Derivatives

In 2012 and 2013, theThe Company has entered into various forward-starting interest rate swap transactions to effectively convert variable rate FHLB advances and junior subordinated notes to fixed rate debt as of the forward-starting dates. The swap transactions were designated as cash flow hedges. Three interestInterest rate swaps with a total notional amount of $70,000 have beenwere terminated in 2015, subject to termination fees totaling $541. The termination fees will beare being reclassified from accumulated other comprehensive income to interest expense over the remaining life of the underlying cash flows which will be through June 2020. The remainingAn interest rate swap with a notional amount of $30,000 became effective in December 2015. Another interest rate swap, with a notional amount of $20,000, has a forward-starting date in September 2018. No amount of ineffectiveness was included in net income for the nine months ended September 30, 20162017 or 2015,2016, and the Company estimates there will be approximately $513$373 of cash payments and reclassification from accumulated other comprehensive income to interest expense through the twelve12 months ended September 30, 2017.2018. Derivative contracts are executed with a Credit Support Annex, which is a bilateral ratings-sensitive agreement that requires collateral postings at established credit threshold levels. These agreements protect the interests of the Company and its counterparties should either party suffer a credit rating deterioration. As of both September 30, 20162017 and December 31, 2015,2016, the Company pledged $1,270 and $740, respectively,$470 of collateral to the counterparty in the form of cash on deposit with a third party. The Company's counterparty was required to pledge $720 and $1,070 at September 30, 2017 and December 31, 2016, respectively.

The table below identifies the balance sheet category and fair values of the Company's derivative instruments designated as cash flow hedges as of September 30, 20162017 and December 31, 2015.2016.
Interest Rate Swap  
Notional
Amount
 Fair Value 
Balance Sheet
Category
 Receive Rate Pay Rate Maturity
September 30, 2016  $30,000
 $1,302
 Other Liabilities 1.17% 2.52% 9/21/2020
December 31, 2015  30,000
 774
 Other Liabilities 0.88% 2.52% 9/21/2020
Interest Rate Swap  
Notional
Amount
 Fair Value 
Balance Sheet
Category
 Weighted Average Receive Rate Weighted Average Pay Rate Maturity
September 30, 2017             
Interest rate swap  $30,000
 $(351) Other Liabilities 1.64% 2.52% 9/21/2020
Interest rate swap(1)
  20,000
 786
 Other Assets 
 4.81% 9/30/2026
December 31, 2016             
Interest rate swap  30,000
 (496) Other Liabilities 1.30% 2.52% 9/21/2020
Interest rate swap(1)
  20,000
 1,068
 Other Assets 
 4.81% 9/30/2026
(1) This swap is a forward-starting swap with a weighted average pay rate of 4.81 percent beginning September 30, 2018. No interest payments are required related to this swap until December 30, 2018.

The following table identifies the pre-tax losses recognized on the Company's derivative instruments designated as cash flow hedges for the nine months ended September 30, 20162017 and 2015.2016.
 Effective Portion Ineffective Portion Effective Portion Ineffective Portion
 Amount of 
Reclassified from AOCI into
Income
 
Recognized in Income on
Derivatives
 Amount of 
Reclassified from AOCI into
Income
 
Recognized in Income on
Derivatives
 Pre-tax (Loss)  Pre-tax (Loss) 
 Recognized in Amount of Amount of Recognized Amount of Amount of
Interest Rate Swap  OCI Category Gain (Loss) Category Gain (Loss)  in OCI Category (Loss) Category Gain (Loss)
September 30, 2017 $(376) Interest Expense $(321) Other Income $
September 30, 2016 $(889) Interest Expense $(444) Other Income $
 (889) Interest Expense (444) Other Income 
September 30, 2015 (1,470) Interest Expense (118) Other Income 


23


Table of Contents

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


6.7.  Deferred Income Taxes

Net deferred tax assets consisted of the following as of September 30, 20162017 and December 31, 20152016.  
September 30, 2016 December 31, 2015September 30, 2017 December 31, 2016
Deferred tax assets:      
Allowance for loan losses$6,064
 $5,687
$6,216
 $6,123
Net unrealized losses on securities available for sale15
 719
Intangibles540
 771
231
 462
Accrued expenses597
 898
499
 706
Restricted stock compensation291
 358
564
 446
Net unrealized losses on interest rate swaps643
 473
State net operating loss carryforward1,252
 1,183
1,339
 1,271
Capital loss carryforward355
 355
Other38
 34
137
 190
9,780
 9,759
9,001
 9,917
Deferred tax liabilities:      
Net deferred loan fees and costs330
 350
289
 321
Net unrealized gains on interest rate swaps59
 80
Premises and equipment776
 674
1,227
 1,027
Net unrealized gains on securities available for sale1,954
 210
Other270
 317
226
 261
3,330
 1,551
1,801
 1,689
Net deferred tax assets before valuation allowance6,450
 8,208
7,200
 8,228
Valuation allowance(1,607) (1,538)(1,339) (1,271)
Net deferred tax assets$4,843
 $6,670
$5,861
 $6,957
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 suchthese carryforwards will expire without being utilized.
The federal and state capitalnet operating loss carryforwards expire at the end of 2016.in 2019 and thereafter.

7.8.  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 nine months ended September 30, 20162017 and 2015.2016.
   Unrealized Accumulated Unrealized Unrealized Accumulated
 Unrealized Gains Other Gains Gains Other
 Gains (Losses) on Comprehensive (Losses) on (Losses) on Comprehensive
 on Securities Derivatives Income (Loss) Securities Derivatives Income (Loss)
Balance, December 31, 2014 $416
 $(162) $254
Other comprehensive income (loss) before reclassifications 747
 (911) (164)
Amounts reclassified from accumulated other comprehensive income (47) 73
 26
Net current period other comprehensive income (loss) 700
 (838) (138)
Balance, September 30, 2015 $1,116
 $(1,000) $116
      
Balance, December 31, 2015 $342
 $(772) $(430) $342
 $(772) $(430)
Other comprehensive income (loss) before reclassifications 2,958
 (550) 2,408
 2,958
 (550) 2,408
Amounts reclassified from accumulated other comprehensive income (113) 275
 162
 (113) 275
 162
Net current period other comprehensive income (loss) 2,845
 (275) 2,570
 2,845
 (275) 2,570
Balance, September 30, 2016 $3,187
 $(1,047) $2,140
 $3,187
 $(1,047) $2,140
      
Balance, December 31, 2016 $(1,172) $130
 $(1,042)
Other comprehensive income (loss) before reclassifications 1,556
 (233) 1,323
Amounts reclassified from accumulated other comprehensive income (408) 199
 (209)
Net current period other comprehensive income (loss) 1,148
 (34) 1,114
Balance, September 30, 2017 $(24) $96
 $72

24


Table of Contents

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


8.9.  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 September 30, 20162017 and December 31, 2015.2016. 
September 30, 2016 December 31, 2015September 30, 2017 December 31, 2016
Commitments to extend credit$571,604
 $558,633
$597,325
 $614,681
Standby letters of credit6,547
 8,720
5,424
 5,487
$578,151
 $567,353
$602,749
 $620,168
West Bank previously executed Mortgage Partnership Finance (MPF) Master Commitments (Commitments) with the FHLB of Des Moines to deliver residential mortgage loans and to guarantee the payment of any realized losses that exceed the FHLB's first loss account for mortgages delivered under the Commitments. West Bank receives credit enhancement fees from the FHLB for providing this guarantee and continuing to assist with managing the credit risk of the MPF Program residential mortgage loans. At September 30, 2016,2017, 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 $249.$125. The outstanding balance of mortgage loans sold under the MPF Program was $119,968$98,353 and $139,152$112,084 at September 30, 20162017 and December 31, 2015,2016, respectively.

Contractual commitments: The Company has remaining commitments to invest in five qualified affordable housing projects totaling $6,072$6,253 and $5,768 as of September 30, 2016.2017 and December 31, 2016, respectively.

During 2015, the Company began construction on a new office in Rochester, Minnesota. Progress billings of approximately $4,953 have been paid on the $6,668 contract through September 30, 2016.

Contingencies: On September 29, 2010, West Bank was sued in a class action lawsuit filed in the Iowa District Court for Polk County. Plaintiffs, Darla and Jason T. Legg, asserted nonsufficient funds fees charged by West Bank on debit card transactions were usurious under the Iowa Consumer Credit Code and that the sequence West Bank formerly used to post debit card transactions for payment violated various alleged duties of good faith and ordinary care. Plaintiffs sought alternative remedies including injunctive relief, damages (including treble damages), punitive damages, refund of bank fees, and attorney fees. The trial court entered orders on preliminary motions on March 4, 2014. It dismissed one of 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. On January 22, 2016, the Iowa Supreme Court filed two opinions that affirmed and reversed parts of the trial court rulings. The court reversed the trial court by holding the Iowa Consumer Credit Code usury claim and an unjust enrichment claim should be dismissed. Certification of classes on those claims was also reversed. The court affirmed the trial court by holding that the Plaintiffs could proceed with a breach of express contract claim based on a 2006 change in debit card payment sequencing coupled with the alleged lack of notice concerning that change. During the third quarter of 2016, the parties to the lawsuit participated in a mediation and reached a settlement agreement in principle, which has not yet been finalized, executed, or approved by the court. As part of the proposed settlement, West Bank does not admit to any liability or wrongdoing, and the settlement agreement would include a release of all claims brought or that could have been brought in the lawsuit and would result in a dismissal of the lawsuit with prejudice. In the quarter ended September 30, 2016, West Bank recorded an expense of $250, which is the amount West Bank expects to pay in the settlement. The proposed settlement agreement is subject to court approval and will require notice to be sent to class members providing them with an opportunity to opt out of the class or object to the settlement. West Bank will seek preliminary court approval of the proposed settlement in the fourth quarter of 2016.

Except as described above, neitherNeither 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.


25


Table of Contents

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


9.10. Fair Value Measurements

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

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

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

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

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

The Company's policy is to recognize transfers between Levels at the end of each reporting period, if applicable. There were no transfers between Levels of the fair value hierarchy during the nine months ended September 30, 20162017.

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

Investment securities available for sale: When available, quoted market prices are used to determine the fair value of investment securities. 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, asset-backed securities, state and political subdivision securities, collateralized mortgage obligations, mortgage-backed securities, and one trust preferred security.securities. The Company currently holds no investment securities classified as Level 3.

Generally, management obtains the fair value of investment securities at the end of each reporting period via a third partythird-party pricing service. Management with the assistance of an independent investment advisory firm, reviewed the valuation process used by the third party and believed that process was valid. On a quarterly basis, management corroboratesthe Company tests the fair values by selecting a sample of investment securities byfrom each category of securities, obtaining pricing from an independent investment advisoryportfolio management firm and comparescomparing 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 ofFor a sample of securities. For that sample, thesecurities, prices are further validated by management, with assistance from an independent investment advisoryportfolio management firm, by obtaining details of the inputs used by the pricing service. Those inputs were independently tested, and management concluded the fair values were consistent with GAAP requirements and the investment securities were properly classified in the fair value hierarchy.hierarchy as of the end of the period covered by this report.

Derivative instrument:instruments: The Company's derivative instrument consistsinstruments consist of an interest rate swap,swaps, which isare accounted for as a cash flow hedge.hedges. The Company's derivative position ispositions are classified within Level 2 of the fair value hierarchy and isare 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 derivativederivatives is determined using discounted cash flow models. These models’ key assumptions include the contractual terms of the respective contract along with significant observable inputs, including interest rates, yield curves, nonperformance risk and volatility.


