WEST BANCORPORATION INC - Quarter Report: 2018 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2018

or

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from __________ to __________

Commission File Number: 0-49677

WEST BANCORPORATION, INC.

(Exact Name of Registrant as Specified in its Charter)



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



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

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

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

Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

Yes x No o

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



Large accelerated filer	o
Accelerated filer	x
Non-accelerated filer	o
Smaller reporting company	x
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 24, 2018, there were 16,295,494 shares of common stock, no par value, outstanding.

WEST BANCORPORATION, INC.

INDEX



		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements	4

	Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017	4

	Consolidated Statements of Income for the three and nine months ended September 30, 2018 and 2017	5

	Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017	6

	Consolidated Statements of Stockholders' Equity for the three and nine months ended September 30, 2018 and 2017	7

	Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017	9

	Notes to Consolidated Financial Statements	10

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	30

	"Safe Harbor" Concerning Forward-Looking Statements	30

	Critical Accounting Policies	30

	Non-GAAP Financial Measures	31

	Overview	32

	Results of Operations	34

	Financial Condition	43

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46

Item 4.	Controls and Procedures	46

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	46

Item 1A.	Risk Factors	46

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47

Item 3.	Defaults Upon Senior Securities	47

Item 4.	Mine Safety Disclosures	47

Item 5.	Other Information	47

Item 6.	Exhibits	47

	Signatures	48

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements



West Bancorporation, Inc. and Subsidiary
Consolidated Balance Sheets
(unaudited)

(in thousands, except share and per share data)	September 30, 2018			December 31, 2017
ASSETS
Cash and due from banks	$	26,406		$	34,952
Federal funds sold	876			12,997
Cash and cash equivalents	27,282			47,949
Investment securities available for sale, at fair value	470,331			444,219
Investment securities held to maturity, at amortized cost (fair value $45,890 at December 31, 2017)	—			45,527
Federal Home Loan Bank stock, at cost	10,061			9,174
Loans	1,600,817			1,510,500
Allowance for loan losses	(16,673		)	(16,430		)
Loans, net	1,584,144			1,494,070
Premises and equipment, net	21,722			23,022
Accrued interest receivable	7,782			7,344
Bank-owned life insurance	34,086			33,618
Deferred tax assets, net	6,901			4,645
Other assets	9,357			4,809
Total assets	$	2,171,666		$	2,114,377

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing demand	$	396,079		$	395,888
Interest-bearing demand	313,916			395,052
Savings	943,717			850,216
Time of $250 or more	33,752			16,965
Other time	151,828			152,692
Total deposits	1,839,292			1,810,813
Federal funds purchased	26,245			545
Subordinated notes, net	20,422			20,412
Federal Home Loan Bank advances, net	77,501			76,382
Long-term debt	17,582			22,917
Accrued expenses and other liabilities	6,006			5,210
Total liabilities	1,987,048			1,936,279
COMMITMENTS AND CONTINGENCIES (NOTE 8)
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value; authorized 50,000,000 shares; no shares issued and outstanding at September 30, 2018 and December 31, 2017	—			—
Common stock, no par value; authorized 50,000,000 shares; 16,295,494 and 16,215,672 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively	3,000			3,000
Additional paid-in capital	24,391			23,463
Retained earnings	165,741			153,527
Accumulated other comprehensive loss	(8,514		)	(1,892		)
Total stockholders' equity	184,618			178,098
Total liabilities and stockholders' equity	$	2,171,666		$	2,114,377

See Notes to Consolidated Financial Statements.

Table of Contents



West Bancorporation, Inc. and Subsidiary
Consolidated Statements of Income
(unaudited)
	Three Months Ended September 30,					Nine Months Ended September 30,
(in thousands, except per share data)	2018			2017		2018			2017
Interest income:
Loans, including fees	$	18,347		$	15,854	$	51,989		$	46,865
Investment securities:
Taxable	2,296			1,489		5,995			3,755
Tax-exempt	1,199			1,081		3,867			2,674
Federal funds sold	78			136		336			223
Total interest income	21,920			18,560		62,187			53,517
Interest expense:
Deposits	4,768			2,108		11,578			5,084
Federal funds purchased	61			13		140			82
Subordinated notes	287			232		819			667
Federal Home Loan Bank advances	930			972		2,669			2,837
Long-term debt	187			204		579			334
Total interest expense	6,233			3,529		15,785			9,004
Net interest income	15,687			15,031		46,402			44,513
Provision for loan losses	(400		)	—		(250		)	—
Net interest income after provision for loan losses	16,087			15,031		46,652			44,513
Noninterest income:
Service charges on deposit accounts	649			715		1,925			1,946
Debit card usage fees	422			435		1,254			1,333
Trust services	445			436		1,465			1,264
Increase in cash value of bank-owned life insurance	158			167		468			484
Gain from bank-owned life insurance	—			—		—			307
Realized investment securities gains (losses), net	(78		)	197		(103		)	423
Other income	518			314		1,041			983
Total noninterest income	2,114			2,264		6,050			6,740
Noninterest expense:
Salaries and employee benefits	4,774			4,430		14,062			13,216
Occupancy	1,250			1,087		3,731			3,315
Data processing	670			635		2,020			2,031
FDIC insurance	172			151		499			514
Professional fees	196			184		608			725
Director fees	248			240		758			697
Write-down of premises	—			—		333			—
Other expenses	1,251			1,293		3,795			3,737
Total noninterest expense	8,561			8,020		25,806			24,235
Income before income taxes	9,640			9,275		26,896			27,018
Income taxes	2,507			2,870		5,615			8,142
Net income	$	7,133		$	6,405	$	21,281		$	18,876

Basic earnings per common share	$	0.44		$	0.40	$	1.31		$	1.17
Diluted earnings per common share	$	0.43		$	0.39	$	1.30		$	1.16
Cash dividends declared per common share	$	0.20		$	0.18	$	0.58		$	0.53

See Notes to Consolidated Financial Statements.

Table of Contents



West Bancorporation, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income
(unaudited)
	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2018			2017			2018			2017
Net income	$	7,133		$	6,405		$	21,281		$	18,876
Other comprehensive income (loss) :
Unrealized gains (losses) on investment securities:
Unrealized holding gains (losses) arising during the period	(4,182		)	(1,316		)	(12,373		)	2,509
Unrealized gains on investment securities transferred from held to maturity to available for sale	—			—			363			—
Plus: reclassification adjustment for net (gains) losses realized in net income	78			(197		)	103			(423		)
Less: other reclassification adjustment	—			(34		)	(36		)	(234		)
Income tax benefit (expense)	1,026			588			2,988			(704		)
Other comprehensive income (loss) on investment securities	(3,078		)	(959		)	(8,955		)	1,148
Unrealized gains (losses) on derivatives:
Unrealized holding gains (losses) arising during the period	964			(29		)	3,512			(376		)
Plus: reclassification adjustment for net (gain) loss on derivatives realized in net income	(10		)	70			25			239
Plus: reclassification adjustment for amortization of derivative termination costs	24			28			71			82
Income tax benefit (expense)	(246		)	(26		)	(905		)	21
Other comprehensive income (loss) on derivatives	732			43			2,703			(34		)
Total other comprehensive income (loss)	(2,346		)	(916		)	(6,252		)	1,114
Comprehensive income	$	4,787		$	5,489		$	15,029		$	19,990

See Notes to Consolidated Financial Statements.

