UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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x☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended September 30, 20172020 |
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or |
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o☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from __________ to __________ |
Commission File Number: 0-49677
WEST BANCORPORATION, INC.
(Exact Name of Registrant as Specified in its Charter)
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IOWA | 42-1230603 |
(State of Incorporation) | (I.R.S. Employer Identification No.) |
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Iowa | 42-1230603 |
(State of Incorporation) | (I.R.S. Employer Identification No.) |
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| 1601 22nd Street, West Des Moines, Iowa | 50266 | |
| (Address of principal executive offices) | (Zip Code) | |
Registrant's telephone number, including area code: (515) 222-2300
Securities registered or to be registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common stock, no par value | WTBA | The Nasdaq Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x☒ No o☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x☒ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | o☐ | | | | |
Accelerated filer | x☒ | | | | |
Non-accelerated filer | o☐ | (Do not check if a smaller reporting company) |
Smaller reporting company | o☒ | | | | |
Emerging growth company | o☐ | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o☐ No x☒
As of October 25, 2017,28, 2020, there were 16,215,67216,469,272 shares of common stock, no par value, outstanding.
WEST BANCORPORATION, INC.
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PART I. | | |
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PART I.Item 1. | | |
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Item 1. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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PART II. | | |
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Item 1. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 5. | | |
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Item 6. | | |
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
West Bancorporation, Inc. and Subsidiary Consolidated Balance Sheet
(unaudited)
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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 |
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Cash and cash equivalents | | 39,497 |
| | 76,836 |
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Investment securities available for sale, at fair value | | 418,374 |
| | 260,637 |
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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 |
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Federal Home Loan Bank stock, at cost | | 12,256 |
| | 10,771 |
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Loans | | 1,456,905 |
| | 1,399,870 |
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Allowance for loan losses | | (16,358 | ) | | (16,112 | ) |
Loans, net | | 1,440,547 |
| | 1,383,758 |
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Premises and equipment, net | | 23,173 |
| | 23,314 |
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Accrued interest receivable | | 6,636 |
| | 5,321 |
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Bank-owned life insurance | | 33,451 |
| | 33,111 |
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Deferred tax assets, net | | 5,861 |
| | 6,957 |
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Other assets | | 4,956 |
| | 5,113 |
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Total assets | | $ | 2,030,348 |
| | $ | 1,854,204 |
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| | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | |
LIABILITIES | | | | |
Deposits: | | | | |
Noninterest-bearing demand | | $ | 384,625 |
| | $ | 479,311 |
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Interest-bearing demand | | 328,156 |
| | 282,592 |
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Savings | | 776,921 |
| | 668,688 |
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Time of $250 or more | | 16,539 |
| | 10,446 |
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Other time | | 145,025 |
| | 105,568 |
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Total deposits | | 1,651,266 |
| | 1,546,605 |
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Federal funds purchased | | 925 |
| | 9,690 |
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Short-term borrowings | | 48,000 |
| | — |
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Subordinated notes, net | | 20,408 |
| | 20,398 |
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Federal Home Loan Bank advances, net | | 101,005 |
| | 99,886 |
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Long-term debt, net | | 24,195 |
| | 5,126 |
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Accrued expenses and other liabilities | | 6,462 |
| | 7,123 |
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Total liabilities | | 1,852,261 |
| | 1,688,828 |
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COMMITMENTS AND CONTINGENCIES (NOTE 9) | |
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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 |
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Additional paid-in capital | | 22,763 |
| | 21,462 |
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Retained earnings | | 152,252 |
| | 141,956 |
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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 |
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(in thousands, except share and per share data) | | September 30, 2020 | | December 31, 2019 |
ASSETS | | | | |
Cash and due from banks | | $ | 49,445 | | | $ | 37,808 | |
Federal funds sold | | 16,398 | | | 15,482 | |
Cash and cash equivalents | | 65,843 | | | 53,290 | |
Investment securities available for sale, at fair value | | 374,387 | | | 398,578 | |
Federal Home Loan Bank stock, at cost | | 11,905 | | | 12,491 | |
Loans | | 2,247,425 | | | 1,941,663 | |
Allowance for loan losses | | (25,403) | | | (17,235) | |
Loans, net | | 2,222,022 | | | 1,924,428 | |
Premises and equipment, net | | 28,099 | | | 29,680 | |
Accrued interest receivable | | 11,071 | | | 7,134 | |
Bank-owned life insurance | | 42,520 | | | 34,893 | |
Deferred tax assets, net | | 10,809 | | | 5,361 | |
Other assets | | 9,227 | | | 7,836 | |
Total assets | | $ | 2,775,883 | | | $ | 2,473,691 | |
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LIABILITIES AND STOCKHOLDERS' EQUITY | | | | |
LIABILITIES | | | | |
Deposits: | | | | |
Noninterest-bearing demand | | $ | 619,346 | | | $ | 380,079 | |
Interest-bearing demand | | 363,430 | | | 346,307 | |
Savings | | 1,130,582 | | | 996,836 | |
Time of $250 or more | | 54,241 | | | 81,871 | |
Other time | | 129,181 | | | 209,663 | |
Total deposits | | 2,296,780 | | | 2,014,756 | |
Federal funds purchased | | 2,350 | | | 2,660 | |
Subordinated notes, net | | 20,448 | | | 20,438 | |
Federal Home Loan Bank advances, net | | 175,000 | | | 179,365 | |
Long-term debt | | 22,213 | | | 22,925 | |
Accrued expenses and other liabilities | | 43,772 | | | 21,727 | |
Total liabilities | | 2,560,563 | | | 2,261,871 | |
COMMITMENTS AND CONTINGENCIES (NOTE 8) | | | | |
STOCKHOLDERS' EQUITY | | | | |
Preferred stock, $0.01 par value; authorized 50,000,000 shares; 0 shares issued and outstanding at September 30, 2020 and December 31, 2019 | | 0 | | | 0 | |
Common stock, 0 par value; authorized 50,000,000 shares; 16,469,272 and 16,379,752 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively | | 3,000 | | | 3,000 | |
Additional paid-in capital | | 28,227 | | | 27,260 | |
Retained earnings | | 198,622 | | | 184,821 | |
Accumulated other comprehensive loss | | (14,529) | | | (3,261) | |
Total stockholders' equity | | 215,320 | | | 211,820 | |
Total liabilities and stockholders' equity | | $ | 2,775,883 | | | $ | 2,473,691 | |
See Notes to Consolidated Financial Statements.
West Bancorporation, Inc. and Subsidiary
Consolidated Statements of Income
(unaudited)
| | West Bancorporation, Inc. and Subsidiary | | | | | | | | | |
Consolidated Statements of Income | | | | | | | | | |
(unaudited) | | | | | | | | | |
| | 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) | | 2017 | | 2016 | | 2017 | | 2016 | (in thousands, except per share data) | | 2020 | | 2019 | | 2020 | | 2019 |
Interest income: | | | | | | | | | Interest income: | | | | | | | | |
Loans, including fees | | $ | 15,854 |
| | $ | 14,898 |
| | $ | 46,865 |
| | $ | 42,667 |
| Loans, including fees | | $ | 22,489 | | | $ | 22,203 | | | $ | 67,132 | | | $ | 63,699 | |
Investment securities: | | | | | | | | | Investment securities: | |
Taxable | | 1,489 |
| | 991 |
| | 3,755 |
| | 3,222 |
| Taxable | | 1,728 | | | 2,445 | | | 6,105 | | | 7,405 | |
Tax-exempt | | 1,081 |
| | 780 |
| | 2,674 |
| | 2,482 |
| Tax-exempt | | 378 | | | 353 | | | 994 | | | 1,675 | |
Federal funds sold | | 136 |
| | 27 |
| | 223 |
| | 58 |
| Federal funds sold | | 15 | | | 611 | | | 256 | | | 819 | |
Total interest income | | 18,560 |
| | 16,696 |
| | 53,517 |
| | 48,429 |
| Total interest income | | 24,610 | | | 25,612 | | | 74,487 | | | 73,598 | |
Interest expense: | | | | | | |
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| Interest expense: | | | | | | | | |
Deposits | | 2,108 |
| | 872 |
| | 5,084 |
| | 2,401 |
| Deposits | | 1,946 | | | 6,771 | | | 9,343 | | | 19,405 | |
Federal funds purchased | | 4 |
| | 1 |
| | 24 |
| | 4 |
| Federal funds purchased | | 2 | | | 17 | | | 21 | | | 219 | |
Short-term borrowings | | 9 |
| | 8 |
| | 58 |
| | 39 |
| |
Subordinated notes | | 232 |
| | 169 |
| | 667 |
| | 533 |
| Subordinated notes | | 254 | | | 258 | | | 762 | | | 766 | |
Federal Home Loan Bank advances | | 972 |
| | 894 |
| | 2,837 |
| | 2,645 |
| Federal Home Loan Bank advances | | 1,189 | | | 1,300 | | | 3,702 | | | 3,666 | |
Long-term debt | | 204 |
| | 31 |
| | 334 |
| | 114 |
| Long-term debt | | 87 | | | 150 | | | 316 | | | 499 | |
Total interest expense | | 3,529 |
| | 1,975 |
| | 9,004 |
| | 5,736 |
| Total interest expense | | 3,478 | | | 8,496 | | | 14,144 | | | 24,555 | |
Net interest income | | 15,031 |
| | 14,721 |
| | 44,513 |
| | 42,693 |
| Net interest income | | 21,132 | | | 17,116 | | | 60,343 | | | 49,043 | |
Provision for loan losses | | — |
| | 200 |
| | — |
| | 900 |
| Provision for loan losses | | 4,000 | | | 300 | | | 8,000 | | | 300 | |
Net interest income after provision for loan losses | | 15,031 |
| | 14,521 |
| | 44,513 |
| | 41,793 |
| Net interest income after provision for loan losses | | 17,132 | | | 16,816 | | | 52,343 | | | 48,743 | |
Noninterest income: | | | | | | |
| | |
| Noninterest income: | | | | | | | | |
Service charges on deposit accounts | | 715 |
| | 632 |
| | 1,946 |
| | 1,847 |
| Service charges on deposit accounts | | 609 | | | 630 | | | 1,743 | | | 1,841 | |
Debit card usage fees | | 435 |
| | 450 |
| | 1,333 |
| | 1,372 |
| Debit card usage fees | | 432 | | | 426 | | | 1,205 | | | 1,235 | |
Trust services | | 436 |
| | 355 |
| | 1,264 |
| | 946 |
| Trust services | | 553 | | | 572 | | | 1,477 | | | 1,536 | |
Increase in cash value of bank-owned life insurance | | 167 |
| | 160 |
| | 484 |
| | 492 |
| Increase in cash value of bank-owned life insurance | | 133 | | | 168 | | | 427 | | | 482 | |
Gain from bank-owned life insurance | | — |
| | — |
| | 307 |
| | 443 |
| |
Realized investment securities gains, net | | 197 |
| | — |
| | 423 |
| | 60 |
| |
Loan swap fees | | Loan swap fees | | 983 | | | 0 | | | 1,572 | | | 0 | |
Realized investment securities gains (losses), net | | Realized investment securities gains (losses), net | | 156 | | | 1 | | | 81 | | | (64) | |
Other income | | 314 |
| | 322 |
| | 983 |
| | 892 |
| Other income | | 337 | | | 361 | | | 993 | | | 1,246 | |
Total noninterest income | | 2,264 |
| | 1,919 |
| | 6,740 |
| | 6,052 |
| Total noninterest income | | 3,203 | | | 2,158 | | | 7,498 | | | 6,276 | |
Noninterest expense: | | | | | | |
| | |
| Noninterest expense: | | | | | | | | |
Salaries and employee benefits | | 4,430 |
| | 4,154 |
| | 13,216 |
| | 12,644 |
| Salaries and employee benefits | | 5,412 | | | 5,440 | | | 16,014 | | | 16,324 | |
Occupancy | | 1,087 |
| | 1,038 |
| | 3,315 |
| | 2,972 |
| Occupancy | | 1,383 | | | 1,379 | | | 4,092 | | | 3,956 | |
Data processing | | 635 |
| | 643 |
| | 2,031 |
| | 1,849 |
| Data processing | | 614 | | | 695 | | | 1,882 | | | 2,091 | |
FDIC insurance | | 151 |
| | 272 |
| | 514 |
| | 714 |
| FDIC insurance | | 351 | | | 0 | | | 880 | | | 404 | |
Professional fees | | 184 |
| | 189 |
| | 725 |
| | 619 |
| Professional fees | | 230 | | | 204 | | | 669 | | | 647 | |
Director fees | | 240 |
| | 202 |
| | 697 |
| | 672 |
| Director fees | | 236 | | | 233 | | | 664 | | | 742 | |
Other expenses | | 1,293 |
| | 1,495 |
| | 3,737 |
| | 4,141 |
| Other expenses | | 1,833 | | | 1,585 | | | 4,938 | | | 4,666 | |
Total noninterest expense | | 8,020 |
| | 7,993 |
| | 24,235 |
| | 23,611 |
| Total noninterest expense | | 10,059 | | | 9,536 | | | 29,139 | | | 28,830 | |
Income before income taxes | | 9,275 |
| | 8,447 |
| | 27,018 |
| | 24,234 |
| Income before income taxes | | 10,276 | | | 9,438 | | | 30,702 | | | 26,189 | |
Income taxes | | 2,870 |
| | 2,634 |
| | 8,142 |
| | 7,249 |
| Income taxes | | 2,176 | | | 1,912 | | | 6,544 | | | 5,106 | |
Net income | | $ | 6,405 |
| | $ | 5,813 |
| | $ | 18,876 |
| | $ | 16,985 |
| Net income | | $ | 8,100 | | | $ | 7,526 | | | $ | 24,158 | | | $ | 21,083 | |
| | | | | | | | | | | | | | | | | |
Basic earnings per common share | | $ | 0.40 |
| | $ | 0.36 |
| | $ | 1.17 |
| | $ | 1.05 |
| Basic earnings per common share | | $ | 0.49 | | | $ | 0.46 | | | $ | 1.47 | | | $ | 1.29 | |
Diluted earnings per common share | | $ | 0.39 |
| | $ | 0.36 |
| | $ | 1.16 |
| | $ | 1.05 |
| Diluted earnings per common share | | $ | 0.49 | | | $ | 0.46 | | | $ | 1.46 | | | $ | 1.28 | |
Cash dividends declared per common share | | $ | 0.18 |
| | $ | 0.17 |
| | $ | 0.53 |
| | $ | 0.50 |
| |
See Notes to Consolidated Financial Statements.
West Bancorporation, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Net income | | $ | 8,100 | | | $ | 7,526 | | | $ | 24,158 | | | $ | 21,083 | |
Other comprehensive income (loss): | | | | | | | | |
Unrealized gains on investment securities: | | | | | | | | |
Unrealized holding gains arising during the period | | 357 | | | 1,706 | | | 6,171 | | | 13,673 | |
Plus: reclassification adjustment for net (gains) losses realized in net income | | (156) | | | (1) | | | (81) | | | 64 | |
| | | | | | | | |
Income tax expense | | (50) | | | (426) | | | (1,522) | | | (3,434) | |
Other comprehensive income on investment securities | | 151 | | | 1,279 | | | 4,568 | | | 10,303 | |
Unrealized gains (losses) on derivatives: | | | | | | | | |
Unrealized holding gains (losses) arising during the period | | 256 | | | (5,187) | | | (23,912) | | | (12,357) | |
Plus: reclassification adjustment for net (gains) losses on derivatives realized in net income | | 1,405 | | | (100) | | | 2,768 | | | (351) | |
Plus: reclassification adjustment for amortization of derivative termination costs | | 0 | | | 24 | | | 31 | | | 71 | |
Income tax (expense) benefit | | (415) | | | 1,315 | | | 5,277 | | | 3,156 | |
Other comprehensive income (loss) on derivatives | | 1,246 | | | (3,948) | | | (15,836) | | | (9,481) | |
Total other comprehensive income (loss) | | 1,397 | | | (2,669) | | | (11,268) | | | 822 | |
Comprehensive income | | $ | 9,497 | | | $ | 4,857 | | | $ | 12,890 | | | $ | 21,905 | |
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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.
West Bancorporation, Inc. and Subsidiary
Consolidated Statements of Stockholders' Equity
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands, except share and per share data) | | | | | | | | | | |
| | |
| | Three Months Ended September 30, 2020 |
| | | | | | | | | | | | Accumulated | | |
| | | | | | | | Additional | | | | Other | | |
| | Preferred | | Common Stock | | Paid-In | | Retained | | Comprehensive | | |
| | Stock | | Shares | | Amount | | Capital | | Earnings | | Income (Loss) | | Total |
Balance, June 30, 2020 | | $ | — | | | 16,469,272 | | | $ | 3,000 | | | $ | 27,632 | | | $ | 193,981 | | | $ | (15,926) | | | $ | 208,687 | |
Net income | | — | | | — | | | — | | | — | | | 8,100 | | | 0 | | | 8,100 | |
Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | — | | | 1,397 | | | 1,397 | |
Cash dividends declared, $0.21 per common share | | — | | | — | | | — | | | — | | | (3,459) | | | — | | | (3,459) | |
Stock-based compensation costs | | — | | | — | | | — | | | 595 | | | — | | | — | | | 595 | |
| | | | | | | | | | | | | | |
Balance, September 30, 2020 | | $ | — | | | 16,469,272 | | | $ | 3,000 | | | $ | 28,227 | | | $ | 198,622 | | | $ | (14,529) | | | $ | 215,320 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2019 |
| | | | | | | | | | | | Accumulated | | |
| | | | | | | | Additional | | | | Other | | |
| | Preferred | | Common Stock | | Paid-In | | Retained | | Comprehensive | | |
| | Stock | | Shares | | Amount | | Capital | | Earnings | | Income (Loss) | | Total |
Balance, June 30, 2019 | | $ | 0 | | | 16,379,752 | | | $ | 3,000 | | | $ | 25,691 | | | $ | 176,567 | | | $ | (3,323) | | | $ | 201,935 | |
Net income | | — | | | — | | | — | | | — | | | 7,526 | | | — | | | 7,526 | |
Other comprehensive loss, net of tax | | — | | | — | | | — | | | — | | | — | | | (2,669) | | | (2,669) | |
Cash dividends declared, $0.21 per common share | | — | | | — | | | — | | | — | | | (3,439) | | | — | | | (3,439) | |
Stock-based compensation costs | | — | | | — | | | — | | | 784 | | | — | | | — | | | 784 | |
| | | | | | | | | | | | | | |
Balance, September 30, 2019 | | $ | — | | | 16,379,752 | | | $ | 3,000 | | | $ | 26,475 | | | $ | 180,654 | | | $ | (5,992) | | | $ | 204,137 | |
| | | | | | | | | | | | | | |
See Notes to Consolidated Financial Statements. | | | | | | | | | | |
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West Bancorporation, Inc. and Subsidiary
Consolidated Statements of Stockholders' Equity
(unaudited)
|
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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 | |
|
| |
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| |
|
| |
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| |
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| | |
stock units, net of shares withheld for payroll taxes | | — |
| | 73,564 |
| | — |
| | (394 | ) | | — |
| | — |
| | (394 | ) |
Excess tax benefits from vesting of restricted stock units | | — |
| | — |
| | — |
| | 105 |
| | — |
| | — |
| | 105 |
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Balance, September 30, 2016 | | $ | — |
| | 16,137,999 |
| | $ | 3,000 |
| | $ | 21,056 |
| | $ | 138,668 |
| | $ | 2,140 |
| | $ | 164,864 |
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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 |
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Cash dividends declared, $0.53 per common share | | — |
| | — |
| | — |
| | — |
| | (8,580 | ) | | — |
| | (8,580 | ) |
Stock-based compensation costs | | — |
| | — |
| | — |
| | 1,932 |
| | — |
| | — |
| | 1,932 |
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Issuance of common stock upon vesting of restricted | |
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stock units, net of shares withheld for payroll taxes | | — |
| | 77,673 |
| | — |
| | (631 | ) | | — |
| | — |
| | (631 | ) |
Balance, September 30, 2017 | | $ | — |
| | 16,215,672 |
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| $ | 3,000 |
| | $ | 22,763 |
| | $ | 152,252 |
| | $ | 72 |
| | $ | 178,087 |
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(in thousands, except share and per share data) | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2020 |
| | | | | | | | | | | | Accumulated | | |
| | | | | | | | Additional | | | | Other | | |
| | Preferred | | Common Stock | | Paid-In | | Retained | | Comprehensive | | |
| | Stock | | Shares | | Amount | | Capital | | Earnings | | Loss | | Total |
Balance, December 31, 2019 | | $ | — | | | 16,379,752 | | | $ | 3,000 | | | $ | 27,260 | | | $ | 184,821 | | | $ | (3,261) | | | $ | 211,820 | |
Net income | | — | | | — | | | — | | | — | | | 24,158 | | | 0 | | | 24,158 | |
Other comprehensive loss, net of tax | | — | | | — | | | — | | | — | | | — | | | (11,268) | | | (11,268) | |
Cash dividends declared, $0.63 per common share | | — | | | — | | | — | | | — | | | (10,357) | | | | | (10,357) | |
Stock-based compensation costs | | — | | | — | | | — | | | 1,716 | | | — | | | — | | | 1,716 | |
Issuance of common stock upon vesting of restricted stock units, net of shares withheld for payroll taxes | | 0 | | | 89,520 | | | — | | | (749) | | | — | | | — | | | (749) | |
Balance, September 30, 2020 | | $ | — | | | 16,469,272 | | | $ | 3,000 | | | $ | 28,227 | | | $ | 198,622 | | | $ | (14,529) | | | $ | 215,320 | |
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| | Nine Months Ended September 30, 2019 |
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| | | | | | | | Additional | | | | Other | | |
| | Preferred | | Common Stock | | Paid-In | | Retained | | Comprehensive | | |
| | Stock | | Shares | | Amount | | Capital | | Earnings | | Income (Loss) | | Total |
Balance, December 31, 2018 | | $ | 0 | | | 16,295,494 | | | $ | 3,000 | | | $ | 25,128 | | | $ | 169,709 | | | $ | (6,814) | | | $ | 191,023 | |
Net income | | — | | | — | | | — | | | — | | | 21,083 | | | — | | | 21,083 | |
Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | — | | | 822 | | | 822 | |
Cash dividends declared, $0.62 per common share | | — | | | — | | | — | | | — | | | (10,138) | | | — | | | (10,138) | |
Stock-based compensation costs | | — | | | — | | | — | | | 2,208 | | | — | | | — | | | 2,208 | |
Issuance of common stock upon vesting of restricted stock units, net of shares withheld for payroll taxes | | 0 | | | 84,258 | | | 0 | | | (861) | | | 0 | | | 0 | | | (861) | |
Balance, September 30, 2019 | | $ | — | | | 16,379,752 | | | $ | 3,000 | | | $ | 26,475 | | | $ | 180,654 | | | $ | (5,992) | | | $ | 204,137 | |
See Notes to Consolidated Financial Statements.
West Bancorporation, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(unaudited)
| | West Bancorporation, Inc. and Subsidiary | | | | | |
Consolidated Statements of Cash Flows | | | | | |
(unaudited) | | | | | |
| | Nine Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2017 | | 2016 | (in thousands) | | 2020 | | 2019 |
Cash Flows from Operating Activities: | | | | | Cash Flows from Operating Activities: | | | | |
Net income | | $ | 18,876 |
| | $ | 16,985 |
| Net income | | $ | 24,158 | | | $ | 21,083 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | Adjustments to reconcile net income to net cash provided by operating activities: | |
Provision for loan losses | | — |
| | 900 |
| Provision for loan losses | | 8,000 | | | 300 | |
Net amortization and accretion | | 2,921 |
| | 3,293 |
| Net amortization and accretion | | 1,628 | | | 2,895 | |
Investment securities gains, net | | (423 | ) | | (60 | ) | |
Investment securities (gains) losses, net | | Investment securities (gains) losses, net | | (81) | | | 64 | |
Stock-based compensation | | 1,932 |
| | 1,278 |
| Stock-based compensation | | 1,716 | | | 2,208 | |
Increase in cash value of bank-owned life insurance | | (484 | ) | | (492 | ) | Increase in cash value of bank-owned life insurance | | (427) | | | (482) | |
Gain from bank-owned life insurance | | (307 | ) | | (443 | ) | |
| Gain on sale of premises | | Gain on sale of premises | | 0 | | | (307) | |
Depreciation | | 1,007 |
| | 740 |
| Depreciation | | 1,131 | | | 1,060 | |
Deferred income taxes | | 413 |
| | 253 |
| |
(Benefit) provision for deferred income taxes | | (Benefit) provision for deferred income taxes | | (1,693) | | | 155 | |
Change in assets and liabilities: | | | | | 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 |
| |
Increase in accrued interest receivable | | Increase in accrued interest receivable | | (3,937) | | | (364) | |
Increase in other assets | | Increase in other assets | | (231) | | | (932) | |
Increase in accrued expenses and other liabilities | | Increase in accrued expenses and other liabilities | | 798 | | | 1,623 | |
Net cash provided by operating activities | | 21,979 |
| | 22,312 |
| Net cash provided by operating activities | | 31,062 | | | 27,303 | |
Cash Flows from Investing Activities: | | |
| | |
| Cash Flows from Investing Activities: | | | | |
Proceeds from sales of securities available for sale | | 74,224 |
| | 1,544 |
| Proceeds from sales of securities available for sale | | 133,212 | | | 156,437 | |
Proceeds from maturities and calls of investment securities | | 38,529 |
| | 46,190 |
| |
Proceeds from maturities and calls of securities available for sale | | Proceeds from maturities and calls of securities available for sale | | 54,736 | | | 33,477 | |
Purchases of securities available for sale | | (267,133 | ) | | — |
| Purchases of securities available for sale | | (158,540) | | | (134,548) | |
Purchases of Federal Home Loan Bank stock | | (16,794 | ) | | (16,907 | ) | Purchases of Federal Home Loan Bank stock | | (9,334) | | | (23,378) | |
Proceeds from redemption of Federal Home Loan Bank stock | | 15,309 |
| | 16,887 |
| Proceeds from redemption of Federal Home Loan Bank stock | | 9,920 | | | 23,730 | |
Net increase in loans | | (56,789 | ) | | (136,116 | ) | Net increase in loans | | (305,594) | | | (114,847) | |
Purchase of bank-owned life insurance | | Purchase of bank-owned life insurance | | (7,200) | | | 0 | |
Proceeds from sale of premises | | Proceeds from sale of premises | | 0 | | | 604 | |
Purchases of premises and equipment | | (866 | ) | | (10,201 | ) | Purchases of premises and equipment | | (605) | | | (708) | |
Proceeds of principal and earnings from bank-owned life insurance | | 451 |
| | 812 |
| |
| Net cash used in investing activities | | (213,069 | ) | | (97,791 | ) | Net cash used in investing activities | | (283,405) | | | (59,233) | |
Cash Flows from Financing Activities: | | |
| | |
| Cash Flows from Financing Activities: | | | | |
Net increase in deposits | | 104,661 |
| | 50,927 |
| Net increase in deposits | | 282,024 | | | 130,278 | |
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 |
| | — |
| |
Net decrease in federal funds purchased | | Net decrease in federal funds purchased | | (310) | | | (16,450) | |
| Net increase (decrease) in Federal Home Loan Bank advances | | Net increase (decrease) in Federal Home Loan Bank advances | | (5,000) | | | 15,000 | |
Principal payments on long-term debt | | (2,934 | ) | | (2,458 | ) | Principal payments on long-term debt | | (712) | | | (4,086) | |
Common stock dividends paid | | (8,580 | ) | | (8,057 | ) | Common stock dividends paid | | (10,357) | | | (10,138) | |
Restricted stock units withheld for payroll taxes | | (631 | ) | | (394 | ) | Restricted stock units withheld for payroll taxes | | (749) | | | (861) | |
Net cash provided by financing activities | | 153,751 |
| | 53,678 |
| Net cash provided by financing activities | | 264,896 | | | 113,743 | |
Net (decrease) in cash and cash equivalents | | (37,339 | ) | | (21,801 | ) | |
Net increase in cash and cash equivalents | | Net increase in cash and cash equivalents | | 12,553 | | | 81,813 | |
Cash and Cash Equivalents: | | | | | Cash and Cash Equivalents: | |
Beginning | | 76,836 |
| | 72,651 |
| Beginning | | 53,290 | | | 47,474 | |
Ending | | $ | 39,497 |
| | $ | 50,850 |
| Ending | | $ | 65,843 | | | $ | 129,287 | |
| | | | | | | | |
Supplemental Disclosures of Cash Flow Information: | | | | | Supplemental Disclosures of Cash Flow Information: | |
Cash payments for: | | | | | Cash payments for: | |
Interest | | $ | 8,667 |
| | $ | 5,742 |
| Interest | | $ | 15,034 | | | $ | 23,726 | |
Income taxes | | 6,410 |
| | 5,160 |
| Income taxes | | 7,590 | | | 3,280 | |
| Supplemental Disclosure of Noncash Investing Activities: | | Supplemental Disclosure of Noncash Investing Activities: | |
Establishment of lease liability and right-of-use asset | | Establishment of lease liability and right-of-use asset | | $ | 0 | | | $ | 10,435 | |
See Notes to Consolidated Financial Statements.