26


Table of Contents

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


The following tables present the balances of financial assets and liabilities measured at fair value on a recurring basis by level as of September 30, 20162017 and December 31, 2015.2016.
 September 30, 2016 September 30, 2017
 Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
Financial assets:                
Investment securities available for sale:                
U.S. government agencies and corporations $2,620
 $
 $2,620
 $
 $2,489
 $
 $2,489
 $
State and political subdivisions 67,180
 
 67,180
 
 134,256
 
 134,256
 
Collateralized mortgage obligations 111,197
 
 111,197
 
 149,367
 
 149,367
 
Mortgage-backed securities 87,849
 
 87,849
 
 54,787
 
 54,787
 
Trust preferred security 1,181
 
 1,181
 
Asset-backed securities 46,273
 
 46,273
 
Trust preferred securities 1,700
 
 1,700
 
Corporate notes 8,384
 8,084
 300
 
 29,502
 29,202
 300
 
Derivative instrument, interest rate swap 786
 
 786
 

 

 

 

 

 

 

 

 

Financial liabilities:                
Derivative instrument, interest rate swap $1,302
 $
 $1,302
 $
 $351
 $
 $351
 $
 December 31, 2015 December 31, 2016
 Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
Financial assets:                
Investment securities available for sale:  
  
  
  
  
  
  
  
U.S. government agencies and corporations $2,692
 $
 $2,692
 $
 $2,593
 $
 $2,593
 $
State and political subdivisions 73,079
 
 73,079
 
 64,336
 
 64,336
 
Collateralized mortgage obligations 132,615
 
 132,615
 
 101,950
 
 101,950
 
Mortgage-backed securities 101,088
 
 101,088
 
 80,158
 
 80,158
 
Trust preferred security 1,105
 
 1,105
 
 1,250
 
 1,250
 
Corporate notes and equity securities 10,135
 9,835
 300
 
Corporate notes 10,350
 10,050
 300
 
Derivative instrument, interest rate swap 1,068
 
 1,068
 
                
Financial liabilities:                
Derivative instrument, interest rate swap $774
 $
 $774
 $
 $496
 $
 $496
 $
Certain assets are measured at fair value on a nonrecurring basis. That is, they are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).  As of both September 30, 20162017 and December 31, 2015,2016, impaired loans of $0 and $98, respectively, for which a fair value adjustment was recorded were classified as Level 3.recorded at a net value of $0.  Impaired loans are evaluated and valued at the lower of cost or fair value when the loan is identified as impaired.  Fair value is measured based on the value of the collateral securing these loans.  The types of collateral vary widely and could include accounts receivables, inventory, a variety of equipment and real estate.  Evaluations of the underlying assets are completed for each impaired loan with a specific reserve. Collateral evaluations are reviewed and discounted as appropriate based on knowledge of the specific type of collateral. In the case of real estate, an independent appraisal may be obtained. Types of discounts considered 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 and may be discounted based on management's opinions concerning market developments or the client's business.
 

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Table of Contents

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


GAAP requires disclosure of the fair value of financial assets and financial liabilities, including those that are not measured and reported at fair value on a recurring or nonrecurring basis.  The 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 previously described 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 time deposits are estimated using discounted cash flow analysis, based on observable market interest rates currently being offered on time deposits 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, variable rate FHLB advances, and variable rate long-term borrowings approximate their fair values.  Fair values of subordinated notes, a fixed rate FHLB advance 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.


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Table of Contents

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


The following table presents the carrying amounts and approximate fair values of financial assets and liabilities as of September 30, 20162017 and December 31, 20152016
 September 30, 2016 December 31, 2015 September 30, 2017 December 31, 2016
Fair Value Hierarchy Level Carrying Amount Approximate Fair Value Carrying Amount Approximate Fair ValueFair Value Hierarchy Level Carrying Amount Approximate Fair Value Carrying Amount Approximate Fair Value
Financial assets:                
Cash and due from banksLevel 1 $44,526
 $44,526
 $57,329
 $57,329
Level 1 $33,560
 $33,560
 $40,943
 $40,943
Federal funds soldLevel 1 6,324
 6,324
 15,322
 15,322
Level 1 5,937
 5,937
 35,893
 35,893
Investment securities available for saleSee previous table 278,411
 278,411
 320,714
 320,714
See previous table 418,374
 418,374
 260,637
 260,637
Investment securities held to maturityLevel 2 48,405
 49,943
 51,259
 51,918
Level 2 45,597
 46,356
 48,386
 47,789
Federal Home Loan Bank stockLevel 1 12,467
 12,467
 12,447
 12,447
Level 1 12,256
 12,256
 10,771
 10,771
Loans, net(1)
Level 2 1,366,937
 1,370,122
 1,231,721
 1,235,336
Level 2 1,440,547
 1,439,084
 1,383,758
 1,382,569
Accrued interest receivableLevel 1 5,230
 5,230
 4,688
 4,688
Level 1 6,636
 6,636
 5,321
 5,321
Interest rate swapLevel 2 786
 786
 1,068
 1,068
Financial liabilities:                
DepositsLevel 2 $1,491,656
 $1,491,634
 $1,440,729
 $1,440,762
Level 2 $1,651,266
 $1,651,307
 $1,546,605
 $1,546,307
Federal funds purchasedLevel 1 920
 920
 2,760
 2,760
Level 1 925
 925
 9,690
 9,690
Short-term borrowingsLevel 1 34,500
 34,500
 19,000
 19,000
Level 1 48,000
 48,000
 
 
Subordinated notes, netLevel 2 20,395
 12,646
 20,385
 11,674
Level 2 20,408
 14,021
 20,398
 12,703
Federal Home Loan Bank advances, netLevel 2 99,509
 99,631
 98,385
 98,812
Level 2 101,005
 101,113
 99,886
 99,959
Long-term debt, netLevel 2 5,952
 5,879
 8,405
 8,314
Level 2 24,195
 24,134
 5,126
 5,054
Accrued interest payableLevel 1 336
 336
 343
 343
Level 1 616
 616
 280
 280
Interest rate swapSee previous table 1,302
 1,302
 774
 774
Level 2 351
 351
 496
 496
Off-balance-sheet financial instruments:                
Commitments to extend creditLevel 3 
 
 
 
Level 3 
 
 
 
Standby letters of creditLevel 3 
 
 
 
Level 3 
 
 
 

(1) All loans are Level 2 except impaired loans with a net value of $0 and $98 as of both September 30, 20162017 and December 31, 2015, respectively,2016, which are Level 3.

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

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

"SAFE HARBOR" CONCERNING FORWARD-LOOKING STATEMENTS

Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to the Company's business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meanings of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Forward-looking statements may appear throughout this report. These forward-looking statements are generally identified by the words “believes,” “expects,” “intends,” “anticipates,” “projects,” “future,” “may,” “should,” “will,” “strategy,” “plan,” “opportunity,” “will be,” “will likely result,” “will continue” or similar references, or references to estimates, predictions or future events.  Such forward-looking statements are based upon certain underlying assumptions, risks and uncertainties.  Because of the possibility that the underlying assumptions are incorrect or do not materialize as expected in the future, actual results could differ materially from these forward-looking statements.  Risks and uncertainties that may affect future results include: interest rate risk; competitive pressures; pricing pressures on loans and deposits; changes in credit and other risks posed by the Company's loan and investment portfolios, including declines in commercial or residential real estate values or changes in the allowance for loan losses dictated by new market conditions or regulatory requirements; actions of bank and nonbank competitors; changes in local, national and international economic conditions; changes in regulatory requirements, limitations and costs; changes in customers' acceptance of the Company's products and services; cyber-attacks; unexpected outcomes of existing or new litigation involving the Company; and any other risks described in the “Risk Factors” sections of 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 the Company's financial condition and results of operations are based upon the Company's consolidated financial statements that have been prepared in accordance with GAAP. The preparation of 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, 2015,2016, as filed with the Securities and Exchange Commission on March 3, 2016.1, 2017. 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, 2015.2016.


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

NON-GAAP FINANCIAL MEASURES

This report contains references to financial measures that are not defined in GAAP. Such non-GAAP financial measures include the Company’s presentation of net interest income and net interest margin on a fully taxable equivalent (FTE) basis, and the presentation of the efficiency ratio on an FTE basis, excluding certain income and expenses. Management believes these non-GAAP financial measures provide useful information to both management and investors to analyze and evaluate the Company’s financial performance. Limitations associated with non-GAAP financial measures include the risks that persons might disagree as to the appropriateness of items included in these measures and that different companies might calculate these measures differently. These non-GAAP disclosures should not be considered an alternative to the Company’s GAAP results. The following table reconciles the non-GAAP financial measures of net interest income, net interest margin and efficiency ratio on an FTE basis to GAAP.
  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Reconciliation of net interest income and annualized net interest margin on an FTE basis to GAAP:        
Net interest income (GAAP) $15,031
 $14,721
 $44,513
 $42,693
Tax-equivalent adjustment (1)
 677
 639
 1,892
 1,994
Net interest income on an FTE basis (non-GAAP) $15,708
 $15,360
 $46,405
 $44,687
Average interest-earning assets $1,882,837
 $1,745,878
 $1,820,997
 $1,699,703
Net interest margin on an FTE basis (non-GAAP) 3.31% 3.50% 3.41% 3.51%
         
Reconciliation of efficiency ratio on an FTE basis to GAAP:        
Net interest income on an FTE basis (non-GAAP) $15,708
 $15,360
 $46,405
 $44,687
Noninterest income 2,264
 1,919
 6,740
 6,052
Less: realized investment securities gains, net (197) 
 (423) (60)
Plus: losses on disposal of premises and equipment, net 10
 
 25
 
Adjusted income $17,785
 $17,279
 $52,747
 $50,679
Noninterest expense $8,020
 $7,993
 $24,235
 $23,611
Efficiency ratio on an adjusted and FTE basis (non-GAAP) (2)
 45.10% 46.25% 45.95% 46.59%

(1) Computed on a tax-equivalent basis using an incremental federal income tax rate of 35 percent, adjusted to reflect the effect of the nondeductible interest expense associated with owning tax-exempt securities and loans.
(2) Efficiency ratio expresses noninterest expense as a percent of fully taxable equivalent net interest income and noninterest income, excluding specific noninterest income and expenses. Management believes the presentation of this non-GAAP measure provides supplemental useful information for proper understanding of the financial results, as it enhances the comparability of income and expenses arising from taxable and nontaxable sources.

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 20162017

OVERVIEW

The following discussion describes the consolidated operations and financial condition of the Company, West Bank and West Bank's wholly owned subsidiary WB Funding Corporation (which owned an interest in a limited liability company that was sold in the fourth quarter of 2015).Corporation. Results of operations for the three and nine months ended September 30, 20162017 are compared to the results for the same periods in 20152016, and the consolidated financial condition of the Company as of September 30, 20162017 is compared to balances as of December 31, 20152016. 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 September 30, 20162017 was $5,813,$6,405, or $0.36$0.39 per diluted common share, compared to $5,426,$5,813, or $0.34$0.36 per diluted common share for the three months ended September 30, 2015.2016. The Company's annualized return on average assets (ROA) and return on average equity (ROE) for the three months ended September 30, 20162017 were 1.261.29 and 14.2014.41 percent, respectively, compared to 1.281.26 and 14.6314.20 percent, respectively, for the three months ended September 30, 2015.