Table of Contents



West Bancorporation, Inc. and Subsidiary
Consolidated Statements of Stockholders' Equity
(unaudited)
(in thousands, except share and per share data)

	Three Months Ended September 30, 2018
												Accumulated
						Additional						Other
	Preferred		Common Stock			Paid-In			Retained			Comprehensive
	Stock		Shares	Amount		Capital			Earnings			Income (Loss)			Total
Balance, June 30, 2018	$	—	16,295,494	$	3,000	$	23,653		$	161,867		$	(6,168	)	$	182,352
Net income	—		—	—		—			7,133			—			7,133
Other comprehensive loss, net of tax	—		—	—		—			—			(2,346		)	(2,346		)
Cash dividends declared, $0.20 per common share	—		—	—		—			(3,259		)	—			(3,259		)
Stock-based compensation costs	—		—	—		738			—			—			738
Balance, September 30, 2018	$	—	16,295,494	$	3,000	$	24,391		$	165,741		$	(8,514	)	$	184,618


	Three Months Ended September 30, 2017
												Accumulated
						Additional						Other
	Preferred		Common Stock			Paid-In			Retained			Comprehensive
	Stock		Shares	Amount		Capital			Earnings			Income (Loss)			Total
Balance, June 30, 2017	$	—	16,211,161	$	3,000	$	22,132		$	148,766		$	988		$	174,886
Net income	—		—	—		—			6,405			—			6,405
Other comprehensive loss, net of tax	—		—	—		—			—			(916		)	(916		)
Cash dividends declared, $0.18 per common share	—		—	—		—			(2,919		)	—			(2,919		)
Stock-based compensation costs	—		—	—		709			—			—			709
Issuance of common stock upon vesting of restricted stock units, net of shares withheld for payroll taxes	—		4,511	—		(78		)	—			—			(78		)
Balance, September 30, 2017	$	—	16,215,672	$	3,000	$	22,763		$	152,252		$	72		$	178,087

Table of Contents



West Bancorporation, Inc. and Subsidiary
Consolidated Statements of Stockholders' Equity
(unaudited)
(in thousands, except share and per share data)

	Nine Months Ended September 30, 2018
												Accumulated
						Additional						Other
	Preferred		Common Stock			Paid-In			Retained			Comprehensive
	Stock		Shares	Amount		Capital			Earnings			Income (Loss)			Total
Balance, December 31, 2017	$	—	16,215,672	$	3,000	$	23,463		$	153,527		$	(1,892	)	$	178,098
Reclassification of stranded tax effects of rate change	—		—	—		—			370			(370		)	—
Net income	—		—	—		—			21,281			—			21,281
Other comprehensive loss, net of tax	—		—	—		—			—			(6,252		)	(6,252		)
Cash dividends declared, $0.58 per common share	—		—	—		—			(9,437		)	—			(9,437		)
Stock-based compensation costs	—		—	—		2,004			—			—			2,004
Issuance of common stock upon vesting of restricted stock units, net of shares withheld for payroll taxes	—		79,822	—		(1,076		)	—			—			(1,076		)
Balance, September 30, 2018	$	—	16,295,494	$	3,000	$	24,391		$	165,741		$	(8,514	)	$	184,618


	Nine Months Ended September 30, 2017
												Accumulated
						Additional						Other
	Preferred		Common Stock			Paid-In			Retained			Comprehensive
	Stock		Shares	Amount		Capital			Earnings			Income (Loss)			Total
Balance, December 31, 2016	$	—	16,137,999	$	3,000	$	21,462		$	141,956		$	(1,042	)	$	165,376
Net income	—		—	—		—			18,876			—			18,876
Other comprehensive income, net of tax	—		—	—		—			—			1,114			1,114
Cash dividends declared, $0.53 per common share	—		—	—		—			(8,580		)	—			(8,580		)
Stock-based compensation costs	—		—	—		1,932			—			—			1,932
Issuance of common stock upon vesting of restricted stock units, net of shares withheld for payroll taxes	—		77,673	—		(631		)	—			—			(631		)
Balance, September 30, 2017	$	—	16,215,672	$	3,000	$	22,763		$	152,252		$	72		$	178,087

See Notes to Consolidated Financial Statements.

Table of Contents



West Bancorporation, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(unaudited)
	Nine Months Ended September 30,
(in thousands)	2018			2017
Cash Flows from Operating Activities:
Net income	$	21,281		$	18,876
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	(250		)	—
Net amortization and accretion	3,715			2,921
Investment securities (gains) losses, net	103			(423		)
Stock-based compensation	2,004			1,932
Increase in cash value of bank-owned life insurance	(468		)	(484		)
Gain from bank-owned life insurance	—			(307		)
Depreciation	1,053			1,007
Write-down of premises	333			—
Deferred income taxes	(173		)	413
Change in assets and liabilities:
Increase in accrued interest receivable	(438		)	(1,315		)
Increase in other assets	(1,095		)	(125		)
Increase (decrease) in accrued expenses and other liabilities	881			(516		)
Net cash provided by operating activities	26,946			21,979
Cash Flows from Investing Activities:
Proceeds from sales of securities available for sale	66,140			74,224
Proceeds from maturities and calls of investment securities	34,883			38,529
Purchases of securities available for sale	(96,170		)	(267,133		)
Purchases of Federal Home Loan Bank stock	(10,634		)	(16,794		)
Proceeds from redemption of Federal Home Loan Bank stock	9,747			15,309
Net increase in loans	(89,824		)	(56,789		)
Purchases of premises and equipment	(86		)	(866		)
Proceeds of principal and earnings from bank-owned life insurance	—			451
Net cash used in investing activities	(85,944		)	(213,069		)
Cash Flows from Financing Activities:
Net increase in deposits	28,479			104,661
Net increase in federal funds purchased	25,700			39,235
Proceeds from long-term debt	—			22,000
Principal payments on long-term debt	(5,335		)	(2,934		)
Common stock dividends paid	(9,437		)	(8,580		)
Restricted stock units withheld for payroll taxes	(1,076		)	(631		)
Net cash provided by financing activities	38,331			153,751
Net decrease in cash and cash equivalents	(20,667		)	(37,339		)
Cash and Cash Equivalents:
Beginning	47,949			76,836
Ending	$	27,282		$	39,497

Supplemental Disclosures of Cash Flow Information:
Cash payments for:
Interest	$	15,471		$	8,667
Income taxes	4,822			6,410

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

See Notes to Consolidated Financial Statements.

Table of Contents

West Bancorporation, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

(dollars in thousands, except per share data)

1. Basis of Presentation

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

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

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

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

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

Table of Contents

West Bancorporation, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

(dollars in thousands, except per share data)

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The guidance in the update supersedes the requirements in ASC Topic 840, Leases. The guidance is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for leases with terms of more than 12 months. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2018. The Company currently leases its main location and space for six other branch offices and operational departments under operating leases that will result in recognition of lease assets and lease liabilities on the consolidated balance sheets under the update. The amount of assets and liabilities added to the balance sheet are estimated to be approximately $10,000, which will not have a material impact on the Company's consolidated financial statements. In July 2018, the FASB issued ASU No. 2018-11, Targeted Improvements, which amends ASC 842, Leases. This update provides for an adoption option that will not require earlier periods to be restated at the adoption date.

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

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

In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendment in this update allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the December 22, 2017, enactment of Public Law 115-97, commonly known as the Tax Cut and Jobs Act (Tax Act), which reduced the federal corporate income tax rate and became effective in 2018. For public companies, the update is effective for annual periods beginning after December 15, 2018, with early adoption permitted. The amendment can be adopted at the beginning of the period or on a retrospective basis. The Company adopted the amendment effective January 1, 2018, using the beginning of period method. The reclassified amount was $370.

Table of Contents

West Bancorporation, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

(dollars in thousands, except per share data)

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this update modify the disclosure requirements for fair 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 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 will not have a material effect 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, 2018 and 2017 are presented in the following table.



	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands, except per share data)	2018		2017		2018		2017
Net income	$	7,133	$	6,405	$	21,281	$	18,876

Weighted average common shares outstanding	16,295		16,213		16,268		16,186
Weighted average effect of restricted stock units outstanding	106		118		132		127
Diluted weighted average common shares outstanding	16,401		16,331		16,400		16,313

Basic earnings per common share	$	0.44	$	0.40	$	1.31	$	1.17
Diluted earnings per common share	$	0.43	$	0.39	$	1.30	$	1.16
Number of anti-dilutive common stock equivalents excluded from diluted earnings per share computation	137		24		92		14

Table of Contents

West Bancorporation, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

(dollars in thousands, except per share data)

3. Investment Securities

The following tables show the amortized cost, gross unrealized gains and losses, and fair value of investment securities, by investment security type as of September 30, 2018 and December 31, 2017.



	September 30, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
Securities available for sale:
State and political subdivisions	$	161,888	$	40	$	(6,154	)	$	155,774
Collateralized mortgage obligations ⁽¹⁾	168,296		—		(5,651		)	162,645
Mortgage-backed securities ⁽¹⁾	62,225		—		(1,737		)	60,488
Asset-backed securities ⁽²⁾	39,465		—		(694		)	38,771
Trust preferred security	2,148		—		(148		)	2,000
Corporate notes	51,866		21		(1,234		)	50,653
	$	485,888	$	61	$	(15,618	)	$	470,331


	December 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
Securities available for sale:
State and political subdivisions	$	146,331	$	928	$	(946	)	$	146,313
Collateralized mortgage obligations ⁽¹⁾	162,631		28		(2,727		)	159,932
Mortgage-backed securities ⁽¹⁾	60,956		20		(547		)	60,429
Asset-backed securities ⁽²⁾	45,539		8		(352		)	45,195
Trust preferred security	2,134		—		(128		)	2,006
Corporate notes	30,278		331		(265		)	30,344
	$	447,869	$	1,315	$	(4,965	)	$	444,219

Securities held to maturity:
State and political subdivisions	$	45,527	$	460	$	(97	)	$	45,890


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


(2)	Pass-through asset-backed securities guaranteed by the SBA, representing participating interests in pools of long-term debentures issued by state and local development companies certified by the SBA.