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.Commission (SEC). Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to such rules and regulations. Although management believes that the disclosures are adequate to make the information presented understandable, it is suggested that these interim consolidated financial statements be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2016.2019 filed with the SEC on February 27, 2020. 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, 20172020 and December 31, 2016,2019, net income, and comprehensive income and changes in stockholders' equity for the three and nine months ended September 30, 20172020 and 2016,2019, and cash flows for the nine months ended September 30, 20172020 and 2016.2019. 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.special purpose subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. In accordance with GAAP, West Bancorporation Capital Trust I is recorded on the books of the Company using the equity method of accounting and is not consolidated.
Current accounting developments: In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance in this update supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the industry topics of the Codification. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2017. The Company's revenue is primarily comprised of interest income on financial instruments, including investment securities and loans, which are excluded from the scope of ASU 2014-09. The Company does not expect the guidance to have a material impact on the Company's consolidated financial statements. The most significant impact of the update for the Company may be additional noninterest income disclosure requirements.
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 has concluded that the remaining requirements of this update are not expected 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 guidance is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for leases with lease terms of more than 12 months. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2018, and is to be applied on a modified retrospective basis. The Company currently leases its main location and space for six other branch offices and operational departments under operating leases that will result in recognition of lease assets and lease liabilities on the consolidated balance sheets under the ASU. The amount of assets and liabilities added to the balance sheet are not expected to have a material impact on the Company's consolidated financial statements per preliminary estimates.
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 was effective for annual periods beginning after December 15, 2016. Portions of the amended guidance were to be applied using a modified retrospective transition method, and others require prospective application. Upon adoption of this update on January 1, 2017, the Company made the accounting policy election to account for forfeitures as they occur. This resulted in no effect on the Company's consolidated financial 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. TheUnder the update, the income statement reflectswill reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount of financial assets. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. The allowance for credit losses for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination that are measured at amortized cost basis 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 update. Credit losses relating to available-for-saleavailable for sale debt securities should be recorded through an allowance for credit losses. For public
In December 2019, the FASB issued ASU No. 2019-10, Financial Instruments-Credit Losses (Topic 326). This update amends the effective date of ASU No. 2016-13 for certain entities, including smaller reporting companies the update is effective for annual periodsuntil fiscal years beginning after December 15, 2019,2022, 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, with early adoption permitted. The Company's early adoption of the update as of January 1, 2017, did not have a material impact on the Company's consolidated financial statements.
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.periods. Early adoption is permitted, including adoption in an interim period.permitted. The one-time determination date for identifying as a smaller reporting company was November 15, 2019. The Company met the definition of a smaller reporting company as of this date and plans to adopt the standard with the amended effective date. The Company does not plan to early adopt this standard, but continues to work through implementation. The Company continues collecting and retaining loan and credit data and evaluating various loss estimation models. While we currently cannot reasonably estimate the impact of adopting this standard, we expect the guidance to have a material impact onwill be influenced by the Company's consolidated financial statements.composition, characteristics and quality of our loan and securities portfolios, as well as the general economic conditions and forecasts as of the adoption date.
West Bancorporation, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
(dollars in thousands, except per share data)
In August 2017,2018, the FASB issued ASU 2017-12, Derivatives and HedgingNo. 2018-13, Fair Value Measurement (Topic 815)820): Targeted ImprovementsDisclosure Framework - Changes to Accountingthe Disclosure Requirements for Hedging ActivitiesFair Value Measurement. The amendments in this update better align an entity's risk management activities and financial reportingmodify the disclosure requirements 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, thefair value measurements by removing, modifying, or adding certain disclosures. The update is effective for interim and annual periods in fiscal years beginning after December 15, 2019, with early adoption permitted for the removed disclosures and delayed adoption until the fiscal year 2020 permitted for the new disclosures. The removed and modified disclosures will be adopted on a retrospective basis, and the new disclosures will be adopted on a prospective basis. The adoption did not have a material effect on the Company’s consolidated financial statements.
In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Financial Instruments - Credit Losses (ASC 326), Derivatives and Hedging (ASC 815), and Financial Instruments (ASC 825). The amendments in the ASU improve the Codification by eliminating inconsistencies and providing clarifications. The amended guidance in this ASU related to the credit losses will be effective for the Company for fiscal years and interim 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.2022. The Company is currently assessingevaluating the impact of the ASU on the Company’s consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide optional guidance butfor a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. It provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact of the reference rate reform on the Company’s consolidated financial statements.
In October 2020, the FASB issued ASU No. 2020-08, Codification Improvements to Subtopic 310-20, Receivables-Nonrefundable Fees and Other Costs. The amendments in this update clarify that an entity should reevaluate whether a callable debt security is within the scope of ASC paragraph 310-20-35-33 for each reporting period. The amendments in this update are effective for public business entities beginning after December 15, 2020. The Company 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, 20172020 and 20162019 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) | 2017 | | 2016 | | 2017 | | 2016 | (in thousands, except per share data) | 2020 | | 2019 | | 2020 | | 2019 |
Net income | $ | 6,405 |
| | $ | 5,813 |
| | $ | 18,876 |
| | $ | 16,985 |
| Net income | $ | 8,100 | | | $ | 7,526 | | | $ | 24,158 | | | $ | 21,083 | |
| | | | | | | | | | | | | | | |
Weighted average common shares outstanding | 16,213 |
| | 16,135 |
| | 16,186 |
| | 16,110 |
| Weighted average common shares outstanding | 16,470 | | | 16,380 | | | 16,439 | | | 16,352 | |
Weighted average effect of restricted stock units outstanding | 118 |
| | 51 |
| | 127 |
| | 47 |
| Weighted average effect of restricted stock units outstanding | 54 | | | 86 | | | 59 | | | 79 | |
Diluted weighted average common shares outstanding | 16,331 |
| | 16,186 |
| | 16,313 |
| | 16,157 |
| Diluted weighted average common shares outstanding | 16,524 | | | 16,466 | | | 16,498 | | | 16,431 | |
| |
| | |
| | |
| | |
| | | | | | | | |
Basic earnings per common share | $ | 0.40 |
| | $ | 0.36 |
| | $ | 1.17 |
| | $ | 1.05 |
| Basic earnings per common share | $ | 0.49 | | | $ | 0.46 | | | $ | 1.47 | | | $ | 1.29 | |
Diluted earnings per common share | $ | 0.39 |
| | $ | 0.36 |
| | $ | 1.16 |
| | $ | 1.05 |
| Diluted earnings per common share | $ | 0.49 | | | $ | 0.46 | | | $ | 1.46 | | | $ | 1.28 | |
Number of anti-dilutive common stock equivalents excluded from diluted earnings per share computation | 24 |
| | 88 |
| | 14 |
| | 106 |
| Number of anti-dilutive common stock equivalents excluded from diluted earnings per share computation | 243 | | | 160 | | | 251 | | | 183 | |
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, 20172020 and December 31, 2016.2019.
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized (Losses) | | Fair Value |
Securities available for sale: | | | | | | | |
State and political subdivisions | $ | 106,200 | | | $ | 2,482 | | | $ | (492) | | | $ | 108,190 | |
Collateralized mortgage obligations (1) | 132,859 | | | 6,058 | | | 0 | | | 138,917 | |
Mortgage-backed securities (1) | 74,710 | | | 730 | | | (24) | | | 75,416 | |
Collateralized loan obligations | 52,820 | | | 65 | | | (1,321) | | | 51,564 | |
Corporate notes and other investments | 300 | | | 0 | | | 0 | | | 300 | |
| $ | 366,889 | | | $ | 9,335 | | | $ | (1,837) | | | $ | 374,387 | |
| | | | | | | |
| | | | | | | |
| December 31, 2019 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized (Losses) | | Fair Value |
Securities available for sale: | | | | | | | |
State and political subdivisions | $ | 45,442 | | | $ | 1,736 | | | $ | 0 | | | $ | 47,178 | |
Collateralized mortgage obligations (1) | 180,899 | | | 1,651 | | | (629) | | | 181,921 | |
Mortgage-backed securities (1) | 73,038 | | | 225 | | | (233) | | | 73,030 | |
Asset-backed securities (2) | 17,551 | | | 66 | | | (17) | | | 17,600 | |
Collateralized loan obligations | 64,939 | | | 21 | | | (128) | | | 64,832 | |
Corporate notes and other investments | 15,300 | | | 0 | | | (1,283) | | | 14,017 | |
| $ | 397,169 | | | $ | 3,699 | | | $ | (2,290) | | | $ | 398,578 | |
|
| | | | | | | | | | | | | | | |
| 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 subdivisions | 133,300 |
| | 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 securities | 2,130 |
| | — |
| | (430 | ) | | 1,700 |
|
Corporate notes | 29,288 |
| | 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 |
|
| |
| | |
| | |
| | |
|
| December 31, 2016 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized (Losses) | | Fair Value |
Securities available for sale: | | | | | | | |
U.S. government agencies and corporations | $ | 2,524 |
| | $ | 69 |
| | $ | — |
| | $ | 2,593 |
|
State and political subdivisions | 64,551 |
| | 376 |
| | (591 | ) | | 64,336 |
|
Collateralized mortgage obligations (1) | 103,038 |
| | 255 |
| | (1,343 | ) | | 101,950 |
|
Mortgage-backed securities (1) | 80,614 |
| | 341 |
| | (797 | ) | | 80,158 |
|
Trust preferred security | 1,784 |
| | — |
| | (534 | ) | | 1,250 |
|
Corporate notes | 10,326 |
| | 25 |
| | (1 | ) | | 10,350 |
|
| $ | 262,837 |
| | $ | 1,066 |
| | $ | (3,266 | ) | | $ | 260,637 |
|
| | | | | | | |
Securities held to maturity: | | | | | | | |
State and political subdivisions | $ | 48,386 |
| | $ | 70 |
| | $ | (667 | ) | | $ | 47,789 |
|
| |
(1) | All collateralized mortgage obligations and mortgage-backed securities consist of residential mortgage pass-through securities guaranteed by FHLMC or FNMA, real estate mortgage investment conduits guaranteed by FNMA, FHLMC or GNMA, and commercial mortgage pass-through securities guaranteed by the SBA. |
| |
(2) | Pass-through asset-backed securities guaranteed by the SBA, representing participating interests in pools of long-term debentures issued by state and local development companies certified by the SBA. |
(1)All collateralized mortgage obligations and mortgage-backed securities consist of residential mortgage pass-through securities and real estate mortgage investment conduits guaranteed by FNMA, FHLMC or GNMA, and commercial mortgage pass-through securities guaranteed by the SBA.
(2)Pass-through asset-backed securities guaranteed by the SBA, representing participating interests in pools of commercial working capital and equipment loans.
Investment securities with an amortized cost of approximately $123,457$165,424 and $141,995$148,257 as of September 30, 20172020 and December 31, 2016,2019, 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.
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, 2017,2020, by contractual maturity, are shown below. Certain securities have call features that allow the issuer to call the securities prior to maturity. Expected maturities may differ from contractual maturities for collateralized mortgage obligations mortgage-backed securities and asset-backedmortgage-backed securities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Therefore, collateralized mortgage obligations mortgage-backed securities and asset-backedmortgage-backed securities are not included in the maturity categories within the following maturity summary.
| | | | | | | | | | | |
| September 30, 2020 |
| Amortized Cost | | Fair Value |
Due in one year or less | $ | 1,125 | | | $ | 1,130 | |
Due after one year through five years | 20,205 | | | 19,829 | |
Due after five years through ten years | 41,999 | | | 41,127 | |
Due after ten years | 95,991 | | | 97,968 | |
| 159,320 | | | 160,054 | |
Collateralized mortgage obligations and mortgage-backed securities | 207,569 | | | 214,333 | |
| $ | 366,889 | | | $ | 374,387 | |
|
| | | | | | | |
| September 30, 2017 |
| Amortized Cost | | Fair Value |
Due in one year or less | $ | 2,117 |
| | $ | 2,121 |
|
Due after one year through five years | 5,633 |
| | 5,660 |
|
Due after five years through ten years | 43,213 |
| | 43,819 |
|
Due after ten years | 116,255 |
| | 116,347 |
|
| 167,218 |
| | 167,947 |
|
Collateralized mortgage obligations, mortgage-backed and asset-backed securities | 251,271 |
| | 250,427 |
|
| $ | 418,489 |
| | $ | 418,374 |
|
The amortized cost and fair value of investment securities held to maturity as of September 30, 2017, by contractual maturity, are shown below. Certain securities have call features that allow the issuer to call the securities prior to maturity.
|
| | | | | | | |
| September 30, 2017 |
| Amortized Cost | | Fair Value |
Due in one year or less | $ | — |
| | $ | — |
|
Due after one year through five years | 1,595 |
| | 1,600 |
|
Due after five years through ten years | 24,936 |
| | 25,364 |
|
Due after ten years | 19,066 |
| | 19,392 |
|
| $ | 45,597 |
| | $ | 46,356 |
|
The details of the sales of investment securities available for sale for the three and nine months ended September 30, 20172020 and 20162019 are summarized in the following table.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Proceeds from sales | $ | 54,631 | | | $ | 11,095 | | | $ | 133,212 | | | $ | 156,437 | |
Gross gains on sales | 318 | | | 37 | | | 1,773 | | | 868 | |
Gross losses on sales | 162 | | | 36 | | | 1,692 | | | 932 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Proceeds from sales | $ | 21,204 |
| | $ | — |
| | $ | 74,224 |
| | $ | 1,544 |
|
Gross gains on sales | 197 |
| | — |
| | 527 |
| | 60 |
|
Gross losses on sales | — |
| | — |
| | 104 |
| | — |
|
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, 20172020 and December 31, 2016.2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 |
| Less than 12 months | | 12 months or longer | | Total |
| Fair Value | | Gross Unrealized (Losses) | | Fair Value | | Gross Unrealized (Losses) | | Fair Value | | Gross Unrealized (Losses) |
Securities available for sale: | | | | | | | | | | | |
State and political subdivisions | $ | 30,977 | | | $ | (492) | | | $ | 0 | | | $ | 0 | | | $ | 30,977 | | | $ | (492) | |
Mortgage-backed securities | 14,432 | | | (24) | | | 0 | | | 0 | | | 14,432 | | | (24) | |
Collateralized loan obligations | 31,907 | | | (907) | | | 14,581 | | | (414) | | | 46,488 | | | (1,321) | |
| $ | 77,316 | | | $ | (1,423) | | | $ | 14,581 | | | $ | (414) | | | $ | 91,897 | | | $ | (1,837) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| December 31, 2019 |
| Less than 12 months | | 12 months or longer | | Total |
| Fair Value | | Gross Unrealized (Losses) | | Fair Value | | Gross Unrealized (Losses) | | Fair Value | | Gross Unrealized (Losses) |
Securities available for sale: | | | | | | | | | | | |
| | | | | | | | | | | |
Collateralized mortgage obligations | $ | 54,521 | | | $ | (335) | | | $ | 35,546 | | | $ | (294) | | | $ | 90,067 | | | $ | (629) | |
Mortgage-backed securities | 45,132 | | | (174) | | | 4,687 | | | (59) | | | 49,819 | | | (233) | |
Asset-backed securities | 3,641 | | | (4) | | | 7,075 | | | (13) | | | 10,716 | | | (17) | |
Collateralized loan obligations | 42,823 | | | (128) | | | 0 | | | 0 | | | 42,823 | | | (128) | |
Corporate notes and other investments | 4,499 | | | (501) | | | 9,518 | | | (782) | | | 14,017 | | | (1,283) | |
| $ | 150,616 | | | $ | (1,142) | | | $ | 56,826 | | | $ | (1,148) | | | $ | 207,442 | | | $ | (2,290) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2017 |
| Less than 12 months | | 12 months or longer | | Total |
| Fair Value | | Gross Unrealized (Losses) | | Fair Value | | Gross Unrealized (Losses) | | Fair Value | | Gross Unrealized (Losses) |
Securities available for sale: | | | | | | | | | | | |
U.S. government agencies and corporations | $ | 2,489 |
| | $ | (11 | ) | | $ | — |
| | $ | — |
| | $ | 2,489 |
| | $ | (11 | ) |
State and political subdivisions | 54,004 |
| | (486 | ) | | — |
| | — |
| | 54,004 |
| | (486 | ) |
Collateralized mortgage obligations | 102,016 |
| | (830 | ) | | 18,001 |
| | (251 | ) | | 120,017 |
| | (1,081 | ) |
Mortgage-backed securities | 27,500 |
| | (123 | ) | | — |
| | — |
| | 27,500 |
| | (123 | ) |
Asset-backed securities | 20,217 |
| | (139 | ) | | — |
| | — |
| | 20,217 |
| | (139 | ) |
Trust preferred securities | — |
| | — |
| | 1,700 |
| | (430 | ) | | 1,700 |
| | (430 | ) |
Corporate notes | 7,410 |
| | (92 | ) | | — |
| | — |
| | 7,410 |
| | (92 | ) |
| $ | 213,636 |
| | $ | (1,681 | ) | | $ | 19,701 |
| | $ | (681 | ) | | $ | 233,337 |
| | $ | (2,362 | ) |
| |
| | |
| | |
| | |
| | |
| | |
|
Securities held to maturity: | | | | | | | | | | | |
State and political subdivisions | $ | 1,658 |
| | $ | (7 | ) | | $ | 1,755 |
| | $ | (41 | ) | | $ | 3,413 |
| | $ | (48 | ) |
| | | | | | | | | | | |
| | | | | | | | | | | |
| December 31, 2016 |
| Less than 12 months | | 12 months or longer | | Total |
| Fair Value | | Gross Unrealized (Losses) | | Fair Value | | Gross Unrealized (Losses) | | Fair Value | | Gross Unrealized (Losses) |
Securities available for sale: | | | | | | | | | | | |
State and political subdivisions | $ | 34,903 |
| | $ | (591 | ) | | $ | — |
| | $ | — |
| | $ | 34,903 |
| | $ | (591 | ) |
Collateralized mortgage obligations | 75,771 |
| | (1,255 | ) | | 2,538 |
| | (88 | ) | | 78,309 |
| | (1,343 | ) |
Mortgage-backed securities | 60,221 |
| | (797 | ) | | — |
| | — |
| | 60,221 |
| | (797 | ) |
Trust preferred security | — |
| | — |
| | 1,250 |
| | (534 | ) | | 1,250 |
| | (534 | ) |
Corporate notes | 1,499 |
| | (1 | ) | | — |
| | — |
| | 1,499 |
| | (1 | ) |
| $ | 172,394 |
| | $ | (2,644 | ) | | $ | 3,788 |
| | $ | (622 | ) | | $ | 176,182 |
| | $ | (3,266 | ) |
| | | | | | | | | | | |
Securities held to maturity: | | | | | | | | | | | |
State and political subdivisions | $ | 32,976 |
| | $ | (458 | ) | | $ | 3,968 |
| | $ | (209 | ) | | $ | 36,944 |
| | $ | (667 | ) |
As of September 30, 2017, the2020, securities available for sale and held to maturity securities with unrealized losses included one U.S. government agency security, 8911 state and political subdivision securities, 30 collateralized mortgage obligation securities, eight1 mortgage-backed securities, three asset-backed securities, one trust preferred security and two corporate notes.8 collateralized loan obligation securities. Collateralized loan obligations are debt securities backed by pools of senior secured commercial loans to a diverse group of companies across a broad spectrum of industries. At September 30, 2020, the Company only owned collateralized loan obligations that were AAA or AA rated. The Company believed the unrealized losses on investmentssecurities available for sale and held to maturity as of September 30, 20172020 were due to market conditions rather than reduced estimated cash flows. TheAt September 30, 2020, the Company doesdid not intend to sell these securities, doesdid not anticipate that these securities will be required to be sold before anticipated recovery, and expectsexpected full principal and interest to be collected. Therefore, the Company did not consider these investmentssecurities to have OTTIother than temporary impairment as of September 30, 2017.2020.
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, 20172020 and December 31, 2016.2019.
| | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
Commercial | $ | 641,873 | | | $ | 431,044 | |
Real estate: | | | |
Construction, land and land development | 307,328 | | | 264,193 | |
1-4 family residential first mortgages | 59,043 | | | 54,475 | |
Home equity | 10,566 | | | 12,380 | |
Commercial | 1,230,335 | | | 1,175,024 | |
Consumer and other | 6,051 | | | 6,787 | |
| 2,255,196 | | | 1,943,903 | |
Net unamortized fees and costs | (7,771) | | | (2,240) | |
| $ | 2,247,425 | | | $ | 1,941,663 | |
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Commercial | $ | 316,716 |
| | $ | 334,014 |
|
Real estate: | | | |
Construction, land and land development | 249,453 |
| | 205,610 |
|
1-4 family residential first mortgages | 49,369 |
| | 47,184 |
|
Home equity | 14,558 |
| | 18,057 |
|
Commercial | 820,144 |
| | 788,000 |
|
Consumer and other loans | 8,235 |
| | 8,355 |
|
| 1,458,475 |
| | 1,401,220 |
|
Net unamortized fees and costs | (1,570 | ) | | (1,350 | ) |
| $ | 1,456,905 |
| | $ | 1,399,870 |
|
Included in commercial loans at September 30, 2020, were $224,489 of loans originated in the Paycheck Protection Program (PPP), which was established by the Coronavirus Aid, Relief and Economic Security Act (CARES Act), enacted on March 27, 2020, in response to the Coronavirus Disease 2019 (COVID-19) pandemic. The PPP is administered by the Small Business Administration (SBA). PPP loans may be forgiven by the SBA and are 100 percent guaranteed by the SBA. Therefore, no allowance for loan losses is allocated to PPP loans.
Real estate loans of approximately $710,000$990,000 and $680,000$910,000 were pledged as security for Federal Home Loan Bank (FHLB) advances as of September 30, 20172020 and December 31, 2016,2019, 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.the terms of the loan. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. Loans are reported by the portfolio segments identified above and are analyzed by management on this basis. All loan policies identified below apply to all segments of the loan portfolio.
Delinquencies are determined based on the payment terms of the individual loan agreements. The accrual of interest on past due and other impaired loans is generally discontinued at 90 days past due or when, in the opinion of management, the borrower may be unable to make all payments pursuant to contractual terms. Unless considered collectible, all interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income, if accrued in the current year, or charged to the allowance for loan losses, if accrued in the prior year. Generally, all payments received while a loan is on nonaccrual status are applied to the principal balance of the loan. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.
A loan is classified as a troubled debt restructured (TDR) loan when the Company separately concludes that a borrower is experiencing financial difficulties and a concession is granted that would not otherwise be considered. Concessions may include a restructuring of the loan terms to alleviate the burden of the borrower's cash requirements, such as an extension of the payment terms beyond the original maturity date or a change in the interest rate charged. TDR loans with extended payment terms are accounted for as impaired until performance is established. A change to the interest rate would change the classification of a loan to a TDR loan if the restructured loan yields a rate that is below a market rate for that of a new loan with comparable risk. TDR loans with below-market rates are considered impaired until fully collected. TDR loans may also be reported as nonaccrual or 90 days past due 90 days if they are not performing per the restructured terms.
West Bancorporation, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
(dollars in thousands, except per share data)
The CARES Act also provided financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time in certain circumstances. This temporary suspension may only be applied to modifications of loans that were not more than 30 days past due as of December 31, 2019 and may not be applied to modifications that are not related to the COVID-19 pandemic. If elected, the temporary suspension may be applied to eligible modifications executed during the period beginning on March 1, 2020 and ending on the earlier of December 31, 2020 or 60 days after the termination of the COVID-19 national emergency. On March 22, 2020, April 7, 2020 and August 3, 2020, federal banking regulators in consultation with FASB issued interagency statements that included similar guidance on their approach for the accounting of loan modifications in light of the economic impact of the COVID-19 pandemic that provide that short-term modifications and additional accommodations made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs.
At September 30, 2020, COVID-19-related loan modifications totaled approximately $434,361. The initial modifications primarily included a delay of principal and/or interest payments for up to six months. Additional modifications, including payment deferrals for up to an additional six months, have been made for one hotel company totaling $7,364 and one movie theater company totaling $16,195 as of September 30, 2020. Additional modifications are expected to be made for approximately $67,000 of loans in the hotel industry in mid-November 2020, at the end of the term for the initial modifications. Modified loans continue to accrue interest and are evaluated for past due status based on the revised payment 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.
West Bancorporation, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
(dollars in thousands, except per share data)
TDR loans totaled $247$0 and $426$4 as of September 30, 20172020 and December 31, 2016,2019, respectively, and were included in the nonaccrual loans.category. There were no0 loan modifications considered to be TDR that occurred during the three and nine months ended September 30, 20172020 and 2016. No2019. NaN TDR loans that were modified within the twelve months preceding September 30, 20172020 and September 30, 20162019 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. As noted above, COVID-19 related loan modifications are not reported as TDRs.