The increase in net income for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 was mainly due to higher net interest income. The $1,015, or 7.4 percent, increase in net interest income was fueled by an increase of $155,408, or 12.7 percent, in average loans outstanding for the three months ended September 30, 2016 compared to the same time period in 2015. Partially offsetting the increase in net interest income for the third quarter of 2016 compared to the same period in 2015 was a 5.9 percent increase in noninterest expense. The increase in noninterest expense included a $250 proposed settlement agreement in a class action lawsuit and normal increases in other operating costs. As previously disclosed, the class action litigation was originally filed in September 2010 and has involved considerable management time and expense. As part of the proposed litigation settlement, West Bank does not admit to any liability or wrongdoing, and the settlement agreement, subject to court approval, would include a release of all claims brought or that could have been brought in the lawsuit and would result in a dismissal of the lawsuit with prejudice. West Bank will seek preliminary court approval of the proposed settlement in the fourth quarter of 2016.

Net income for the nine months ended September 30, 2016 was $16,985, or $1.05 per diluted common share, compared to $15,801, or $0.98 per diluted common share, for the nine months ended September 30, 2015. The Company's annualized ROA and ROE for the nine months ended September 30, 2016 were 1.26 and 14.29 percent, respectively, compared to 1.28 and 14.62 percent, respectively, for the first nine months of 2015.

The increase in net income for the nine months ended September 30, 2016 compared to the same period in 2015 was primarily due to growth in net interest income associated with loan growth and the recognition of tax-exempt gain from bank-owned life insurance. Partially offsetting these increases for the first nine months of 2016 compared to the first nine months of 2015 were increases in the provision for loan losses and noninterest expense.

Net interest income for the nine months ended September 30, 2016 grew $2,670, or 6.7 percent, compared to the nine months ended September 30, 2015. Similar to the three months ended September 30, 2016, the increase in net interest income was primarily due to the $115,064 increase in average loans outstanding for the first nine months of 2016 compared to the first nine months of 2015. In association with the loan growth, the Company recorded a provision for loan losses of $900 for the nine months ended September 30, 2016, compared to a $400 provision in the nine months ended September 30, 2015.

The Company recognized tax-exempt gain from bank-owned life insurance of $443 in the nine months ended September 30, 2016 due to the losses of one of our colleagues as well as a former employee. Partially offsetting this tax-exempt income was an increase of approximately $171 in noninterest expense for the nine months ended September 30, 2016 due to the recognition of costs associated with the death of the employee. The remaining $1,002 increase in noninterest expense for the nine months ended September 30, 2016 compared to the same period in 2015 was due to the combination of increased salaries and benefit costs, the litigation settlement mentioned above and normal increases in other operating costs.

The Company has reached an agreement with its insurance carrier for reimbursement of $300 of defense costs related to the class action litigation and a 50 percent reimbursement rate for future class action litigation-related defense costs incurred to conclude the proposed settlement. The $300 reimbursement will be recognized upon receipt, which is expected to be in the fourth quarter of 2016.


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

The increase in net income for the three months ended September 30, 2017 compared to the three months ended September 30, 2016 was primarily due to the combination of higher net interest income, growth in noninterest income and a decrease in the provision for loan losses. Noninterest expense for the three months ended September 30, 2017 held steady compared to the same period in 2016.

Net interest income for the three months ended September 30, 2017 grew $310, or 2.1 percent, compared to the three months ended September 30, 2016. The increase in net interest income was driven by a $47,008, or 3.4 percent, increase in average loans outstanding and a $68,071, or 19.7 percent, increase in average investment securities held for the three months ended September 30, 2017 compared to the same time period in 2016. Partially offsetting the increase in interest income was an increase of $1,236 in interest expense on deposits, primarily due to higher interest rates paid on certain deposit products. The Company recorded no provision for loan losses for the three months ended September 30, 2017 compared to a $200 provision in the three months ended September 30, 2016.

Noninterest income grew $345, or 18.0 percent, during the three months ended September 30, 2017 compared to the same time period in 2016, mainly as the result of net gains on sales of investment securities and an increase in trust revenue.

Net income for the nine months ended September 30, 2017 was $18,876, or $1.16 per diluted common share, compared to $16,985, or $1.05 per diluted common share, for the nine months ended September 30, 2016. The Company's annualized return on average assets and return on average equity for the nine months ended September 30, 2017 were 1.32 and 14.69 percent, respectively, compared to 1.26 and 14.29 percent, respectively, for the first nine months of 2016.

The increase in net income for the nine months ended September 30, 2017 compared to the same period in 2016 was primarily due to growth in net interest income associated with loan growth that exceeded the increase in interest expense on deposits, a decrease in the provision for loan losses and an increase in noninterest income. Partially offsetting these positive changes for the first nine months of 2017 compared to the first nine months of 2016 was a 2.6 percent increase in noninterest expense.

Net interest income for the nine months ended September 30, 2017 grew $1,820, or 4.3 percent, compared to the nine months ended September 30, 2016. The increase in net interest income was primarily due to the $113,699 increase in average loans outstanding for the first nine months of 2017 compared to the first nine months of 2016. During the nine months ended September 30, 2017, interest expense on deposits increased $2,683 compared to the nine months ended September 30, 2016, mainly due to increased interest rates on certain money market deposit products and certificates of deposit as a result of rising market rates. The Company recorded no provision for loan losses for the nine months ended September 30, 2017 compared to a $900 provision in the nine months ended September 30, 2016. During the nine months ended September 30, 2017, the allowance for loan losses grew $246 as a result of net recoveries on previously charged off loans exceeding current year charge-offs.

Noninterest income increased $688, or 11.4 percent, during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, mainly due to net gains on sales of investment securities, an increase in trust revenue and a nonrecurring gain on an asset sale. Noninterest expense grew $624 during the first nine months of 2017, primarily due to an increase in salaries and benefit costs.

Total loans outstanding increased $136,207,$57,035, or 10.94.1 percent, during the first nine months of 2016.2017. Management believes the loan pipeline is strong and that loan growth will continue in all three of our markets during the remainder of 2017. The credit quality of the loan portfolio remainsremained strong as evidenced by the Company's Texas ratio, which was 0.550.27 percent as of September 30, 2016.2017. As of September 30, 2016,2017, the allowance for loan losses was 1.151.12 percent of outstanding loans, and management believes itbelieved the allowance was adequate to absorb any losses inherent in the loan portfolio.




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

Each quarter throughout the year, the Company's four key performance metrics are compared to those of our identified peer group of 16 companies. The group of 16 Midwestern, publicly traded peer financial institutions against which we compare our performance each quarter consists of BankFinancial Corporation, Farmers Capital Bank Corporation, First Business Financial Services, Inc., First Defiance Financial Corp., First Mid-Illinois Bancshares, Inc., Hills Bancorporation, Horizon Bancorp, Isabella Bank Corporation, Mercantile Bank Corporation, MidWestOne Financial Group, Inc., MutualFirst Financial, Inc., Nicolet Bankshares, Inc., Peoples Bancorp, QCR Holdings, Inc., Southwest Bancorp and Waterstone Financial, Inc. The members of the peer group are selected based on their business focus, scope and location of operations, size and other considerations. The Company is in the middle of the group in terms of asset size. The group is periodically reviewed, with changes made primarily to reflect merger and acquisition activity. Our goal is to perform at or near the top of these peers relative to what we consider to be four key metrics: return on average assets, return on average equity, efficiency ratio and Texas ratio. We believe these measures encompass the factors that define the performance of a community bank. When contrasted with the peer group's metrics for the six months ended June 30, 20162017 (latest data available), the Company's metrics for the nine months ended September 30, 20162017 were better than those of each company in the peer group as shown in the table below, except for one peer that had a higher ROA.return on average assets.
 West Bancorporation, Inc. Peer Group Range
 Nine months ended September 30, 20162017 Six months ended June 30, 20162017
Return on average assets1.26%1.32% 0.36%0.56% - 1.34%1.75%
Return on average equity14.29%14.69% 2.60%4.37% - 10.73%12.13%
Efficiency ratio*(1)
46.59%45.95% 54.47%54.04% - 77.57%73.76%
Texas ratio*0.55%0.27% 3.73%3.78% - 23.59%23.16%
* A lower ratio is more desirable.
(1) The efficiency ratio is a non-GAAP measure. For further information, refer to the Non-GAAP Financial Measures section of this report.

Previously announced construction continuesIn July 2017, the Company was included on a new office in Rochester, Minnesota. The new facility will replace a leased office and is expected to open in November 2016. We believe the more prominent locationBank Director Magazine's 2017 Bank Performance Scorecard listing of the new office alongtop performing publicly traded banks in the nation with assets of $1 billion to $5 billion. The ranking was based on five key metrics that measured performance for 2016. The Company was ranked No. 6 in the addition of an experienced consumer banker will enhance our ability to expand the customer base in that market.

During the third quarter of 2016, the Company elected to become a financial holding company. The election provides the Company with additional flexibility to engage in a broader range of financial activities through affiliates than are permissible for bank holding companies that are not financial holding companies. While the Company does not currently have a plan to engage in any new activities, the election affords the ability to respond more quickly to market developments and opportunities.nation.

At its meeting on October 26, 2016,25, 2017, the Board of Directors declared a quarterly dividend of $0.17$0.18 per common share. The dividend is payable on November 23, 2016,22, 2017, to stockholders of record as of November 9, 2016.8, 2017. The dividend was increased by $0.01 to the $0.17$0.18 level for the dividend declared in April 20162017 and represents the highest quarterly dividend amount ever paid by the Company.





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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 nine months ended September 30, 20162017 compared with the same periods in 2015.2016. 
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended September 30, Nine Months Ended September 30,
2016 2015 Change Change % 2016 2015 Change Change %2017 2016 Change Change % 2017 2016 Change Change %
Net income$5,813
 $5,426
 $387
 7.13% $16,985
 $15,801
 $1,184
 7.49%$6,405
 $5,813
 $592
 10.18% $18,876
 $16,985
 $1,891
 11.13%
Average assets1,838,125
 1,678,005
 160,120
 9.54% 1,794,777
 1,652,232
 142,545
 8.63%1,969,547
 1,838,125
 131,422
 7.15% 1,911,391
 1,794,777
 116,614
 6.50%
Average stockholders' equity162,867
 147,120
 15,747
 10.70% 158,821
 144,540
 14,281
 9.88%176,308
 162,867
 13,441
 8.25% 171,827
 158,821
 13,006
 8.19%
                              
Return on average assets1.26% 1.28% (0.02)%   1.26% 1.28% (0.02)%  
1.29% 1.26% 0.03 %   1.32% 1.26% 0.06 %  
Return on average equity14.20% 14.63% (0.43)%   14.29% 14.62% (0.33)%  
14.41% 14.20% 0.21 %   14.69% 14.29% 0.40 %  
Net interest margin(1)3.50% 3.59% (0.09)%   3.51% 3.59% (0.08)%  3.31% 3.50% (0.19)%   3.41% 3.51% (0.10)%  
Efficiency ratio*46.25% 46.30% (0.05)%   46.59% 47.12% (0.53)%  
Efficiency ratio (1) (2)
45.10% 46.25% (1.15)%   45.95% 46.59% (0.64)%  
Dividend payout ratio47.19% 47.36% (0.17)%   47.43% 46.72% 0.71 %  
45.57% 47.19% (1.62)%   45.46% 47.43% (1.97)%  
Average equity to average               
assets ratio8.86% 8.77% 0.09 %   8.85% 8.75% 0.10 %  
Average equity to average assets ratio8.95% 8.86% 0.09 %   8.99% 8.85% 0.14 %  
                              
        As of September 30,          As of September 30,  
        2016 2015 Change          2017 2016 Change  
Texas ratio*        0.55% 2.35% (1.80)%  
Texas ratio (2)
        0.27% 0.55% (0.28)%  
Equity to assets ratio        9.03% 8.61% 0.42 %  
        8.77% 9.03% (0.26)%  
Tangible common equity ratioTangible common equity ratio       9.03% 8.61% 0.42 %  
Tangible common equity ratio       8.77% 9.03% (0.26)%  
*(1) Amounts are presented on an FTE basis. These are non-GAAP measures. For further information, refer to the Non-GAAP Financial Measures section of this report.
(2) A lower ratio is more desirable.