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

Investment securities with an amortized cost of approximately $129,578 and $120,338 as of September 30, 2018 and December 31, 2017, respectively, were pledged to secure access to the Federal Reserve discount window, for public fund deposits, and for other purposes as required or permitted by law or regulation.

Table of Contents

West Bancorporation, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

(dollars in thousands, except per share data)

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



	September 30, 2018
	Amortized Cost		Fair Value
Due in one year or less	$	115	$	115
Due after one year through five years	3,616		3,562
Due after five years through ten years	83,586		81,587
Due after ten years	128,585		123,163
	215,902		208,427
Collateralized mortgage obligations, mortgage-backed securities and asset-backed securities	269,986		261,904
	$	485,888	$	470,331

The details of the sales of investment securities available for sale for the three and nine months ended September 30, 2018 and 2017 are summarized in the following table.



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Proceeds from sales	$	56,924	$	21,204	$	66,140	$	74,224
Gross gains on sales	64		197		98		527
Gross losses on sales	142		—		201		104

Table of Contents

West Bancorporation, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

(dollars in thousands, except per share data)

The following tables show the fair value and gross unrealized losses, aggregated by investment type and length of time that individual securities have been in a continuous loss position, as of September 30, 2018 and December 31, 2017.



	September 30, 2018
	Less than 12 months					12 months or longer					Total
	Fair Value		Gross Unrealized (Losses)			Fair Value		Gross Unrealized (Losses)			Fair Value		Gross Unrealized (Losses)
Securities available for sale:
State and political subdivisions	$	102,773	$	(3,594	)	$	48,632	$	(2,560	)	$	151,405	$	(6,154	)
Collateralized mortgage obligations	52,539		(428		)	110,106		(5,223		)	162,645		(5,651		)
Mortgage-backed securities	33,041		(869		)	26,759		(868		)	59,800		(1,737		)
Asset-backed securities	21,040		(204		)	17,731		(490		)	38,771		(694		)
Trust preferred security	—		—			2,000		(148		)	2,000		(148		)
Corporate notes	30,192		(390		)	14,155		(844		)	44,347		(1,234		)
	$	239,585	$	(5,485	)	$	219,383	$	(10,133	)	$	458,968	$	(15,618	)


	December 31, 2017
	Less than 12 months					12 months or longer					Total
	Fair Value		Gross Unrealized (Losses)			Fair Value		Gross Unrealized (Losses)			Fair Value		Gross Unrealized (Losses)
Securities available for sale:
State and political subdivisions	$	86,750	$	(946	)	$	—	$	—		$	86,750	$	(946	)
Collateralized mortgage obligations	107,526		(1,583		)	46,396		(1,144		)	153,922		(2,727		)
Mortgage-backed securities	53,974		(547		)	—		—			53,974		(547		)
Asset-backed securities	38,652		(352		)	—		—			38,652		(352		)
Trust preferred security	—		—			2,006		(128		)	2,006		(128		)
Corporate notes	14,735		(265		)	—		—			14,735		(265		)
	$	301,637	$	(3,693	)	$	48,402	$	(1,272	)	$	350,039	$	(4,965	)

Securities held to maturity:
State and political subdivisions	$	12,611	$	(70	)	$	1,740	$	(27	)	$	14,351	$	(97	)

As of September 30, 2018, the available for sale securities with unrealized losses included 208 state and political subdivision securities, 45 collateralized mortgage obligation securities, 18 mortgage-backed securities, seven asset-backed securities, one trust preferred security and 19 corporate notes. The Company believed the unrealized losses on securities available for sale as of September 30, 2018 were due to market conditions rather than reduced estimated cash flows. At this time, the Company does not intend to sell these securities, does not anticipate that these securities will be required to be sold before anticipated recovery, and expects full principal and interest to be collected. Therefore, the Company did not consider these securities to have other than temporary impairment as of September 30, 2018.

Table of Contents

West Bancorporation, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

(dollars in thousands, except per share data)

4. Loans and Allowance for Loan Losses

Loans consisted of the following segments as of September 30, 2018 and December 31, 2017.



	September 30, 2018			December 31, 2017
Commercial	$	316,467		$	347,482
Real estate:
Construction, land and land development	204,891			207,451
1-4 family residential first mortgages	49,411			51,044
Home equity	14,103			13,811
Commercial	1,011,809			886,114
Consumer and other	6,293			6,363
	1,602,974			1,512,265
Net unamortized fees and costs	(2,157		)	(1,765		)
	$	1,600,817		$	1,510,500

Real estate loans of approximately $800,000 and $810,000 were pledged as security for Federal Home Loan Bank (FHLB) advances as of September 30, 2018 and December 31, 2017, respectively.

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

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

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

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

Table of Contents

West Bancorporation, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

(dollars in thousands, except per share data)

TDR loans totaled $687 and $220 as of September 30, 2018 and December 31, 2017, respectively, and were included in the nonaccrual category. There was one loan modification considered to be TDR, with a pre- and post-modification recorded investment of $560, that occurred during the nine months ended September 30, 2018. There were no loan modifications considered to be TDR that occurred during the three months ended September 30, 2018 or during the three and nine months ended September 30, 2017.

One TDR loan that was modified within the twelve months preceding September 30, 2018, with a recorded investment of $552, has subsequently had a payment default. No TDR loans that were modified within the twelve months preceding September 30, 2017 have subsequently had a payment default. A TDR loan is considered to have a payment default when it is past due 30 days or more.

The following table summarizes the recorded investment in impaired loans by segment, broken down by loans with no related allowance for loan losses and loans with a related allowance and the amount of that allowance as of September 30, 2018 and December 31, 2017.



	September 30, 2018						December 31, 2017
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Commercial	$	930	$	930	$	—	$	—	$	—	$	—
Real estate:
Construction, land and land development	—		—		—		—		—		—
1-4 family residential first mortgages	110		110		—		91		91		—
Home equity	—		—		—		172		172		—
Commercial	687		687		—		220		220		—
Consumer and other	—		—		—		—		—		—
	1,727		1,727		—		483		483		—
With an allowance recorded:
Commercial	—		—		—		—		—		—
Real estate:
Construction, land and land development	—		—		—		—		—		—
1-4 family residential first mortgages	—		—		—		—		—		—
Home equity	14		14		14		21		21		21
Commercial	105		105		105		118		118		118
Consumer and other	—		—		—		—		—		—
	119		119		119		139		139		139
Total:
Commercial	930		930		—		—		—		—
Real estate:
Construction, land and land development	—		—		—		—		—		—
1-4 family residential first mortgages	110		110		—		91		91		—
Home equity	14		14		14		193		193		21
Commercial	792		792		105		338		338		118
Consumer and other	—		—		—		—		—		—
	$	1,846	$	1,846	$	119	$	622	$	622	$	139

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

Table of Contents

West Bancorporation, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

(dollars in thousands, except per share data)

The following table summarizes the average recorded investment and interest income recognized on impaired loans by segment for the three and nine months ended September 30, 2018 and 2017.



	Three Months Ended September 30,								Nine Months Ended September 30,
	2018				2017				2018				2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	950	$	—	$	—	$	—	$	661	$	—	$	24	$	—
Real estate:
Construction, land and land development	—		—		—		—		—		—		—		—
1-4 family residential first mortgages	113		—		97		—		115		—		101		—
Home equity	129		6		29		—		155		6		33		—
Commercial	707		—		262		—		581		—		291		—
Consumer and other	—		—		—		—		—		—		—		—
	1,899		6		388		—		1,512		6		449		—
With an allowance recorded:
Commercial	—		—		62		—		—		—		78		—
Real estate:
Construction, land and land development	—		—		—		—		—		—		—		—
1-4 family residential first mortgages	—		—		—		—		—		—		—		—
Home equity	15		—		157		—		17		—		223		—
Commercial	107		—		125		—		112		—		130		—
Consumer and other	—		—		—		—		—		—		—		—
	122		—		344		—		129		—		431		—
Total:
Commercial	950		—		62		—		661		—		102		—
Real estate:
Construction, land and land development	—		—		—		—		—		—		—		—
1-4 family residential first mortgages	113		—		97		—		115		—		101		—
Home equity	144		6		186		—		172		6		256		—
Commercial	814		—		387		—		693		—		421		—
Consumer and other	—		—		—		—		—		—		—		—
	$	2,021	$	6	$	732	$	—	$	1,641	$	6	$	880	$	—

Table of Contents

West Bancorporation, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

(dollars in thousands, except per share data)

The following tables provide an analysis of the payment status of the recorded investment in loans as of September 30, 2018 and December 31, 2017.