West Bancorporation, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
(dollars in thousands, except per share data)
The following table summarizes the recorded investment in impaired loans by segment, broken down by loans with no related allowance for loan losses and loans with a related allowance and the amount of that allowance as of September 30, 20172020 and December 31, 2016.2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| Recorded Investment | | Unpaid Principal Balance | | Related Allowance | | Recorded Investment | | Unpaid Principal Balance | | Related Allowance |
With no related allowance recorded: | | | | | | | | | | | |
Commercial | $ | 0 | | | $ | 0 | | | $ | — | | | $ | 91 | | | $ | 91 | | | $ | — | |
Real estate: | | | | | | | | | | | |
Construction, land and land development | 0 | | | 0 | | | — | | | 0 | | | 0 | | | — | |
1-4 family residential first mortgages | 383 | | | 383 | | | — | | | 411 | | | 411 | | | — | |
Home equity | 0 | | | 0 | | | — | | | 31 | | | 31 | | | — | |
Commercial | 15,915 | | | 15,915 | | | — | | | 5 | | | 5 | | | — | |
Consumer and other | 0 | | | 0 | | | — | | | 0 | | | 0 | | | — | |
| 16,298 | | | 16,298 | | | — | | | 538 | | | 538 | | | — | |
With an allowance recorded: | | | | | | | | | | | |
Commercial | 1,474 | | | 1,474 | | | 210 | | | 0 | | | 0 | | | — | |
Real estate: | | | | | | | | | | | |
Construction, land and land development | 0 | | | 0 | | | — | | | 0 | | | 0 | | | — | |
1-4 family residential first mortgages | 0 | | | 0 | | | — | | | 0 | | | 0 | | | — | |
Home equity | 0 | | | 0 | | | — | | | 0 | | | 0 | | | — | |
Commercial | 0 | | | 0 | | | — | | | 0 | | | 0 | | | — | |
Consumer and other | 0 | | | 0 | | | — | | | 0 | | | 0 | | | — | |
| 1,474 | | | 1,474 | | | 210 | | | 0 | | | 0 | | | — | |
Total: | | | | | | | | | | | |
Commercial | 1,474 | | | 1,474 | | | 210 | | | 91 | | | 91 | | | 0 | |
Real estate: | | | | | | | | | | | |
Construction, land and land development | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
1-4 family residential first mortgages | 383 | | | 383 | | | 0 | | | 411 | | | 411 | | | 0 | |
Home equity | 0 | | | 0 | | | 0 | | | 31 | | | 31 | | | 0 | |
Commercial | 15,915 | | | 15,915 | | | 0 | | | 5 | | | 5 | | | 0 | |
Consumer and other | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| $ | 17,772 | | | $ | 17,772 | | | $ | 210 | | | $ | 538 | | | $ | 538 | | | $ | 0 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| Recorded 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 | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
1-4 family residential first mortgages | 94 |
| | 94 |
| | — |
| | 108 |
| | 108 |
| | — |
|
Home equity | 30 |
| | 30 |
| | — |
| | 41 |
| | 41 |
| | — |
|
Commercial | 247 |
| | 247 |
| | — |
| | 335 |
| | 335 |
| | — |
|
Consumer and other loans | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| 371 |
| | 371 |
| | — |
| | 519 |
| | 519 |
| | — |
|
With an allowance recorded: | | | | | | | | | | | |
Commercial | — |
| | — |
| | — |
| | 91 |
| | 91 |
| | 91 |
|
Real estate: | | | | | | | | | | | |
Construction, land and land development | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
1-4 family residential first mortgages | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Home equity | 23 |
| | 23 |
| | 23 |
| | 276 |
| | 276 |
| | 276 |
|
Commercial | 123 |
| | 123 |
| | 123 |
| | 136 |
| | 136 |
| | 136 |
|
Consumer and other loans | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| 146 |
| | 146 |
| | 146 |
| | 503 |
| | 503 |
| | 503 |
|
Total: | | | | | | | | | | | |
Commercial | — |
| | — |
| | — |
| | 126 |
| | 126 |
| | 91 |
|
Real estate: | | | | | | | | | | | |
Construction, land and land development | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
1-4 family residential first mortgages | 94 |
| | 94 |
| | — |
| | 108 |
| | 108 |
| | — |
|
Home equity | 53 |
| | 53 |
| | 23 |
| | 317 |
| | 317 |
| | 276 |
|
Commercial | 370 |
| | 370 |
| | 123 |
| | 471 |
| | 471 |
| | 136 |
|
Consumer and other loans | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| $ | 517 |
| | $ | 517 |
| | $ | 146 |
| | $ | 1,022 |
| | $ | 1,022 |
| | $ | 503 |
|
The balance of impaired loans at September 30, 20172020 and December 31, 20162019 was composed of 53 and 106 different borrowers, respectively. The Company has no0 commitments to advance additional funds on any of the impaired loans.
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, 20172020 and 2016.2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized |
With no related allowance recorded: | | | | | | | | | | | | | | | |
Commercial | $ | 0 | | | $ | 0 | | | $ | 546 | | | $ | 39 | | | $ | 54 | | | $ | 2 | | | $ | 796 | | | $ | 39 | |
Real estate: | | | | | | | | | | | | | | | |
Construction, land and land development | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
1-4 family residential first mortgages | 386 | | | 1 | | | 16 | | | 0 | | | 395 | | | 4 | | | 52 | | | 6 | |
Home equity | 0 | | | 0 | | | 35 | | | 0 | | | 3 | | | 0 | | | 34 | | | 2 | |
Commercial | 3,979 | | | 4 | | | 305 | | | 22 | | | 1,592 | | | 14 | | | 495 | | | 22 | |
Consumer and other | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| 4,365 | | | 5 | | | 902 | | | 61 | | | 2,044 | | | 20 | | | 1,377 | | | 69 | |
With an allowance recorded: | | | | | | | | | | | | | | | |
Commercial | 369 | | | 0 | | | 0 | | | 0 | | | 148 | | | 0 | | | 9 | | | 0 | |
Real estate: | | | | | | | | | | | | | | | |
Construction, land and land development | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
1-4 family residential first mortgages | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Home equity | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Commercial | 0 | | | 0 | | | 45 | | | 6 | | | 0 | | | 0 | | | 76 | | | 6 | |
Consumer and other | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| 369 | | | 0 | | | 45 | | | 6 | | | 148 | | | 0 | | | 85 | | | 6 | |
Total: | | | | | | | | | | | | | | | |
Commercial | 369 | | | 0 | | | 546 | | | 39 | | | 202 | | | 2 | | | 805 | | | 39 | |
Real estate: | | | | | | | | | | | | | | | |
Construction, land and land development | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
1-4 family residential first mortgages | 386 | | | 1 | | | 16 | | | 0 | | | 395 | | | 4 | | | 52 | | | 6 | |
Home equity | 0 | | | 0 | | | 35 | | | 0 | | | 3 | | | 0 | | | 34 | | | 2 | |
Commercial | 3,979 | | | 4 | | | 350 | | | 28 | | | 1,592 | | | 14 | | | 571 | | | 28 | |
Consumer and other | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| $ | 4,734 | | | $ | 5 | | | $ | 947 | | | $ | 67 | | | $ | 2,192 | | | $ | 20 | | | $ | 1,462 | | | $ | 75 | |
18
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 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 Recognized |
With no related allowance recorded: | | | | | | | | | | | | | | | |
Commercial | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 24 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Real estate: | | | | | | | | | | | | | | | |
Construction, land and land development | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 11 |
| | — |
|
1-4 family residential first mortgages | 97 |
| | — |
| | 124 |
| | — |
| | 101 |
| | — |
| | 242 |
| | 1 |
|
Home equity | 29 |
| | — |
| | — |
| | — |
| | 33 |
| | — |
| | — |
| | — |
|
Commercial | 262 |
| | — |
| | 377 |
| | — |
| | 291 |
| | — |
| | 407 |
| | — |
|
Consumer and other loans | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| 388 |
| | — |
| | 501 |
| | — |
| | 449 |
| | — |
| | 660 |
| | 1 |
|
With an allowance recorded: | | | | | | | | | | | | | | | |
Commercial | 62 |
| | — |
| | 130 |
| | — |
| | 78 |
| | — |
| | 135 |
| | — |
|
Real estate: | | | | | | | | | | | | | | | |
Construction, land and land development | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
1-4 family residential first mortgages | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Home equity | 157 |
| | — |
| | 254 |
| | — |
| | 223 |
| | — |
| | 261 |
| | — |
|
Commercial | 125 |
| | — |
| | 143 |
| | — |
| | 130 |
| | — |
| | 148 |
| | — |
|
Consumer and other loans | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| 344 |
| | — |
| | 527 |
| | — |
| | 431 |
| | — |
| | 544 |
| | — |
|
Total: | | | | | | | | | | | | | | | |
Commercial | 62 |
| | — |
| | 130 |
| | — |
| | 102 |
| | — |
| | 135 |
| | — |
|
Real estate: | | | | | | | | | | | | | | | |
Construction, land and land development | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 11 |
| | — |
|
1-4 family residential first mortgages | 97 |
| | — |
| | 124 |
| | — |
| | 101 |
| | — |
| | 242 |
| | 1 |
|
Home equity | 186 |
| | — |
| | 254 |
| | — |
| | 256 |
| | — |
| | 261 |
| | — |
|
Commercial | 387 |
| | — |
| | 520 |
| | — |
| | 421 |
| | — |
| | 555 |
| | — |
|
Consumer and other loans | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| $ | 732 |
| | $ | — |
| | $ | 1,028 |
| | $ | — |
| | $ | 880 |
| | $ | — |
| | $ | 1,204 |
| | $ | 1 |
|
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, 20172020 and December 31, 2016.2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 |
| 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 | $ | 1,700 | | | $ | 0 | | | $ | 0 | | | $ | 1,700 | | | $ | 638,699 | | | $ | 1,474 | | | $ | 641,873 | |
Real estate: | | | | | | | | | | | | | |
Construction, land and | | | | | | | | | | | | | |
land development | 0 | | | 0 | | | 0 | | | 0 | | | 307,328 | | | 0 | | | 307,328 | |
1-4 family residential | | | | | | | | | | | | | |
first mortgages | 92 | | | 0 | | | 0 | | | 92 | | | 58,568 | | | 383 | | | 59,043 | |
Home equity | 0 | | | 0 | | | 0 | | | 0 | | | 10,566 | | | 0 | | | 10,566 | |
Commercial | 0 | | | 0 | | | 0 | | | 0 | | | 1,214,420 | | | 15,915 | | | 1,230,335 | |
Consumer and other | 0 | | | 0 | | | 0 | | | 0 | | | 6,051 | | | 0 | | | 6,051 | |
Total | $ | 1,792 | | | $ | 0 | | | $ | 0 | | | $ | 1,792 | | | $ | 2,235,632 | | | $ | 17,772 | | | $ | 2,255,196 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 |
| 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 | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 430,953 | | | $ | 91 | | | $ | 431,044 | |
Real estate: | | | | | | | | | | | | | |
Construction, land and | | | | | | | | | | | | | |
land development | 0 | | | 0 | | | 0 | | | 0 | | | 264,193 | | | 0 | | | 264,193 | |
1-4 family residential | | | | | | | | | | | | | |
first mortgages | 76 | | | 0 | | | 0 | | | 76 | | | 53,988 | | | 411 | | | 54,475 | |
Home equity | 0 | | | 0 | | | 0 | | | 0 | | | 12,349 | | | 31 | | | 12,380 | |
Commercial | 0 | | | 152 | | | 0 | | | 152 | | | 1,174,867 | | | 5 | | | 1,175,024 | |
Consumer and other | 0 | | | 0 | | | 0 | | | 0 | | | 6,787 | | | 0 | | | 6,787 | |
Total | $ | 76 | | | $ | 152 | | | $ | 0 | | | $ | 228 | | | $ | 1,943,137 | | | $ | 538 | | | $ | 1,943,903 | |
19
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 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 |
Commercial | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 316,716 |
| | $ | — |
| | $ | 316,716 |
|
Real estate: | | | | | | | | | | | | | |
Construction, land and | | | | | | | | | | | | | |
land development | — |
| | — |
| | — |
| | — |
| | 249,453 |
| | — |
| | 249,453 |
|
1-4 family residential | | | | | | | | | | | | | |
first mortgages | — |
| | — |
| | — |
| | — |
| | 49,275 |
| | 94 |
| | 49,369 |
|
Home equity | 3 |
| | — |
| | — |
| | 3 |
| | 14,502 |
| | 53 |
| | 14,558 |
|
Commercial | — |
| | — |
| | — |
| | — |
| | 819,774 |
| | 370 |
| | 820,144 |
|
Consumer and other | — |
| | — |
| | — |
| | — |
| | 8,235 |
| | — |
| | 8,235 |
|
Total | $ | 3 |
| | $ | — |
| | $ | — |
| | $ | 3 |
| | $ | 1,457,955 |
| | $ | 517 |
| | $ | 1,458,475 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 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 |
Commercial | $ | 109 |
| | $ | — |
| | $ | — |
| | $ | 109 |
| | $ | 333,779 |
| | $ | 126 |
| | $ | 334,014 |
|
Real estate: | | | | | | | | | | | | | |
Construction, land and | | | | | | | | | | | | | |
land development | — |
| | — |
| | — |
| | — |
| | 205,610 |
| | — |
| | 205,610 |
|
1-4 family residential | | | | | | | | | | | | | |
first mortgages | 64 |
| | — |
| | — |
| | 64 |
| | 47,012 |
| | 108 |
| | 47,184 |
|
Home equity | — |
| | — |
| | — |
| | — |
| | 17,740 |
| | 317 |
| | 18,057 |
|
Commercial | — |
| | — |
| | — |
| | — |
| | 787,529 |
| | 471 |
| | 788,000 |
|
Consumer and other | — |
| | — |
| | — |
| | — |
| | 8,355 |
| | — |
| | 8,355 |
|
Total | $ | 173 |
| | $ | — |
| | $ | — |
| | $ | 173 |
| | $ | 1,400,025 |
| | $ | 1,022 |
| | $ | 1,401,220 |
|
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, 20172020 and December 31, 2016.2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 |
| Pass | | Watch | | Substandard | | Doubtful | | Total |
Commercial | $ | 638,425 | | | $ | 569 | | | $ | 2,879 | | | $ | 0 | | | $ | 641,873 | |
Real estate: | | | | | | | | | |
Construction, land and land development | 307,269 | | | 59 | | | 0 | | | 0 | | | 307,328 | |
1-4 family residential first mortgages | 58,078 | | | 335 | | | 630 | | | 0 | | | 59,043 | |
Home equity | 10,415 | | | 151 | | | 0 | | | 0 | | | 10,566 | |
Commercial | 1,188,395 | | | 25,136 | | | 16,804 | | | 0 | | | 1,230,335 | |
Consumer and other | 6,051 | | | 0 | | | 0 | | | 0 | | | 6,051 | |
Total | $ | 2,208,633 | | | $ | 26,250 | | | $ | 20,313 | | | $ | 0 | | | $ | 2,255,196 | |
| | | September 30, 2017 | | December 31, 2019 |
| Pass | | Watch | | Substandard | | Doubtful | | Total | | Pass | | Watch | | Substandard | | Doubtful | | Total |
Commercial | $ | 314,078 |
| | $ | 560 |
| | $ | 2,078 |
| | $ | — |
| | $ | 316,716 |
| Commercial | $ | 410,070 | | | $ | 18,680 | | | $ | 2,294 | | | $ | 0 | | | $ | 431,044 | |
Real estate: | | | | | | | | | | Real estate: | |
Construction, land and land development | 249,308 |
| | 145 |
| | — |
| | — |
| | 249,453 |
| Construction, land and land development | 264,132 | | | 61 | | | 0 | | | 0 | | | 264,193 | |
1-4 family residential first mortgages | 48,564 |
| | 552 |
| | 253 |
| | — |
| | 49,369 |
| 1-4 family residential first mortgages | 52,168 | | | 1,841 | | | 466 | | | 0 | | | 54,475 | |
Home equity | 14,377 |
| | 56 |
| | 125 |
| | — |
| | 14,558 |
| Home equity | 12,349 | | | 0 | | | 31 | | | 0 | | | 12,380 | |
Commercial | 800,622 |
| | 18,246 |
| | 1,276 |
| | — |
| | 820,144 |
| Commercial | 1,146,472 | | | 28,475 | | | 77 | | | 0 | | | 1,175,024 | |
Consumer and other | 8,196 |
| | 39 |
| | — |
| | — |
| | 8,235 |
| Consumer and other | 6,787 | | | 0 | | | 0 | | | 0 | | | 6,787 | |
Total | $ | 1,435,145 |
| | $ | 19,598 |
| | $ | 3,732 |
| | $ | — |
| | $ | 1,458,475 |
| Total | $ | 1,891,978 | | | $ | 49,057 | | | $ | 2,868 | | | $ | 0 | | | $ | 1,943,903 | |
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2016 |
| Pass | | Watch | | Substandard | | Doubtful | | Total |
Commercial | $ | 329,366 |
| | $ | 3,303 |
| | $ | 1,345 |
| | $ | — |
| | $ | 334,014 |
|
Real estate: | | | | | | | | | |
Construction, land and land development | 204,572 |
| | — |
| | 1,038 |
| | — |
| | 205,610 |
|
1-4 family residential first mortgages | 46,278 |
| | 798 |
| | 108 |
| | — |
| | 47,184 |
|
Home equity | 17,646 |
| | — |
| | 411 |
| | — |
| | 18,057 |
|
Commercial | 769,010 |
| | 18,392 |
| | 598 |
| | — |
| | 788,000 |
|
Consumer and other | 8,355 |
| | — |
| | — |
| | — |
| | 8,355 |
|
Total | $ | 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's financial condition is satisfactory and stable. The borrower has satisfactory debt service capacity, and the loan is well secured. The loan is performing as agreed, and the financial characteristics and trends fall in line with industry statistics.
Risk rating 5: The borrower's financial condition is less than satisfactory. The loan is still generally paying as agreed, but strained cash flows may cause some slowness in payments. The collateral values adequately preclude loss on the loan. Financial characteristics and trends lag industry statistics. There may be noncompliance with loan covenants.
Risk rating 6: The borrower's financial condition is deficient. Payment delinquencies may be more common. Collateral values still protect from loss, but margins are narrow. The loan may be reliant on secondary sources of repayment, including liquidation of collateral and guarantor support.
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 lendersbankers 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.loans included on the Watch List.
In addition to the Company's internal credit monitoring practices and procedures, an outsourced independent credit review function is in place to further assess assigned internal risk classifications and monitor compliance with internal lending policies and procedures.
In all portfolio segments, the primary risks are that a borrower's income stream diminishes to the point that the borrower is not able to make scheduled principal and interest payments and any collateral securing the loan declines in value. The risk of declining collateral values is present for most types of loans.
Commercial loans consist primarily of loans to businesses for various purposes, including revolving lines to finance current operations, inventory and accounts receivable, and capital expenditure loans to finance equipment and other fixed assets. These loans generally have short maturities, have either adjustable or fixed interest rates, and are either unsecured or secured by inventory, accounts receivable and/or fixed assets. For commercial loans, the primary source of repayment is from the operation of the business.
Real estate loans include various types of loans for which the Company holds real property as collateral, and consist of loans on commercial properties and single and multifamily residences. Real estate loans are typically structured to mature or reprice every five to ten years with payments based on amortization periods up to 30 years. The majority of construction loans are to contractors and developers for construction of commercial buildings or residential real estate. These loans typically have maturities of up to 24 months. The Company's loan policy includes minimum appraisal and other credit guidelines.
Consumer loans include loans extended to individuals for household, family and other personal expenditures not secured by real estate. The majority of the Company's consumer lending is for vehicles, consolidation of personal debts and household improvements. The repayment source for consumer loans, including 1-4 family residential and home equity loans, is typically wages.
The allowance for loan losses is established through a provision for loan losses charged to expense. The allowance is an amount that management believes will be adequate to absorb probable losses on existing loans based on an evaluation of the collectability of loans and prior loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, the review of specific problem loans, and the current economic conditions that may affect the borrower's ability to pay. Loans are charged-off against the allowance for loan losses when management believes that collectability of the principal is unlikely. While management uses the best information available to make its evaluations, future adjustments to the allowance may be necessary if there are significant changes in economic conditions or the other factors relied upon.
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, 20172020 and 2016.2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2020 |
| | | Real Estate | | | | |
| Commercial | | Construction and Land | | 1-4 Family Residential | | Home Equity | | Commercial | | Consumer and Other | | Total |
Beginning balance | $ | 4,318 | | | $ | 3,300 | | | $ | 331 | | | $ | 128 | | | $ | 13,205 | | | $ | 81 | | | $ | 21,363 | |
Charge-offs | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Recoveries | 35 | | | 0 | | | 0 | | | 1 | | | 4 | | | 0 | | | 40 | |
Provision (1) | 491 | | | 124 | | | 29 | | | (2) | | | 3,358 | | | 0 | | | 4,000 | |
Ending balance | $ | 4,844 | | | $ | 3,424 | | | $ | 360 | | | $ | 127 | | | $ | 16,567 | | | $ | 81 | | | $ | 25,403 | |
| | | | | | | | | | | | | |
| Three Months Ended September 30, 2019 |
| | | Real Estate | | | | |
| Commercial | | Construction and Land | | 1-4 Family Residential | | Home Equity | | Commercial | | Consumer and Other | | Total |
Beginning balance | $ | 3,732 | | | $ | 2,286 | | | $ | 222 | | | $ | 139 | | | $ | 10,275 | | | $ | 83 | | | $ | 16,737 | |
Charge-offs | (199) | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | (199) | |
Recoveries | 168 | | | 0 | | | 5 | | | 27 | | | 3 | | | 1 | | | 204 | |
Provision (1) | 12 | | | 81 | | | (8) | | | (19) | | | 233 | | | 1 | | | 300 | |
Ending balance | $ | 3,713 | | | $ | 2,367 | | | $ | 219 | | | $ | 147 | | | $ | 10,511 | | | $ | 85 | | | $ | 17,042 | |
| | | | | | | | | | | | | |
| Nine Months Ended September 30, 2020 |
| | | Real Estate | | | | |
| Commercial | | Construction and Land | | 1-4 Family Residential | | Home Equity | | Commercial | | Consumer and Other | | Total |
Beginning balance | $ | 3,875 | | | $ | 2,375 | | | $ | 216 | | | $ | 127 | | | $ | 10,565 | | | $ | 77 | | | $ | 17,235 | |
Charge-offs | 0 | | | 0 | | | 0 | | | (1) | | | 0 | | | 0 | | | (1) | |
Recoveries | 79 | | | 0 | | | 71 | | | 3 | | | 10 | | | 6 | | | 169 | |
Provision (1) | 890 | | | 1,049 | | | 73 | | | (2) | | | 5,992 | | | (2) | | | 8,000 | |
Ending balance | $ | 4,844 | | | $ | 3,424 | | | $ | 360 | | | $ | 127 | | | $ | 16,567 | | | $ | 81 | | | $ | 25,403 | |
| | | | | | | | | | | | | |
| Nine Months Ended September 30, 2019 |
| | | Real Estate | | | | |
| Commercial | | Construction and Land | | 1-4 Family Residential | | Home Equity | | Commercial | | Consumer and Other | | Total |
Beginning balance | $ | 3,508 | | | $ | 2,384 | | | $ | 250 | | | $ | 171 | | | $ | 10,301 | | | $ | 75 | | | $ | 16,689 | |
Charge-offs | (254) | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | (254) | |
Recoveries | 227 | | | 0 | | | 14 | | | 50 | | | 9 | | | 7 | | | 307 | |
Provision (1) | 232 | | | (17) | | | (45) | | | (74) | | | 201 | | | 3 | | | 300 | |
Ending balance | $ | 3,713 | | | $ | 2,367 | | | $ | 219 | | | $ | 147 | | | $ | 10,511 | | | $ | 85 | | | $ | 17,042 | |
(1)The negative provisions for the various segments are related to the decline in outstanding balances in each of those portfolio segments during the time periods disclosed and/or improvement in the credit quality factors related to those portfolio segments.
22
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2017 |
| | | Real Estate | | | | |
| Commercial | | Construction and Land | | 1-4 Family Residential | | Home Equity | | Commercial | | Consumer and Other | | Total |
Beginning balance | $ | 3,802 |
| | $ | 2,552 |
| | $ | 350 |
| | $ | 372 |
| | $ | 9,307 |
| | $ | 103 |
| | $ | 16,486 |
|
Charge-offs | (3 | ) | | — |
| | — |
| | (176 | ) | | — |
| | — |
| | (179 | ) |
Recoveries | 34 |
| | — |
| | 8 |
| | 5 |
| | 3 |
| | 1 |
| | 51 |
|
Provision (1) | (165 | ) | | 170 |
| | (24 | ) | | 16 |
| | 1 |
| | 2 |
| | — |
|
Ending balance | $ | 3,668 |
| | $ | 2,722 |
| | $ | 334 |
| | $ | 217 |
| | $ | 9,311 |
| | $ | 106 |
| | $ | 16,358 |
|
| | | | | | | | | | | | | |
| Three Months Ended September 30, 2016 |
| | | Real Estate | | | | |
| Commercial | | 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 |
|
Charge-offs | (25 | ) | | (140 | ) | | — |
| | — |
| | — |
| | (6 | ) | | (171 | ) |
Recoveries | 53 |
| | — |
| | 37 |
| | 6 |
| | 4 |
| | — |
| | 100 |
|
Provision (1) | (318 | ) | | 8 |
| | (84 | ) | | (25 | ) | | 621 |
| | (2 | ) | | 200 |
|
Ending balance | $ | 4,151 |
| | $ | 2,672 |
| | $ | 346 |
| | $ | 464 |
| | $ | 8,231 |
| | $ | 94 |
| | $ | 15,958 |
|
| | | | | | | | | | | | | |
| Nine Months Ended September 30, 2017 |
| | | Real Estate | | | | |
| Commercial | | Construction and Land | | 1-4 Family Residential | | Home Equity | | Commercial | | Consumer and Other | | Total |
Beginning balance | $ | 3,881 |
| | $ | 2,639 |
| | $ | 317 |
| | $ | 478 |
| | $ | 8,697 |
| | $ | 100 |
| | $ | 16,112 |
|
Charge-offs | (196 | ) | | — |
| | — |
| | (176 | ) | | — |
| | — |
| | (372 | ) |
Recoveries | 174 |
| | 398 |
| | 10 |
| | 20 |
| | 9 |
| | 7 |
| | 618 |
|
Provision (1) | (191 | ) | | (315 | ) | | 7 |
| | (105 | ) | | 605 |
| | (1 | ) | | — |
|
Ending balance | $ | 3,668 |
| | $ | 2,722 |
| | $ | 334 |
| | $ | 217 |
| | $ | 9,311 |
| | $ | 106 |
| | $ | 16,358 |
|
| | | | | | | | | | | | | |
| Nine Months Ended September 30, 2016 |
| | | Real Estate | | | | |
| Commercial | | 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 |
|
Charge-offs | (25 | ) | | (140 | ) | | (93 | ) | | — |
| | — |
| | (6 | ) | | (264 | ) |
Recoveries | 194 |
| | 56 |
| | 58 |
| | 30 |
| | 10 |
| | 7 |
| | 355 |
|
Provision (1) | (387 | ) | | 418 |
| | (127 | ) | | (47 | ) | | 967 |
| | 76 |
| | 900 |
|
Ending balance | $ | 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 outstanding balances in each of those portfolio segments during the time periods disclosed and/or improvement in the credit quality factors related to those portfolio segments. |
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, 20172020 and December 31, 2016.2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 |
| | | Real Estate | | | | |
| Commercial | | Construction and Land | | 1-4 Family Residential | | Home Equity | | Commercial | | Consumer and Other | | Total |
Ending balance: | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | 210 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 210 | |
Collectively evaluated for impairment | 4,634 | | | 3,424 | | | 360 | | | 127 | | | 16,567 | | | 81 | | | 25,193 | |
Total | $ | 4,844 | | | $ | 3,424 | | | $ | 360 | | | $ | 127 | | | $ | 16,567 | | | $ | 81 | | | $ | 25,403 | |
| | | | | | | | | | | | | |
| December 31, 2019 |
| | | Real Estate | | | | |
| Commercial | | Construction and Land | | 1-4 Family Residential | | Home Equity | | Commercial | | Consumer and Other | | Total |
Ending balance: | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
Collectively evaluated for impairment | 3,875 | | | 2,375 | | | 216 | | | 127 | | | 10,565 | | | 77 | | | 17,235 | |
Total | $ | 3,875 | | | $ | 2,375 | | | $ | 216 | | | $ | 127 | | | $ | 10,565 | | | $ | 77 | | | $ | 17,235 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2017 |
| | | Real Estate | | | | |
| Commercial | | Construction and Land | | 1-4 Family Residential | | Home Equity | | Commercial | | Consumer and Other | | Total |
Ending balance: | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | — |
| | $ | — |
| | $ | — |
| | $ | 23 |
| | $ | 123 |
| | $ | — |
| | $ | 146 |
|
Collectively evaluated for impairment | 3,668 |
| | 2,722 |
| | 334 |
| | 194 |
| | 9,188 |
| | 106 |
| | 16,212 |
|
Total | $ | 3,668 |
| | $ | 2,722 |
| | $ | 334 |
| | $ | 217 |
| | $ | 9,311 |
| | $ | 106 |
| | $ | 16,358 |
|
| | | | | | | | | | | | | |
| December 31, 2016 |
| | | Real Estate | | | | |
| Commercial | | Construction and Land | | 1-4 Family Residential | | Home Equity | | Commercial | | Consumer and Other | | Total |
Ending balance: | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | 91 |
| | $ | — |
| | $ | — |
| | $ | 276 |
| | $ | 136 |
| | $ | — |
| | $ | 503 |
|
Collectively evaluated for impairment | 3,790 |
| | 2,639 |
| | 317 |
| | 202 |
| | 8,561 |
| | 100 |
| | 15,609 |
|
Total | $ | 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, 20172020 and December 31, 2016.2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 |
| | | Real Estate | | | | |
| Commercial | | Construction and Land | | 1-4 Family Residential | | Home Equity | | Commercial | | Consumer and Other | | Total |
Ending balance: | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | 1,474 | | | $ | 0 | | | $ | 383 | | | $ | 0 | | | $ | 15,915 | | | $ | 0 | | | $ | 17,772 | |
Collectively evaluated for impairment | 640,399 | | | 307,328 | | | 58,660 | | | 10,566 | | | 1,214,420 | | | 6,051 | | | 2,237,424 | |
Total | $ | 641,873 | | | $ | 307,328 | | | $ | 59,043 | | | $ | 10,566 | | | $ | 1,230,335 | | | $ | 6,051 | | | $ | 2,255,196 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 |
| | | Real Estate | | | | |
| Commercial | | Construction and Land | | 1-4 Family Residential | | Home Equity | | Commercial | | Consumer and Other | | Total |
Ending balance: | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | 91 | | | $ | 0 | | | $ | 411 | | | $ | 31 | | | $ | 5 | | | $ | 0 | | | $ | 538 | |
Collectively evaluated for impairment | 430,953 | | | 264,193 | | | 54,064 | | | 12,349 | | | 1,175,019 | | | 6,787 | | | 1,943,365 | |
Total | $ | 431,044 | | | $ | 264,193 | | | $ | 54,475 | | | $ | 12,380 | | | $ | 1,175,024 | | | $ | 6,787 | | | $ | 1,943,903 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2017 |
| | | Real Estate | | | | |
| Commercial | | Construction and Land | | 1-4 Family Residential | | Home Equity | | Commercial | | Consumer and Other | | Total |
Ending balance: | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | — |
| | $ | — |
| | $ | 94 |
| | $ | 53 |
| | $ | 370 |
| | $ | — |
| | $ | 517 |
|
Collectively evaluated for impairment | 316,716 |
| | 249,453 |
| | 49,275 |
| | 14,505 |
| | 819,774 |
| | 8,235 |
| | 1,457,958 |
|
Total | $ | 316,716 |
| | $ | 249,453 |
| | $ | 49,369 |
| | $ | 14,558 |
| | $ | 820,144 |
| | $ | 8,235 |
| | $ | 1,458,475 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2016 |
| | | Real Estate | | | | |
| Commercial | | Construction and Land | | 1-4 Family Residential | | Home Equity | | Commercial | | Consumer and Other | | Total |
Ending balance: | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | 126 |
| | $ | — |
| | $ | 108 |
| | $ | 317 |
| | $ | 471 |
| | $ | — |
| | $ | 1,022 |
|
Collectively evaluated for impairment | 333,888 |
| | 205,610 |
| | 47,076 |
| | 17,740 |
| | 787,529 |
| | 8,355 |
| | 1,400,198 |
|
Total | $ | 334,014 |
| | $ | 205,610 |
| | $ | 47,184 |
| | $ | 18,057 |
| | $ | 788,000 |
| | $ | 8,355 |
| | $ | 1,401,220 |
|
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
The Company has entered into various forward-starting interest rate swap transactionsagreements as part of its interest rate risk management strategy. The Company uses interest rate swaps to effectively convert variablemanage its interest rate FHLB advancesrisk exposure on certain loans, variable-rate and junior subordinated notesshort-term borrowings, and deposits due to fixedinterest rate debtmovements. The notional amounts of the interest rate swaps do not represent amounts exchanged by the counterparties, but rather, the notional amount is used to determine, along with other terms of the derivative, the amounts to be exchanged between the counterparties.