Definitions of ratios:
Return on average assets - annualized net income divided by average assets.
Return on average equity - annualized net income divided by average stockholders' equity.
Net interest margin - annualized tax-equivalent net interest income divided by average interest-earning assets.
Efficiency ratio - noninterest expense (excluding other real estate owned expense) 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 - equity divided by assets.
Tangible common equity ratio - common equity less intangible assets (none held) divided by tangible assets.



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

Net Interest Income

The following tables present average balances and related interest income or interest expense, with the resulting annualized average yield or rate by category of interest-earning assets or interest-bearing liabilities.  Interest income and the resulting net interest income are shown on a fully taxablean FTE basis.
Data for the three months ended September 30:Data for the three months ended September 30:              Data for the three months ended September 30:              
                             
Average Balance Interest Income/Expense Yield/RateAverage Balance Interest Income/Expense Yield/Rate
2016 2015 Change 
Change-
%
 2016 2015 Change 
Change-
%
 2016 2015 Change2017 2016 Change 
Change-
%
 2017 2016 Change 
Change-
%
 2017 2016 Change
Interest-earning assets:                                          
Loans: (1) (2)
                                          
Commercial$365,632
 $337,915
 $27,717
 8.20 % $3,874
 $3,564
 $310
 8.70 % 4.22% 4.18% 0.04 %$308,585
 $365,632
 $(57,047) (15.60)% $3,452
 $3,874
 $(422) (10.89)% 4.44% 4.22% 0.22 %
Real estate (3)
1,003,492
 877,732
 125,760
 14.33 % 11,166
 9,921
 1,245
 12.55 % 4.43% 4.48% (0.05)%1,109,041
 1,003,492
 105,549
 10.52 % 12,503
 11,166
 1,337
 11.97 % 4.47% 4.43% 0.04 %
Consumer and other9,983
 8,052
 1,931
 23.98 % 102
 84
 18
 21.43 % 4.06% 4.12% (0.06)%8,489
 9,983
 (1,494) (14.97)% 88
 102
 (14) (13.73)% 4.09% 4.06% 0.03 %
Total loans1,379,107
 1,223,699
 155,408
 12.70 % 15,142
 13,569
 1,573
 11.59 % 4.37% 4.40% (0.03)%1,426,115
 1,379,107
 47,008
 3.41 % 16,043
 15,142
 901
 5.95 % 4.46% 4.37% 0.09 %
 
  
  
  
  
  
  
  
  
    
 
  
  
  
  
  
  
  
  
    
Investment securities: 
  
  
  
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
  
  
  
Taxable230,054
 211,297
 18,757
 8.88 % 991
 1,017
 (26) (2.56)% 1.72% 1.93% (0.21)%259,225
 230,054
 29,171
 12.68 % 1,489
 991
 498
 50.25 % 2.30% 1.72% 0.58 %
Tax-exempt (3)
115,934
 107,408
 8,526
 7.94 % 1,176
 1,195
 (19) (1.59)% 4.06% 4.45% (0.39)%154,834
 115,934
 38,900
 33.55 % 1,569
 1,176
 393
 33.42 % 4.05% 4.06% (0.01)%
Total investment securities345,988
 318,705
 27,283
 8.56 % 2,167
 2,212
 (45) (2.03)% 2.50% 2.78% (0.28)%414,059
 345,988
 68,071
 19.67 % 3,058
 2,167
 891
 41.12 % 2.95% 2.50% 0.45 %
 
  
  
  
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
  
  
  
Federal funds sold20,783
 43,725
 (22,942) (52.47)% 26
 28
 (2) (7.14)% 0.51% 0.26% 0.25 %42,663
 20,783
 21,880
 105.28 % 136
 26
 110
 423.08 % 1.27% 0.51% 0.76 %
Total interest-earning assets (3)
$1,745,878
 $1,586,129
 $159,749
 10.07 % 17,335
 15,809
 1,526
 9.65 % 3.95% 3.95%  %$1,882,837
 $1,745,878
 $136,959
 7.84 % 19,237
 17,335
 1,902
 10.97 % 4.05% 3.95% 0.10 %
 
  
  
  
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
  
  
  
Interest-bearing liabilities: 
  
  
  
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
  
  
  
Deposits: 
  
  
  
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
  
  
  
Interest-bearing demand,                                          
savings and money                                          
market$944,809
 $815,195
 $129,614
 15.90 % 678
 302
 376
 124.50 % 0.29% 0.15% 0.14 %$1,081,227
 $944,809
 $136,418
 14.44 % 1,686
 678
 1,008
 148.67 % 0.62% 0.29% 0.33 %
Time deposits110,223
 121,356
 (11,133) (9.17)% 194
 198
 (4) (2.02)% 0.70% 0.65% 0.05 %159,949
 110,223
 49,726
 45.11 % 422
 194
 228
 117.53 % 1.04% 0.70% 0.34 %
Total deposits1,055,032
 936,551
 118,481
 12.65 % 872
 500
 372
 74.40 % 0.33% 0.21% 0.12 %1,241,176
 1,055,032
 186,144
 17.64 % 2,108
 872
 1,236
 141.74 % 0.67% 0.33% 0.34 %
Other borrowed funds132,583
 139,302
 (6,719) (4.82)% 1,103
 941
 162
 17.22 % 3.31% 2.68% 0.63 %150,548
 132,583
 17,965
 13.55 % 1,421
 1,103
 318
 28.83 % 3.75% 3.31% 0.44 %
Total interest-bearing                                          
liabilities$1,187,615
 $1,075,853
 $111,762
 10.39 % 1,975
 1,441
 534
 37.06 % 0.66% 0.53% 0.13 %$1,391,724
 $1,187,615
 $204,109
 17.19 % 3,529
 1,975
 1,554
 78.68 % 1.01% 0.66% 0.35 %
 
  
  
  
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
  
  
  
Tax-equivalent net interest income  
  
  
 $15,360
 $14,368
 $992
 6.90 %  
  
  
Net interest spread 
  
  
  
  
  
  
  
 3.29% 3.42% (0.13)%
Net interest margin 
  
  
  
  
  
  
  
 3.50% 3.59% (0.09)%
Tax-equivalent net interest income (FTE) (4)
Tax-equivalent net interest income (FTE) (4)
  
  
 $15,708
 $15,360
 $348
 2.27 %  
  
  
Net interest spread (FTE) 
  
  
  
  
  
  
  
 3.04% 3.29% (0.25)%
Net interest margin (FTE) (4)
Net interest margin (FTE) (4)
  
  
  
  
  
  
  
 3.31% 3.50% (0.19)%

3435


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

Data for the nine months ended September 30:Data for the nine months ended September 30:              Data for the nine months ended September 30:              
                                          
Average Balance Interest Income/Expense Yield/RateAverage Balance Interest Income/Expense Yield/Rate
2016 2015 Change 
Change-
%
 2016 2015 Change 
Change-
%
 2016 2015 Change2017 2016 Change 
Change-
%
 2017 2016 Change 
Change-
%
 2017 2016 Change
Interest-earning assets:                                          
Loans: (1) (2)
                                          
Commercial$361,315
 $327,185
 $34,130
 10.43 % $11,377
 $10,232
 $1,145
 11.19 % 4.21% 4.18% 0.03 %$326,090
 $361,315
 $(35,225) (9.75)% $10,556
 $11,377
 $(821) (7.22)% 4.33% 4.21% 0.12 %
Real estate (3)
951,226
 870,436
 80,790
 9.28 % 31,768
 29,181
 2,587
 8.87 % 4.46% 4.48% (0.02)%1,100,526
 951,226
 149,300
 15.70 % 36,692
 31,768
 4,924
 15.50 % 4.46% 4.46%  %
Consumer and other8,716
 8,572
 144
 1.68 % 257
 252
 5
 1.98 % 3.94% 3.93% 0.01 %8,340
 8,716
 (376) (4.31)% 251
 257
 (6) (2.33)% 4.02% 3.94% 0.08 %
Total loans1,321,257
 1,206,193
 115,064
 9.54 % 43,402
 39,665
 3,737
 9.42 % 4.39% 4.40% (0.01)%1,434,956
 1,321,257
 113,699
 8.61 % 47,499
 43,402
 4,097
 9.44 % 4.43% 4.39% 0.04 %
 
  
  
  
  
  
  
  
  
    
 
  
  
  
  
  
  
  
  
    
Investment securities: 
  
  
  
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
  
  
  
Taxable243,811
 219,597
 24,214
 11.03 % 3,222
 3,184
 38
 1.19 % 1.76% 1.93% (0.17)%230,060
 243,811
 (13,751) (5.64)% 3,755
 3,222
 533
 16.54 % 2.18% 1.76% 0.42 %
Tax-exempt (3)
120,049
 104,325
 15,724
 15.07 % 3,742
 3,495
 247
 7.07 % 4.16% 4.47% (0.31)%129,808
 120,049
 9,759
 8.13 % 3,932
 3,742
 190
 5.08 % 4.04% 4.16% (0.12)%
Total investment securities363,860
 323,922
 39,938
 12.33 % 6,964
 6,679
 285
 4.27 % 2.55% 2.75% (0.20)%359,868
 363,860
 (3,992) (1.10)% 7,687
 6,964
 723
 10.38 % 2.85% 2.55% 0.30 %
 
  
  
  
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
  
  
  
Federal funds sold14,586
 31,190
 (16,604) (53.24)% 57
 60
 (3) (5.00)% 0.53% 0.26% 0.27 %26,173
 14,586
 11,587
 79.44 % 223
 57
 166
��291.23 % 1.14% 0.53% 0.61 %
Total interest-earning assets (3)
$1,699,703
 $1,561,305
 $138,398
 8.86 % 50,423
 46,404
 4,019
 8.66 % 3.96% 3.97% (0.01)%$1,820,997
 $1,699,703
 $121,294
 7.14 % 55,409
 50,423
 4,986
 9.89 % 4.07% 3.96% 0.11 %
 
  
  
  
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
  
  
  
Interest-bearing liabilities: 
  
  
  
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
  
  
  
Deposits: 
  
  
  
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
  
  
  