	September 30, 2018
	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Nonaccrual Loans		Total Loans
Commercial	$	75	$	—	$	—	$	75	$	315,462	$	930	$	316,467
Real estate:
Construction, land and
land development	—		—		—		—		204,891		—		204,891
1-4 family residential
first mortgages	174		—		—		174		49,127		110		49,411
Home equity	30		—		—		30		14,059		14		14,103
Commercial	—		—		—		—		1,011,017		792		1,011,809
Consumer and other	—		—		—		—		6,293		—		6,293
Total	$	279	$	—	$	—	$	279	$	1,600,849	$	1,846	$	1,602,974



	December 31, 2017
	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Nonaccrual Loans		Total Loans
Commercial	$	40	$	20	$	—	$	60	$	347,422	$	—	$	347,482
Real estate:
Construction, land and
land development	—		—		—		—		207,451		—		207,451
1-4 family residential
first mortgages	—		75		—		75		50,878		91		51,044
Home equity	—		—		—		—		13,618		193		13,811
Commercial	—		—		—		—		885,776		338		886,114
Consumer and other	—		—		—		—		6,363		—		6,363
Total	$	40	$	95	$	—	$	135	$	1,511,508	$	622	$	1,512,265

Table of Contents

West Bancorporation, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

(dollars in thousands, except per share data)

The following tables present the recorded investment in loans by credit quality indicator and loan segment as of September 30, 2018 and December 31, 2017.



	September 30, 2018
	Pass		Watch		Substandard		Doubtful		Total
Commercial	$	295,080	$	19,379	$	2,008	$	—	$	316,467
Real estate:
Construction, land and land development	203,461		1,430		—		—		204,891
1-4 family residential first mortgages	47,929		1,311		171		—		49,411
Home equity	13,911		78		114		—		14,103
Commercial	982,212		27,837		1,760		—		1,011,809
Consumer and other	6,265		—		28		—		6,293
Total	$	1,548,858	$	50,035	$	4,081	$	—	$	1,602,974



	December 31, 2017
	Pass		Watch		Substandard		Doubtful		Total
Commercial	$	344,586	$	901	$	1,995	$	—	$	347,482
Real estate:
Construction, land and land development	206,719		732		—		—		207,451
1-4 family residential first mortgages	49,905		890		249		—		51,044
Home equity	13,466		54		291		—		13,811
Commercial	856,789		20,574		8,751		—		886,114
Consumer and other	6,327		36		—		—		6,363
Total	$	1,477,792	$	23,187	$	11,286	$	—	$	1,512,265

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

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

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

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

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

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

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

Table of Contents

West Bancorporation, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

(dollars in thousands, except per share data)

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

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

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

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

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

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

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

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

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

The allowance for loan losses is established through a provision for loan losses charged to expense. The allowance is an amount that management believes will be adequate to absorb probable losses on existing loans based on an evaluation of the collectability of loans and prior loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, the review of specific problem loans, and the current economic conditions that may affect the borrower's ability to pay. Loans are charged-off against the allowance for loan losses when management believes that collectability of the principal is unlikely. While management uses the best information available to make its evaluations, future adjustments to the allowance may be necessary if there are significant changes in economic conditions or the other factors relied upon.

Table of Contents

West Bancorporation, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

(dollars in thousands, except per share data)

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

The following tables detail the changes in the allowance for loan losses by segment for the three and nine months ended September 30, 2018 and 2017.



	Three Months Ended September 30, 2018
				Real Estate
	Commercial			Construction and Land			1-4 Family Residential			Home Equity			Commercial		Consumer and Other			Total
Beginning balance	$	3,673		$	1,911		$	304		$	182		$	10,369	$	79		$	16,518
Charge-offs	—			—			—			—			—		—			—
Recoveries	539			—			7			6			2		1			555
Provision ⁽¹⁾	(907		)	185			(23		)	—			346		(1		)	(400		)
Ending balance	$	3,305		$	2,096		$	288		$	188		$	10,717	$	79		$	16,673

	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

	Nine Months Ended September 30, 2018
				Real Estate
	Commercial			Construction and Land			1-4 Family Residential			Home Equity			Commercial		Consumer and Other			Total
Beginning balance	$	3,866		$	2,213		$	319		$	186		$	9,770	$	76		$	16,430
Charge-offs	(208		)	—			—			(1		)	—		—			(209		)
Recoveries	649			—			14			17			9		13			702
Provision ⁽¹⁾	(1,002		)	(117		)	(45		)	(14		)	938		(10		)	(250		)
Ending balance	$	3,305		$	2,096		$	288		$	188		$	10,717	$	79		$	16,673

	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


(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.

Table of Contents

West Bancorporation, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

(dollars in thousands, except per share data)

The following tables present a breakdown of the allowance for loan losses disaggregated on the basis of impairment analysis method by segment as of September 30, 2018 and December 31, 2017.



	September 30, 2018
			Real Estate
	Commercial		Construction and Land		1-4 Family Residential		Home Equity		Commercial		Consumer and Other		Total
Ending balance:
Individually evaluated for impairment	$	—	$	—	$	—	$	14	$	105	$	—	$	119
Collectively evaluated for impairment	3,305		2,096		288		174		10,612		79		16,554
Total	$	3,305	$	2,096	$	288	$	188	$	10,717	$	79	$	16,673

	December 31, 2017
			Real Estate
	Commercial		Construction and Land		1-4 Family Residential		Home Equity		Commercial		Consumer and Other		Total
Ending balance:
Individually evaluated for impairment	$	—	$	—	$	—	$	21	$	118	$	—	$	139
Collectively evaluated for impairment	3,866		2,213		319		165		9,652		76		16,291
Total	$	3,866	$	2,213	$	319	$	186	$	9,770	$	76	$	16,430

The following tables present the recorded investment in loans, exclusive of unamortized fees and costs, disaggregated on the basis of impairment analysis method by segment as of September 30, 2018 and December 31, 2017.



	September 30, 2018
			Real Estate
	Commercial		Construction and Land		1-4 Family Residential		Home Equity		Commercial		Consumer and Other		Total
Ending balance:
Individually evaluated for impairment	$	930	$	—	$	110	$	14	$	792	$	—	$	1,846
Collectively evaluated for impairment	315,537		204,891		49,301		14,089		1,011,017		6,293		1,601,128
Total	$	316,467	$	204,891	$	49,411	$	14,103	$	1,011,809	$	6,293	$	1,602,974



	December 31, 2017
			Real Estate
	Commercial		Construction and Land		1-4 Family Residential		Home Equity		Commercial		Consumer and Other		Total
Ending balance:
Individually evaluated for impairment	$	—	$	—	$	91	$	193	$	338	$	—	$	622
Collectively evaluated for impairment	347,482		207,451		50,953		13,618		885,776		6,363		1,511,643
Total	$	347,482	$	207,451	$	51,044	$	13,811	$	886,114	$	6,363	$	1,512,265

Table of Contents

West Bancorporation, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

(dollars in thousands, except per share data)

5. Derivatives

The Company uses interest rate swap agreements to manage the interest rate risk related to the variability in interest payments due to changes in interest rates. The Company entered into two forward-starting interest rate swap transactions to effectively convert variable rate debt instruments to fixed rate instruments. These two swap transactions are designated as cash flow hedges of the changes in LIBOR, the benchmark interest rate being hedged, associated with the interest payments on $50,000 of debt instruments. In January 2018, the Company entered into an interest rate swap agreement that effectively converts certain customer deposits with variable rates based on the federal funds upper target rate to fixed rate instruments. This swap transaction has a notional amount of $60,000 with a forward-starting date in December 2018 and is designated as a cash flow hedge of the risk of changes in total cash flows paid on certain customer deposits. The Company is exposed to credit risk in the event of nonperformance by counterparties to the interest rate swaps, which is minimized by collateral-pledging provisions in the agreements. Derivative contracts are executed with a Credit Support Annex, which is a bilateral ratings-sensitive agreement that requires collateral postings at established credit threshold levels. These agreements protect the interests of the Company and its counterparties should either party suffer a credit rating deterioration. As of September 30, 2018 and December 31, 2017, the Company pledged $0 and $210, respectively, of collateral to the counterparty in the form of cash on deposit with a third party. The Company's counterparty was required to pledge $4,440 and $980 at September 30, 2018 and December 31, 2017, respectively. The Company estimates there will be approximately $43 of cash receipts and reclassification from accumulated other comprehensive income to interest expense through the 12 months ending September 30, 2019. Interest rate swaps with a total notional amount of $70,000 were terminated in 2015, subject to termination fees totaling $541. The termination fees are being reclassified from accumulated other comprehensive income to interest expense over the remaining life of the underlying cash flows through June 2020. Approximately $95 of termination fees will be reclassified to interest expense through the 12 months ended September 30, 2019.