Interest Rate Swaps Designated as of forward-starting dates.a Cash Flow Hedge: The swap transactions wereCompany had interest rate swaps designated as cash flow hedges. Interest ratehedges with total notional amounts of $305,000 and $335,000 at September 30, 2020 and December 31, 2019, respectively. As of September 30, 2020, the Company had swaps with a total notional amount of $70,000$175,000 that hedge the interest payments of rolling fixed-rate one- or three-month funding consisting of FHLB advances or brokered deposits. Also as of September 30, 2020, the Company had a swap with a total notional amount of $20,000 that effectively converts variable-rate junior subordinated notes to fixed-rate debt, and swaps with a total notional amount of $110,000 that hedge the interest payments of certain deposits accounts.
Derivatives Not Designated as Accounting Hedges: To accommodate customer needs, the Company on occasion offers loan level interest rate swaps to its customers and offsets its exposure from such contracts by entering into mirror image swaps with a swap counterparty (back-to-back swap program). The interest rate swaps are free-standing derivatives and are recorded at fair value. The Company enters into a floating-rate loan and a fixed-rate swap with our customer. Simultaneously, the Company enters into an offsetting fixed-rate swap with a swap counterparty. In connection with each swap transaction, the Company agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on the same notional amount at a fixed interest rate. At the same time, the Company agrees to pay a swap counterparty the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. These transactions allow the Company’s customers to effectively convert variable-rate loans to fixed-rate loans. The customer accommodations and any offsetting swaps are treated as non-hedging derivative instruments which do not qualify for hedge accounting.
The table below identifies the balance sheet category and fair values of the Company's derivative instruments as of September 30, 2020 and December 31, 2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Notional Amount | | Fair Value | | Balance Sheet Category | | Weighted Average Floating Rate | | Weighted Average Fixed Rate | | Weighted Average Maturity - Years |
Cash flow hedges: | | | | | | | | | | | | |
September 30, 2020 | | | | | | | | | | | | |
Interest rate swaps | | $ | 305,000 | | | $ | (26,870) | | | Other Liabilities | | 0.39 | % | | 2.17 | % | | 5.3 |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
December 31, 2019 | | | | | | | | | | | | |
Interest rate swaps | | $ | 215,000 | | | $ | (5,786) | | | Other Liabilities | | 1.84 | % | | 2.26 | % | | 5.5 |
Interest rate swaps | | 70,000 | | | 403 | | | Other Assets | | 2.62 | % | | 2.37 | % | | 5.2 |
Forward-starting interest rate swaps(1) | | 50,000 | | | (343) | | | Other Liabilities | | 0 | | | 1.74 | % | | 6.1 |
| | | | | | | | | | | | |
Non-hedging derivatives: | | | | | | | | | | | | |
September 30, 2020 | | | | | | | | | | | | |
Interest rate swaps - counterparty | | $ | 84,192 | | | $ | 1,562 | | | Other Assets | | 2.90 | % | | 3.47 | % | | 10.0 |
Interest rate swaps - loan customer | | 84,192 | | | (1,562) | | | Other Liabilities | | 2.90 | % | | 3.47 | % | | 10.0 |
(1) The fixed rate for forward-starting swaps represents the fixed rate to be paid beginning on the scheduled start dates of the swaps. No interest payments were terminatedrequired related to these swaps in 2015, subject2019 or 2020.
West Bancorporation, Inc. and Subsidiary
Notes to termination fees totaling $541. Consolidated Financial Statements
(unaudited)
(dollars in thousands, except per share data)
The termination fees are beingfollowing table identifies the pre-tax gains or losses recognized on the Company's derivative instruments designated as cash flow hedges for the nine months ended September 30, 2020 and 2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Reclassified from AOCI into Income |
| | Amount of Pre-tax Gain (Loss) Recognized in OCI | |
| | | | | Amount of Gain (Loss) |
| | Nine Months Ended September 30, | | | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | Category | | 2020 | | 2019 |
Interest rate swaps | | $ | (23,912) | | | $ | (12,357) | | | Interest Expense | | $ | (2,799) | | | $ | 280 | |
The Company estimates there will be approximately $5,436 reclassified from accumulated other comprehensive income to interest expense over the remaining life of the underlying cash flows through June 2020. An 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, 2017 or 2016, and the Company estimates there will be approximately $373 of cash payments and reclassification from accumulated other comprehensive income(AOCI) to interest expense through the 12 months endedending September 30, 2018.2021 related to cash flow hedges.
The Company is exposed to credit risk in the event of nonperformance by interest rate swap counterparties, which is minimized by collateral-pledging provisions in the agreements. Derivative contracts with swap counterparties 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, 20172020 and December 31, 2016,2019, the Company pledged $470$29,540 and $6,570, respectively, of collateral to the counterpartycounterparties in the form of cash on deposit with a third party.parties. The Company's counterparty was required to pledge $720interest rate swap product with the borrower is cross collateralized with the underlying loan and $1,070 at September 30, 2017 and December 31, 2016, respectively.therefore there is no pledged cash collateral under swap contracts with customers.
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, 2017 and December 31, 2016.
|
| | | | | | | | | | | | | | | | | | | |
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, 2017 and 2016.
|
| | | | | | | | | | | | | | | | | |
| | | Effective Portion | | Ineffective Portion |
| | | Amount of | | Reclassified from AOCI into Income | | Recognized in Income on Derivatives |
| | | Pre-tax (Loss) | | |
| | | Recognized | | | | Amount of | | | | Amount of |
Interest Rate Swap | | | 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 | | — |
|
West Bancorporation, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
(dollars in thousands, except per share data)
7. Deferred6. Income Taxes
Net deferred tax assets consisted of the following as of September 30, 20172020 and December 31, 2016. 2019.
| | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
Deferred tax assets: | | | |
Allowance for loan losses | $ | 6,351 | | | $ | 4,309 | |
| | | |
Net unrealized losses on interest rate swaps | 6,718 | | | 1,441 | |
Lease liabilities | 2,011 | | | 2,275 | |
Accrued expenses | 238 | | | 297 | |
Restricted stock unit compensation | 608 | | | 832 | |
State net operating loss carryforward | 1,178 | | | 1,114 | |
Capital loss carryforward | 0 | | | 3 | |
Other | 36 | | | 53 | |
| 17,140 | | | 10,324 | |
Deferred tax liabilities: | | | |
Right-of-use assets | 1,955 | | | 2,218 | |
Net deferred loan fees and costs | 264 | | | 218 | |
Net unrealized gains on securities available for sale | 1,874 | | | 352 | |
| | | |
Premises and equipment | 801 | | | 839 | |
Other | 259 | | | 219 | |
| 5,153 | | | 3,846 | |
Net deferred tax assets before valuation allowance | 11,987 | | | 6,478 | |
Valuation allowance | (1,178) | | | (1,117) | |
Net deferred tax assets | $ | 10,809 | | | $ | 5,361 | |
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Deferred tax assets: | | | |
Allowance for loan losses | $ | 6,216 |
| | $ | 6,123 |
|
Net unrealized losses on securities available for sale | 15 |
| | 719 |
|
Intangibles | 231 |
| | 462 |
|
Accrued expenses | 499 |
| | 706 |
|
Restricted stock compensation | 564 |
| | 446 |
|
State net operating loss carryforward | 1,339 |
| | 1,271 |
|
Other | 137 |
| | 190 |
|
| 9,001 |
| | 9,917 |
|
Deferred tax liabilities: | | | |
Net deferred loan fees and costs | 289 |
| | 321 |
|
Net unrealized gains on interest rate swaps | 59 |
| | 80 |
|
Premises and equipment | 1,227 |
| | 1,027 |
|
Other | 226 |
| | 261 |
|
| 1,801 |
| | 1,689 |
|
Net deferred tax assets before valuation allowance | 7,200 |
| | 8,228 |
|
Valuation allowance | (1,339 | ) | | (1,271 | ) |
Net deferred tax assets | $ | 5,861 |
| | $ | 6,957 |
|
The Company has recorded a valuation allowance against the tax effect of the state net operating loss carryforwards, as management believes it is more likely than not that these carryforwards will expire without being utilized. The state net operating loss carryforwards expire in 20192020 and thereafter.
8.
West Bancorporation, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
(dollars in thousands, except per share data)
The CARES Act, enacted in March 2020, included several significant tax provisions for corporations including increasing the amount of deductible interest under section 163(j), allowing companies to carryback certain net operating losses, and increasing the amount of net operating loss that corporations can use to offset income. These changes did not have a significant impact on the Company’s income taxes.
7. Accumulated Other Comprehensive Income (Loss)
The following table summarizes the changes in the balances of each component of accumulated other comprehensive income (loss), net of tax, for the nine months ended September 30, 20172020 and 2016.2019.
| | | | | | | | | | | | | | | | | | | | |
| | Unrealized | | Unrealized | | Accumulated |
| | Gains | | Gains | | Other |
| | (Losses) on | | (Losses) on | | Comprehensive |
| | Securities | | Derivatives | | Income (Loss) |
Balance, December 31, 2019 | | $ | 1,057 | | | $ | (4,318) | | | $ | (3,261) | |
Other comprehensive income (loss) before reclassifications | | 4,628 | | | (17,934) | | | (13,306) | |
Amounts reclassified from accumulated other comprehensive income | | (60) | | | 2,098 | | | 2,038 | |
Net current period other comprehensive income (loss) | | 4,568 | | | (15,836) | | | (11,268) | |
Balance, September 30, 2020 | | $ | 5,625 | | | $ | (20,154) | | | $ | (14,529) | |
| | | | | | |
Balance, December 31, 2018 | | $ | (8,123) | | | $ | 1,309 | | | $ | (6,814) | |
Other comprehensive income (loss) before reclassifications | | 10,255 | | | (9,268) | | | 987 | |
Amounts reclassified from accumulated other comprehensive income | | 48 | | | (213) | | | (165) | |
Net current period other comprehensive income (loss) | | 10,303 | | | (9,481) | | | 822 | |
Balance, September 30, 2019 | | $ | 2,180 | | | $ | (8,172) | | | $ | (5,992) | |
|
| | | | | | | | | | | | |
| | Unrealized | | Unrealized | | Accumulated |
| | Gains | | Gains | | Other |
| | (Losses) on | | (Losses) on | | Comprehensive |
| | Securities | | Derivatives | | Income (Loss) |
Balance, December 31, 2015 | | $ | 342 |
| | $ | (772 | ) | | $ | (430 | ) |
Other comprehensive income (loss) before reclassifications | | 2,958 |
| | (550 | ) | | 2,408 |
|
Amounts reclassified from accumulated other comprehensive income | | (113 | ) | | 275 |
| | 162 |
|
Net current period other comprehensive income (loss) | | 2,845 |
| | (275 | ) | | 2,570 |
|
Balance, September 30, 2016 | | $ | 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 |
|
West Bancorporation, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
(dollars in thousands, except per share data)
9.8. Commitments and Contingencies
Financial instruments with off-balance-sheet risk: The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations that it uses for on-balance-sheet instruments. The Company's commitments consisted of the following approximate amounts as of September 30, 20172020 and December 31, 2016. 2019.
| | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
Commitments to extend credit | $ | 835,179 | | | $ | 672,117 | |
Standby letters of credit | 17,804 | | | 8,029 | |
| $ | 852,983 | | | $ | 680,146 | |
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Commitments to extend credit | $ | 597,325 |
| | $ | 614,681 |
|
Standby letters of credit | 5,424 |
| | 5,487 |
|
| $ | 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, 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 $125. The outstanding balance of mortgage loans sold under the MPF Program was $98,353$48,417 and $112,084$63,409 at September 30, 20172020 and December 31, 2016,2019, respectively.
Contractual commitments: The Company hashad remaining commitments to invest in qualified affordable housing projects totaling $6,253$3,505 and $5,768$2,042 as of September 30, 20172020 and December 31, 2016,2019, respectively.
West Bancorporation, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
(dollars in thousands, except per share data)
Contingencies: Neither the Company nor West Bank is a party, and no property of these entities is subject, to any material pending legal proceedings, other than ordinary routine litigation incidental to West Bank's business. The Company does not know of any proceeding contemplated by a governmental authority against the Company or West Bank.
West Bancorporation, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
(dollars in thousands, except per share data)
10.9. Fair Value Measurements
Accounting guidance on fair value measurements and disclosuresdefines fair value and establishes a framework for measuring the fair value of assets and liabilities using a hierarchy system. Fair value is defined as 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 Levelslevels at the end of each reporting period, if applicable. There were no0 transfers between Levelslevels of the fair value hierarchy during the nine months ended September 30, 2017.2020.
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.securities (Level 1). If quoted market prices are not available, the Company determines fair value based on various sources and may apply matrix pricing with observable prices for similar bonds where a price for the identical bond is not observable.observable (Level 2). The fair values of these securities are determined by pricing models that consider observable market data such as interest rate volatilities, LIBOR yield curve, credit spreads, prices from market makers and live trading systems. Level 1 securities include certainFor the corporate bonds 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, and trust preferred securities. Thebond portfolio, the Company currently holds no investment securities classifiedhas elected to use a matrix pricing model as Level 3.a practical expedient to individual quoted market prices.
Generally, managementManagement obtains the fair value of investment securities at the end of each reporting period via a third-party pricing service. Management reviewed the valuation process used by the third party and believed thatthe process was valid. On a quarterly basis, the Company testsmanagement corroborates the fair values by selectingof a randomly selected sample of investment securities from each category of securities,by obtaining pricing from an independent investment portfolio management firmfinancial market data vendor and comparing the two sets of fair values. Any significant variances are reviewed and investigated. For a sample of securities, prices are further validated by management with assistance from an independent investment portfolio management firm, by obtaining details of the inputs used by the pricing service. Those inputs were independently tested, and management concluded the fair values were consistent with GAAP requirements and the investment securities were properly classified in the fair value hierarchy as of the end of the period covered by this report.hierarchy.
Derivative instruments: The Company's derivative instruments consist of interest rate swaps accounted for as cash flow hedges, as well as interest rate swaps which are accounted for as cash flow hedges.non-hedging derivatives. The Company's derivative positions are classified within Level 2 of the fair value hierarchy and are valued using models generally accepted in the financial services industry and that use actively quoted or observable market input values from external market data providers and/or non-binding broker-dealer quotations. The fair value of the derivatives is determined using discounted cash flow models. These models’ key assumptions include the contractual terms of the respective contract along with significant observable inputs, including interest rates, yield curves, nonperformance risk and volatility.
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, 20172020 and December 31, 2016.2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 |
| | Total | | Level 1 | | Level 2 | | Level 3 |
Financial assets: | | | | | | | | |
Investment securities available for sale: | | | | | | | | |
State and political subdivisions | | $ | 108,190 | | | $ | 0 | | | $ | 108,190 | | | $ | 0 | |
Collateralized mortgage obligations | | 138,917 | | | 0 | | | 138,917 | | | 0 | |
Mortgage-backed securities | | 75,416 | | | 0 | | | 75,416 | | | 0 | |
Collateralized loan obligations | | 51,564 | | | 0 | | | 51,564 | | | 0 | |
Corporate notes and other investments | | 300 | | | 0 | | | 300 | | | 0 | |
Derivative instruments, interest rate swaps | | 1,562 | | | 0 | | | 1,562 | | | 0 | |
| | | | | | | | |
Financial liabilities: | | | | | | | | |
Derivative instruments, interest rate swaps | | $ | 28,432 | | | $ | 0 | | | $ | 28,432 | | | $ | 0 | |
| | | | September 30, 2017 | | | December 31, 2019 |
| | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 |
Financial assets: | | | | | | | | | Financial assets: | | | | | | | | |
Investment securities available for sale: | | | | | | | | | Investment securities available for sale: | | | | | | | | |
U.S. government agencies and corporations | | $ | 2,489 |
| | $ | — |
| | $ | 2,489 |
| | $ | — |
| |
State and political subdivisions | | 134,256 |
| | — |
| | 134,256 |
| | — |
| State and political subdivisions | | $ | 47,178 | | | $ | 0 | | | $ | 47,178 | | | $ | 0 | |
Collateralized mortgage obligations | | 149,367 |
| | — |
| | 149,367 |
| | — |
| Collateralized mortgage obligations | | 181,921 | | | 0 | | | 181,921 | | | 0 | |
Mortgage-backed securities | | 54,787 |
| | — |
| | 54,787 |
| | — |
| Mortgage-backed securities | | 73,030 | | | 0 | | | 73,030 | | | 0 | |
Asset-backed securities | | 46,273 |
| | — |
| | 46,273 |
| | — |
| Asset-backed securities | | 17,600 | | | 0 | | | 17,600 | | | 0 | |
Trust preferred securities | | 1,700 |
| | — |
| | 1,700 |
| | — |
| |
Corporate notes | | 29,502 |
| | 29,202 |
| | 300 |
| | — |
| |
Derivative instrument, interest rate swap | | 786 |
| | — |
| | 786 |
| | — |
| |
Collateralized loan obligations | | Collateralized loan obligations | | 64,832 | | | 0 | | | 64,832 | | | 0 | |
Corporate notes and other investments | | Corporate notes and other investments | | 14,017 | | | 0 | | | 14,017 | | | 0 | |
Derivative instruments, interest rate swaps | | Derivative instruments, interest rate swaps | | 403 | | | 0 | | | 403 | | | 0 | |
| |
|
| |
|
| |
|
| |
|
| |
Financial liabilities: | | | | | | | | | Financial liabilities: | |
Derivative instrument, interest rate swap | | $ | 351 |
| | $ | — |
| | $ | 351 |
| | $ | — |
| Derivative instrument, interest rate swap | | $ | 6,129 | | | $ | 0 | | | $ | 6,129 | | | $ | 0 | |
|
| | | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | Total | | Level 1 | | Level 2 | | Level 3 |
Financial assets: | | | | | | | | |
Investment securities available for sale: | | |
| | |
| | |
| | |
|
U.S. government agencies and corporations | | $ | 2,593 |
| | $ | — |
| | $ | 2,593 |
| | $ | — |
|
State and political subdivisions | | 64,336 |
| | — |
| | 64,336 |
| | — |
|
Collateralized mortgage obligations | | 101,950 |
| | — |
| | 101,950 |
| | — |
|
Mortgage-backed securities | | 80,158 |
| | — |
| | 80,158 |
| | — |
|
Trust preferred security | | 1,250 |
| | — |
| | 1,250 |
| | — |
|
Corporate notes | | 10,350 |
| | 10,050 |
| | 300 |
| | — |
|
Derivative instrument, interest rate swap | | 1,068 |
| | — |
| | 1,068 |
| | — |
|
| | | | | | | | |
Financial liabilities: | | | | | | | | |
Derivative instrument, interest rate swap | | $ | 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, 2017 and December 31, 2016,2020, impaired loans with a net book value of $1,264 for which a fair value adjustment was recorded were recorded atclassified as Level 3. As of December 31, 2019, there were 0 impaired loans that had a netfair value of $0.adjustment. Impaired loans are classified within Level 3 of the fair value hierarchy and 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 includedinclude 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.
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 estimatingfollowing table presents the carrying amounts and approximate fair valuevalues 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 assetsas of September 30, 2020 and financial liabilities are discussed below.December 31, 2019.
Cash and due from banks: The carrying amount approximates fair value. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 |
| | Carrying Amount | | Approximate Fair Value | | Level 1 | | Level 2 | | Level 3 |
Financial assets: | | | | | | | | | | |
Cash and due from banks | | $ | 49,445 | | | $ | 49,445 | | | $ | 49,445 | | | $ | 0 | | | $ | 0 | |
Federal funds sold | | 16,398 | | | 16,398 | | | 16,398 | | | 0 | | | 0 | |
Investment securities available for sale | | 374,387 | | | 374,387 | | | 0 | | | 374,387 | | | 0 | |
Federal Home Loan Bank stock | | 11,905 | | | 11,905 | | | 11,905 | | | 0 | | | 0 | |
Loans, net | | 2,222,022 | | | 2,297,198 | | | 0 | | | 2,295,934 | | | 1,264 | |
Accrued interest receivable | | 11,071 | | | 11,071 | | | 11,071 | | | 0 | | | 0 | |
Interest rate swaps | | 1,562 | | | 1,562 | | | 0 | | | 1,562 | | | 0 | |
Financial liabilities: | | | | | | | | | | |
Deposits | | $ | 2,296,780 | | | $ | 2,297,650 | | | $ | 0 | | | $ | 2,297,650 | | | $ | 0 | |
Federal funds purchased | | 2,350 | | | 2,350 | | | 2,350 | | | 0 | | | 0 | |
Subordinated notes, net | | 20,448 | | | 16,492 | | | 0 | | | 16,492 | | | 0 | |
Federal Home Loan Bank advances, net | | 175,000 | | | 175,000 | | | 0 | | | 175,000 | | | 0 | |
Long-term debt | | 22,213 | | | 22,210 | | | 0 | | | 22,210 | | | 0 | |
Accrued interest payable | | 1,180 | | | 1,180 | | | 1,180 | | | 0 | | | 0 | |
Interest rate swaps | | 28,432 | | | 28,432 | | | 0 | | | 28,432 | | | 0 | |
Off-balance-sheet financial instruments: | | | | | | | | | | |
Commitments to extend credit | | 0 | | | — | | | 0 | | | 0 | | | 0 | |
Standby letters of credit | | 0 | | | — | | | 0 | | | 0 | | | 0 | |
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.