Interest-bearing demand,                                          
savings and money                                          
market$909,950
 $817,065
 $92,885
 11.37 % 1,842
 953
 889
 93.28 % 0.27% 0.16% 0.11 %$1,030,095
 $909,950
 $120,145
 13.20 % 4,107
 1,842
 2,265
 122.96 % 0.53% 0.27% 0.26 %
Time deposits110,218
 132,766
 (22,548) (16.98)% 559
 669
 (110) (16.44)% 0.68% 0.67% 0.01 %139,964
 110,218
 29,746
 26.99 % 977
 559
 418
 74.78 % 0.93% 0.68% 0.25 %
Total deposits1,020,168
 949,831
 70,337
 7.41 % 2,401
 1,622
 779
 48.03 % 0.31% 0.23% 0.08 %1,170,059
 1,020,168
 149,891
 14.69 % 5,084
 2,401
 2,683
 111.75 % 0.58% 0.31% 0.27 %
Other borrowed funds138,687
 148,681
 (9,994) (6.72)% 3,335
 2,842
 493
 17.35 % 3.21% 2.56% 0.65 %146,583
 138,687
 7,896
 5.69 % 3,920
 3,335
 585
 17.54 % 3.58% 3.21% 0.37 %
Total interest-bearing                                          
liabilities$1,158,855
 $1,098,512
 $60,343
 5.49 % 5,736
 4,464
 1,272
 28.49 % 0.66% 0.54% 0.12 %$1,316,642
 $1,158,855
 $157,787
 13.62 % 9,004
 5,736
 3,268
 56.97 % 0.91% 0.66% 0.25 %
 
  
  
  
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
  
  
  
Tax-equivalent net interest income  
  
  
 $44,687
 $41,940
 $2,747
 6.55 %  
  
  
Net interest spread 
  
  
  
  
  
  
  
 3.30% 3.43% (0.13)%
Net interest margin 
  
  
  
  
  
  
  
 3.51% 3.59% (0.08)%
Tax-equivalent net interest income (FTE) (4)
Tax-equivalent net interest income (FTE) (4)
  
  
 $46,405
 $44,687
 $1,718
 3.84 %  
  
  
Net interest spread (FTE) 
  
  
  
  
  
  
  
 3.16% 3.30% (0.14)%
Net interest margin (FTE) (4)
Net interest margin (FTE) (4)
  
  
  
  
  
  
  
 3.41% 3.51% (0.10)%

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

The Company's largest component of net income is net interest income.income, which is the difference between interest earned on interest-earning assets, consisting primarily of loans and investment securities, and interest paid on interest-bearing liabilities, consisting of deposits and borrowings. Fluctuations in net interest income can result from the combination of changes in the average balances of asset and liability categories and changes in interest rates. Interest rates earned and paid are affected by general economic conditions, particularly changes in market interest rates, and by competitive factors, government policies and the actions of regulatory authorities. The Board of Governors of the Federal Reserve System increased the targeted federal funds interest rate by 25 basis points in each of December 2015, the first interest rate change in seven years. No additional changes to the targeted federal funds interest rate have been made to date in 2016.2016, March 2017 and June 2017.


3536


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

Net interest margin is a measure of the net return on interest-earning assets and is computed by dividing annualized tax-equivalent net interest income by total average interest-earning assets for the period. The net interest margin for the three and nine months ended September 30, 20162017 declined nine19 and eight10 basis points, respectively, compared to the three and nine months ended September 30, 2015.2016. The primary drivers of the decline in the net interest margin for both the three and nine months ended September 30, 2016 compared to the same respective periods in 2015 were an increase in interest rates paid on certain deposit categories a reduction in yield on investment securities due to calls of higher yielding securities, and an increase in the ratevariable rates paid on other borrowed funds.funds, partially offset by an increase in yield on loans and investment securities. Despite the decline in the net interest margin, tax-equivalent net interest income for the three and nine months ended September 30, 20162017 increased $992$348 and $2,747,$1,718, respectively, compared to the same time periods in 2015.2016. The increase in net interest income for both 2016 periodsthe three and nine months ended September 30, 2017 compared to the three and nine months ended September 30, 20152016 was largely due to the increase in average outstanding loans.loans and an increase in yield on investment securities. Management expects the persisting lowcurrent interest rate environment to continue to put pressure on the net interest margin throughout the remainder of 2016.2017. Management continually develops and applies strategies to attempt to maintain the net interest margin.

Tax-equivalent interest income on loans increased $1,573 and $3,737, respectively,$901 for the three andmonths ended September 30, 2017 compared to the three months ended September 30, 2016. For the nine months ended September 30, 20162017, tax-equivalent interest income on loans increased $4,097 compared to the three and nine months ended September 30, 2015.same time period in 2016. The improvement for both time periods was primarily due to the significant increase in average loan balances outstanding. The average yields on loans decreased slightlyincreased by nine and four basis points, respectively, for the three and nine months ended September 30, 20162017 compared to the three and nine months ended September 30, 2015, respectively.2016. The Company continues to focus on expanding existing and entering into new customer relationships while maintaining strong credit quality. The yield on the Company's loan portfolio is affected by the portfolio's loan mix, 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 higher during the three months ended September 30, 2017 than during the same period in 2016 as a result of significant investment purchase activity during the second and third quarters of 2017. The average balance of investment securities was slightly lower during the nine months ended September 30, 20162017 than during the same periodsperiod in 2015,2016. The purchase activity in 2017 focused on higher yielding bonds within the existing risk profile and was the result of growth in deposits and the reinvestment of proceeds from sales and principal paydowns of investment securities. In certain cases, securities were sold and the funds were reinvested in securities with higher rates while callsslightly extending the duration of certain higher-yielding municipal securities and a lowerthe portfolio, which is expected to improve the yield on the most recentinvestment portfolio purchases caused thein future periods. The overall portfolio yield to decline 28increased 45 and 2030 basis points, respectively, for the three and nine months ended September 30, 20162017 compared to the same periods last year. The increase in average balances was primarily attributable to purchases in the third quarter of 2015. No investment securities were purchased during the nine months ended September 30, 2016.

The average balance of interest-bearing demand, savings and money market deposits increased for the three and nine months ended September 30, 20162017 compared to the three and nine months ended September 30, 2015, mainly2016, partially due to an increase in average balances of money market accounts, including public funds from municipalities. In addition, approximately $76,000 of noninterest-bearing accounts were reclassified to interest-bearing accounts in April 2017 as part of a retail deposit product restructuring in which we realigned and simplified the retail checking account products provided to our customers. The average rate paid on interest-bearing demand, savings and money market deposits for the three and nine months ended September 30, 20162017 increased 1433 and 1126 basis points, respectively, compared to the three and nine months ended September 30, 2015.2016. The increase in interest expense was primarily due to increasing interest rates on certain money market deposit products in late December 2015 andresponse to the mix of new deposits in 2016.Federal Reserve System's rate increases. The average balance of time deposits continued to declineincreased for the three and nine months ended September 30, 20162017 compared to the same periods in 2015 as fewer maturing deposits have been renewed2016. The increase was primarily due to the historically lowshift of demand and savings account balances to higher interest rates. Meanwhile, interestrate time deposits. Interest rates on time deposits increased five34 and 25 basis points, respectively, for the three months and one basis point for the nine months ended September 30, 20162017 compared to the same periods in 2015,2016, primarily due to feeshigher market interest rates paid at the time new and renewed Certificate of Deposit Account Registry Servicetime deposits were issued.

The average rate paid on other borrowed funds increased 6344 and 6537 basis points, respectively, for the three and nine months ended September 30, 20162017 compared to the three and nine months ended September 30, 2015.2016. The increase in the average rate paid was due to the combination of an interest rate swap that became effective in December 2015, amortization of interest rate swap termination fees paid in 2015, and increases in rates for variable rate FHLB advances, the subordinated notes and a subordinated note.long-term debt. The declineCompany borrowed an additional $22,000 in long-term borrowings in May 2017 resulting in an increase in the average balance of other borrowed funds for the three and nine months ended September 30, 2016 compared to the same periods in 2015 was caused by lower average overnight borrowings and scheduled principal payments on long-term borrowings.

funds.

3637


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

Provision for Loan Losses and the Related Allowance for Loan Losses

The provision for loan losses represents a chargecharges 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,evaluation, no provision was recorded for either the provision for loan losses was $200 for both the three or nine months ended September 30, 20162017, as 2017 year-to-date recoveries on previously charged off loans exceeded year-to-date charge-offs and 2015.were sufficient to increase the allowance for loan losses to a level deemed appropriate in relation to the 2017 year-to-date loan growth and credit quality. The provision for loan losses was $900 and $400, respectively, for the three and nine months ended September 30, 2016 was $200 and 2015. The increased provision for the nine months ended September 30, 2016 compared to the same time period in 2015 was directly associated with the strong 2016 year-to-date loan growth.$900, respectively.

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

West Bank has a significant portion of its loan portfolio in commercial real estate loans, commercial lines of credit, commercial term loans, and construction and land development loans.  West Bank's typical commercial borrower is a small- or medium-sized, privately owned business entity.  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. 

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

3738


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

West Bank's policy is to charge off loans when, in management's opinion, a loan or a portion of a loan is deemed uncollectible. Concerted efforts are made to maximize subsequent recoveries.  The following table summarizes the activity in the Company's allowance for loan losses for the three and nine months ended September 30, 20162017 and 20152016 and related ratios. 
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended September 30, Nine Months Ended September 30,
2016 2015 Change 2016 2015 Change2017 2016 Change 2017 2016 Change
Balance at beginning of period$15,829
 $14,364
 $1,465
 $14,967
 $13,607
 $1,360
$16,486
 $15,829
 $657
 $16,112
 $14,967
 $1,145
Charge-offs(171) (154) (17) (264) (225) (39)(179) (171) (8) (372) (264) (108)
Recoveries100
 250
 (150) 355
 878
 (523)51
 100
 (49) 618
 355
 263
Net (charge-offs) recoveries(71) 96
 (167) 91
 653
 (562)(128) (71) (57) 246
 91
 155
Provision for loan losses charged to operations200
 200
 
 900
 400
 500

 200
 (200) 
 900
 (900)
Balance at end of period$15,958
 $14,660
 $1,298
 $15,958
 $14,660
 $1,298
$16,358
 $15,958
 $400
 $16,358
 $15,958
 $400
                      
Average loans outstanding$1,379,107
 $1,223,699
   $1,321,257
 $1,206,160
  $1,426,115
 $1,379,107
   $1,434,956
 $1,321,257
  
                      
Ratio of annualized net charge-offs           
(recoveries) during the period           
to average loans outstanding0.02% (0.03)%   (0.01)% (0.07)%  
Ratio of annualized net charge-offs (recoveries) during the period to average loans outstanding0.04% 0.02%   (0.02)% (0.01)%  
                      
Ratio of allowance for loan losses to           
average loans outstanding1.16% 1.20 %   1.21 % 1.22 %  
Ratio of allowance for loan losses to average loans outstanding1.15% 1.16%   1.14 % 1.21 %  
In general, the U.S. economy is growing, but at a lowerslower rate than was considered normal before the financial crisis. Average monthly job growth in 2016 has dropped below 200,000,through August 2017 was approximately 177,000, while the national unemployment rate has increaseddeclined slightly to 5.04.2 percent as of September 30, 2016.2017, the lowest level since May 2007. The U.S. economy lost 33,000 jobs in September 2017, primarily in the leisure and hospitality industries, that were attributed to Hurricanes Irma and Harvey. Activity in the housing market continues at a moderate pace. Interest rates are expected to continue to gradually increase, although any increase may be delayed due to the sluggish world economy.rise. The economic environments in Iowa and Minnesota continue to slowly improve. Based on the current economic indicators, the Company decided to maintain the economic factors within the allowance for loan losses evaluation at the same levels used in 2015.2016. In the first nine months of 2016,2017, the Company continued to use experience factors based on the highest losses calculated over a rolling 12-, 16-, or 20-quarter period. The loanLoan growth in the first nine months of 20162017 resulted in the portion of the allowance for loan losses related to loans collectively evaluated for impairment to increase by $1,041$603 to a total of $15,441, which was 1.12$16,212, or 1.11 percent, of loans collectively evaluated for impairment as of September 30, 20162017 compared to $14,400,$15,609, or 1.161.11 percent, as of December 31, 2015.2016. Management believesbelieved the resulting allowance for loan losses as of September 30, 20162017 was adequate to absorb theany losses inherent in the loan portfolio at the end of the quarter.