The table below identifies the balance sheet category and fair values of the Company's derivative instruments designated as cash flow hedges as of September 30, 2018 and December 31, 2017.



	Notional Amount		Fair Value			Balance Sheet Category	Weighted Average Receive Rate		Weighted Average Pay Rate		Maturity
September 30, 2018
Interest rate swap	$	30,000	$	414		Other Assets	2.66	%	2.52	%	9/21/2020
Interest rate swap⁽¹⁾	20,000		1,851			Other Assets	5.45	%	4.81	%	9/30/2026
Interest rate swap⁽²⁾	60,000		2,082			Other Assets	—		2.31	%	12/31/2025
December 31, 2017
Interest rate swap	$	30,000	$	(86	)	Other Liabilities	1.95	%	2.52	%	9/21/2020
Interest rate swap⁽¹⁾	20,000		895			Other Assets	—		4.81	%	9/30/2026


(1)	This swap is a forward-starting swap with a weighted average pay rate of 4.81 percent beginning September 30, 2018. No interest payments are required related to this swap until December 30, 2018.


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

The following table identifies the pre-tax gains or losses recognized on the Company's derivative instruments designated as cash flow hedges for the nine months ended September 30, 2018 and 2017.



					Reclassified from AOCI into Income
	Amount of Pre-tax Gain (Loss) Recognized in OCI				Reclassified from AOCI into Income
	Amount of Pre-tax Gain (Loss) Recognized in OCI					Amount of Loss
	Nine Months Ended September 30,					Nine Months Ended September 30,
	2018		2017		Category	2018			2017
Interest rate swaps	$	3,512	(376	)	Interest Expense	$	(96	)	(321	)

Table of Contents

West Bancorporation, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

(dollars in thousands, except per share data)

6. Income Taxes

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

Net deferred tax assets consisted of the following as of September 30, 2018 and December 31, 2017.



	September 30, 2018			December 31, 2017
Deferred tax assets:
Allowance for loan losses	$	4,168		$	4,108
Net unrealized losses on securities available for sale	3,890			902
Intangibles	—			101
Accrued expenses	305			176
Restricted stock compensation	519			544
State net operating loss carryforward	1,496			1,379
Other	72			86
	10,450			7,296
Deferred tax liabilities:
Net deferred loan fees and costs	182			193
Net unrealized gains on interest rate swaps	1,044			139
Premises and equipment	690			792
Other	137			148
	2,053			1,272
Net deferred tax assets before valuation allowance	8,397			6,024
Valuation allowance	(1,496		)	(1,379		)
Net deferred tax assets	$	6,901		$	4,645

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

Table of Contents

West Bancorporation, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

(dollars in thousands, except per share data)

7. Accumulated Other Comprehensive Income (Loss)

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



	Unrealized			Unrealized			Accumulated
	Gains			Gains			Other
	(Losses) on			(Losses) on			Comprehensive
	Securities			Derivatives			Income (Loss)
Balance, December 31, 2017	$	(2,237	)	$	345		$	(1,892	)
Transfer of securities held to maturity to securities available for sale	273			—			273
Other comprehensive income (loss) before reclassifications	(9,281		)	2,634			(6,647		)
Amounts reclassified from accumulated other comprehensive income	53			69			122
Net current period other comprehensive income (loss)	(8,955		)	2,703			(6,252		)
Reclassification of stranded tax effects	(475		)	105			(370		)
Balance, September 30, 2018	$	(11,667	)	$	3,153		$	(8,514	)

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

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, 2018 and December 31, 2017.



	September 30, 2018		December 31, 2017
Commitments to extend credit	$	591,283	$	617,949
Standby letters of credit	6,035		5,996
	$	597,318	$	623,945

West Bank previously executed Mortgage Partnership Finance (MPF) Master Commitments (Commitments) with the FHLB of Des Moines to deliver residential mortgage loans and to guarantee the payment of any realized losses that exceed the FHLB's first loss account for mortgages delivered under the Commitments. West Bank receives credit enhancement fees from the FHLB for providing this guarantee and continuing to assist with managing the credit risk of the MPF Program residential mortgage loans. At September 30, 2018, the liability represented by the present value of the credit enhancement fees less any expected losses in the mortgages delivered under the Commitments was approximately $16. The outstanding balance of mortgage loans sold under the MPF Program was $82,139 and $94,292 at September 30, 2018 and December 31, 2017, respectively.

Contractual commitments: The Company had remaining commitments to invest in qualified affordable housing projects totaling $4,672 and $6,130 as of September 30, 2018 and December 31, 2017, respectively. The Company also has a commitment to invest $5,149 in a federal new market tax credit project as of September 30, 2018.

Table of Contents

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.

9. Fair Value Measurements

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

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

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

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

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

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

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

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

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

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

Table of Contents

West Bancorporation, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

(dollars in thousands, except per share data)

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



	September 30, 2018
	Total		Level 1		Level 2		Level 3
Financial assets:
Investment securities available for sale:
State and political subdivisions	$	155,774	$	—	$	155,774	$	—
Collateralized mortgage obligations	162,645		—		162,645		—
Mortgage-backed securities	60,488		—		60,488		—
Asset-backed securities	38,771		—		38,771		—
Trust preferred security	2,000		—		2,000		—
Corporate notes	50,653		—		50,653		—
Derivative instruments, interest rate swaps	4,347		—		4,347		—



	December 31, 2017
	Total		Level 1		Level 2		Level 3
Financial assets:
Investment securities available for sale:
State and political subdivisions	$	146,313	$	—	$	146,313	$	—
Collateralized mortgage obligations	159,932		—		159,932		—
Mortgage-backed securities	60,429		—		60,429		—
Asset-backed securities	45,195		—		45,195		—
Trust preferred security	2,006		—		2,006		—
Corporate notes	30,344		—		30,344		—
Derivative instrument, interest rate swap	895		—		895		—

Financial liabilities:
Derivative instrument, interest rate swap	$	86	$	—	$	86	$	—

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

Table of Contents

West Bancorporation, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

(dollars in thousands, except per share data)

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



		September 30, 2018				December 31, 2017
	Fair Value Hierarchy Level	Carrying Amount		Approximate Fair Value		Carrying Amount		Approximate Fair Value
Financial assets:
Cash and due from banks	Level 1	$	26,406	$	26,406	$	34,952	$	34,952
Federal funds sold	Level 1	876		876		12,997		12,997
Investment securities available for sale	See previous table	470,331		470,331		444,219		444,219
Investment securities held to maturity	Level 2	—		—		45,527		45,890
Federal Home Loan Bank stock	Level 1	10,061		10,061		9,174		9,174
Loans, net	Level 2	1,584,144		1,553,283		1,494,070		1,490,166
Accrued interest receivable	Level 1	7,782		7,782		7,344		7,344
Interest rate swaps	Level 2	4,347		4,347		895		895
Financial liabilities:
Deposits	Level 2	$	1,839,292	$	1,838,548	$	1,810,813	$	1,810,924
Federal funds purchased	Level 1	26,245		26,245		545		545
Subordinated notes, net	Level 2	20,422		16,277		20,412		15,357
Federal Home Loan Bank advances, net	Level 2	77,501		77,501		76,382		76,382
Long-term debt	Level 2	17,582		17,537		22,917		22,860
Accrued interest payable	Level 1	1,050		1,050		736		736
Interest rate swap	Level 2	—		—		86		86
Off-balance-sheet financial instruments:
Commitments to extend credit	Level 3	—		—		—		—
Standby letters of credit	Level 3	—		—		—		—

Table of Contents

West Bancorporation, Inc.

Management's Discussion and Analysis

(in thousands, except share and per share data)

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

"SAFE HARBOR" CONCERNING FORWARD-LOOKING STATEMENTS

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

CRITICAL ACCOUNTING POLICIES

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

Table of Contents

West Bancorporation, Inc.