West Bancorporation, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
(dollars in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 |
| | Carrying Amount | | Approximate Fair Value | | Level 1 | | Level 2 | | Level 3 |
Financial assets: | | | | | | | | | | |
Cash and due from banks | | $ | 37,808 | | | $ | 37,808 | | | $ | 37,808 | | | $ | 0 | | | $ | 0 | |
Federal funds sold | | 15,482 | | | 15,482 | | | 15,482 | | | 0 | | | 0 | |
Investment securities available for sale | | 398,578 | | | 398,578 | | | 0 | | | 398,578 | | | 0 | |
Federal Home Loan Bank stock | | 12,491 | | | 12,491 | | | 12,491 | | | 0 | | | 0 | |
Loans, net | | 1,924,428 | | | 1,941,208 | | | 0 | | | 1,941,208 | | | 0 | |
Accrued interest receivable | | 7,134 | | | 7,134 | | | 7,134 | | | 0 | | | 0 | |
Interest rate swaps | | 403 | | | 403 | | | 0 | | | 403 | | | 0 | |
Financial liabilities: | | | | | | | | | | |
Deposits | | $ | 2,014,756 | | | $ | 2,015,427 | | | $ | 0 | | | $ | 2,015,427 | | | $ | 0 | |
Federal funds purchased | | 2,660 | | | 2,660 | | | 2,660 | | | 0 | | | 0 | |
Subordinated notes, net | | 20,438 | | | 18,568 | | | 0 | | | 18,568 | | | 0 | |
Federal Home Loan Bank advances, net | | 179,365 | | | 179,365 | | | 0 | | | 179,365 | | | 0 | |
Long-term debt | | 22,925 | | | 22,910 | | | 0 | | | 22,910 | | | 0 | |
Accrued interest payable | | 2,070 | | | 2,070 | | | 2,070 | | | 0 | | | 0 | |
Interest rate swaps | | 6,129 | | | 6,129 | | | 0 | | | 6,129 | | | 0 | |
Off-balance-sheet financial instruments: | | | | | | | | | | |
Commitments to extend credit | | — | | | — | | | 0 | | | 0 | | | 0 | |
Standby letters of credit | | 0 | | | — | | | 0 | | | 0 | | | 0 | |
10. Risks and Uncertainties
On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic, which continues to spread throughout the United States and around the world. The following table presentsCOVID-19 pandemic has adversely affected, and continues to adversely affect, economic activity globally, nationally and locally. Actions taken around the carrying amountsworld to help mitigate the spread of COVID-19 include restrictions on travel, quarantines in certain areas, and approximate fair valuesforced closures for certain types of public places, businesses and schools. COVID-19 and actions taken to mitigate the spread of it have had and are expected to continue to have an adverse impact on the economies and financial assetsmarkets of many countries, including the geographical area in which the Company operates. Due to the COVID-19 pandemic, market interest rates have declined significantly, with the 10-year Treasury bond falling below 1.00 percent on March 3, 2020 for the first time. Such events have adversely affected business and liabilitiesconsumer confidence, generally, and the Company and its customers, and their respective suppliers, vendors and processors, have been adversely affected. On March 3, 2020, the Federal Open Market Committee reduced the targeted federal funds interest rate range by 50 basis points to 1.00 - 1.25 percent. This range was further reduced to 0.0 - 0.25 percent on March 16, 2020. On March 27, 2020, the CARES Act was enacted to, among other provisions, provide emergency assistance for individuals, families and businesses affected by the COVID-19 pandemic. These reductions in interest rates and other effects of the COVID-19 pandemic may adversely affect the Company's financial condition and results of operations in future periods. The extent of the pandemic's effect on our business will depend on many factors, primarily including the speed and extent of any recovery from the related economic recession. Among other things, this will depend on the duration of the COVID-19 pandemic, particularly in our Iowa and Minnesota markets, the development and distribution of vaccines, therapies and other public health initiatives to control the spread of the disease, the nature and size of federal economic stimulus and other governmental efforts, and the possibility of additional state lockdown or stay-at-home orders in our markets. It is reasonably possible that estimates made in the financial statements could be materially and adversely impacted in the near term as a result of September 30, 2017 and December 31, 2016. these conditions, including expected credit losses on loans.
|
| | | | | | | | | | | | | | | | | |
| | | September 30, 2017 | | December 31, 2016 |
| Fair Value Hierarchy Level | | Carrying Amount | | Approximate Fair Value | | Carrying Amount | | Approximate Fair Value |
Financial assets: | | | | | | | | | |
Cash and due from banks | Level 1 | | $ | 33,560 |
| | $ | 33,560 |
| | $ | 40,943 |
| | $ | 40,943 |
|
Federal funds sold | Level 1 | | 5,937 |
| | 5,937 |
| | 35,893 |
| | 35,893 |
|
Investment securities available for sale | See previous table | | 418,374 |
| | 418,374 |
| | 260,637 |
| | 260,637 |
|
Investment securities held to maturity | Level 2 | | 45,597 |
| | 46,356 |
| | 48,386 |
| | 47,789 |
|
Federal Home Loan Bank stock | Level 1 | | 12,256 |
| | 12,256 |
| | 10,771 |
| | 10,771 |
|
Loans, net(1) | Level 2 | | 1,440,547 |
| | 1,439,084 |
| | 1,383,758 |
| | 1,382,569 |
|
Accrued interest receivable | Level 1 | | 6,636 |
| | 6,636 |
| | 5,321 |
| | 5,321 |
|
Interest rate swap | Level 2 | | 786 |
| | 786 |
| | 1,068 |
| | 1,068 |
|
Financial liabilities: | | | | | | | | | |
Deposits | Level 2 | | $ | 1,651,266 |
| | $ | 1,651,307 |
| | $ | 1,546,605 |
| | $ | 1,546,307 |
|
Federal funds purchased | Level 1 | | 925 |
| | 925 |
| | 9,690 |
| | 9,690 |
|
Short-term borrowings | Level 1 | | 48,000 |
| | 48,000 |
| | — |
| | — |
|
Subordinated notes, net | Level 2 | | 20,408 |
| | 14,021 |
| | 20,398 |
| | 12,703 |
|
Federal Home Loan Bank advances, net | Level 2 | | 101,005 |
| | 101,113 |
| | 99,886 |
| | 99,959 |
|
Long-term debt, net | Level 2 | | 24,195 |
| | 24,134 |
| | 5,126 |
| | 5,054 |
|
Accrued interest payable | Level 1 | | 616 |
| | 616 |
| | 280 |
| | 280 |
|
Interest rate swap | Level 2 | | 351 |
| | 351 |
| | 496 |
| | 496 |
|
Off-balance-sheet financial instruments: | | | | | | | | | |
Commitments to extend credit | Level 3 | | — |
| | — |
| | — |
| | — |
|
Standby letters of credit | Level 3 | | — |
| | — |
| | — |
| | — |
|
(1) All loans are Level 2 except impaired loans with a net value of $0 as of both September 30, 2017 and December 31, 2016, which are Level 3.
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'sCompany’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)"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: the effects of the COVID-19 pandemic, including its potential effects on the economic environment, our customers and our operations, as well as any changes to federal, state or local government laws, regulations or orders in connection with the pandemic; interest rate risk; competitive pressures; pricing pressures on loans and deposits; changes in credit and other risks posed by the Company'sCompany’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, accounting standards (including as a result of the future implementation of the current expected credit loss (CECL) accounting standard) or regulatory requirements; actions of bank and nonbank competitors; changes in local, national and international economic conditions; changes in legal and regulatory requirements, limitations and costs; changes in customers'customers’ acceptance of the Company'sCompany’s products and services; cyber-attacks; unexpected outcomes of existing or new litigation involving the Company; the monetary, trade and other regulatory policies of the U.S. government; acts of war or terrorism, widespread disease or pandemics, such as the COVID-19 pandemic, or other adverse external events; developments and uncertainty related to the future use and availability of some reference rates, such as the London Interbank Offered Rate, as well as other alternative reference rates; 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.SEC. The Company undertakes no obligation to revise or update such forward-looking statements to reflect current or future events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of the Company's financial condition and results of operations are based upon the Company's consolidated financial statements that have been prepared in accordance with GAAP. The preparation of thesethe Company's financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, income and expenses. These estimates are based upon historical experience and on various other assumptions that management believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The estimates and judgments that management believes involve the most complex and subjective estimates and judgments and have the most effect on the Company's reported financial position and results of operations are described as critical accounting policies in the Company's Annual Report on Form 10-K for the year ended December 31, 2016,2019, as filed with the Securities and Exchange CommissionSEC on March 1, 2017.February 27, 2020. 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, 2016.2019.
West Bancorporation, Inc.
Management's Discussion and Analysis
(in thousands, except share and per share data)
NON-GAAP FINANCIAL MEASURES
This report contains references to financial measures that are not defined in GAAP. Such non-GAAP financial measures include the Company’s presentation of net interest income and net interest margin on a fully taxable equivalent (FTE) basis, and the presentation of the efficiency ratio on an adjusted and FTE basis, excluding certain income and expenses.expenses and the presentation of the allowance for loan losses ratio, excluding PPP loans. Management believes these non-GAAP financial measures provide useful information to both management and investors to analyze and evaluate the Company’s financial performance. These measures are considered standard measures of comparison within the banking industry. Additionally, management believes providing measures on an FTE basis enhances the comparability of income arising from taxable and nontaxable sources. Limitations associated with non-GAAP financial measures include the risks that persons might disagree as to the appropriateness of items included in these measures and that different companies might calculate these measures differently. These non-GAAP disclosures should not be considered an alternative to the Company’s GAAP results. The following table reconciles the non-GAAP financial measures of net interest income and net interest margin andon a fully taxable equivalent basis, efficiency ratio on an adjusted and FTE basis, loans, net of PPP loans and allowance for loan losses ratio, excluding PPP loans to their most directly comparable measures under GAAP.
| | | | | | | | | | | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | 2020 | | 2019 | | 2020 | | 2019 |
| | 2017 | | 2016 | | 2017 | | 2016 | |
Reconciliation of net interest income and annualized net interest margin on an FTE basis to GAAP: | | | | | | | | | |
Reconciliation of net interest income and net interest margin on an FTE basis to GAAP: | | Reconciliation of net interest income and net interest margin on an FTE basis to GAAP: | | | | | | | | |
Net interest income (GAAP) | | $ | 15,031 |
| | $ | 14,721 |
| | $ | 44,513 |
| | $ | 42,693 |
| Net interest income (GAAP) | | $ | 21,132 | | | $ | 17,116 | | | $ | 60,343 | | | $ | 49,043 | |
Tax-equivalent adjustment (1) | | 677 |
| | 639 |
| | 1,892 |
| | 1,994 |
| Tax-equivalent adjustment (1) | | 144 | | | 178 | | | 516 | | | 650 | |
Net interest income on an FTE basis (non-GAAP) | | $ | 15,708 |
| | $ | 15,360 |
| | $ | 46,405 |
| | $ | 44,687 |
| Net interest income on an FTE basis (non-GAAP) | | 21,276 | | | 17,294 | | | 60,859 | | | 49,693 | |
Average interest-earning assets | | $ | 1,882,837 |
| | $ | 1,745,878 |
| | $ | 1,820,997 |
| | $ | 1,699,703 |
| Average interest-earning assets | | 2,639,532 | | | 2,334,365 | | | 2,544,429 | | | 2,249,520 | |
Net interest margin on an FTE basis (non-GAAP) | | 3.31 | % | | 3.50 | % | | 3.41 | % | | 3.51 | % | Net interest margin on an FTE basis (non-GAAP) | | 3.21 | % | | 2.94 | % | | 3.19 | % | | 2.95 | % |
| | | | | | | | | |
Reconciliation of efficiency ratio on an FTE basis to GAAP: | | | | | | | | | 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 |
| Net interest income on an FTE basis (non-GAAP) | | $ | 21,276 | | | $ | 17,294 | | | $ | 60,859 | | | $ | 49,693 | |
Noninterest income | | 2,264 |
| | 1,919 |
| | 6,740 |
| | 6,052 |
| Noninterest income | | 3,203 | | | 2,158 | | | 7,498 | | | 6,276 | |
Less: realized investment securities gains, net | | (197 | ) | | — |
| | (423 | ) | | (60 | ) | |
Plus: losses on disposal of premises and equipment, net | | 10 |
| | — |
| | 25 |
| | — |
| |
Adjustment for realized investment securities (gains) losses, net | | Adjustment for realized investment securities (gains) losses, net | | (156) | | | (1) | | | (81) | | | 64 | |
Adjustment for (gain) loss on sale of fixed assets | | Adjustment for (gain) loss on sale of fixed assets | | 1 | | | — | | | 3 | | | (307) | |
Adjusted income | | $ | 17,785 |
| | $ | 17,279 |
| | $ | 52,747 |
| | $ | 50,679 |
| Adjusted income | | 24,324 | | | 19,451 | | | 68,279 | | | 55,726 | |
Noninterest expense | | $ | 8,020 |
| | $ | 7,993 |
| | $ | 24,235 |
| | $ | 23,611 |
| Noninterest expense | | 10,059 | | | 9,536 | | | 29,139 | | 28,830 | |
Efficiency ratio on an adjusted and FTE basis (non-GAAP) (2) | | 45.10 | % | | 46.25 | % | | 45.95 | % | | 46.59 | % | Efficiency ratio on an adjusted and FTE basis (non-GAAP) (2) | | 41.35 | % | | 49.03 | % | | 42.68% | | 51.74 | % |
| | | | As of September 30, |
| | | 2020 | | 2019 |
Reconciliation of allowance for loan losses ratio, excluding PPP loans: | | Reconciliation of allowance for loan losses ratio, excluding PPP loans: | | | | |
Loans outstanding (GAAP) | | Loans outstanding (GAAP) | | $ | 2,247,425 | | | $ | 1,836,730 | |
Less: PPP loans | | Less: PPP loans | | (224,489) | | | — | |
Loans, net of PPP loans (non-GAAP) | | Loans, net of PPP loans (non-GAAP) | | 2,022,936 | | | 1,836,730 | |
Allowance for loan losses | | Allowance for loan losses | | 25,403 | | | 17,042 | |
Allowance for loan losses ratio, excluding PPP loans (non-GAAP) | | Allowance for loan losses ratio, excluding PPP loans (non-GAAP) | | 1.26 | % | | 0.93 | % |
(1) Computed on a tax-equivalent basis using an incrementala federal income tax rate of 3521 percent, adjusted to reflect the effect of the nondeductible interest expense associated with owning tax-exempt securities and loans. 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 arising from taxable and nontaxable sources.
(2) EfficiencyThe 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 Company's financial results, as it enhancesperformance. It is a standard measure of comparison within the comparabilitybanking industry.
West Bancorporation, Inc.
Management's Discussion and expenses arising from taxable and nontaxable sources.Analysis
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017
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.special purpose subsidiaries (which are invested in new markets tax credit activities). Results of operations for the three and nine months ended September 30, 20172020 are compared to the results for the same periods in 2016,2019, and the consolidated financial condition of the Company as of September 30, 20172020 is compared to December 31, 2016.2019. The Company operatesconducts business from its main office in three markets:West Des Moines, Iowa and through its branch offices in 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;Coralville; and southern Minnesota, which includes the cities of Rochester, Owatonna, Mankato and St. Cloud.
SIGNIFICANT DEVELOPMENTS - IMPACT OF COVID-19
The COVID-19 pandemic in the United States, and efforts to contain it, have had a complex and significant adverse impact on the economy, the banking industry and the Rochester,Company. The impact on future fiscal periods is subject to a high degree of uncertainty.
Effects on Our Market Areas. Our commercial and consumer banking products and services are offered primarily in Iowa and Minnesota, area.where individual and governmental responses to the COVID-19 pandemic led to a broad curtailment of economic activity beginning in March 2020. In Iowa and Minnesota, schools closed for the remainder of the school year, most retail establishments, including restaurants and entertainment venues, were ordered to close for varying lengths of time, and travel and non-critical healthcare services were significantly curtailed. Since the initial shut down in March 2020, phased reopening plans began in mid-May subject to public health reopening guidelines, including social distancing and limitations on capacity. Schools and colleges have reopened under various in-person, on-line and hybrid learning models. These measures have had a lasting impact on the economies of and customers located in these states. The Bank remained open during the closures as banks had been identified as essential services. Initially, the Bank continued to serve its customers through its drive-ups and Video Teller Machines and inside its branch offices by appointment only. Our full service branch lobbies reopened to walk-in customer activity in June 2020.
Both states in our market areas have experienced an increase in unemployment levels as a result of the curtailment of business activities since March 2020. Unemployment in Iowa rose from an average of 3.1 percent in February 2020 to an average of 4.3 percent in September 2020, and peaked at 10.8 percent in April 2020 according to the Iowa Workforce Development. Unemployment in Minnesota rose from an average of 3.6 percent in February 2020 to 5.4 percent in September 2020, and peaked at 9.4 percent in May 2020, according to the Minnesota Department of Employment and Economic Development.
Policy and Regulatory Developments. Federal, state and local governments and regulatory authorities have enacted and issued a range of policy responses to the COVID-19 pandemic, including the following:
•The Federal Reserve decreased the range for the federal funds target rate by 0.5 percent on March 3, 2020, and by another 1.0 percent on March 16, 2020, reaching a current range of 0.0 - 0.25 percent.
•On March 27, 2020, President Trump signed the Coronavirus Aid, Relief and Economic Security Act (CARES Act), which established a $2 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the U.S. Small Business Administration (SBA), referred to as the paycheck protection program (PPP). After the initial $349 billion in funds for the PPP was exhausted, an additional $310 billion in funding for PPP loans was authorized. The Bank originated $224,489 in PPP loans as a lender in the program. In addition, the CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. See Note 4 of the financial statements for additional disclosure of TDRs.
West Bancorporation, Inc.
Management's Discussion and Analysis
(in thousands, except share and per share data)
•On April 7, 2020, federal banking regulators issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19, and stated that institutions generally do not need to categorize COVID-19-related modifications as TDRs and that the agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as TDRs. See Note 4 of the financial statements for additional disclosure of TDRs.
•On April 9, 2020, the Federal Reserve announced additional measures aimed at supporting small and mid-sized businesses, as well as state and local governments impacted by COVID-19. The Federal Reserve announced the Main Street Business Lending Program, which established two new loan facilities intended to facilitate lending to small and mid-sized businesses: (1) the Main Street New Loan Facility, or MSNLF, and (2) the Main Street Expanded Loan Facility, or MSELF. MSNLF loans are unsecured term loans originated on or after April 8, 2020, while MSELF loans are provided as upsized tranches of existing loans originated beforeApril 8, 2020. The combined size of the program is authorized up to $600 billion.
•On August 3, 2020, the FFIEC issued a Joint Statement on Additional Loan Accommodations Related to COVID-19, which, among other things, encouraged financial institutions to consider prudent additional loan accommodation options when borrowers are unable to meet their obligations due to continuing financial challenges. Accommodation options should be based on prudent risk management and consumer protection principles.
•In addition to the policy responses described above, the federal bank regulatory agencies, along with their state counterparts, have issued a stream of guidance in response to the COVID-19 pandemic and have taken a number of unprecedented steps to help banks navigate the pandemic and mitigate its impact. These include, without limitation: requiring banks to focus on business continuity and pandemic planning; adding pandemic scenarios to stress testing; encouraging bank use of capital buffers and reserves in lending programs; permitting certain regulatory reporting extensions; reducing margin requirements on swaps; permitting certain otherwise prohibited investments in investment funds; issuing guidance to encourage banks to work with customers affected by the pandemic and encourage loan workouts; and providing credit under the Community Reinvestment Act ("CRA") for certain pandemic related loans, investments and public service. Moreover, because of the need for social distancing measures, the agencies revamped the manner in which they conducted periodic examinations of their regular institutions, including making greater use of off-site reviews. The Federal Reserve also issued guidance encouraging banking institutions to utilize its discount window for loans and intraday credit extended by its Reserve Banks to help households and businesses impacted by the pandemic and announced numerous funding facilities. The FDIC has also acted to mitigate the deposit insurance assessment effects of participating in the PPP and the Federal Reserve's PPP Liquidity Facility and Money Market Mutual Fund Liquidity Facility.
West Bancorporation, Inc.
Management's Discussion and Analysis
(in thousands, except share and per share data)
Effects on Our Business. The COVID-19 pandemic and the specific developments referred to above have had and will continue to have a significant impact on our business. In particular, we anticipate that a significant portion of the Bank’s borrowers in the hotel, restaurant, retail and movie theater industries will continue to endure significant economic distress, which has caused, and may continue to cause, them to draw on their existing lines of credit and adversely affect their ability to repay existing indebtedness, and may adversely impact the value of collateral. These developments, together with economic conditions generally, are also expected to impact our commercial real estate portfolio, particularly with respect to real estate with exposure to these industries, and the value of certain collateral securing our loans. As a result, we anticipate that our financial condition, capital levels and results of operations could be adversely affected, as described in further detail below.
Our Response. We have taken numerous steps in response to the COVID-19 pandemic, including the following:
•We have been actively working with loan customers to evaluate prudent loan modification terms. As of September 30, 2020, approximately $434,361, or 19.3%, of loans were in payment deferral status under COVID-19 related modifications. COVID-19 related modifications primarily involve a delay of principal and/or interest payments for up to six months. As of September 30, 2020, approximately $361,015 of these loans are scheduled to return to regular payment status in October and November of 2020. Additional modifications, including payment deferrals for up to an additional six months, have been made for one hotel company totaling $7,364 and one movie theater company totaling $16,195 as of September 30, 2020. Additional modifications are expected to be made for approximately $67,000 of loans in the hotel industry in mid-November 2020, at the end of the term for the initial modifications.
•We had 925 PPP loans with an aggregate outstanding balance of $224,489 as of September 30, 2020. Borrowers have begun the process of filing for forgiveness with the SBA. When the borrower applies for loan forgiveness, the Bank has 60 days to submit the application to the SBA. The SBA then has 90 days to approve the loan forgiveness. We began receiving forgiveness payments from the SBA in October 2020 and expect the forgiveness process to extend into 2021.
•From mid-March through the end of June 2020, we limited all branch activity to drive-up and appointment only services. We have been promoting our digital banking options through our website, and customers have been encouraged to utilize our online and mobile banking services. Our customer service and retail banking departments have remained fully staffed and available to assist customers through our various digital channels. As we have reopened our lobbies for customer activity, we have implemented various social distancing and cleaning protocols recommended by governmental health departments to protect the health and safety of our employees and customers. We continue to pay all employees according to their normal work schedule, even if their workload has been altered. No employees have been furloughed or laid off as a result of COVID-19.
•We have successfully deployed a modified working strategy, including emphasis on social distancing and remote work as necessary to emphasize the safety of our teams and continuity of our business processes. We do not anticipate significant challenges to our ability to maintain our systems and controls in light of the measures we have taken to prevent the spread of COVID-19. No material operational or internal control challenges or risks have been identified to date.
Liquidity and Capital Strength. We maintain access to multiple sources of liquidity and continually review these sources in preparation for any unforeseen funding needs due to COVID-19. The Company has funding available from the FHLB, along with access to federal funds lines with various correspondent banks and access to the brokered certificate of deposit market. In addition, the Company has borrowing capacity at the Federal Reserve discount window and has access to the Paycheck Protection Program Liquidity Facility established by the Federal Reserve. If an extended recession causes large numbers of the Company’s deposit customers to withdraw their funds, the Company might become more reliant on volatile or more expensive sources of wholesale funding, which could have an adverse effect on the Company's net interest margin.
The Company's capital ratios continue to exceed the highest required regulatory benchmark levels. We have, in recent years, raised our quarterly dividend in the second quarter of each year. However, due to the uncertainty facing our economy, our Board of Directors kept the dividend at the prior level of $0.21 per share for the dividend paid in the second and third quarters of 2020 and has decided to keep the dividend at the same level of $0.21 per share for the dividend to be paid in the fourth quarter of 2020. Our Board of Directors will evaluate the dividend on a quarterly basis based on the effects the COVID-19 pandemic has on the Company and its customers.
West Bancorporation, Inc.
Management's Discussion and Analysis
(in thousands, except share and per share data)
Exposure to Stressed Industries. Certain industries are widely expected to be particularly impacted by shutdowns, capacity restrictions, quarantines and social distancing in response to COVID-19 and efforts to contain it. Those industries include travel, hospitality and entertainment, retail, healthcare services, energy and manufacturing. At September 30, 2020, West Bank's commercial real estate and commercial operating loan exposure to the hotel, retail, restaurant and movie theater industries was approximately $186,354, $107,418, $21,765 and $16,195 respectively. Collectively, at September 30, 2020, those exposures made up approximately 14.8 percent of the total loan portfolio. Because of the significant uncertainties related to the duration of the COVID-19 pandemic and its potential effects on our customers, and on the national and local economy as a whole, there can be no assurances as to how the crisis may ultimately affect the Company's loan portfolio.
SUMMARY
Net income for the three months ended September 30, 20172020 was $6,405,$8,100, or $0.39$0.49 per diluted common share, compared to $5,813,$7,526, or $0.36$0.46 per diluted common share, for the three months ended September 30, 2016.2019. The Company's annualized return on average assets and return on average equity for the three months ended September 30, 20172020 were 1.291.16 percent and 14.4115.20 percent, respectively, compared to 1.261.22 percent and 14.2014.76 percent, respectively, for the three months ended September 30, 2016.2019.
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, 20172020 compared to the three months ended September 30, 2016same period in 2019 was primarily due to the combination of higheran increase in net interest income growth inand noninterest income, and a decreasepartially offset by an increase 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, 20172020 grew $310, or 2.1 percent,$4,016 compared to the three months ended September 30, 2016.2019. The increase in net interest income was driven byprimarily due to the decrease in interest expense on deposits. During the three months ended September 30, 2020, interest expense on deposits decreased $5,018 compared to the three months ended September 30, 2019, primarily due to the Federal Reserve's reductions in the targeted federal funds rate that occurred in March 2020. In response to the economic conditions and reduction in market rates, West Bank lowered its rates in March 2020 in almost all deposit categories.
The Company recorded 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 heldprovision for loan losses of $4,000 during the three months ended September 30, 2020, compared to $300 for the three months ended September 30, 2017 compared2019, due primarily to the same time period in 2016. Partially offsettinguncertainty surrounding economic conditions as a result of the COVID-19 pandemic and due to an 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 provisionnonaccrual loans and slow economic recovery in the three months ended September 30, 2016.hotel and entertainment industries.
Noninterest income grew $345, or 18.0 percent,increased $1,045 during the three months ended September 30, 20172020 compared to the same time period in 2016, mainly as the result of net gainsthree months ended September 30, 2019, primarily due to loan swap fees earned on sales ofback-to-back interest rate swaps and increased realized investment securities andgains compared to the three months ended September 30, 2019. Noninterest expense increased $523 during the three months ended September 30, 2020 compared to the three months ended September 30, 2019 primarily due to an increase in trust revenue.FDIC insurance expense.
Net income for the nine months ended September 30, 20172020 was $18,876,$24,158, or $1.16$1.46 per diluted common share, compared to $16,985,$21,083, or $1.05$1.28 per diluted common share, for the nine months ended September 30, 2016.2019. The Company's annualized return on average assets and return on average equity for the nine months ended September 30, 20172020 were 1.321.21 percent and 14.6915.47 percent, respectively, compared to 1.261.20 percent and 14.2914.25 percent, respectively, for the first nine months of 2016.2019.
The increase in net income for the nine months ended September 30, 20172020 compared to the same period in 20162019 was primarily due to growthincreases in net interest income associated with loan growth that exceeded theand noninterest income, partially offset by an 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.losses.
Net interest income for the nine months ended September 30, 20172020 grew $1,820,$11,300, or 4.323.0 percent, compared to the nine months ended September 30, 2016.2019. The impact of an increase in net interest income was primarily due to the $113,699 increaseaverage balance of total interest-earning assets and declines in the rates paid on interest-bearing liabilities exceeded the effects of declines in rates earned on interest-earning assets and increases in the average loans outstandingbalance of total interest-bearing liabilities. Average interest-earning assets for the first nine months of 20172020 were $294,909 higher than the average interest-earning assets for the first nine months of 2019. Average interest-bearing liabilities for the nine months ended September 30, 2020 were $146,698 higher than the average interest-bearing liabilities for the nine months ended September 30, 2019. The Federal Reserve's action to reduce the targeted federal funds rate by 25 basis points in each of August, September and October of 2019 and by an additional 150 basis points in March 2020 resulted in decreases in both the yield on interest-earning assets and the rate paid on interest-bearing liabilities for the first nine months of 2020 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.2019.
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 $57,035, or 4.1 percent, during the first nine months of 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 remained strong as evidenced by the Company's Texas ratio, which was 0.27 percent as of September 30, 2017. As of September 30, 2017, the allowance for loan losses was 1.12 percent of outstanding loans, and management believed the allowance was adequate to absorb any losses inherent in the loan portfolio.
West Bancorporation, Inc.
Management's Discussion and Analysis
(in thousands, except share and per share data)
The Company recorded an $8,000 provision for loan losses for the nine months ended September 30, 2020, compared to $300 for the nine months ended September 30, 2019. The increased provision recorded in 2020 was due to the uncertainty surrounding economic conditions as a result of the COVID-19 pandemic and due to an increase in nonaccrual loans and slow economic recovery in the hotel and entertainment industries.
Each quarter throughout
Noninterest income increased $1,222 during the year,nine months ended September 30, 2020, compared to the Company's fournine months ended September 30, 2019, due primarily to loan swap fees earned on back-to-back interest rate swaps and realized investment securities gains during the nine months ended September 30, 2020, compared to realized investment securities losses during the nine months ended September 30, 2019. For additional information on the loan swaps, refer to Note 5 of the financial statements.
Total loans outstanding increased $305,762, or 15.7 percent, during the first nine months of 2020. Loan growth included $224,489 of PPP loans originated in 2020. We expect the COVID-19 pandemic to have an adverse effect on our loan pipeline and the credit quality of our loan portfolio during the remainder of 2020 and into 2021. Disruption to our customers could result in increased loan delinquencies and defaults and a decline in local loan demand. The duration of the COVID-19 pandemic could have a significant impact on the future credit quality of our loan portfolio, although it is not possible to project the impact with any precision at this time. As of September 30, 2020, the allowance for loan losses was 1.13 percent of outstanding loans, compared to 0.89 percent as of December 31, 2019. At September 30, 2020, the allowance for loan losses was 1.26 percent of outstanding loans excluding $224,489 of PPP loans, which are 100 percent guaranteed by the SBA. Management believed the allowance for loan losses at September 30, 2020 was adequate to absorb any losses inherent in the loan portfolio as of that date.