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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 September 30,Three Months Ended September 30,
Noninterest income:2016 2015 Change Change %2017 2016 Change Change %
Service charges on deposit accounts$632
 $663
 $(31) (4.68)%$715
 $632
 $83
 13.13 %
Debit card usage fees450
 463
 (13) (2.81)%435
 450
 (15) (3.33)%
Trust services355
 302
 53
 17.55 %436
 355
 81
 22.82 %
Increase in cash value of bank-owned life insurance160
 183
 (23) (12.57)%167
 160
 7
 4.38 %
Realized investment securities gains, net197
 
 197
 N/A
Other income:     
  
     
  
Revenue from residential mortgage banking51
 45
 6
 13.33 %
Loan fees22
 85
 (63) (74.12)%
Letter of credit fees23
 13
 10
 76.92 %
Credit card fees63
 53
 10
 18.87 %
Discount on purchased income tax credits36
 8
 28
 350.00 %
All other income163
 128
 35
 27.34 %278
 314
 (36) (11.46)%
Total other income322
 324
 (2) (0.62)%314
 322
 (8) (2.48)%
Total noninterest income$1,919
 $1,935
 $(16) (0.83)%$2,264
 $1,919
 $345
 17.98 %
              
Nine Months Ended September 30,Nine Months Ended September 30,
Noninterest income:2016 2015 Change Change %2017 2016 Change Change %
Service charges on deposit accounts$1,847
 $1,934
 $(87) (4.50)%$1,946
 $1,847
 $99
 5.36 %
Debit card usage fees1,372
 1,367
 5
 0.37 %1,333
 1,372
 (39) (2.84)%
Trust services946
 944
 2
 0.21 %1,264
 946
 318
 33.62 %
Increase in cash value of bank-owned life insurance492
 550
 (58) (10.55)%484
 492
 (8) (1.63)%
Gain from bank-owned life insurance443
 
 443
 N/A
307
 443
 (136) (30.70)%
Realized investment securities gains, net60
 47
 13
 27.66 %423
 60
 363
 605.00 %
Other income:     
  
     
  
Revenue from residential mortgage banking116
 132
 (16) (12.12)%
Loan fees50
 122
 (72) (59.02)%
Letter of credit fees80
 61
 19
 31.15 %
Credit card fees195
 164
 31
 18.90 %
Discount on purchased income tax credits117
 43
 74
 172.09 %
Gain on sale of other assets88
 
 88
 N/A
All other income451
 396
 55
 13.89 %778
 849
 (71) (8.36)%
Total other income892
 875
 17
 1.94 %983
 892
 91
 10.20 %
Total noninterest income$6,052
 $5,717
 $335
 5.86 %$6,740
 $6,052
 $688
 11.37 %
ServiceThe increase in service charges on deposit accounts declined for the three and nine months ended September 30, 2016,2017 compared to the three and nine months ended September 30, 2015, primarily due2016 was driven by the March and April 2017 realignment and simplification of the retail checking account products provided to lower fees resulting from fewer instancesour customers. We expect to see higher retail service charge income for the remainder of 2017 compared to the same period in 2016, but we cannot predict how customers may modify their banking behavior in response to the change in checking account terms related to the product realignment. During the three and nine months ended September 30, 2017, nonsufficient funds which was partially offset by higher fees from commercial accounts.declined $33 and $86, respectively, compared to the same time periods in 2016, consistent with the trend of the past several years.

Revenue from trust services was higher during the three and nine months ended September 30, 2017 compared to the three and nine months ended September 30, 2016 compared to the same time period in 2015, due to the combination of successful,a higher amount of one-time estate fees and asset growth achieved through ongoing business development efforts and pricing updates for certain account types.efforts.

The increase in cash value ofGain from bank-owned life insurance was lowerrecognized for both the nine months ended September 30, 2017 and 2016, but not during the three months ended September 30, 2017 and 2016.

The Company recognized net gains on sales of investment securities in the three and nine months ended September 30, 2016 than2017, as the Company took advantage of the opportunity to sell various types of investment securities available for sale at gains and reinvested the proceeds in the threehigher yielding securities with similar risk profiles and nine months ended September 30, 2015, as crediting rates within the policies have declined slightly due to the historically low interest rate environment. As previously mentioned, gain from bank-owned life insurance was recognized for the nine months ended September 30, 2016 due to the losses of one of our colleagues as well as a former employee.longer durations.

The Company sold three preferred stocks during the nine months ended September 30, 2016, recognizing gains of $60, while net gains on sales of securities of $47 were recognized during the nine months ended September 30, 2015.

3940


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

Loan fees declinedTotal revenue from discounts on purchased transferable State of Iowa income tax credits increased for the three and nine months ended September 30, 2016 compared to the same periods in 2015, due to the recognition of a rate lock fee on one loan in the third quarter of 2015. Letter of credit fees grew due to the increase in the amount of standby letters of credit activity for both the three and nine months ended September 30, 20162017 compared to the same time periods in 2016. During the second quarter of 2017, the Company entered into agreements to purchase additional discounted transferable income tax credits and expects to recognize total income from discounts of approximately $153 for the year ended December 31, 2017. The Company reviews opportunities to acquire transferable State of Iowa income tax credits at favorable discounts as they are presented and as they are aligned with our projected ability to utilize them.

Gain on sale of other assets for the nine months ended September 30, 2017 included a nonrecurring gain of $88 in June 2017 related to a final payment received from the 2015 sale of SmartyPig, LLC.

All other income declined during the three and nine months ended September 30, 2017 compared to the three and nine months ended September 30, 2015.

Credit card fees increased for the three and nine months ended September 30, 2016, compared to the three and nine months ended September 30, 2015,primarily due to both higher volumesa lower level of letter of credit transactionsfees and an increase in the number of credit cards issued through a third party. All other income for the three months ended September 30, 2016 included a discount of $33 related to the purchase of a State of Iowa income tax credit.

small losses on equipment disposals.

4041


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 September 30,Three Months Ended September 30,
Noninterest expense:2016 2015 Change Change %2017 2016 Change Change %
Salaries and employee benefits$4,154
 $4,056
 $98
 2.42 %$4,430
 $4,154
 $276
 6.64 %
Occupancy1,038
 1,031
 7
 0.68 %1,087
 1,038
 49
 4.72 %
Data processing643
 595
 48
 8.07 %635
 643
 (8) (1.24)%
FDIC insurance expense272
 209
 63
 30.14 %151
 272
 (121) (44.49)%
Professional fees189
 194
 (5) (2.58)%184
 189
 (5) (2.65)%
Director fees202
 226
 (24) (10.62)%240
 202
 38
 18.81 %
Other expenses:     
  
     
  
Marketing72
 55
 17
 30.91 %
Business development157
 166
 (9) (5.42)%191
 157
 34
 21.66 %
Insurance expense88
 96
 (8) (8.33)%89
 88
 1
 1.14 %
Investment advisory fees124
 130
 (6) (4.62)%22
 124
 (102) (82.26)%
Charitable contributions180
 
 180
 N/A
Postage and courier79
 78
 1
 1.28 %72
 79
 (7) (8.86)%
Trust106
 107
 (1) (0.93)%124
 106
 18
 16.98 %
Consulting fees91
 70
 21
 30.00 %60
 91
 (31) (34.07)%
Supplies75
 68
 7
 10.29 %
Miscellaneous losses(5) 247
 (252) (102.02)%
Low income housing projects amortization99
 76
 23
 30.26 %102
 99
 3
 3.03 %
Miscellaneous losses247
 27
 220
 814.81 %
All other357
 365
 (8) (2.19)%458
 504
 (46) (9.13)%
Total other1,495
 1,238
 257
 20.76 %1,293
 1,495
 (202) (13.51)%
Total noninterest expense$7,993
 $7,549
 $444
 5.88 %$8,020
 $7,993
 $27
 0.34 %
              
Nine Months Ended September 30,Nine Months Ended September 30,
Noninterest expense:2016 2015 Change Change %2017 2016 Change Change %
Salaries and employee benefits$12,644
 $12,051
 $593
 4.92 %$13,216
 $12,644
 $572
 4.52 %
Occupancy2,972
 3,090
 (118) (3.82)%3,315
 2,972
 343
 11.54 %
Data processing1,849
 1,738
 111
 6.39 %2,031
 1,849
 182
 9.84 %
FDIC insurance expense714
 620
 94
 15.16 %514
 714
 (200) (28.01)%
Professional fees619
 575
 44
 7.65 %725
 619
 106
 17.12 %
Director fees672
 642
 30
 4.67 %697
 672
 25
 3.72 %
Other expenses:     
  
     
  
Marketing170
 182
 (12) (6.59)%
Business development574
 534
 40
 7.49 %609
 574
 35
 6.10 %
Insurance expense256
 265
 (9) (3.40)%267
 256
 11
 4.30 %
Investment advisory fees397
 375
 22
 5.87 %89
 397
 (308) (77.58)%
Charitable contributions180
 
 180
 N/A
Postage and courier241
 244
 (3) (1.23)%238
 241
 (3) (1.24)%
Trust310
 300
 10
 3.33 %339
 310
 29
 9.35 %
Consulting fees238
 191
 47
 24.61 %213
 238
 (25) (10.50)%
Supplies217
 220
 (3) (1.36)%
Miscellaneous losses(1) 246
 (247) (100.41)%
Low income housing projects amortization305
 198
 107
 54.04 %322
 305
 17
 5.57 %
Miscellaneous losses246
 13
 233
 1,792.31 %
All other1,187
 1,200
 (13) (1.08)%1,481
 1,574
 (93) (5.91)%
Total other4,141
 3,722
 419
 11.26 %3,737
 4,141
 (404) (9.76)%
Total noninterest expense$23,611
 $22,438
 $1,173
 5.23 %$24,235
 $23,611
 $624
 2.64 %

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

Salaries and employee benefits increased for the three and nine months ended September 30, 20162017 when compared to the three and nine months ended September 30, 2015, primarily2016, mainly as the result of increases in stock-based compensation costs, health insurance, defined contribution plan expenses and payroll taxes. The increases in defined contribution plan expenses and payroll taxes were primarily associated with a one-time payout of accrued vacation that occurredan increase in the second quarterprice of 2016 in conjunction with a change in the Company's vacation carryover policy.Company common stock, which increased stock-based employee compensation costs.

When contrastedcompared with the nine months ended September 30, 2015, occupancy costs declined for thethree and nine months ended September 30, 2016, primarilyoccupancy costs increased for the three and nine months ended September 30, 2017, partially as the result of operating costs associated with the Februarynew Rochester, Minnesota, office, which opened in November 2016. Also impacting the increase in occupancy costs compared to the prior year was a first quarter 2016 purchase of the Waukee, Iowa, branch facility. The reduction reflects a one-time reversal of previously accrued rent related to the terms of the previous lease. Ongoing operating costslease for that location are expected to remain lower than previous rental costs. Occupancy costs are expected to increase when the new Rochester building opensWaukee, Iowa, branch facility at the time the branch was acquired in the fourth quarter ofFebruary 2016.