Management's Discussion and Analysis

(in thousands, except share and per share data)

NON-GAAP FINANCIAL MEASURES

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

The following table reconciles the non-GAAP financial measures of net interest income and net interest margin on an FTE basis and efficiency ratio on an adjusted and FTE basis to GAAP.



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Reconciliation of net interest income and annualized net interest margin on an FTE basis to GAAP:
Net interest income (GAAP)	$	15,687		$	15,031		$	46,402		$	44,513
Tax-equivalent adjustment ⁽¹⁾	49			677			574			1,892
Net interest income on an FTE basis (non-GAAP)	$	15,736		$	15,708		$	46,976		$	46,405
Average interest-earning assets	$	2,118,129		$	1,882,837		$	2,058,934		$	1,820,997
Net interest margin on an FTE basis (non-GAAP)	2.95		%	3.31		%	3.05		%	3.41		%

Reconciliation of efficiency ratio on an FTE basis to GAAP:
Net interest income on an FTE basis (non-GAAP)	$	15,736		$	15,708		$	46,976		$	46,405
Noninterest income	2,114			2,264			6,050			6,740
Adjustment for realized investment securities (gains) losses, net	78			(197		)	103			(423		)
Plus: losses on disposal of premises and equipment, net	14			10			14			25
Adjusted income	$	17,942		$	17,785		$	53,143		$	52,747
Noninterest expense	$	8,561		$	8,020		$	25,806		$	24,235
Adjustment for write-down of premises	—			—			(333		)	—
Adjusted expense	$	8,561		$	8,020		$	25,473		$	24,235
Efficiency ratio on an adjusted and FTE basis (non-GAAP) ⁽²⁾	47.71		%	45.10		%	47.93		%	45.95		%


(1)	Computed on a tax-equivalent basis using a federal income tax rate of 21 percent in 2018 and 35 percent in 2017, adjusted to reflect the effect of the nondeductible interest expense associated with owning tax-exempt securities and loans.


(2)	Efficiency ratio expresses noninterest expense as a percent of fully taxable equivalent net interest income and noninterest income, excluding specific noninterest income and expenses.

Table of Contents

West Bancorporation, Inc.

Management's Discussion and Analysis

(in thousands, except share and per share data)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018

OVERVIEW

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

Net income for the three months ended September 30, 2018 was $7,133, or $0.43 per diluted common share, compared to $6,405, or $0.39 per diluted common share, for the three months ended September 30, 2017. The Company's annualized return on average assets and return on average equity for the three months ended September 30, 2018 were 1.28 percent and 15.40 percent, respectively, compared to 1.29 percent and 14.41 percent, respectively, for the three months ended September 30, 2017.

The increase in net income for the three months ended September 30, 2018 compared to the same period in 2017 was primarily due to higher net interest income, a negative provision for loan losses and a decrease in income taxes, partially offset by an increase in noninterest expense and a decrease in noninterest income. On December 22, 2017, the Tax Act was enacted, and it reduced the federal corporate income tax rate from the previous maximum rate of 35 percent to 21 percent effective for 2018 and future years. The reduction in the federal income tax rate was the primary driver of the decrease in income taxes for the three months ended September 30, 2018 compared to the same period in 2017. The benefit of the lower federal income tax rate in 2018 was partially offset by additional income tax expense of $492 recorded in the three months ended September 30, 2018 related to the correction of taxable income from January 1, 2014 through June 30, 2018. In August 2018, the Company became aware that interest income on one loan had been incorrectly treated as tax exempt and was excluded from taxable income during the period from January 1, 2014 through June 30, 2018.

Net interest income for the three months ended September 30, 2018 grew $656 compared to the three months ended September 30, 2017. The increase in net interest income was primarily due to a $113,381 increase in average investments and a $148,643 increase in average loans outstanding for the three months ended September 30, 2018 compared to the three months ended September 30, 2017. During the three months ended September 30, 2018, interest expense on deposits increased $2,660 compared to the three months ended September 30, 2017, mainly due to a $256,497 increase in average interest-bearing deposit balances and increases in interest rates on various deposit products as a result of rising market rates. The Company recorded a negative provision for loan losses of $400 for the three months ended September 30, 2018 compared to no provision for loan losses for the three months ended September 30, 2017. During the three months ended September 30, 2018, the Company recovered $508 on one previously charged-off commercial loan.

Noninterest income declined $150 during the three months ended September 30, 2018 compared to the three months ended September 30, 2017, mainly due to net realized investment securities losses in 2018 compared to net realized investment securities gains in 2017, partially offset by credit-related default guarantee fees recorded in 2018, which is included in other income. Noninterest expense grew $541 during the three months ended September 30, 2018 compared to the same time period in 2017, primarily due to an increase in salaries and benefits and occupancy costs.

Net income for the nine months ended September 30, 2018 was $21,281, or $1.30 per diluted common share, compared to $18,876, or $1.16 per diluted common share, for the nine months ended September 30, 2017. The Company's annualized return on average assets and return on average equity for the nine months ended September 30, 2018 were 1.32 percent and 15.77 percent, respectively, compared to 1.32 percent and 14.69 percent, respectively, for the first nine months of 2017.

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

Table of Contents

West Bancorporation, Inc.

Management's Discussion and Analysis

(in thousands, except share and per share data)

Net interest income for the nine months ended September 30, 2018 grew $1,889, or 4.2 percent, compared to the nine months ended September 30, 2017. The increase in net interest income was primarily due to a $144,682 increase in average investments and a $94,272 increase in average loans outstanding for the first nine months of 2018 compared to the first nine months of 2017. During the nine months ended September 30, 2018, interest expense on deposits increased $6,494 compared to the nine months ended September 30, 2017, mainly due to a $265,871 increase in average interest bearing deposit balances and increases in interest rates on various deposit products as a result of rising market rates. The Company recorded a negative provision for loan losses of $250 for the nine months ended September 30, 2018 compared to no provision in the nine months ended September 30, 2017.

Noninterest income declined $690 during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017, mainly due to a nonrecurring gain from bank-owned life insurance in 2017 and net realized investment securities losses in 2018 compared to net realized investment securities gains in 2017, partially offset by an increase in trust services income and credit-related default guarantee fees recorded in 2018, which is included in other income. Noninterest expense grew $1,571 during the nine months ended September 30, 2018 compared to the same time period in 2017, primarily due to an increase in salaries and benefits, an increase in occupancy costs and a write-down of premises in 2018. To meet the changing needs of customers and improve the efficiency of resources, the Company will consolidate the Iowa City and Coralville branches before the end of 2018. Accordingly, the Company recognized a write-down of premises of $333 during the nine months ended September 30, 2018 related to the Iowa City branch facility. Eastern Iowa customers will continue to be served by our team at the Coralville branch and through our online and mobile banking platforms.

Total loans outstanding increased $90,317, or 6.0 percent, during the first nine months of 2018. Management believes the loan pipeline is strong and that loan growth will continue in all three of our markets during the remainder of 2018. The credit quality of the loan portfolio remained strong, as evidenced by the Company's Texas ratio, which was 0.92 percent as of September 30, 2018. As of September 30, 2018, the allowance for loan losses was 1.04 percent of outstanding loans, and management believed the allowance was adequate to absorb any losses inherent in the loan portfolio as of that date.

Each quarter throughout the year, the Company's four key performance metrics are compared to those of our identified peer group of 16 Midwestern, publicly traded peer financial institutions. The peer group includes BankFinancial Corporation, Farmers Capital Bank Corporation, First Business Financial Services, Inc., First Defiance Financial Corp., First Internet Bancorp, First Mid-Illinois Bancshares, Inc., Hills Bancorporation, Horizon Bancorp, Isabella Bank Corporation, Mercantile Bank Corporation, MidWestOne Financial Group, Inc., MutualFirst Financial, Inc., Nicolet Bankshares, Inc., Peoples Bancorp, QCR Holdings, Inc. and Waterstone Financial, Inc. Farmers Capital Bank Corporation was merged into another company in the third quarter of 2018 and therefore will drop out of our peer group going forward. The members of the peer group are selected based on their business focus, scope and location of operations, size and other considerations. The Company is in the middle of the group in terms of asset size. The group is periodically reviewed, with changes made primarily to reflect merger and acquisition activity. Our goal is to perform at or near the top of these peers relative to what we consider to be four key metrics: return on average assets, return on average equity, efficiency ratio and Texas ratio. We believe these measures encompass the factors that define the performance of a community bank. Company and peer results for the key financial performance measures are summarized below.