On a quarterly basis, the Company compares three key performance metrics are compared to those of our identified peer group. The peer group was revised in the first quarter of 16 companies.2020 after evaluating financial institutions that we believe better reflect our business, particularly in terms of market capitalization, asset size and loan portfolio composition. The peer group for 2020 consists of 1621 Midwestern, publicly traded peer financial institutions against which we compare our performance each quarter consists of BankFinancialincluding Bank First Corporation, Civista Bancshares, Inc., CrossFirst Bankshares, Inc., Equity Bancshares, Inc., Farmers Capital Bank Corporation,National Banc Corp., Farmers & Merchants Bancorp, Inc., First Business Financial Services, Inc., First Defiance Financial Corp., First Mid-IllinoisMid Bancshares, Inc., German American Bancorp, Inc., Hills Bancorporation, HorizonIsabella Bank Corporation, LCNB Corp., Level One Bancorp, IsabellaInc., Macatawa Bank Corporation, Mackinac Financial Corporation, Mercantile Bank Corporation, MidWestOne Financial Group, Inc., MutualFirst Financial, Inc., Nicolet Bankshares, Inc., Peoples Bancorp, QCR Holdings, Inc., Southwestand Southern Missouri 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. OurCompany's goal is to perform at or near the top of these peersthis peer group relative to what we consider to be fourthree 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 theCompany and peer group's metricsresults for the six months ended June 30, 2017 (latest data available), the Company's metrics for the nine months ended September 30, 2017 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 return on average assets.key financial performance measures are summarized below.
|
| | | |
| West Bancorporation, Inc. | | Peer Group Range |
| Nine months ended September 30, 2017 | | Six months ended June 30, 2017 |
Return on average assets | 1.32% | | 0.56% - 1.75% |
Return on average equity | 14.69% | | 4.37% - 12.13% |
Efficiency ratio*(1)
| 45.95% | | 54.04% - 73.76% |
Texas ratio* | 0.27% | | 3.78% - 23.16% |
* A lower ratio is more desirable. | | | | | | | | | | | | | | | | | |
| West Bancorporation, Inc. | | Peer Group Range(3) |
| As of and for the nine months ended September 30, 2020 | | As of and for the six months ended June 30, 2020 | | As of and for the six months ended June 30, 2020 |
Return on average equity | 15.47% | | 15.61% | | -1.14% - 12.80% |
Efficiency ratio(1) (2) | 42.68% | | 43.41% | | 47.85% - 71.80% |
Texas ratio(2) | 7.38% | | 0.17% | | 2.67% - 16.15% |
(1) The efficiency ratio is a non-GAAP financial measure. For further information, refer to the Non-GAAP Financial Measures section of this report.
(2) A lower ratio is more desirable.
In July 2017, the Company was included on Bank Director Magazine's 2017 Bank Performance Scorecard listing of the top 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 nation.(3) Latest data available.
At its meeting on October 25, 2017,28, 2020, the Company's Board of Directors declared a quarterly cash dividend of $0.18$0.21 per common share. The dividend is payable on November 22, 2017,25, 2020, to stockholders of record as ofon November 8, 2017. The dividend was increased by $0.01 to the $0.18 level for the dividend declared in April 2017 and represents the highest quarterly dividend ever paid by the Company.
11, 2020.
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, 20172020 compared with the same periods in 2016.2019.
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | Change | | Change % | | 2017 | | 2016 | | Change | | Change % | | 2020 | | 2019 | | Change | | Change % | | 2020 | | 2019 | | Change | | Change % |
Net income | $ | 6,405 |
| | $ | 5,813 |
| | $ | 592 |
| | 10.18 | % | | $ | 18,876 |
| | $ | 16,985 |
| | $ | 1,891 |
| | 11.13 | % | Net income | $ | 8,100 | | | $ | 7,526 | | | $ | 574 | | | 7.63 | % | | $ | 24,158 | | | $ | 21,083 | | | $ | 3,075 | | | 14.59 | % |
Average assets | 1,969,547 |
| | 1,838,125 |
| | 131,422 |
| | 7.15 | % | | 1,911,391 |
| | 1,794,777 |
| | 116,614 |
| | 6.50 | % | Average assets | 2,766,151 | | | 2,448,529 | | | 317,622 | | | 12.97 | % | | 2,666,532 | | | 2,358,409 | | | 308,123 | | | 13.06 | % |
Average stockholders' equity | 176,308 |
| | 162,867 |
| | 13,441 |
| | 8.25 | % | | 171,827 |
| | 158,821 |
| | 13,006 |
| | 8.19 | % | Average stockholders' equity | 212,054 | | | 202,372 | | | 9,682 | | | 4.78 | % | | 208,628 | | | 197,827 | | | 10,801 | | | 5.46 | % |
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Return on average assets | 1.29 | % | | 1.26 | % | | 0.03 | % | | | | 1.32 | % | | 1.26 | % | | 0.06 | % | | |
| Return on average assets | 1.16 | % | | 1.22 | % | | (0.06) | % | | 1.21 | % | | 1.20 | % | | 0.01 | % | | |
Return on average equity | 14.41 | % | | 14.20 | % | | 0.21 | % | | | | 14.69 | % | | 14.29 | % | | 0.40 | % | | |
| Return on average equity | 15.20 | % | | 14.76 | % | | 0.44 | % | | 15.47 | % | | 14.25 | % | | 1.22 | % | | |
Net interest margin (1) | 3.31 | % | | 3.50 | % | | (0.19 | )% | | | | 3.41 | % | | 3.51 | % | | (0.10 | )% | | | Net interest margin (1) | 3.21 | % | | 2.94 | % | | 0.27 | % | | 3.19 | % | | 2.95 | % | | 0.24 | % | |
Efficiency ratio (1) (2) | 45.10 | % | | 46.25 | % | | (1.15 | )% | | | | 45.95 | % | | 46.59 | % | | (0.64 | )% | | | Efficiency ratio (1) (2) | 41.35 | % | | 49.03 | % | | (7.68) | % | | 42.68 | % | | 51.74 | % | | (9.06) | % | |
Dividend payout ratio | 45.57 | % | | 47.19 | % | | (1.62 | )% | | | | 45.46 | % | | 47.43 | % | | (1.97 | )% | | |
| Dividend payout ratio | 42.70 | % | | 45.70 | % | | (3.00) | % | | 42.87 | % | | 48.09 | % | | (5.22) | % | | |
Average equity to average assets ratio | 8.95 | % | | 8.86 | % | | 0.09 | % | | | | 8.99 | % | | 8.85 | % | | 0.14 | % | | |
| Average equity to average assets ratio | 7.67 | % | | 8.27 | % | | (0.60) | % | | 7.82 | % | | 8.39 | % | | (0.57) | % | | |
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| | | | | | | | | As of September 30, | | | | As of September 30, | |
| | | | | | | | | 2017 | | 2016 | | Change | | | | 2020 | | 2019 | | Change | |
Texas ratio (2) | | | | | | | | | 0.27 | % | | 0.55 | % | | (0.28 | )% | | | Texas ratio (2) | | 7.38 | % | | 0.24 | % | | 7.14 | % | |
Equity to assets ratio | | | | | | | | | 8.77 | % | | 9.03 | % | | (0.26 | )% | | |
| Equity to assets ratio | | 7.76 | % | | 8.31 | % | | (0.55) | % | | |
Tangible common equity ratio | Tangible common equity ratio | | | | | | | | 8.77 | % | | 9.03 | % | | (0.26 | )% | | |
| Tangible common equity ratio | | 7.76 | % | | 8.31 | % | | (0.55) | % | | |
(1) Amounts are presented on an FTE basis. These are non-GAAP financial measures. For further information, refer to the Non-GAAP Financial Measures section of this report.
(2) A lower ratio is more desirable.
Definitions of ratios:
•Return on average assets - annualized net income divided by average assets.
•Return on average equity - annualized net income divided by average stockholders' equity.
•Net interest margin - annualized tax-equivalent net interest income divided by average interest-earning assets.
•Efficiency ratio - noninterest expense (excluding other real estate owned expense)expense and write-down of premises) divided by noninterest income (excluding net securities gains (losses) and gains/losses on disposition of premises and equipment) plus tax-equivalent net interest income.
•Dividend payout ratio - dividends paid to common stockholders divided by net income.
•Average equity to average assets ratio - average equity divided by average assets.
•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.
West Bancorporation, Inc.
Management's Discussion and Analysis
(in thousands, except share and per share data)
Net Interest Income
The following tables present average balances and related interest income or interest expense, with the resulting annualized average yield or rate by category of interest-earning assets or interest-bearing liabilities. Interest income and the resulting net interest income are shown on an FTE basis.
| | Data for the three months ended September 30: | Data for the three months ended September 30: | | | | | | | | | | | | | | | Data for the three months ended September 30: | |
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| Average Balance | | Interest Income/Expense | | Yield/Rate | | Average Balance | | Interest Income/Expense | | Yield/Rate |
| 2017 | | 2016 | | Change | | Change- % | | 2017 | | 2016 | | Change | | Change- % | | 2017 | | 2016 | | Change | | 2020 | | 2019 | | Change | | Change- % | | 2020 | | 2019 | | Change | | Change- % | | 2020 | | 2019 | | Change |
Interest-earning assets: | | | | | | | | | | | | | | | | | | | | | | Interest-earning assets: | | | | | | | | | | | | | | | | | | | | | |
Loans: (1) (2) | | | | | | | | | | | | | | | | | | | | | | Loans: (1) (2) | |
Commercial | $ | 308,585 |
| | $ | 365,632 |
| | $ | (57,047 | ) | | (15.60 | )% | | $ | 3,452 |
| | $ | 3,874 |
| | $ | (422 | ) | | (10.89 | )% | | 4.44 | % | | 4.22 | % | | 0.22 | % | Commercial | $ | 635,577 | | | $ | 396,228 | | | $ | 239,349 | | | 60.41 | % | | $ | 5,549 | | | $ | 5,088 | | | $ | 461 | | | 9.06 | % | | 3.47 | % | | 5.09 | % | | (1.62) | % |
Real estate (3) | 1,109,041 |
| | 1,003,492 |
| | 105,549 |
| | 10.52 | % | | 12,503 |
| | 11,166 |
| | 1,337 |
| | 11.97 | % | | 4.47 | % | | 4.43 | % | | 0.04 | % | Real estate (3) | 1,589,000 | | | 1,413,114 | | | 175,886 | | | 12.45 | % | | 16,934 | | | 17,129 | | | (195) | | | (1.14) | % | | 4.24 | % | | 4.81 | % | | (0.57) | % |
Consumer and other | 8,489 |
| | 9,983 |
| | (1,494 | ) | | (14.97 | )% | | 88 |
| | 102 |
| | (14 | ) | | (13.73 | )% | | 4.09 | % | | 4.06 | % | | 0.03 | % | Consumer and other | 6,031 | | | 7,108 | | | (1,077) | | | (15.15) | % | | 64 | | | 87 | | | (23) | | | (26.44) | % | | 4.19 | % | | 4.89 | % | | (0.70) | % |
Total loans | 1,426,115 |
| | 1,379,107 |
| | 47,008 |
| | 3.41 | % | | 16,043 |
| | 15,142 |
| | 901 |
| | 5.95 | % | | 4.46 | % | | 4.37 | % | | 0.09 | % | Total loans | 2,230,608 | | | 1,816,450 | | | 414,158 | | | 22.80 | % | | 22,547 | | | 22,304 | | | 243 | | | 1.09 | % | | 4.02 | % | | 4.87 | % | | (0.85) | % |
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Investment securities: | |
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| Investment securities: | | | | | | | | | | | | | | | | | | | | | |
Taxable | 259,225 |
| | 230,054 |
| | 29,171 |
| | 12.68 | % | | 1,489 |
| | 991 |
| | 498 |
| | 50.25 | % | | 2.30 | % | | 1.72 | % | | 0.58 | % | Taxable | 294,545 | | | 357,585 | | | (63,040) | | | (17.63) | % | | 1,728 | | | 2,445 | | | (717) | | | (29.33) | % | | 2.35 | % | | 2.74 | % | | (0.39) | % |
Tax-exempt (3) | 154,834 |
| | 115,934 |
| | 38,900 |
| | 33.55 | % | | 1,569 |
| | 1,176 |
| | 393 |
| | 33.42 | % | | 4.05 | % | | 4.06 | % | | (0.01 | )% | Tax-exempt (3) | 57,839 | | | 48,532 | | | 9,307 | | | 19.18 | % | | 465 | | | 429 | | | 36 | | | 8.39 | % | | 3.22 | % | | 3.54 | % | | (0.32) | % |
Total investment securities | 414,059 |
| | 345,988 |
| | 68,071 |
| | 19.67 | % | | 3,058 |
| | 2,167 |
| | 891 |
| | 41.12 | % | | 2.95 | % | | 2.50 | % | | 0.45 | % | Total investment securities | 352,384 | | | 406,117 | | | (53,733) | | | (13.23) | % | | 2,193 | | | 2,874 | | | (681) | | | (23.70) | % | | 2.49 | % | | 2.83 | % | | (0.34) | % |
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Federal funds sold | 42,663 |
| | 20,783 |
| | 21,880 |
| | 105.28 | % | | 136 |
| | 26 |
| | 110 |
| | 423.08 | % | | 1.27 | % | | 0.51 | % | | 0.76 | % | Federal funds sold | 56,540 | | | 111,798 | | | (55,258) | | | (49.43) | % | | 15 | | | 611 | | | (596) | | | (97.55) | % | | 0.10 | % | | 2.17 | % | | (2.07) | % |
Total interest-earning assets (3) | $ | 1,882,837 |
| | $ | 1,745,878 |
| | $ | 136,959 |
| | 7.84 | % | | 19,237 |
| | 17,335 |
| | 1,902 |
| | 10.97 | % | | 4.05 | % | | 3.95 | % | | 0.10 | % | Total interest-earning assets (3) | $ | 2,639,532 | | | $ | 2,334,365 | | | $ | 305,167 | | | 13.07 | % | | 24,755 | | | 25,789 | | | (1,034) | | | (4.01) | % | | 3.73 | % | | 4.38 | % | | (0.65) | % |
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Interest-bearing liabilities: | |
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| Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | |
Deposits: | |
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| Deposits: | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing demand, | | | | | | | | | | | | | | | | | | | | | | Interest-bearing demand, | |
savings and money | | | | | | | | | | | | | | | | | | | | | | savings and money | |
market | $ | 1,081,227 |
| | $ | 944,809 |
| | $ | 136,418 |
| | 14.44 | % | | 1,686 |
| | 678 |
| | 1,008 |
| | 148.67 | % | | 0.62 | % | | 0.29 | % | | 0.33 | % | market | $ | 1,482,705 | | | $ | 1,347,942 | | | $ | 134,763 | | | 10.00 | % | | 1,355 | | | 5,022 | | | (3,667) | | | (73.02) | % | | 0.36 | % | | 1.48 | % | | (1.12) | % |
Time deposits | 159,949 |
| | 110,223 |
| | 49,726 |
| | 45.11 | % | | 422 |
| | 194 |
| | 228 |
| | 117.53 | % | | 1.04 | % | | 0.70 | % | | 0.34 | % | Time deposits | 188,828 | | | 297,229 | | | (108,401) | | | (36.47) | % | | 591 | | | 1,749 | | | (1,158) | | | (66.21) | % | | 1.25 | % | | 2.33 | % | | (1.08) | % |
Total deposits | 1,241,176 |
| | 1,055,032 |
| | 186,144 |
| | 17.64 | % | | 2,108 |
| | 872 |
| | 1,236 |
| | 141.74 | % | | 0.67 | % | | 0.33 | % | | 0.34 | % | Total deposits | 1,671,533 | | | 1,645,171 | | | 26,362 | | | 1.60 | % | | 1,946 | | | 6,771 | | | (4,825) | | | (71.26) | % | | 0.46 | % | | 1.63 | % | | (1.17) | % |
Other borrowed funds | 150,548 |
| | 132,583 |
| | 17,965 |
| | 13.55 | % | | 1,421 |
| | 1,103 |
| | 318 |
| | 28.83 | % | | 3.75 | % | | 3.31 | % | | 0.44 | % | Other borrowed funds | 225,995 | | | 190,501 | | | 35,494 | | | 18.63 | % | | 1,532 | | | 1,725 | | | (193) | | | (11.19) | % | | 2.70 | % | | 3.59 | % | | (0.89) | % |
Total interest-bearing | | | | | | | | | | | | | | | | | | | | | | Total interest-bearing | | | | | | | | | | | | | | | | | | | | | |
liabilities | $ | 1,391,724 |
| | $ | 1,187,615 |
| | $ | 204,109 |
| | 17.19 | % | | 3,529 |
| | 1,975 |
| | 1,554 |
| | 78.68 | % | | 1.01 | % | | 0.66 | % | | 0.35 | % | liabilities | $ | 1,897,528 | | | $ | 1,835,672 | | | $ | 61,856 | | | 3.37 | % | | 3,478 | | | 8,496 | | | (5,018) | | | (59.06) | % | | 0.73 | % | | 1.84 | % | | (1.11) | % |
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Tax-equivalent net interest income (FTE) (4) | Tax-equivalent net interest income (FTE) (4) | | |
| | |
| | $ | 15,708 |
| | $ | 15,360 |
| | $ | 348 |
| | 2.27 | % | | |
| | |
| | |
| Tax-equivalent net interest income (FTE) (4) | | | | | | $ | 21,277 | | | $ | 17,293 | | | $ | 3,984 | | | 23.04 | % | | | | | | |
Net interest spread (FTE) | |
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| | |
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| | |
| | 3.04 | % | | 3.29 | % | | (0.25 | )% | Net interest spread (FTE) | | | | | | | | | | | | | | | | 3.00 | % | | 2.54 | % | | 0.46 | % |
Net interest margin (FTE) (4) | Net interest margin (FTE) (4) | | |
| | |
| | |
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| | 3.31 | % | | 3.50 | % | | (0.19 | )% | Net interest margin (FTE) (4) | | | | | | | | | | | | | | | | 3.21 | % | | 2.94 | % | | 0.27 | % |
See footnotes on following page
West Bancorporation, Inc.
Management's Discussion and Analysis
(in thousands, except share and per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Data for the nine months ended September 30: | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Average Balance | | Interest Income/Expense | | Yield/Rate |
| 2020 | | 2019 | | Change | | Change- % | | 2020 | | 2019 | | Change | | Change- % | | 2020 | | 2019 | | Change |
Interest-earning assets: | | | | | | | | | | | | | | | | | | | | | |
Loans: (1) (2) | | | | | | | | | | | | | | | | | | | | | |
Commercial | $ | 551,476 | | | $ | 381,778 | | | $ | 169,698 | | | 44.45 | % | | $ | 15,927 | | | $ | 14,628 | | | $ | 1,299 | | | 8.88 | % | | 3.86 | % | | 5.12 | % | | (1.26) | % |
Real estate (3) | 1,557,211 | | | 1,385,089 | | | 172,122 | | | 12.43 | % | | 51,284 | | | 49,111 | | | 2,173 | | | 4.42 | % | | 4.40 | % | | 4.74 | % | | (0.34) | % |
Consumer and other | 6,374 | | | 6,709 | | | (335) | | | (4.99) | % | | 210 | | | 246 | | | (36) | | | (14.63) | % | | 4.40 | % | | 4.91 | % | | (0.51) | % |
Total loans | 2,115,061 | | | 1,773,576 | | | 341,485 | | | 19.25 | % | | 67,421 | | | 63,985 | | | 3,436 | | | 5.37 | % | | 4.26 | % | | 4.82 | % | | (0.56) | % |
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Investment securities: | | | | | | | | | | | | | | | | | | | | | |
Taxable | 325,853 | | | 349,719 | | | (23,866) | | | (6.82) | % | | 6,105 | | | 7,405 | | | (1,300) | | | (17.56) | % | | 2.50 | % | | 2.82 | % | | (0.32) | % |
Tax-exempt (3) | 48,381 | | | 76,836 | | | (28,455) | | | (37.03) | % | | 1,221 | | | 2,038 | | | (817) | | | (40.09) | % | | 3.37 | % | | 3.54 | % | | (0.17) | % |
Total investment securities | 374,234 | | | 426,555 | | | (52,321) | | | (12.27) | % | | 7,326 | | | 9,443 | | | (2,117) | | | (22.42) | % | | 2.61 | % | | 2.95 | % | | (0.34) | % |
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Federal funds sold | 55,134 | | | 49,389 | | | 5,745 | | | 11.63 | % | | 256 | | | 819 | | | (563) | | | (68.74) | % | | 0.62 | % | | 2.22 | % | | (1.60) | % |
Total interest-earning assets (3) | $ | 2,544,429 | | | $ | 2,249,520 | | | $ | 294,909 | | | 13.11 | % | | 75,003 | | | 74,247 | | | 756 | | | 1.02 | % | | 3.94 | % | | 4.41 | % | | (0.47) | % |
| | | | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | |
Deposits: | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing demand, | | | | | | | | | | | | | | | | | | | | | |
savings and money | | | | | | | | | | | | | | | | | | | | | |
market | $ | 1,450,279 | | | $ | 1,328,439 | | | $ | 121,840 | | | 9.17 | % | | 6,308 | | | 15,267 | | | (8,959) | | | (58.68) | % | | 0.58 | % | | 1.54 | % | | (0.96) | % |
Time deposits | 229,205 | | | 253,355 | | | (24,150) | | | (9.53) | % | | 3,035 | | | 4,138 | | | (1,103) | | | (26.66) | % | | 1.77 | % | | 2.18 | % | | (0.41) | % |
Total deposits | 1,679,484 | | | 1,581,794 | | | 97,690 | | | 6.18 | % | | 9,343 | | | 19,405 | | | (10,062) | | | (51.85) | % | | 0.74 | % | | 1.64 | % | | (0.90) | % |
Other borrowed funds | 229,431 | | | 180,423 | | | 49,008 | | | 27.16 | % | | 4,801 | | | 5,150 | | | (349) | | | (6.78) | % | | 2.80 | % | | 3.82 | % | | (1.02) | % |
Total interest-bearing | | | | | | | | | | | | | | | | | | | | | |
liabilities | $ | 1,908,915 | | | $ | 1,762,217 | | | $ | 146,698 | | | 8.32 | % | | 14,144 | | | 24,555 | | | (10,411) | | | (42.40) | % | | 0.99 | % | | 1.86 | % | | (0.87) | % |
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Net interest income (FTE) (4) | | | | | | $ | 60,859 | | | $ | 49,692 | | | $ | 11,167 | | | 22.47 | % | | | | | | |
Net interest spread (FTE) | | | | | | | | | | | | | | | | | 2.95 | % | | 2.55 | % | | 0.40 | % |
Net interest margin (FTE) (4) | | | | | | | | | | | | | | | | 3.19 | % | | 2.95 | % | | 0.24 | % |
(1)Average loan balances include nonaccrual loans. Interest income recognized on nonaccrual loans has been included. |
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Data for the nine months ended September 30: | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Average Balance | | Interest Income/Expense | | Yield/Rate |
| 2017 | | 2016 | | Change | | Change- % | | 2017 | | 2016 | | Change | | Change- % | | 2017 | | 2016 | | Change |
Interest-earning assets: | | | | | | | | | | | | | | | | | | | | | |
Loans: (1) (2) | | | | | | | | | | | | | | | | | | | | | |
Commercial | $ | 326,090 |
| | $ | 361,315 |
| | $ | (35,225 | ) | | (9.75 | )% | | $ | 10,556 |
| | $ | 11,377 |
| | $ | (821 | ) | | (7.22 | )% | | 4.33 | % | | 4.21 | % | | 0.12 | % |
Real estate (3) | 1,100,526 |
| | 951,226 |
| | 149,300 |
| | 15.70 | % | | 36,692 |
| | 31,768 |
| | 4,924 |
| | 15.50 | % | | 4.46 | % | | 4.46 | % | | — | % |
Consumer and other | 8,340 |
| | 8,716 |
| | (376 | ) | | (4.31 | )% | | 251 |
| | 257 |
| | (6 | ) | | (2.33 | )% | | 4.02 | % | | 3.94 | % | | 0.08 | % |
Total loans | 1,434,956 |
| | 1,321,257 |
| | 113,699 |
| | 8.61 | % | | 47,499 |
| | 43,402 |
| | 4,097 |
| | 9.44 | % | | 4.43 | % | | 4.39 | % | | 0.04 | % |
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Investment securities: | |
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Taxable | 230,060 |
| | 243,811 |
| | (13,751 | ) | | (5.64 | )% | | 3,755 |
| | 3,222 |
| | 533 |
| | 16.54 | % | | 2.18 | % | | 1.76 | % | | 0.42 | % |
Tax-exempt (3) | 129,808 |
| | 120,049 |
| | 9,759 |
| | 8.13 | % | | 3,932 |
| | 3,742 |
| | 190 |
| | 5.08 | % | | 4.04 | % | | 4.16 | % | | (0.12 | )% |
Total investment securities | 359,868 |
| | 363,860 |
| | (3,992 | ) | | (1.10 | )% | | 7,687 |
| | 6,964 |
| | 723 |
| | 10.38 | % | | 2.85 | % | | 2.55 | % | | 0.30 | % |
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Federal funds sold | 26,173 |
| | 14,586 |
| | 11,587 |
| | 79.44 | % | | 223 |
| | 57 |
| | 166 |
| �� | 291.23 | % | | 1.14 | % | | 0.53 | % | | 0.61 | % |
Total interest-earning assets (3) | $ | 1,820,997 |
| | $ | 1,699,703 |
| | $ | 121,294 |
| | 7.14 | % | | 55,409 |
| | 50,423 |
| | 4,986 |
| | 9.89 | % | | 4.07 | % | | 3.96 | % | | 0.11 | % |
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Interest-bearing liabilities: | |
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Deposits: | |
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Interest-bearing demand, | | | | | | | | | | | | | | | | | | | | | |
savings and money | | | | | | | | | | | | | | | | | | | | | |
market | $ | 1,030,095 |
| | $ | 909,950 |
| | $ | 120,145 |
| | 13.20 | % | | 4,107 |
| | 1,842 |
| | 2,265 |
| | 122.96 | % | | 0.53 | % | | 0.27 | % | | 0.26 | % |
Time deposits | 139,964 |
| | 110,218 |
| | 29,746 |
| | 26.99 | % | | 977 |
| | 559 |
| | 418 |
| | 74.78 | % | | 0.93 | % | | 0.68 | % | | 0.25 | % |
Total deposits | 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 funds | 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 | $ | 1,316,642 |
| | $ | 1,158,855 |
| | $ | 157,787 |
| | 13.62 | % | | 9,004 |
| | 5,736 |
| | 3,268 |
| | 56.97 | % | | 0.91 | % | | 0.66 | % | | 0.25 | % |
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Tax-equivalent net interest income (FTE) (4) | | |
| | |
| | $ | 46,405 |
| | $ | 44,687 |
| | $ | 1,718 |
| | 3.84 | % | | |
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Net interest spread (FTE) | |
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| | |
| | 3.16 | % | | 3.30 | % | | (0.14 | )% |
Net interest margin (FTE) (4) | | |
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| | |
| | 3.41 | % | | 3.51 | % | | (0.10 | )% |
(2)Interest income on loans includes amortization of loan fees and costs and prepayment penalties collected, which are not material.
(3)Tax-exempt income has been adjusted to a tax-equivalent basis using a federal income tax rate of 21 percent and is adjusted to reflect the effect of the nondeductible interest expense associated with owning tax-exempt investment securities and loans.
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(1) | Average loan balances include nonaccrual loans. Interest income recognized on nonaccrual loans has been included. |
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(2) | Interest income on loans includes amortization of loan fees and costs and prepayment penalties collected, which are not material. |
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(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. |
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(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. |
(4)Net interest income (FTE) and net interest margin (FTE) are non-GAAP financial measures. For further information, refer to the Non-GAAP Financial Measures section of this report.
The Company's largest component of net income is net interest income, which is the difference between interest earned on interest-earning assets, consisting primarily of loans and investment securities, and interest paid on interest-bearing liabilities, consisting of deposits and borrowings. Fluctuations in net interest income can result from the combination of changes in the average balances of asset and liability categories and changes in interest rates. Interest rates earned and paid are affected by general economic conditions, particularly changes in market interest rates, and by competitive factors, government policies and actions of regulatory authorities. The Board of Governors of the Federal Reserve System increaseddecreased the targeted federal funds interest rate by 25 basis points in each of December 2016,August, September and October of 2019. In addition, in response to the COVID-19 pandemic, the Federal Reserve decreased the targeted federal funds interest rate by a total of 150 basis points in March 20172020. These decreases impacted the comparability of net interest income between 2019 and June 2017.2020.