The increase in data processing expense for the three and nine months ended September 30, 20162017 compared to the same time periodsperiod in 20152016 was primarily because of costs associated with upgrading credit analysis software, one-time costs associated with revising the implementation of additionalretail checking account products, ongoing enhancements and monitoring tools for maintaining security, measures and mobile banking in 2016, and an annualannual-inflation-rate-based contractual increase in fees paid to our core processor that is based upon an inflation factor.applications systems service provider.

Federal Deposit Insurance Corporation (FDIC)FDIC insurance expense increaseddeclined for both the three and nine months ended September 30, 20162017 compared to the three and nine months ended September 30, 2015.2016. The increases were dueFDIC assessment rate calculation includes a series of risk-based factors. As a result of the May 2017 capital injection of $40,000 into West Bank, the capital ratio component improved enough to the combination of growth in total assets and a July 1, 2016 revision inreduce the assessment rate system for institutions with less than $10 billion in total assets. Based onto the change in methodology for calculation of the rate within the revised assessment system, the rate can be significantly affectedminimum level established by the types of loans within the portfolio and by the credit quality of the portfolio.  The Company expectsFDIC. Management believes the assessment calculation revisions torate will increaseremain at the Company's annual costminimum level throughout the remainder of FDIC insurance by approximately $100.2017 and into 2018.

Professional fees increased for the nine months ended September 30, 20162017 compared to the same time period in 2015,2016, chiefly due to increased costs associated with preparation and adoption of the West Bancorporation, Inc. 2017 Equity Incentive Plan and filing a new shelf registration statement with the Securities and Exchange Commission (which allows us to issue registered equity and debt instruments) and due to higher legal fees associated with the previously disclosed litigation.at West Bank.

Director feesThe increase in business development expense for the three months ended September 30, 2016 declined compared to the three months ended September 30, 2015 as the result of one director, who was not replaced, retiring from the Board of Directors in late April 2016. Director fees increased for theand nine months ended September 30, 2016 compared to the same period in 2015 as a result of higher stock-based compensation costs.

The increase in marketing expense for the three months ended September 30, 20162017 compared to the three months ended September 30, 2015 was because of costs associated with converting certain branch locations to drive-up service only. The increase in business development costs for theand nine months ended September 30, 2016 compared to the same time period in 2015 was the result of efforts to cultivate new and expanded customer relationships.

Investment advisory fees consistdeclined for the three and nine months ended September 30, 2017 as contrasted with the same time periods in 2016, mainly as a result of fees paid to an independent investment advisory firm for assistance with managingbringing the administration of the investment portfolio andin-house, effective October 1, 2016. The Company also pays an administrative fee charged byto an investment management firm for assisting with the purchase and administration of public company floating rate commercial loans. Effective October 1, 2016,That administrative fee has declined as the investment portfolio will be managed internally with an expected annual cost savingsresult of approximately $280.holding a lower level of those loans.

Consulting feesCharitable contributions increased for the three and nine months ended September 30, 2017 compared to the same time periods in 2016 due to the accrual of the normal annual contribution to the West Bancorporation Foundation.

The increase in trust expense in the three and nine months ended September 30, 2017 compared to the three and nine months ended September 30, 2015, primarily due to expenses relating to2016 is commensurate with the increase in the growth in trust assets.

Consulting fees declined in the three and nine months ended September 30, 2017, as the 2016 expense included data analysis conductedcosts associated with a class action litigation matter, which was settled in association withthe third quarter of 2016. Miscellaneous losses declined in 2017, as the three and nine months ended September 30, 2016 included a $250 settlement of the previously mentioned class action litigation. An offsetting $300 insurance reimbursement of litigation costs was received in the fourth quarter of 2016.

Low income housing project amortization increasedAll other expenses declined for the three and nine months ended September 30, 20162017 compared to the same time periods in 20152016, primarily due to the Company making commitmentselimination of certain costs related to invest in additional projects. The projected expense for the year ended December 31,a retail deposit product, and first quarter 2016 is approximately $400 compared to $228 for the year ended December 31, 2015. The combination of the tax deductible amortization plus the federal income tax credits exceeds the investment in the projects.included a one-time cost associated with a bank-owned life insurance claim.

Miscellaneous losses increased for the three and nine months ended September 30, 2016 compared to the same time periods in 2015, due to reaching a $250 mediated proposed settlement agreement during the third quarter of 2016 for the previously disclosed class action litigation.

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

Income Tax Expense

The Company recorded income tax expense of $2,870 (30.9 percent of pre-tax income) and $8,142 (30.1 percent of pre-tax income) for the three and nine months ended September 30, 2017, respectively, compared with $2,634 (31.2 percent of pre-tax income) and $7,249 (29.9 percent of pre-tax income) for the three and nine months ended September 30, 2016, respectively, compared with $2,466 (31.2 percent of pre-tax income) and $7,101 (31.0 percent of pre-tax income) for the three and nine months ended September 30, 2015, respectively.2016. 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, tax-exempt gain on bank-owned life insurance, disallowed interest expense, and state income taxes. For

Two other items significantly impacted the effective tax rate for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. The adoption of ASU No. 2016-09, Compensation—Stock Compensation (Topic 718), effective January 1, 2017, simplified the recording of income taxes related to vesting of equity compensation. The impact of an increase in the fair value of restricted stock over the vesting period is now recorded as a reduction in income tax expense rather than as additional paid-in capital. During the nine months ended September 30, 2017, a tax benefit of $285 was recorded as a result of this change in accounting method. By comparison, the tax benefit recorded in additional paid-in capital for the nine months ended September 30, 2016 the tax rate was also lower than the statutory income tax rate due to $443 of tax-exempt gain from bank-owned life insurance.$105. The tax rate for the first nine months of 20162017 and 20152016 was also impacted by year-to-date federal low income housing tax credits of approximately $262$308 and $225,$262, respectively.


43


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

FINANCIAL CONDITION

The Company had total assets of $1,824,830$2,030,348 as of September 30, 2016,2017, an increase of 4.379.5 percent compared to total assets of $1,854,204 as of December 31, 2015.2016. The most significant changes in the balance sheet were increases in investment securities available for sale, loans, premises and equipment, deposits, and short-term borrowings and decreaseslong-term debt, and a decline in cash and cash equivalents and securities available for sale.equivalents. A summary of changes in the components of the balance sheet components is provided below.

Investment Securities

The balance of investment securities available for sale declinedincreased by $42,303$157,737 during the nine months ended September 30, 2016, which was attributed primarily to normal principal paydowns on mortgage-backed securities and collateralized mortgage obligations, and calls of state2017. State and political subdivision securities increased by $69,920, corporate notes increased by $19,152, and corporate notes. The Company also sold equitygovernment agency guaranteed collateralized mortgage obligations, mortgage-backed securities during the second quarter of 2016 forand asset-backed securities increased by a total of $1,544, resulting$68,319 during the nine months ended September 30, 2017. The Company purchased $267,133 of investment securities available for sale during the nine months ended September 30, 2017. Securities sold totaled $74,224, and the proceeds were primarily reinvested in higher yielding securities that have a gainsimilar risk profile. The remaining purchases included the reinvestment of $60. These cash flows were used to fund loan growth.normal principal paydowns, calls and maturities, as well as investing the growth in deposits. The overall mix of the entire investment portfolio did not change significantly as a result of this activity.

As of September 30, 2016,2017, approximately 7160 percent of the available for sale investment securities portfolio consisted of government agency guaranteed collateralized mortgage obligations, mortgage-backed securities and mortgage-backedasset-backed securities. In the current low interest rate environment, managementManagement believes boththese securities provide relatively good yields, have little to no credit risk and provide fairly consistent cash flows.

Loans and Nonperforming Assets

Loans outstanding increased $136,207$57,035, from $1,246,688$1,399,870 as of December 31, 2015,2016 to $1,382,895$1,456,905 as of September 30, 2016.2017. Growth in the loan portfolio during the first nine months of 20162017 was primarily the result of increases of $33,444$43,843 in construction loans and $103,271$32,144 in commercial real estate loans. Approximately $44,000 of new commercial real estate loans were made to entities managedThis growth was partially offset by a West Bank related party.decrease of $17,298 in commercial loans that included a $16,556 reduction in public company floating rate loans purchased from a third-party asset manager. The Company continues to focus on business development efforts in all of its markets. Management believes loan growth will continue in all three of our markets during the remainder of 2016, however, not at the level experienced in the first nine months of 2016.2017.

Credit quality of the Company's loan portfolio remains strong and stable. The Company's Texas ratio, which is computed by dividing total nonperforming assets by tangible common equity plus the allowance for loan losses, was 0.550.27 percent as of September 30, 2016,2017, compared to 0.870.56 percent as of December 31, 2015.2016. The ratio for both dates was significantly better than the June 30, 20162017 peer group average (latest data available), which was approximately 9.988.57 percent, according to data in the June 20162017 Bank Holding Company Performance Report prepared by the Division of Supervision and Regulation of the Federal Reserve.


44


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

The following table sets forth the amount of nonperforming loans and assets held by the Company and common ratio measurements of those itemsassets as of the dates shown. 
September 30, 2016 December 31, 2015 ChangeSeptember 30, 2017 December 31, 2016 Change
Nonaccrual loans$1,003
 $1,381
 $(378)$517
 $1,022
 $(505)
Loans past due 90 days and still accruing interest
 
 

 
 
Troubled debt restructured loans (1)

 80
 (80)
 
 
Total nonperforming loans1,003
 1,461
 (458)517
 1,022
 (505)
Other real estate owned
 
 

 
 
Total nonperforming assets$1,003
 $1,461
 $(458)$517
 $1,022
 $(505)
 
  
  
 
  
  
Nonperforming loans to total loans0.07% 0.12% (0.05)%0.04% 0.07% (0.03)%
Nonperforming assets to total assets0.05% 0.08% (0.03)%0.03% 0.06% (0.03)%

(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 twowas one TDR loansloan as of September 30, 2016,2017 with a balance of $247, and threetwo TDR loans as of December 31, 20152016, with an aggregate balancesbalance of $464 and $613, respectively,$426, 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 910 to the financial statements.

Deposits

Deposits increased $104,661 during the first nine months of 2017, or 6.8 percent, compared to December 31, 2016.  Interest-bearing demand accounts increased $45,564, and noninterest-bearing demand accounts declined $94,686, from December 31, 2016 to September 30, 2017. Savings deposits, which include money market and insured cash sweep money market accounts, increased $108,233
from December 31, 2016 to September 30, 2017. Approximately $76,000 of noninterest-bearing accounts was reclassified to interest-bearing accounts in April 2017 as part of a retail deposit product restructuring. Other balance fluctuations were primarily due to business development efforts and normal customer activity, as corporate customers' liquidity needs vary at any given time. Total time deposits increased $45,550 during the first nine months of 2017, primarily due to customers moving balances from savings accounts, including money market accounts, to higher interest rate time deposits. As of September 30, 2017, a significant related party relationship maintained total deposit balances with West Bank of approximately $146,000.