	West Bancorporation, Inc.	Peer Group Range
	Nine Months Ended September 30, 2018	Six months ended June 30, 2018
Return on average assets	1.32%	0.74% - 1.79%
Return on average equity	15.77%	7.00% - 12.10%
Efficiency ratio^{(1) (2)}	47.93%	54.28% - 75.65%
Texas ratio⁽²⁾	0.92%	1.40% - 19.16%

(1) The efficiency ratio is a non-GAAP financial measure. For further information, refer to the Non-GAAP Financial Measures section of this report.

(2) A lower ratio is more desirable.

At its meeting on October 24, 2018, the Board of Directors declared a quarterly cash dividend of $0.20 per common share. The dividend is payable on November 21, 2018, to stockholders of record on November 7, 2018.

Table of Contents

West Bancorporation, Inc.

Management's Discussion and Analysis

(in thousands, except share and per share data)

RESULTS OF OPERATIONS

The following table shows selected financial results and measures for the three and nine months ended September 30, 2018 compared with the same periods in 2017.



	Three Months Ended September 30,											Nine Months Ended September 30,
	2018			2017			Change			Change %		2018			2017			Change			Change %
Net income	$	7,133		$	6,405		$	728		11.37	%	$	21,281		$	18,876		$	2,405		12.74	%
Average assets	2,211,263			1,969,547			241,716			12.27	%	2,151,993			1,911,391			240,602			12.59	%
Average stockholders' equity	183,835			176,308			7,527			4.27	%	180,462			171,827			8,635			5.03	%

Return on average assets	1.28		%	1.29		%	(0.01		)%			1.32		%	1.32		%	—		%
Return on average equity	15.40		%	14.41		%	0.99		%			15.77		%	14.69		%	1.08		%
Net interest margin ⁽¹⁾	2.95		%	3.31		%	(0.36		)%			3.05		%	3.41		%	(0.36		)%
Efficiency ratio ^{(1) (2)}	47.71		%	45.10		%	2.61		%			47.93		%	45.95		%	1.98		%
Dividend payout ratio	45.69		%	45.57		%	0.12		%			44.34		%	45.46		%	(1.12		)%
Average equity to average assets ratio	8.31		%	8.95		%	(0.64		)%			8.39		%	8.99		%	(0.60		)%

												As of September 30,
												2018			2017			Change
Texas ratio ⁽²⁾												0.92		%	0.27		%	0.65		%
Equity to assets ratio												8.50		%	8.77		%	(0.27		)%
Tangible common equity ratio												8.50		%	8.77		%	(0.27		)%

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

(2) A lower ratio is more desirable.

Definitions of ratios:


•	Return on average assets - annualized net income divided by average assets.


•	Return on average equity - annualized net income divided by average stockholders' equity.


•	Net interest margin - annualized tax-equivalent net interest income divided by average interest-earning assets.


•	Efficiency ratio - noninterest expense (excluding other real estate owned expense and write-down of premises) divided by noninterest income (excluding net securities gains (losses) and gains/losses on disposition of premises and equipment) plus tax-equivalent net interest income.


•	Dividend payout ratio - dividends paid to common stockholders divided by net income.


•	Texas ratio - total nonperforming assets divided by tangible common equity plus the allowance for loan losses.


•	Equity to assets ratio - equity divided by assets.


•	Tangible common equity ratio - common equity less intangible assets (none held) divided by tangible assets.

Table of Contents

West Bancorporation, Inc.

Management's Discussion and Analysis

(in thousands, except share and per share data)

Net Interest Income

The following tables present average balances and related interest income or interest expense, with the resulting annualized average yield or rate by category of interest-earning assets or interest-bearing liabilities. Interest income and the resulting net interest income are shown on an FTE basis.



Data for the three months ended September 30:

	Average Balance									Interest Income/Expense									Yield/Rate
	2018		2017		Change			Change- %		2018		2017		Change			Change- %		2018		2017		Change
Interest-earning assets:
Loans: ^{(1) (2)}
Commercial	$	323,648	$	308,585	$	15,063		4.88	%	$	3,938	$	3,452	$	486		14.08	%	4.83	%	4.44	%	0.39	%
Real estate ⁽³⁾	1,244,540		1,109,041		135,499			12.22	%	14,334		12,503		1,831			14.64	%	4.57	%	4.47	%	0.10	%
Consumer and other	6,570		8,489		(1,919		)	(22.61	)%	71		88		(17		)	(19.32	)%	4.29	%	4.09	%	0.20	%
Total loans	1,574,758		1,426,115		148,643			10.42	%	18,343		16,043		2,300			14.34	%	4.62	%	4.46	%	0.16	%

Investment securities:
Taxable	360,672		259,225		101,447			39.13	%	2,296		1,489		807			54.20	%	2.55	%	2.30	%	0.25	%
Tax-exempt⁽³⁾	166,768		154,834		11,934			7.71	%	1,252		1,569		(317		)	(20.20	)%	3.01	%	4.05	%	(1.04	)%
Total investment securities	527,440		414,059		113,381			27.38	%	3,548		3,058		490			16.02	%	2.69	%	2.95	%	(0.26	)%

Federal funds sold	15,931		42,663		(26,732		)	(62.66	)%	78		136		(58		)	(42.65	)%	1.96	%	1.27	%	0.69	%
Total interest-earning assets ⁽³⁾	$	2,118,129	$	1,882,837	$	235,292		12.50	%	21,969		19,237		2,732			14.20	%	4.12	%	4.05	%	0.07	%

Interest-bearing liabilities:
Deposits:
Interest-bearing demand,
savings and money
market	$	1,313,645	$	1,081,227	$	232,418		21.50	%	4,060		1,686		2,374			140.81	%	1.23	%	0.62	%	0.61	%
Time deposits	184,028		159,949		24,079			15.05	%	708		422		286			67.77	%	1.53	%	1.04	%	0.49	%
Total deposits	1,497,673		1,241,176		256,497			20.67	%	4,768		2,108		2,660			126.19	%	1.26	%	0.67	%	0.59	%
Other borrowed funds	127,196		150,548		(23,352		)	(15.51	)%	1,465		1,421		44			3.10	%	4.57	%	3.75	%	0.82	%
Total interest-bearing
liabilities	$	1,624,869	$	1,391,724	$	233,145		16.75	%	6,233		3,529		2,704			76.62	%	1.52	%	1.01	%	0.51	%

Tax-equivalent net interest income (FTE) ⁽⁴⁾										$	15,736	$	15,708	$	28		0.18	%
Net interest spread (FTE)																			2.60	%	3.04	%	(0.44	)%
Net interest margin (FTE) ⁽⁴⁾																			2.95	%	3.31	%	(0.36	)%

Table of Contents

West Bancorporation, Inc.

Management's Discussion and Analysis

(in thousands, except share and per share data)



Data for the nine months ended September 30:

	Average Balance									Interest Income/Expense									Yield/Rate
	2018		2017		Change			Change- %		2018		2017		Change			Change- %		2018		2017		Change
Interest-earning assets:
Loans: ^{(1) (2)}
Commercial	$	324,074	$	326,090	$	(2,016	)	(0.62	)%	$	11,439	$	10,556	$	883		8.36	%	4.72	%	4.33	%	0.39	%
Real estate ⁽³⁾	1,198,497		1,100,526		97,971			8.90	%	40,483		36,692		3,791			10.33	%	4.52	%	4.46	%	0.06	%
Consumer and other	6,657		8,340		(1,683		)	(20.18	)%	207		251		(44		)	(17.53	)%	4.15	%	4.02	%	0.13	%
Total loans	1,529,228		1,434,956		94,272			6.57	%	52,129		47,499		4,630			9.75	%	4.56	%	4.43	%	0.13	%

Investment securities:
Taxable	324,279		230,060		94,219			40.95	%	5,995		3,755		2,240			59.65	%	2.46	%	2.18	%	0.28	%
Tax-exempt ⁽³⁾	180,271		129,808		50,463			38.88	%	4,301		3,932		369			9.38	%	3.18	%	4.04	%	(0.86	)%
Total investment securities	504,550		359,868		144,682			40.20	%	10,296		7,687		2,609			33.94	%	2.72	%	2.85	%	(0.13	)%

Federal funds sold	25,156		26,173		(1,017		)	(3.89	)%	336		223		113			50.67	%	1.79	%	1.14	%	0.65	%
Total interest-earning assets ⁽³⁾	$	2,058,934	$	1,820,997	$	237,937		13.07	%	62,761		55,409		7,352			13.27	%	4.08	%	4.07	%	0.01	%

Interest-bearing liabilities:
Deposits:
Interest-bearing demand,
savings and money
market	$	1,257,925	$	1,030,095	$	227,830		22.12	%	9,804		4,107		5,697			138.71	%	1.04	%	0.53	%	0.51	%
Time deposits	178,005		139,964		38,041			27.18	%	1,774		977		797			81.58	%	1.33	%	0.93	%	0.40	%
Total deposits	1,435,930		1,170,059		265,871			22.72	%	11,578		5,084		6,494			127.73	%	1.08	%	0.58	%	0.50	%
Other borrowed funds	127,170		146,583		(19,413		)	(13.24	)%	4,207		3,920		287			7.32	%	4.42	%	3.58	%	0.84	%
Total interest-bearing
liabilities	$	1,563,100	$	1,316,642	$	246,458		18.72	%	15,785		9,004		6,781			75.31	%	1.35	%	0.91	%	0.44	%

Net interest income (FTE) ⁽⁴⁾										$	46,976	$	46,405	$	571		1.23	%
Net interest spread (FTE)																			2.73	%	3.16	%	(0.43	)%
Net interest margin (FTE) ⁽⁴⁾																			3.05	%	3.41	%	(0.36	)%


(1)	Average loan balances include nonaccrual loans. Interest income recognized on nonaccrual loans has been included.