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, 2017 declined 192020 increased by 27 and 1024 basis points, respectively, compared to the three and nine months ended September 30, 2016.2019. The primary driversdriver of the declineincrease in the net interest margin were an increasewas a decrease in interest rates paid on certain deposit categoriesdeposits and an increase in the variable rates paid on other borrowed funds, partially offset by an increasea decrease in yield on loans and investment securities. Despite the decline in the net interest margin, tax-equivalentinvestments. Tax-equivalent net interest income for the three and nine months ended September 30, 20172020 increased $348$3,984 and $1,718,$11,167, respectively, compared to the same time periods in 2016.2019. The increase in net interest income for the three and nine months ended September 30, 20172020 compared to the three and nine months ended September 30, 20162019 was largely due to thea decrease in rates paid on deposits and borrowed funds and an increase in average outstanding loans, andpartially offset by an increase in average interest-bearing liabilities and a decrease in yield on investment securities.loans and investments. Management expects the current interestdecrease in the targeted federal funds rate environmentin March 2020 to continue to put pressureresult in both lower rates paid on the net interest margin throughoutdeposits and lower yields on loans for the remainder of 2017. Management continually develops2020 and applies strategies2021 compared to attempt to maintain the net interest margin.2019.
Tax-equivalent interest income on loans increased $901$243 for the three months ended September 30, 20172020 compared to the three months ended September 30, 2016.2019. For the nine months ended September 30, 2017,2020, tax-equivalent interest income on loans increased $4,097$3,436, compared to the same time period in 2016.2019. The improvement for both time periods was primarily due to the increase in average loan balances outstanding. The average yields on loans increasedoutstanding, which was significantly offset in part by nine and four basis points, respectively,the overall decline in loan yields. Average loan balances for the three and nine months ended September 30, 2017 compared to2020 included $224,288 and $133,354, respectively, of PPP loans. Interest income recognized on PPP loans was $1,365 and $2,438 for the three and nine months ended September 30, 2016. 2020, resulting in a yield of 2.42 and 2.44 percent, respectively. These interest income amounts include amortization of origination fees paid by the SBA. While the PPP loans contributed to the increase in average loans and interest income, they negatively impacted the overall yield on loans as can be seen in the significant decline in yield on commercial loans.
The Company continues to focus on expanding existing and entering into new customer relationships while maintaining strong credit quality. The yield on the Company's loan portfolio is affected by the portfolio's loan mix, the interest rate environment, the effects of competition, the level of nonaccrual loans and reversals of previously accrued interest on charged-off loans. The political and economic environments can also influence the volume of new loan originations and the mix of variable ratevariable-rate versus fixed ratefixed-rate loans.
The average balance of investment securities was higher during the three months ended September 30, 2017 than during the same period We anticipate that our interest income will be adversely affected in 2016future periods as a result of significant investment purchase activity during the secondCOVID-19 pandemic, including the possibility of decreases in the size of our loan portfolio and third quarters of 2017. The average balance of investment securities was slightly lower during the nine months ended September 30, 2017 than during the same period in 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 slightly extendingdeclining credit quality, the duration of PPP loans, the portfolio, which is expected to improve the yield on the investment portfolioeffect of lower interest rates, and an increase in future periods. The overall portfolio yield increased 45 and 30 basis points, respectively, for the three and nine months ended September 30, 2017 compared to the same periods last year.nonaccrual loans.
The average balance of interest-bearing demand, savings and money market deposits increased for the three and nine months ended September 30, 20172020, compared to the three and nine months ended September 30, 2016, partially2019, primarily 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 toand 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.demand accounts. The average rate paid on interest-bearing demand, savings and money market deposits for the three and nine months ended September 30, 2017 increased 332020 decreased 112 and 2696 basis points, respectively, compared to the three and nine months ended September 30, 2016. The increase in interest expense was primarily due to increasing interest rates on certain money market deposit products in response to the Federal Reserve System's rate increases.2019. The average balance of time deposits increased for the three and nine months ended September 30, 2017 compared to the same periods in 2016. The increase was primarily due to the shift of demand and savings account balances to higher interest rate time deposits. Interest ratespaid on time deposits increased 34decreased 108 and 2541 basis points, respectively, for the three and nine months ended September 30, 20172020 compared to the same periods in 2016,three and nine months ended September 30, 2019. The decreases were primarily due to higher marketdecreasing interest rates paid aton all deposit products in response to the time new and renewed timeunprecedented decrease in the targeted federal funds rate in March 2020. The COVID-19 pandemic could result in lower levels of deposits were issued.in future periods, which could decrease our average interest-bearing deposits for the remainder of 2020.
The average rate paid onbalance of other borrowed funds increased 44$35,494 and 37$49,008, respectively, for the three and nine months ended September 30, 2020 compared to the three and nine months ended September 30, 2019, primarily due to an increase in FHLB advances. The rate paid on borrowed funds declined 89 and 102 basis points, respectively, for the three and nine months ended September 30, 20172020 compared to the three and nine months ended September 30, 2016. The increase2019, primarily due to the maturity of long-term, high-rate FHLB advances in December 2019 through September 2020 and the reduction of market rates beginning in the average rate paid was due to increasessecond half of 2019 on short-term and variable-rate borrowings. The impact of the COVID-19 pandemic and possible decreases in rates for variable rate FHLB advances, the subordinated notes and long-term debt. The Company borrowed an additional $22,000 in long-term borrowings in May 2017 resultinginterest-bearing deposits could result in an increase in borrowed funds in 2020, which we generally expect to be at lower interest rates in comparison to 2019.
As a result of the average balancereductions in the targeted federal funds interest rate, as well as the impact of other borrowed funds.the COVID-19 pandemic, we expect that our net interest income and net interest margin could decrease in future periods.
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 chargesa charge made to earnings to maintain an adequate allowance for loan losses. The adequacy of the allowance for loan losses is evaluated quarterly by management and reviewed by the Board of Directors. The allowance for loan losses is management's best estimate of probable losses inherent in the loan portfolio as of the balance sheet date. Based upon the evaluation, no provision was recorded for either the three or nine months ended September 30, 2017, as 2017 year-to-date recoveries on previously charged off loans exceeded year-to-date charge-offs and 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 $4,000 and $8,000 for the three and nine months ended September 30, 20162020, compared to $300 for the three and nine months ended September 30, 2019. The increased provision for the three and nine months ended September 30, 2020, compared to the same time periods in 2019, was $200due to general uncertainty in the economy as a result of the COVID-19 pandemic, growth in the loan portfolio, increase in nonaccrual loans and $900, respectively.the slow economic recovery in the hotel and movie theater industries. We believe the provision for loan losses could increase in future periods based on our belief that the credit quality of our loan portfolio may decline and loan defaults could increase as a result of the duration of the COVID-19 pandemic.
Factors considered in establishing an appropriate allowance include: the borrower's financial condition; the value and adequacy of loan collateral; the condition of the local economy and the borrower's specific industry; the levels and trends of loans by segment; and a review of delinquent and classified loans. In response to COVID-19, the Company has increased its monitoring efforts of certain segments of the loan portfolio that management believes are under increased stress in the current economic conditions, including hotel and movie theater exposures. Ongoing communication with customers regarding revenue and cash flow expectations are used to monitor risks and stress in the loan portfolio. Customers in the hotel industry are providing monthly updates on occupancy rates. West Bank experienced an increase of $17,382 in nonaccrual loans in the third quarter of 2020. As loan deferral periods expire, future deterioration in credit quality may be identified and loan defaults could increase. Additional loan accommodations are being considered for loans in the hotel industry.
The quarterly evaluation of the allowance 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 southeasternsouthern 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 thanCompared to residential mortgages or consumer loans, because they oftencommercial loans typically 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.
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, 20172020 and 20162019 and related ratios.
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
Balance at beginning of period | $ | 16,486 |
| | $ | 15,829 |
| | $ | 657 |
| | $ | 16,112 |
| | $ | 14,967 |
| | $ | 1,145 |
| Balance at beginning of period | $ | 21,363 | | | $ | 16,737 | | | $ | 4,626 | | | $ | 17,235 | | | $ | 16,689 | | | $ | 546 | |
Charge-offs | (179 | ) | | (171 | ) | | (8 | ) | | (372 | ) | | (264 | ) | | (108 | ) | Charge-offs | — | | | (199) | | | 199 | | | (1) | | | (254) | | | 253 | |
Recoveries | 51 |
| | 100 |
| | (49 | ) | | 618 |
| | 355 |
| | 263 |
| Recoveries | 40 | | | 204 | | | (164) | | | 169 | | | 307 | | | (138) | |
Net (charge-offs) recoveries | (128 | ) | | (71 | ) | | (57 | ) | | 246 |
| | 91 |
| | 155 |
| |
Net recoveries | | Net recoveries | 40 | | | 5 | | | 35 | | | 168 | | | 53 | | | 115 | |
Provision for loan losses charged to operations | — |
| | 200 |
| | (200 | ) | | — |
| | 900 |
| | (900 | ) | Provision for loan losses charged to operations | 4,000 | | | 300 | | | 3,700 | | | 8,000 | | | 300 | | | 7,700 | |
Balance at end of period | $ | 16,358 |
| | $ | 15,958 |
| | $ | 400 |
| | $ | 16,358 |
| | $ | 15,958 |
| | $ | 400 |
| Balance at end of period | $ | 25,403 | | | $ | 17,042 | | | $ | 8,361 | | | $ | 25,403 | | | $ | 17,042 | | | $ | 8,361 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Average loans outstanding | $ | 1,426,115 |
| | $ | 1,379,107 |
| | | | $ | 1,434,956 |
| | $ | 1,321,257 |
| | | Average loans outstanding | $ | 2,230,608 | | | $ | 1,816,450 | | | $ | 2,115,061 | | | $ | 1,773,576 | | |
| | | | | | | | | | | | | | | | | | | | |
Ratio of annualized net charge-offs (recoveries) during the period to average loans outstanding | 0.04 | % | | 0.02 | % | | | | (0.02 | )% | | (0.01 | )% | | | |
Ratio of annualized net (charge-offs) recoveries during the period to average loans outstanding | | Ratio of annualized net (charge-offs) recoveries during the period to average loans outstanding | 0.01 | % | | 0.00 | % | | 0.01 | % | | 0.01 | % | |
| | | | | | | | | | | | | | | | | | | | |
Ratio of allowance for loan losses to average loans outstanding | 1.15 | % | | 1.16 | % | | | | 1.14 | % | | 1.21 | % | | | Ratio of allowance for loan losses to average loans outstanding | 1.14 | % | | 0.94 | % | | 1.20 | % | | 0.96 | % | |
| Ratio of allowance for loan losses to total loans at end of period | | Ratio of allowance for loan losses to total loans at end of period | 1.13 | % | | 0.93 | % | | 1.13 | % | | 0.93 | % | |
| Ratio of allowance for loan losses to total loans at end of period, excluding PPP loans | | Ratio of allowance for loan losses to total loans at end of period, excluding PPP loans | 1.26 | % | | 0.93 | % | | 1.26 | % | | 0.93 | % | |
In general,March 2020, the U.S. economy is growing, but atdeteriorated as a slower rate than was considered normal beforeresult of the financial crisis. Average monthlyCOVID-19 pandemic. While job growth through August 2017 wasaveraged approximately 177,000, while232,000 per month for the first two months of 2020, approximately 22 million jobs were lost in March and April 2020. Additionally, the national unemployment rate has declined slightlyincreased from 4.4 percent as of March 31, 2020 to 4.27.9 percent as of September 30, 2017, the lowest level since May 2007. The U.S. economy lost 33,000 jobs2020 and peaked at 14.7 percent 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 rise. The economic environments in Iowa and Minnesota continue to improve.April 2020. Based on the current economic and credit quality trend indicators, the Company decided to maintainhas increased the economic and credit quality trend factors within the allowance for loan losses evaluation at the same levels used in 2016. In the first nine months of 2017, the Company continued to use experience factors based on the highest losses calculated over a rolling 12-, 16-, or 20-quarter period. Loan growth in the first nine months of 2017 resulted in the portion ofevaluation. We believe that the allowance for loan losses related toas a percent of total loans collectively evaluated for impairment tomay increase $603 to a totalin future periods based on our belief that the credit quality of $16,212, or 1.11 percent, as of September 30, 2017 compared to $15,609, or 1.11 percent, as of December 31, 2016. Management believed the resulting allowance for loan losses as of September 30, 2017 was adequate to absorb any losses inherent in theour loan portfolio at the endcould decline and loan defaults may increase as a result of the quarter.COVID-19 pandemic.
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, |
Noninterest income: | 2020 | | 2019 | | Change | | Change % |
Service charges on deposit accounts | $ | 609 | | | $ | 630 | | | $ | (21) | | | (3.33) | % |
Debit card usage fees | 432 | | | 426 | | | 6 | | | 1.41 | % |
Trust services | 553 | | | 572 | | | (19) | | | (3.32) | % |
Increase in cash value of bank-owned life insurance | 133 | | | 168 | | | (35) | | | (20.83) | % |
Loan swap fees | 983 | | | — | | | 983 | | | N/A |
Realized investment securities gains, net | 156 | | | 1 | | | 155 | | | 15,500.00 | % |
Other income: | | | | | | | |
All other income | 337 | | | 361 | | | (24) | | | (6.65) | % |
Total other income | 337 | | | 361 | | | (24) | | | (6.65) | % |
Total noninterest income | $ | 3,203 | | | $ | 2,158 | | | $ | 1,045 | | | 48.42 | % |
| | | | | | | |
| Nine Months Ended September 30, |
Noninterest income: | 2020 | | 2019 | | Change | | Change % |
Service charges on deposit accounts | $ | 1,743 | | | $ | 1,841 | | | $ | (98) | | | (5.32) | % |
Debit card usage fees | 1,205 | | | 1,235 | | | (30) | | | (2.43) | % |
Trust services | 1,477 | | | 1,536 | | | (59) | | | (3.84) | % |
Increase in cash value of bank-owned life insurance | 427 | | | 482 | | | (55) | | | (11.41) | % |
Loan swap fees | 1,572 | | | — | | | 1,572 | | | N/A |
Realized investment securities gains (losses), net | 81 | | | (64) | | | 145 | | | 226.56 | % |
Other income: | | | | | | | |
Gain on sale of premises | — | | | 307 | | | (307) | | | (100.00) | % |
All other income | 993 | | | 939 | | | 54 | | | 5.75 | % |
Total other income | 993 | | | 1,246 | | | (253) | | | (20.30) | % |
Total noninterest income | $ | 7,498 | | | $ | 6,276 | | | $ | 1,222 | | | 19.47 | % |
|
| | | | | | | | | | | | | | |
| Three Months Ended September 30, |
Noninterest income: | 2017 | | 2016 | | Change | | Change % |
Service charges on deposit accounts | $ | 715 |
| | $ | 632 |
| | $ | 83 |
| | 13.13 | % |
Debit card usage fees | 435 |
| | 450 |
| | (15 | ) | | (3.33 | )% |
Trust services | 436 |
| | 355 |
| | 81 |
| | 22.82 | % |
Increase in cash value of bank-owned life insurance | 167 |
| | 160 |
| | 7 |
| | 4.38 | % |
Realized investment securities gains, net | 197 |
| | — |
| | 197 |
| | N/A |
|
Other income: | | | | | |
| | |
|
Discount on purchased income tax credits | 36 |
| | 8 |
| | 28 |
| | 350.00 | % |
All other income | 278 |
| | 314 |
| | (36 | ) | | (11.46 | )% |
Total other income | 314 |
| | 322 |
| | (8 | ) | | (2.48 | )% |
Total noninterest income | $ | 2,264 |
| | $ | 1,919 |
| | $ | 345 |
| | 17.98 | % |
| | | | | | | |
| Nine Months Ended September 30, |
Noninterest income: | 2017 | | 2016 | | Change | | Change % |
Service charges on deposit accounts | $ | 1,946 |
| | $ | 1,847 |
| | $ | 99 |
| | 5.36 | % |
Debit card usage fees | 1,333 |
| | 1,372 |
| | (39 | ) | | (2.84 | )% |
Trust services | 1,264 |
| | 946 |
| | 318 |
| | 33.62 | % |
Increase in cash value of bank-owned life insurance | 484 |
| | 492 |
| | (8 | ) | | (1.63 | )% |
Gain from bank-owned life insurance | 307 |
| | 443 |
| | (136 | ) | | (30.70 | )% |
Realized investment securities gains, net | 423 |
| | 60 |
| | 363 |
| | 605.00 | % |
Other income: | | | | | |
| | |
|
Discount on purchased income tax credits | 117 |
| | 43 |
| | 74 |
| | 172.09 | % |
Gain on sale of other assets | 88 |
| | — |
| | 88 |
| | N/A |
|
All other income | 778 |
| | 849 |
| | (71 | ) | | (8.36 | )% |
Total other income | 983 |
| | 892 |
| | 91 |
| | 10.20 | % |
Total noninterest income | $ | 6,740 |
| | $ | 6,052 |
| | $ | 688 |
| | 11.37 | % |
The increaseCompany offers loan level interest rate swaps to its customers and offsets its exposure from such contracts by entering into mirror image swaps with a swap counterparty (back-to-back swap program). Loan swap fees consist of fees earned in service chargesthe back-to-back swap program and are largely dependent on deposit accountsthe timing and volume of customer activity. The back-to-back swap program began in the first quarter of 2020, resulting in income from loan swap fees for the three and nine months ended September 30, 20172020 and none in the 2019 periods.
The gain on sale of premises in the first nine months of 2019 was the result of the sale of the Iowa City branch facility after the Company consolidated the Iowa City and Coralville branches.
Service charges on deposit accounts decreased for the three and nine months ended September 30, 2020 when compared to the three and nine months ended September 30, 2016 was driven by the March and April 2017 realignment and simplification2019, primarily as a result of the retail checking account products provided to our customers. We expect to see higher retail service chargereduction in nonsufficient fund fees. After excluding gain on sale of premises, other income increased 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 fees 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 due to the combination of a higher amount of one-time estate fees and asset growth achieved through ongoing business development efforts.
Gain from bank-owned life insurance was recognized for both the nine months ended September 30, 2017 and 2016, but not during2020 when compared to 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, 2017,2019, primarily due to an increase in mortgage loan fees as the Company took advantagea result of the opportunity to sell various typeshigher volumes of investment securities available for sale at gainsmortgage origination and reinvested the proceeds in higher yielding securities with similar risk profiles and slightly longer durations.refinancing activity.
West Bancorporation, Inc.
Management's Discussion and Analysis
(in thousands, except share and per share data)
Total revenue from discounts on purchased transferable State of Iowa income tax credits increased for the three and nine months ended September 30, 2017 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, 2016, primarily due to a lower level of letter of credit fees and small losses on equipment disposals.
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: | 2017 | | 2016 | | Change | | Change % | Noninterest expense: | 2020 | | 2019 | | Change | | Change % |
Salaries and employee benefits | $ | 4,430 |
| | $ | 4,154 |
| | $ | 276 |
| | 6.64 | % | Salaries and employee benefits | $ | 5,412 | | | $ | 5,440 | | | $ | (28) | | | (0.51) | % |
Occupancy | 1,087 |
| | 1,038 |
| | 49 |
| | 4.72 | % | Occupancy | 1,383 | | | 1,379 | | | 4 | | | 0.29 | % |
Data processing | 635 |
| | 643 |
| | (8 | ) | | (1.24 | )% | Data processing | 614 | | | 695 | | | (81) | | | (11.65) | % |
FDIC insurance expense | 151 |
| | 272 |
| | (121 | ) | | (44.49 | )% | |
FDIC insurance | | FDIC insurance | 351 | | | — | | | 351 | | | N/A |
Professional fees | 184 |
| | 189 |
| | (5 | ) | | (2.65 | )% | Professional fees | 230 | | | 204 | | | 26 | | | 12.75 | % |
Director fees | 240 |
| | 202 |
| | 38 |
| | 18.81 | % | Director fees | 236 | | | 233 | | | 3 | | | 1.29 | % |
Other expenses: | | | | | |
| | |
| Other expenses: | | | | |
Marketing | | Marketing | 57 | | | 52 | | | 5 | | | 9.62 | % |
Business development | 191 |
| | 157 |
| | 34 |
| | 21.66 | % | Business development | 158 | | | 229 | | | (71) | | | (31.00) | % |
Insurance expense | 89 |
| | 88 |
| | 1 |
| | 1.14 | % | Insurance expense | 110 | | | 95 | | | 15 | | | 15.79 | % |
Investment advisory fees | 22 |
| | 124 |
| | (102 | ) | | (82.26 | )% | |
Charitable contributions | 180 |
| | — |
| | 180 |
| | N/A |
| Charitable contributions | 45 | | | 45 | | | — | | | — | % |
Postage and courier | 72 |
| | 79 |
| | (7 | ) | | (8.86 | )% | Postage and courier | 77 | | | 65 | | | 12 | | | 18.46 | % |
Subscriptions | | Subscriptions | 147 | | | 102 | | | 45 | | | 44.12 | % |
Trust | 124 |
| | 106 |
| | 18 |
| | 16.98 | % | Trust | 117 | | | 120 | | | (3) | | | (2.50) | % |
Consulting fees | 60 |
| | 91 |
| | (31 | ) | | (34.07 | )% | Consulting fees | 67 | | | 62 | | | 5 | | | 8.06 | % |
Miscellaneous losses | (5 | ) | | 247 |
| | (252 | ) | | (102.02 | )% | |
Low income housing projects amortization | 102 |
| | 99 |
| | 3 |
| | 3.03 | % | Low income housing projects amortization | 110 | | | 120 | | | (10) | | | (8.33) | % |
New markets tax credit project amortization and management fees | | New markets tax credit project amortization and management fees | 230 | | | 230 | | | — | | | — | % |
All other | 458 |
| | 504 |
| | (46 | ) | | (9.13 | )% | All other | 715 | | | 465 | | | 250 | | | 53.76 | % |
Total other | 1,293 |
| | 1,495 |
| | (202 | ) | | (13.51 | )% | |
Total other expenses | | Total other expenses | 1,833 | | | 1,585 | | | 248 | | | 15.65 | % |
Total noninterest expense | $ | 8,020 |
| | $ | 7,993 |
| | $ | 27 |
| | 0.34 | % | Total noninterest expense | $ | 10,059 | | | $ | 9,536 | | | $ | 523 | | | 5.48 | % |
| | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Nine Months Ended September 30, |
Noninterest expense: | 2017 | | 2016 | | Change | | Change % | Noninterest expense: | 2020 | | 2019 | | Change | | Change % |
Salaries and employee benefits | $ | 13,216 |
| | $ | 12,644 |
| | $ | 572 |
| | 4.52 | % | Salaries and employee benefits | $ | 16,014 | | | $ | 16,324 | | | $ | (310) | | | (1.90) | % |
Occupancy | 3,315 |
| | 2,972 |
| | 343 |
| | 11.54 | % | Occupancy | 4,092 | | | 3,956 | | | 136 | | | 3.44 | % |
Data processing | 2,031 |
| | 1,849 |
| | 182 |
| | 9.84 | % | Data processing | 1,882 | | | 2,091 | | | (209) | | | (10.00) | % |
FDIC insurance expense | 514 |
| | 714 |
| | (200 | ) | | (28.01 | )% | |
FDIC insurance | | FDIC insurance | 880 | | | 404 | | | 476 | | | 117.82 | % |
Professional fees | 725 |
| | 619 |
| | 106 |
| | 17.12 | % | Professional fees | 669 | | | 647 | | | 22 | | | 3.40 | % |
Director fees | 697 |
| | 672 |
| | 25 |
| | 3.72 | % | Director fees | 664 | | | 742 | | | (78) | | | (10.51) | % |
Other expenses: | | | | | |
| | |
| Other expenses: | | | | |
Marketing | | Marketing | 145 | | | 154 | | | (9) | | | (5.84) | % |
Business development | 609 |
| | 574 |
| | 35 |
| | 6.10 | % | Business development | 562 | | | 765 | | | (203) | | | (26.54) | % |
Insurance expense | 267 |
| | 256 |
| | 11 |
| | 4.30 | % | Insurance expense | 324 | | | 284 | | | 40 | | | 14.08 | % |
Investment advisory fees | 89 |
| | 397 |
| | (308 | ) | | (77.58 | )% | |
Charitable contributions | 180 |
| | — |
| | 180 |
| | N/A |
| Charitable contributions | 135 | | | 135 | | | — | | | — | % |
Postage and courier | 238 |
| | 241 |
| | (3 | ) | | (1.24 | )% | Postage and courier | 245 | | | 207 | | | 38 | | | 18.36 | % |
Subscriptions | | Subscriptions | 415 | | | 287 | | | 128 | | | 44.60 | % |
Trust | 339 |
| | 310 |
| | 29 |
| | 9.35 | % | Trust | 337 | | | 331 | | | 6 | | | 1.81 | % |
Consulting fees | 213 |
| | 238 |
| | (25 | ) | | (10.50 | )% | Consulting fees | 233 | | | 193 | | | 40 | | | 20.73 | % |
Miscellaneous losses | (1 | ) | | 246 |
| | (247 | ) | | (100.41 | )% | |
Low income housing projects amortization | 322 |
| | 305 |
| | 17 |
| | 5.57 | % | Low income housing projects amortization | 315 | | | 311 | | | 4 | | | 1.29 | % |
New markets tax credit project amortization and management fees | | New markets tax credit project amortization and management fees | 689 | | | 689 | | | — | | | — | % |
All other | 1,481 |
| | 1,574 |
| | (93 | ) | | (5.91 | )% | All other | 1,538 | | | 1,310 | | | 228 | | | 17.40 | % |
Total other | 3,737 |
| | 4,141 |
| | (404 | ) | | (9.76 | )% | |
Total other expenses | | Total other expenses | 4,938 | | | 4,666 | | | 272 | | | 5.83 | % |
Total noninterest expense | $ | 24,235 |
| | $ | 23,611 |
| | $ | 624 |
| | 2.64 | % | Total noninterest expense | $ | 29,139 | | | $ | 28,830 | | | $ | 309 | | | 1.07 | % |
West Bancorporation, Inc.
Management's Discussion and Analysis
(in thousands, except share and per share data)
Salaries and employee benefits increaseddecreased for the three and nine months ended September 30, 20172020 when compared to the three and nine months ended September 30, 2016, mainly2019, primarily due to a decrease in expenses related to restricted stock units and insurance benefits. The Company has not made, and at this time does not expect to make, any material staffing or compensation changes as thea result of an increase in the price of Company common stock, whichCOVID-19 pandemic. Occupancy expense increased stock-based employee compensation costs.
When compared withfor the three and nine months ended September 30, 2016, occupancy costs increased2020 when compared to the nine months ended September 30, 2019, because of the incurrence of a full nine months of expenses related to the expansion into the cities of Owatonna, Mankato and St. Cloud, Minnesota, which occurred toward the end of the first quarter of 2019. Data processing decreased for the three and nine months ended September 30, 2017, partially as the result of operating costs associated with the new 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 one-time reversal of previously accrued rent related to the terms of the previous lease for the Waukee, Iowa, branch facility at the time the branch was acquired in February 2016.
The increase in data processing expense for the nine months ended September 30, 20172020 compared to the same time periodperiods in 2016 was2019, primarily because of costs associateddue to a new contract signed with upgrading credit analysis software, one-time costs associated with revising the retail checking account products, ongoing enhancements and monitoring tools for maintaining security, and an annual-inflation-rate-based contractual increase in fees paid to ourWest Bank's core applications systems servicedata processing provider.
FDIC insurance expense declined forincreased during the three and nine months ended September 30, 20172020 when compared to the three and nine months ended September 30, 2016. The FDIC assessment rate calculation includes a series of risk-based factors. As a result of the May 2017 capital injection of $40,000 into West Bank, the capital ratio component improved enough to reduce the assessment rate2019 primarily due to the minimum level established byincrease in the FDIC. Management believesCompany's average assets and assessment rate. Additionally, during the assessment rate will remain at the minimum level throughout the remainder of 2017 and into 2018.