Borrowings

Short-term borrowings, in the form of overnight funding, increased to $48,000 as of September 30, 2017 from $0 as of December 31, 2016. The need for overnight funding is primarily dependent on corporate customer deposit fluctuations, loan fundings and loan repayments. The investment portfolio was increased during the third quarter of 2017 in anticipation of known deposit increases coming in the fourth quarter. Overnight borrowings funded those investments in the interim.

Long-term debt increased $19,069 during the first nine months of 2017. On May 25, 2017, the Company entered into a credit agreement with a commercial bank and borrowed $25,000. This credit agreement replaced a prior credit agreement with the same commercial bank that had a remaining balance of $3,000. The additional borrowing was used to make a capital injection into the Company's subsidiary, West Bank. Principal and interest under the term note are payable quarterly over five years. Required quarterly principal payments are $625, with the balance due at maturity. The Company may make additional principal payments without penalty. The interest rate is variable at 1.95 percent over the 30-day LIBOR rate. The interest rate was 3.18 percent at September 30, 2017.


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

Premises and Equipment

Premises and equipment increased $9,461 since December 31, 2015, to $21,023 as of September 30, 2016. In February 2016, the Company purchased a branch facility for $4,512 that had previously been leased. The Company also spent $4,278 from December 31, 2015 through September 30, 2016, on the construction of a new office in Rochester, Minnesota.

Deposits

Deposits increased $50,927 during the first nine months of 2016, or 3.53 percent, compared to December 31, 2015.  Savings deposits, which include money market and insured cash sweep money market accounts, increased $66,653 from December 31, 2015 to September 30, 2016 . Interest-bearing demand accounts declined $3,184, and noninterest-bearing demand accounts declined $3,273 from December 31, 2015 to September 30, 2016. These changes were due to a combination of business development efforts and normal fluctuations, as corporate customers' liquidity needs vary at any given time. Total time deposits declined $9,269 during the first nine months of 2016 due to the continued low interest rate environment. As of September 30, 2016, a significant related party relationship maintained total deposit balances with West Bank of approximately $190,000.

Borrowings

Short-term borrowings increased to $34,500 as of September 30, 2016 from $19,000 as of December 31, 2015. The need for this overnight funding is primarily dependent on corporate customer deposit fluctuations, loan fundings and loan repayments. Long-term debt declined $2,453 during the first nine months of 2016 due to scheduled repayments.

Liquidity and Capital Resources

The objectives of liquidity management are to ensure the availability of sufficient cash flows to meet all financial commitments and to capitalize on opportunities for profitable business expansion.  The Company's principal source of funds is deposits.  Other sources include loan principal repayments, proceeds from the maturity and sale of investment securities, principal payments on collateralized mortgage obligations, mortgage-backed and mortgage-backedasset-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 $50,850$39,497 as of September 30, 20162017 compared with $72,651$76,836 as of December 31, 2015.2016.

As of September 30, 2016,2017, West Bank had additional borrowing capacity available from the FHLB of approximately $238,000,$255,000, as well as $67,000 through unsecured federal funds lines of credit with correspondent banks.  Net cash from operating activities contributed $22,207 and $22,424$21,979 to liquidity for the nine months ended September 30, 2016 and 2015, respectively.  The2017.  Management believed that the combination of high levels of potentially liquid assets, cash flows from operations, and additional borrowing capacity provided the Company with strong liquidity as of September 30, 2016.2017.

The Company's total stockholders' equity increased to $164,864$178,087 at September 30, 20162017 from $152,377$165,376 at December 31, 2015.2016.  The increase was primarily the result of net income less dividends paid, and an increase in accumulated other comprehensive income.

At September 30, 2016,2017, the Company's tangible common equity as a percent of tangible assets was 9.038.77 percent compared to 8.728.92 percent as of December 31, 2015.2016.

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 believesbelieved the Company and West Bank met all capital adequacy requirements to which they were subject as of September 30, 2016.2017.

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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 With Capital Conservation Buffer
 
To Be Well-Capitalized
Under Prompt Corrective
Action Provisions
Actual 
For Capital
Adequacy Purposes With Capital Conservation Buffer
 
To Be Well-Capitalized
Under Prompt Corrective
Action Provisions
Amount Ratio Amount Ratio Amount RatioAmount Ratio Amount Ratio Amount Ratio
As of September 30, 2016:           
As of September 30, 2017:           
Total Capital (to Risk-Weighted Assets)                      
Consolidated$198,682
 11.87% $144,372
 8.625% N/A
 N/A
$214,373
 12.01% $165,070
 9.25% N/A
 N/A
West Bank183,202
 11.06% 142,894
 8.625% $165,674
 10.00%235,067
 13.18% 164,963
 9.25% $178,339
 10.00%
 
  
  
  
  
  
 
  
  
  
  
  
Tier 1 Capital (to Risk-Weighted Assets) 
  
  
  
  
  
 
  
  
  
  
  
Consolidated182,724
 10.92% 110,894
 6.625% N/A
 N/A
198,015
 11.10% 129,379
 7.25% N/A
 N/A
West Bank167,244
 10.09% 109,759
 6.625% 132,539
 8.00%218,709
 12.26% 129,295
 7.25% 142,671
 8.00%
                      
Common Equity Tier 1 Capital (to Risk-Weighted Assets)Common Equity Tier 1 Capital (to Risk-Weighted Assets)          Common Equity Tier 1 Capital (to Risk-Weighted Assets)          
Consolidated162,724
 9.72% 85,786
 5.125% N/A
 N/A
178,015
 9.98% 102,611
 5.75% N/A
 N/A
West Bank167,244
 10.09% 84,908
 5.125% 107,688
 6.50%218,709
 12.26% 102,545
 5.75% 115,920
 6.50%
 
  
  
  
  
  
 
  
  
  
  
  
Tier 1 Capital (to Average Assets) 
  
  
  
  
  
 
  
  
  
  
  
Consolidated182,724
 9.97% 73,329
 4.00% N/A
 N/A
198,015
 10.06% 78,738
 4.00% N/A
 N/A
West Bank167,244
 9.20% 72,685
 4.00% 90,856
 5.00%218,709
 11.12% 78,694
 4.00% 98,368
 5.00%
 
  
  
  
  
  
 
  
  
  
  
  
As of December 31, 2015: 
  
  
  
  
  
As of December 31, 2016: 
  
  
  
  
  
Total Capital (to Risk-Weighted Assets) 
  
  
  
  
  
 
  
  
  
  
  
Consolidated$187,790
 12.12% $123,979
 8.00% N/A
 N/A
$202,530
 11.87% $147,108
 8.625% N/A
 N/A
West Bank174,450
 11.32% 123,279
 8.00% $154,099
 10.00%186,118
 11.04% 145,414
 8.625% $168,597
 10.00%
 
  
  
  
  
  
 
  
  
  
  
  
Tier 1 Capital (to Risk-Weighted Assets) 
  
  
  
  
  
 
  
  
  
  
  
Consolidated172,807
 11.15% 92,984
 6.00% N/A
 N/A
186,418
 10.93% 112,996
 6.625% N/A
 N/A
West Bank159,467
 10.35% 92,460
 6.00% 123,279
 8.00%170,006
 10.08% 111,695
 6.625% 134,877
 8.00%
                      
Common Equity Tier 1 Capital (to Risk-Weighted Assets)Common Equity Tier 1 Capital (to Risk-Weighted Assets)          Common Equity Tier 1 Capital (to Risk-Weighted Assets)          
Consolidated152,807
 9.86% 69,738
 4.50% N/A
 N/A
166,418
 9.76% 87,412
 5.125% N/A
 N/A
West Bank159,467
 10.35% 69,345
 4.50% 100,164
 6.50%170,006
 10.08% 86,406
 5.125% 109,588
 6.50%
                      
Tier 1 Capital (to Average Assets) 
  
  
  
  
  
 
  
  
  
  
  
Consolidated172,807
 9.91% 69,764
 4.00% N/A
 N/A
186,418
 10.14% 73,530
 4.00% N/A
 N/A
West Bank159,467
 9.20% 69,352
 4.00% 86,690
 5.00%170,006
 9.34% 72,807
 4.00% 91,009
 5.00%

On January 1, 2015, the Company and West Bank became subject to the rules of the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act changes. The new rules included the implementation of a new capital conservation buffer that is added to the minimum requirements for capital adequacy purposes. The capital conservation buffer is subject to a three year phase-in period that began on January 1, 2016 and will be fully phased-in on January 1, 2019 at 2.5 percent. The required phase-in capital conservation buffer during 20162017 is 0.6251.25 percent. A banking organization with a conservation buffer of less than the required amount will be subject to limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. At September 30, 2016,2017, the ratios for the Company and West Bank were sufficient to meet the fully phased-in conservation buffer.

In late May 2017, the Company made a capital injection into the Company's subsidiary, West Bank, funded by entering into a $25,000 credit agreement with an unaffiliated commercial bank (see Note 5 to the Consolidated Financial Statements) and selling four bank buildings to West Bank for $18,000. The four bank buildings were properties the Company had previously owned and leased to West Bank. The new credit agreement replaced a prior credit agreement that had a remaining outstanding balance of $3,000, for net loan proceeds of $22,000. In total, $40,000 was added to West Bank's capital.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of earnings volatility that results from adverse changes in interest rates and market prices. The Company's market risk is primarily interest rate risk arising from its core banking activities of lending and deposit taking. Interest rate risk is the risk that the change in market interest rates may adversely affect the Company's net interest income. Management continually develops and implements strategies to mitigate this risk. The analysis of the Company's interest rate risk as of December 31, 20152016 was presented in the Company's Form 10-K filed with the Securities and Exchange Commission on March 3, 2016.1, 2017. The Company has not experienced any material changes to its interest rate risk position since December 31, 2015.2016. Management does not believe that the Company's primary market risk exposure and management of that exposure in the first nine months of 20162017 materially changed compared to those in the year ended December 31, 2015.2016.

Item 4. Controls and Procedures

a. Evaluation of disclosure controls and procedures. As of the end of the period covered by this report, an evaluation of the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) was performed under the supervision, and with the participation, of the Company's Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the 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 requiredNeither the Company nor West Bank is a party, and no property of these entities is subject, to any material pending legal proceedings, other than ordinary routine litigation incidental to West Bank's business. The Company does not know of any proceeding contemplated by this item is set forth in Note 8 ofa governmental authority against the Notes to Consolidated Financial Statements included in Part I Item 1 of this report and is incorporated herein by reference.Company or West Bank.

Item 1A. Risk Factors

Management does not believe there have been any material changes in the risk factors that were disclosed in the Company's Form 10-K filed with the Securities and Exchange Commission on March 3, 2016.1, 2017.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.



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Item 6. Exhibits

The following exhibits are filed as part of this report:
ExhibitsDescription
31.1
31.2
32.1
32.2
101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document


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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)   
    
    
October 27, 201626, 2017By:/s/ David D. Nelson 
Date David D. Nelson 
  Chief Executive Officer and President 
  (Principal Executive Officer) 
    
October 27, 201626, 2017By:/s/ Douglas R. Gulling 
Date Douglas R. Gulling 
  Executive Vice President, Treasurer and Chief Financial Officer 
  (Principal Financial Officer) 
    
October 27, 201626, 2017By:/s/ Marie I. Roberts 
Date Marie I. Roberts 
  Senior Vice President, Controller and Chief Accounting Officer 
  (Principal Accounting Officer) 


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EXHIBIT INDEX

The following exhibits are filed herewith:
Exhibit No.Description
31.1Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002
31.2Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002
32.1Certification 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
32.2Certification 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.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document

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