Professional fees increased for the ninethree months ended September 30, 2017 compared2019 the Company applied approximately $200 of credits to its quarterly assessment, which resulted in no expense for the same time period in 2016, chiefly due to increased costs associated with preparation and adoptionthird quarter 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 at West Bank.2019.
The increase in businessBusiness development expense decreased for the three and nine months ended September 30, 20172020 when compared to the three and nine months ended September 30, 2016 was2019, primarily due to the result of efforts to cultivate newlimitations placed on business development activities during COVID-19 shutdowns and expanded customer relationships.
Investment advisory fees declinedsocial distancing guidelines. Other expenses were higher for the three months and nine months ended September 30, 2017 as contrasted with the same time periods in 2016, mainly as a result of bringing the administration of the investment portfolio in-house, effective October 1, 2016. The Company also pays an administrative fee to an investment management firm for assisting with the purchase and administration of public company floating rate commercial loans. That administrative fee has declined as the result of holding a lower level of those loans.
Charitable 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, 20172020 when compared to the three and nine months ended September 30, 20162019, due primarily to operational losses as a result of check fraud schemes. West Bank is commensurate withworking to recover approximately $380, but the increase in the growth in trust assets.probability of collection is undeterminable at this time.
Consulting fees declined in the three and nine months ended September 30, 2017, as the 2016 expense included data analysis costs associated with a class action litigation matter, which was settled in the 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.
All other expenses declined for the three and nine months ended September 30, 2017 compared to the same periods in 2016, primarily due to the elimination of certain costs related to a retail deposit product, and first quarter 2016 included a one-time cost associated with a bank-owned life insurance claim.
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$2,176 (21.2 percent of pre-tax income) and $8,142 (30.1$6,544 (21.3 percent of pre-tax income) for the three and nine months ended September 30, 2017, respectively,2020, compared with $2,634 (31.2$1,912 (20.3 percent of pre-tax income) and $7,249 (29.9$5,106 (19.5 percent of pre-tax income) for the three and nine months ended September 30, 2016.2019. The Company's consolidated income tax rate differs from the federal statutory income tax rate in each period, primarily due to tax-exempt interest income, the tax-exempt increase in cash value of bank-owned life insurance, tax-exempt gain on bank-owned life insurance, disallowed interest expense, and state income taxes.
Two other items significantly impacted the effective tax rate In addition, for the nine months ended September 30, 2017 compared to2020, a tax expense of $116 was recorded as a result of 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 increasedecrease 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 capitalperiod. Comparatively, for the nine months ended September 30, 20162019, a tax benefit of $15 was $105.recorded as a result of the increase in fair value of restricted stock over the vesting period. The tax raterates for the first nine months of 20172020 and 2016 was2019 were also impacted by year-to-date federal low income housing tax credits and a new markets tax credit of approximately $308$930 and $262,$949, respectively.
FINANCIAL CONDITION
The Company had total assets of $2,030,348$2,775,883 as of September 30, 2017, an increase of 9.5 percent2020, compared to total assets of $1,854,204$2,473,691 as of December 31, 2016. The most significant changes2019. Fluctuations in the balance sheet wereincluded increases in investment securities available for sale, loans, bank-owned life insurance, deposits short-term borrowings and long-term debt,other liabilities, and a declinedecrease in cash and cash equivalents.investment securities. A summarydiscussion of changes in the balance sheet components is provided below.
Investment Securities
The balance of investment securities available for sale increaseddeclined by $157,737$24,191 during the nine months ended September 30, 2017. State and political subdivision securities increased by $69,920, corporate notes increased by $19,152, and government agency guaranteed collateralized mortgage obligations, mortgage-backed securities and asset-backed securities increased by a total of $68,3192020. Securities were sold during the first nine months endedof 2020 to create liquidity for expected loan growth prior to the COVID-19 pandemic or as part of a reinvestment strategy to improve yield. Collateralized loan obligations (CLOs) are debt securities backed by pools of senior secured commercial loans to a diverse group of companies across a broad spectrum of industries. At September 30, 2017. The2020, the Company purchased $267,133 of investment securities available for sale during the nine months ended September 30, 2017. Securities sold totaled $74,224,owned AAA and the proceeds were primarily reinvested in higher yielding securities that have a similar risk profile. The remaining purchases included the reinvestment of normal principal paydowns, callsAA rated CLOs 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.
own CLOs rated below AA. As of September 30, 2017,2020, approximately 6057 percent of the available for sale investment securities portfolio consisted of government agency guaranteed collateralized mortgage obligations mortgage-backed securities and asset-backedmortgage-backed securities. Management currently believes these securities provide relatively good yields, have little to no credit risk and provide fairly consistent cash flows.
West Bancorporation, Inc.
Management's Discussion and Analysis
(in thousands, except share and per share data)
Loans and Nonperforming Assets
Loans outstanding increased $57,035,$305,762 from $1,399,870$1,941,663 as of December 31, 20162019 to $1,456,905$2,247,425 as of September 30, 2017. Growth2020. Changes in the loan portfolio during the first nine months of 2017 was primarily the result of2020 included increases of $43,843 in construction loans and $32,144$55,311 in commercial real estate loans. This growth was partially offset by a decrease of $17,298loans and $43,135 in construction, land and land development loans, while commercial loans, that included a $16,556 reduction in public company floating rateexcluding PPP loans, purchased from a third-party asset manager.declined $13,660. As of September 30, 2020, PPP loans outstanding totaled $224,489. The Company continues to focus on business development efforts in all of its markets. Management believesWe anticipate that loan growth will continue to slow down in all threethe future as a result of the duration of COVID-19 and the related economic uncertainties in our markets duringmarket areas.
Nonaccrual loans increased $17,234 from December 31, 2019 to September 30, 2020. The increase in nonaccrual loans was the remainderresult of 2017.
Creditdowngrades in the credit quality of two borrowers due to the Company's loan portfolio remains strongduration of COVID-19 and stable.related economic stress. These loans were classified as watch or substandard prior to COVID-19 and were further downgraded in September 2020. The Company's Texas ratio, which is computed by dividing total nonperforming assets by tangible common equity plus the allowance for loan losses, was 0.277.38 percent as of September 30, 2017,2020, compared to 0.560.23 percent as of December 31, 2016. The ratio for both dates was significantly better than2019. We believe the June 30, 2017 peer group average (latest data available), which was approximately 8.57 percent, accordingCOVID-19 pandemic may have an adverse affect on the credit quality of our loan portfolio during the remainder of 2020 and into 2021. Further disruption to dataour customers in the June 2017 Bank Holding Company Performance Report preparedhotel, retail, restaurant and movie theater industries could result in increased loan delinquencies and defaults. Management believes impaired loans may increase in the future as a result of the COVID-19 pandemic and efforts to contain it. No credit issues are anticipated with PPP loans at this time, as they are 100 percent guaranteed by the DivisionSBA.
In accordance with regulatory guidelines, the Company exercises heightened risk management practices when non-owner occupied commercial real estate lending exceeds 300 percent of Supervisiontotal risk-based capital or construction, land development, and Regulationother land loans exceed 100 percent of total risk-based capital. Although the Company's loan portfolio is heavily concentrated in real estate and its real estate portfolio levels exceed these regulatory guidelines, it has established risk management policies and procedures to regularly monitor the commercial real estate portfolio. An analysis of the Federal Reserve.Company's non-owner occupied commercial real estate portfolio as of December 31, 2019 was presented in the Company's Form 10-K filed with the SEC on February 27, 2020, and the Company has not experienced any material changes to that analysis since December 31, 2019.
West Bancorporation, Inc.
Management's Discussion and Analysis
(in thousands, except share and per share data)
The following table sets forth the amount of nonperforming assets held by the Company and common ratio measurements of those assets as of the dates shown.
| | | | | | | | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 | | Change |
Nonaccrual loans | $ | 17,772 | | | $ | 538 | | | $ | 17,234 | |
Loans past due 90 days and still accruing interest | — | | | — | | | — | |
Troubled debt restructured loans (1) | — | | | — | | | — | |
Total nonperforming loans | 17,772 | | | 538 | | | 17,234 | |
Other real estate owned | — | | | — | | | — | |
Total nonperforming assets | $ | 17,772 | | | $ | 538 | | | $ | 17,234 | |
| | | | | |
Nonperforming loans to total loans | 0.79 | % | | 0.03 | % | | 0.76 | % |
Nonperforming assets to total assets | 0.64 | % | | 0.02 | % | | 0.62 | % |
|
| | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 | | Change |
Nonaccrual loans | $ | 517 |
| | $ | 1,022 |
| | $ | (505 | ) |
Loans past due 90 days and still accruing interest | — |
| | — |
| | — |
|
Troubled debt restructured loans (1) | — |
| | — |
| | — |
|
Total nonperforming loans | 517 |
| | 1,022 |
| | (505 | ) |
Other real estate owned | — |
| | — |
| | — |
|
Total nonperforming assets | $ | 517 |
| | $ | 1,022 |
| | $ | (505 | ) |
| |
| | |
| | |
|
Nonperforming loans to total loans | 0.04 | % | | 0.07 | % | | (0.03 | )% |
Nonperforming assets to total assets | 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 no TDR loans as of September 30, 2020 categorized as nonaccrual. There was one TDR loan as of December 31, 2019 with a balance of $4 categorized as nonaccrual.
| |
(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 was one TDR loan as of September 30, 2017 with a balance of $247, and two TDR loans as of December 31, 2016 with an aggregate balance of $426, categorized as nonaccrual.
|
As of September 30, 2020, West Bank's loan modifications related to COVID-19 totaled $434,361. None of these modifications were considered TDRs, in accordance with the CARES Act and other interpretive guidance provided by recent bank regulatory interagency statements, and none were considered impaired. For additional information, refer to “Provision for Loan Losses and the Related Allowance for Loan Losses” in this section and NotesNote 4 and 10 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.
West Bancorporation, Inc.
Management's Discussion and Analysis
(in thousands, except share and per share data)
Bank-Owned Life Insurance
The Company purchased $7,200 of bank-owned life insurance in September 2020. As of September 30, 2020, total bank-owned life insurance was 16.6 percent of the Bank's tier 1 capital.
Deposits
Deposits increased $282,024 during the first nine months of 2020. Noninterest-bearing and interest-bearing demand accounts and savings accounts, which include money market accounts, increased a total of $390,136 from December 31, 2019 to September 30, 2020. Balance fluctuations were primarily due to normal customer activity, as corporate customers' liquidity needs vary at any given time. In addition, funds disbursed under the PPP program were deposited into customer deposit accounts and will impact overall deposit fluctuations as customers spend those funds according to the PPP rules. Total time deposits declined $108,112 during the first nine months of 2020 primarily due to the maturity of brokered CDs totaling $50,000. In addition, some maturing certificates of deposit are not being renewed in the current low interest rate environment. We believe that deposit levels could decrease in future periods as a result of the distressed economic conditions in our market areas relating to the COVID-19 pandemic and the low interest rates.
Borrowed Funds
The Company had $177,350 of overnight federal funds purchased and short-term FHLB advances outstanding at September 30, 2020. If we were to experience increases in draws on customer lines of credit or decreased deposit levels in future periods as a result of distressed economic conditions in our market areas relating to the COVID-19 pandemic, our level of borrowed funds could increase. See "Liquidity and Capital Resources" in this section for further discussion on the Company's borrowing capacity.
Derivatives
At December 31, 2019 and September 30, 2020, the Company had interest rate swap contracts associated with borrowed funds and deposits with a total notional amount of $335,000 and $305,000, respectively. The fair value of these derivative contracts, which is reported in other liabilities on the balance sheet, declined $21,144 from December 31, 2019 to September 30, 2020 due to the significant decrease in market interest rates. See Note 5 for additional information on the impact of the change in derivative fair values on AOCI.
Liquidity and Capital Resources
The objectives of liquidity management are to ensure the availability of sufficient cash flows to meet all financial commitments and to capitalize on opportunities for profitable business expansion. The Company's principal source of funds is deposits. Other sources include loan principal repayments, proceeds from the maturity and sale of investment securities, principal payments on collateralized mortgage obligations, mortgage-backed and asset-backed securities, federal funds purchased, advances from the FHLB, and funds provided by operations. Liquidity management is conducted on both a daily and a long-term basis. Investments in liquid assets are adjusted based on expected loan demand, projected loan and investment securities maturities and payments, expected deposit flows and the objectives set by the Company's asset-liability management policy. The Company had liquid assets (cash and cash equivalents) of $39,497$65,843 as of September 30, 20172020 compared with $76,836$53,290 as of December 31, 2016.2019.
The Company believes there could be potential stresses on liquidity management as a direct result of the duration of the COVID-19 pandemic. As customers manage their own liquidity needs, we could experience an increase in the utilization of existing lines of credit. In addition, the Bank participated in the PPP under the CARES Act. The Federal Reserve Bank established a PPP Liquidity Facility that would provide funding specifically for loans made under the PPP, which would allow us to retain existing sources of liquidity for our traditional operations. PPP loans would be pledged as collateral on any of the Bank's borrowings under the PPP Liquidity Facility. The Bank has not utilized the Federal Reserve Bank's PPP Liquidity Facility to date.
West Bancorporation, Inc.
Management's Discussion and Analysis
(in thousands, except share and per share data)
As of September 30, 2017,2020, West Bank had additional borrowing capacity available from the FHLB of approximately $255,000,$367,000, as well as approximately $51,000 through the Federal Reserve discount window and $67,000 through unsecured federal funds lines of credit with correspondent banks. Net cash from operating activities contributed $21,979$31,062 to liquidity for the nine months ended September 30, 2017.2020. 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, 2017.2020. Management continually monitors liquidity to look for signs of stress resulting from the COVID-19 pandemic.
The Company's total stockholders' equity increased to $178,087$215,320 at September 30, 20172020 from $165,376$211,820 at December 31, 2016.2019. The increase was primarily the result of net income less dividends paid, and an increasepartially offset by the decline in accumulated other comprehensive income.
fair value of derivatives. At September 30, 2017,2020, the Company's tangible common equity as a percent of tangible assets was 8.777.76 percent compared to 8.928.56 percent as of December 31, 2016.2019.
The Company and West Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements (as shown in the following table) can result in certain mandatory and possibly additional discretionary actions by regulators, which, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and West Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's and West Bank's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Management believed the Company and West Bank met all capital adequacy requirements to which they were subject as of September 30, 2017.2020.
West Bancorporation, Inc.
Management's Discussion and Analysis
(in thousands, except share and per share data)
The Company's and West Bank's capital amounts and ratios are presented in the following table.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Actual | | For Capital Adequacy Purposes | | For Capital Adequacy Purposes With Capital Conservation Buffer | | To Be Well-Capitalized Under Prompt Corrective Action Provisions |
| Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
As of September 30, 2020: | | | | | | | | | | | | | | | |
Total Capital (to Risk-Weighted Assets) | | | | | | | | | | | | |
Consolidated | $ | 275,253 | | | 11.47 | % | | $ | 191,911 | | | 8.00 | % | | $ | 251,883 | | | 10.50 | % | | N/A | | N/A |
West Bank | 281,691 | | | 11.75 | % | | 191,806 | | | 8.00 | % | | 251,746 | | | 10.50 | % | | $ | 239,758 | | | 10.00 | % |
| | | | | | | | | | | | | | | |
Tier 1 Capital (to Risk-Weighted Assets) | | | | | | | | | | | | |
Consolidated | 249,849 | | | 10.42 | % | | 143,933 | | | 6.00 | % | | 203,905 | | | 8.50 | % | | N/A | | N/A |
West Bank | 256,287 | | | 10.69 | % | | 143,855 | | | 6.00 | % | | 203,794 | | | 8.50 | % | | 191,806 | | | 8.00 | % |
| | | | | | | | | | | | | | | |
Common Equity Tier 1 Capital (to Risk-Weighted Assets) | | | | | | | | | | |
Consolidated | 229,849 | | | 9.58 | % | | 107,950 | | | 4.50 | % | | 167,922 | | | 7.00 | % | | N/A | | N/A |
West Bank | 256,287 | | | 10.69 | % | | 107,891 | | | 4.50 | % | | 167,831 | | | 7.00 | % | | 155,843 | | | 6.50 | % |
| | | | | | | | | | | | | | | |
Tier 1 Capital (to Average Assets) | | | | | | | | | | | | |
Consolidated | 249,849 | | | 9.06 | % | | 110,350 | | | 4.00 | % | | 110,350 | | | 4.00 | % | | N/A | | N/A |
West Bank | 256,287 | | | 9.30 | % | | 110,241 | | | 4.00 | % | | 110,241 | | | 4.00 | % | | 137,801 | | | 5.00 | % |
| | | | | | | | | | | | | | | |
As of December 31, 2019: | | | | | | | | | | | | | | | |
Total Capital (to Risk-Weighted Assets) | | | | | | | | | | | | |
Consolidated | $ | 252,316 | | | 11.40 | % | | $ | 177,013 | | | 8.00 | % | | $ | 232,330 | | | 10.50 | % | | N/A | | N/A |
West Bank | 259,644 | | | 11.74 | % | | 176,970 | | | 8.00 | % | | 232,273 | | | 10.50 | % | | $ | 221,212 | | | 10.00 | % |
| | | | | | | | | | | | | | | |
Tier 1 Capital (to Risk-Weighted Assets) | | | | | | | | | | | | |
Consolidated | 235,081 | | | 10.62 | % | | 132,760 | | | 6.00 | % | | 188,077 | | | 8.50 | % | | N/A | | N/A |
West Bank | 242,409 | | | 10.96 | % | | 132,727 | | | 6.00 | % | | 188,030 | | | 8.50 | % | | 176,970 | | | 8.00 | % |
| | | | | | | | | | | | | | | |
Common Equity Tier 1 Capital (to Risk-Weighted Assets) | | | | | | | | | | |
Consolidated | 215,081 | | | 9.72 | % | | 99,570 | | | 4.50 | % | | 154,887 | | | 7.00 | % | | N/A | | N/A |
West Bank | 242,409 | | | 10.96 | % | | 99,546 | | | 4.50 | % | | 154,849 | | | 7.00 | % | | 143,788 | | | 6.50 | % |
| | | | | | | | | | | | | | | |
Tier 1 Capital (to Average Assets) | | | | | | | | | | | | |
Consolidated | 235,081 | | | 9.53 | % | | 98,693 | | | 4.00 | % | | 98,693 | | | 4.00 | % | | N/A | | N/A |
West Bank | 242,409 | | | 9.83 | % | | 98,656 | | | 4.00 | % | | 98,656 | | | 4.00 | % | | 123,320 | | | 5.00 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| Actual | | For Capital Adequacy Purposes With Capital Conservation Buffer | | To Be Well-Capitalized Under Prompt Corrective Action Provisions |
| Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
As of September 30, 2017: | | | | | | | | | | | |
Total Capital (to Risk-Weighted Assets) | | | | | | | | | | | |
Consolidated | $ | 214,373 |
| | 12.01 | % | | $ | 165,070 |
| | 9.25 | % | | N/A |
| | N/A |
|
West Bank | 235,067 |
| | 13.18 | % | | 164,963 |
| | 9.25 | % | | $ | 178,339 |
| | 10.00 | % |
| |
| | |
| | |
| | |
| | |
| | |
|
Tier 1 Capital (to Risk-Weighted Assets) | |
| | |
| | |
| | |
| | |
| | |
|
Consolidated | 198,015 |
| | 11.10 | % | | 129,379 |
| | 7.25 | % | | N/A |
| | N/A |
|
West Bank | 218,709 |
| | 12.26 | % | | 129,295 |
| | 7.25 | % | | 142,671 |
| | 8.00 | % |
| | | | | | | | | | | |
Common Equity Tier 1 Capital (to Risk-Weighted Assets) | | | | | | | | | | |
Consolidated | 178,015 |
| | 9.98 | % | | 102,611 |
| | 5.75 | % | | N/A |
| | N/A |
|
West Bank | 218,709 |
| | 12.26 | % | | 102,545 |
| | 5.75 | % | | 115,920 |
| | 6.50 | % |
| |
| | |
| | |
| | |
| | |
| | |
|
Tier 1 Capital (to Average Assets) | |
| | |
| | |
| | |
| | |
| | |
|
Consolidated | 198,015 |
| | 10.06 | % | | 78,738 |
| | 4.00 | % | | N/A |
| | N/A |
|
West Bank | 218,709 |
| | 11.12 | % | | 78,694 |
| | 4.00 | % | | 98,368 |
| | 5.00 | % |
| |
| | |
| | |
| | |
| | |
| | |
|
As of December 31, 2016: | |
| | |
| | |
| | |
| | |
| | |
|
Total Capital (to Risk-Weighted Assets) | |
| | |
| | |
| | |
| | |
| | |
|
Consolidated | $ | 202,530 |
| | 11.87 | % | | $ | 147,108 |
| | 8.625 | % | | N/A |
| | N/A |
|
West Bank | 186,118 |
| | 11.04 | % | | 145,414 |
| | 8.625 | % | | $ | 168,597 |
| | 10.00 | % |
| |
| | |
| | |
| | |
| | |
| | |
|
Tier 1 Capital (to Risk-Weighted Assets) | |
| | |
| | |
| | |
| | |
| | |
|
Consolidated | 186,418 |
| | 10.93 | % | | 112,996 |
| | 6.625 | % | | N/A |
| | N/A |
|
West Bank | 170,006 |
| | 10.08 | % | | 111,695 |
| | 6.625 | % | | 134,877 |
| | 8.00 | % |
| | | | | | | | | | | |
Common Equity Tier 1 Capital (to Risk-Weighted Assets) | | | | | | | | | | |
Consolidated | 166,418 |
| | 9.76 | % | | 87,412 |
| | 5.125 | % | | N/A |
| | N/A |
|
West Bank | 170,006 |
| | 10.08 | % | | 86,406 |
| | 5.125 | % | | 109,588 |
| | 6.50 | % |
| | | | | | | | | | | |
Tier 1 Capital (to Average Assets) | |
| | |
| | |
| | |
| | |
| | |
|
Consolidated | 186,418 |
| | 10.14 | % | | 73,530 |
| | 4.00 | % | | N/A |
| | N/A |
|
West Bank | 170,006 |
| | 9.34 | % | | 72,807 |
| | 4.00 | % | | 91,009 |
| | 5.00 | % |
On January 1, 2015, theThe Company and West Bank becameare subject to the rules of the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act changes.Act. The new rules includedinclude the implementation of a 2.5 percent 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 2017 is 1.25 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, 2017,2020, the capital 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.
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, 2016 was presented in the Company's Form 10-K filed with the Securities and Exchange Commission on March 1, 2017. The Company has not experienced any material changes to its interest rate risk position since December 31, 2016. Management does not believe that the Company's primary market risk exposure and management of that exposure in the first nine months of 2017 materially changed compared to those in the year ended December 31, 2016.Not required for smaller reporting companies.
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'sSEC's rules and forms.
b. Changes in internal controlscontrol over financial reporting. There were no changes in the Company's internal control over financial reporting that occurred during the period covered by this reportquarter ended September 30, 2020, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PartPART II - OTHER INFORMATION
Item 1. Legal Proceedings
Neither the Company nor West Bank is a party, and no property of these entities is subject, to any material pending legal proceedings, other than ordinary routine litigation incidental to West Bank's business. The Company does not know of any proceeding contemplated by a governmental authority against the Company or West Bank.
Item 1A. Risk Factors
Management does not believe there have been any material changes inIn addition to the risk factors that were disclosedset forth under Part I, Item 1A “Risk Factors” in the Company'sCompany’s Form 10-K filedfor the fiscal year ended December 31, 2019, the following risk factors apply to the Company:
The COVID-19 pandemic has had an adverse impact on our economy and the duration and extent of this impact is subject to a high degree of uncertainty.
The spread of COVID-19 has led to a broad economic recession and elevated levels of unemployment, and has adversely impacted certain industries and markets in which our customers operate, particularly the hotel, restaurant, retail and movie theater industries.As of September 30, 2020, West Bank’s aggregate loan exposure to the hotel, restaurant, retail and movie theater industries made up approximately 14.8 percent of the total loan portfolio.
These developments have had, and are expected to continue to have, an adverse impact on the credit quality of our loan portfolio, and potentially the results of operations.As of September 30, 2020, approximately $434.4 million, or 19.3%, of loans were in payment deferral status under COVID-19 related modifications.In addition, during the nine months ended September 30, 2020, nonaccrual loans increased $17.2 million due to the duration of COVID-19 and related economic stress.
The extent of the pandemic’s effect on our business will depend on many factors, primarily including the speed and extent of any recovery from the related economic recession.Among other things, this will depend on the duration of the COVID-19 pandemic, particularly in our Iowa and Minnesota markets, the development and distribution of vaccines, therapies and other public health initiatives to control the spread of the disease, the nature and size of federal economic stimulus and other governmental efforts, and the possibility of additional state lockdown or stay-at-home orders in our markets.
The pandemic has also increased our exposure to related business risks, including the following:
•We have had to modify our business practices, including with respect to branch operations, employee travel, employee work locations, participation in meetings, events and conferences, and related changes for our vendors and other business partners. The effects of these changes on our business are uncertain and difficult to quantify, but could include decreased efficiency, lower growth and increased risks of fraud.
•Demand for our products and services may decline, and we may determine that we are not able to prudently grow our loan portfolio.
•If the economic downturn or high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased provisions for credit losses and charge-offs and reduced income.
•The net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us.
•As a result of the decline in the Federal Reserve’s target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and reducing net income.
•FDIC premiums could increase if the agency experiences additional resolution costs.
In addition, we depend upon the management skills of our executive officers and directors. The unanticipated loss or unavailability of key employees due to the pandemic could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.
As a participating lender in the PPP, the Company and the Bank are subject to additional risks of litigation from the Bank’s customers or other parties regarding the Bank’s processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.
On March 27, 2020, President Trump signed the CARES Act, which included a loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The PPP opened on April 3, 2020; however, because of the short timeframe between the passing of the CARES Act and the opening of the PPP, there was some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes the Company to risks relating to noncompliance with the SecuritiesPPP.
Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and Exchange Commissionprocedures that such banks used in processing applications for the PPP and claims related to agent fees. The Company and the Bank may be exposed to the risk of similar litigation, from both customers and non-customers that approached the Bank regarding PPP loans, regarding its process and procedures used in processing applications for the PPP, or litigation from agents with respect to agent fees. If any such litigation is filed against the Company or the Bank and is not resolved in a manner favorable to the Company or the Bank, it may result in significant financial liability or adversely affect the Company’s reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on March 1, 2017.our business, financial condition and results of operations.
The Bank also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Bank, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by the Company, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.
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.
Item 6. Exhibits
The following exhibits are filed as part of this report:
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| | | | |
Exhibits | Description |
31.1 | |
31.2 | |
32.1 | |
32.2 | |
101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
101.SCH | XBRL Taxonomy Extension Schema Document |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and combined in Exhibit 101) |
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 29, 2020 | By: | /s/ David D. Nelson | |
Date | | David D. Nelson | |
| | Chief Executive Officer and President | |
| | (Principal Executive Officer) | |
| | | |
West Bancorporation, Inc.October 29, 2020 | By: | | |
(Registrant) | | | |
| | | |
| | | |
October 26, 2017 | By: | /s/ David D. Nelson | |
Date | | David D. Nelson | |
| | Chief Executive Officer and President | |
| | (Principal Executive Officer) | |
| | | |
October 26, 2017 | By: | /s/ Douglas R. Gulling | |
Date | | Douglas R. Gulling | |
| | Executive Vice President, Treasurer and Chief Financial Officer | |
| | (Principal Financial Officer) | |
| | | |
October 26, 201729, 2020 | By: | /s/ Marie I. RobertsJane M. Funk | |
Date | | Marie I. RobertsJane M. Funk | |
| | Senior Vice President, Controller and Chief Accounting Officer | |
| | (Principal Accounting Officer) | |