(2)	Interest income on loans includes amortization of loan fees and costs and prepayment penalties collected, which are not material.


(3)	Tax-exempt income has been adjusted to a tax-equivalent basis using a federal income tax rate of 21 percent in 2018 and 35 percent in 2017 and is adjusted to reflect the effect of the nondeductible interest expense associated with owning tax-exempt investment securities and loans.


(4)	Net interest income (FTE) and net interest margin (FTE) are non-GAAP financial measures. For further information, refer to the Non-GAAP Financial Measures section of this report.

The Company's largest component of net income is net interest income, which is the difference between interest earned on interest-earning assets, consisting primarily of loans and investment securities, and interest paid on interest-bearing liabilities, consisting of deposits and borrowings. Fluctuations in net interest income can result from the combination of changes in the average balances of asset and liability categories and changes in interest rates. Interest rates earned and paid are affected by general economic conditions, particularly changes in market interest rates, and by competitive factors, government policies and actions of regulatory authorities. The Board of Governors of the Federal Reserve System increased the targeted federal funds interest rate by a total of 75 basis points in the nine months ended September 30, 2018 and a total of 75 basis points in 2017. We expect the Board of Governors of the Federal Reserve System will increase the targeted federal funds interest rate by 25 basis points one more time in 2018.

Table of Contents

West Bancorporation, Inc.

Management's Discussion and Analysis

(in thousands, except share and per share data)

Net interest margin is a measure of the net return on interest-earning assets and is computed by dividing annualized tax-equivalent net interest income by total average interest-earning assets for the period. The net interest margin for the three and nine months ended September 30, 2018 declined 36 basis points, for each period, compared to the three and nine months ended September 30, 2017. The primary drivers of the decline in the net interest margin were an increase in interest rates paid on deposits and an increase in the variable rates paid on other borrowed funds, partially offset by an increase in yield on loans. Also impacting the net interest margin was the decline in the federal income tax rate to 21 percent in 2018, from 35 percent in 2017, which is used in the calculation of the tax-equivalent interest income on tax-exempt loans and securities on a non-GAAP basis. The change in the federal income tax rate used in the tax-equivalent adjustment to net interest income accounted for approximately 8 and 9 basis points, respectively, of the decline in net interest margin for the three and nine months ended September 30, 2018 compared to the three and nine months ended September 30, 2017. Despite the decline in the net interest margin, tax-equivalent net interest income for the three and nine months ended September 30, 2018 increased $28 and $571, respectively, compared to the same time periods in 2017. The increase in net interest income for the three and nine months ended September 30, 2018 compared to the three and nine months ended September 30, 2017 was largely due to an increase in average outstanding loans and securities, partially offset by an increase in average deposit balances and an increase in rates on deposits and other borrowed funds. Management expects the current interest rate environment to continue to put pressure on the net interest margin throughout the remainder of 2018, particularly if the U.S. Treasury yield curve continues to flatten.

Tax-equivalent interest income on loans increased $2,300 for the three months ended September 30, 2018 compared to the three months ended September 30, 2017. For the nine months ended September 30, 2018, tax-equivalent interest income on loans increased $4,630 compared to the same time period in 2017. The improvement for both time periods was primarily due to the increase in average loan balances outstanding. The average yield on loans increased by 16 and 13 basis points, respectively, for the three and nine months ended September 30, 2018 compared to the three and nine months ended September 30, 2017, which is less than the increase in the cost of deposits due to the relatively flat yield curve. The Company continues to focus on expanding existing and entering into new customer relationships while maintaining strong credit quality. The yield on the Company's loan portfolio is affected by the portfolio's loan mix, the interest rate environment, the effects of competition, the level of nonaccrual loans and reversals of previously accrued interest on charged-off loans. The political and economic environments can also influence the volume of new loan originations and the mix of variable rate versus fixed rate loans.

The average balance of investment securities was higher during the three and nine months ended September 30, 2018 than during the same periods in 2017 as a result of significant investment purchase activity during the second half of 2017. The purchase activity in 2017 focused on higher yielding bonds within the existing risk profile and was the result of growth in deposits and the reinvestment of proceeds from sales and principal paydowns of investment securities. In certain cases, securities were sold and the funds were reinvested in securities with higher rates while slightly extending the duration of the portfolio. The change in the federal income tax rate used in the tax-equivalent adjustment of tax-exempt securities accounted for an approximately 78 basis point reduction in the yield on tax-exempt investment securities for both the three and nine months ended September 30, 2018 compared to the three and nine months ended September 30, 2017. This was partially offset by improvements of 25 and 28 basis points, respectively, in the yield on taxable investment securities for the three and nine months ended September 30, 2018 compared to the three and nine months ended September 30, 2017.

The average balance of interest-bearing demand, savings and money market deposits increased for the three and nine months ended September 30, 2018 compared to the three and nine months ended September 30, 2017, primarily due to an increase in average balances of money market accounts. In addition, approximately $76,000 of noninterest-bearing accounts were reclassified to interest-bearing accounts in April 2017 as part of a retail deposit product restructuring in which we realigned and simplified the retail checking account products provided to our customers. The average rate paid on interest-bearing demand, savings and money market deposits for the three and nine months ended September 30, 2018 increased 61 and 51 basis points, respectively, compared to the three and nine months ended September 30, 2017. The increase in interest expense was primarily due to increasing interest rates on certain money market deposit products in response to increases in the targeted federal funds rate. The average balance of time deposits also increased for the three and nine months ended September 30, 2018 compared to the same periods in 2017. The increase was primarily due to the shift of demand and savings account balances to higher interest rate time deposits. Interest rates on time deposits increased 49 and 40 basis points, respectively, for the three and nine months ended September 30, 2018 compared to the same periods in 2017, primarily due to higher market interest rates paid at the time new and renewed time deposits were issued.

Table of Contents

West Bancorporation, Inc.

Management's Discussion and Analysis

(in thousands, except share and per share data)

The average rate paid on other borrowed funds increased 82 and 84 basis points, respectively, for the three and nine months ended September 30, 2018 compared to the three and nine months ended September 30, 2017. The increase in the average rate paid was due to increases in rates for variable rate FHLB advances, subordinated notes and long-term debt. The average balance of other borrowed funds declined for the three and nine months ended September 30, 2018 compared to the three and nine months ended September 30, 2017, primarily due to the December 2017 payoff of a $25,000 FHLB advance, partially offset by a $22,000 increase in long-term debt in May 2017.

Provision for Loan Losses and the Related Allowance for Loan Losses

The provision for loan losses represents charges made to earnings to maintain an adequate allowance for loan losses. The adequacy of the allowance for loan losses is evaluated quarterly by management and reviewed by the Board of Directors. The allowance for loan losses is management's best estimate of probable losses inherent in the loan portfolio as of the balance sheet date. Based upon the most recent evaluation, a negative provision for loan losses of $400 was recorded for the three months ended September 30, 2018. The negative provision recorded for the nine months ended September 30, 2018 was $250. No provision was recorded for the three and nine months ended September 30, 2017. During the three months ended September 30, 2018, the Company recovered $508 on a previously charged off commercial loan.

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

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

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

Table of Contents

West Bancorporation, Inc.

Management's Discussion and Analysis

(in thousands, except share and per share data)

West Bank's policy is to charge off loans when, in management's opinion, a loan or a portion of a loan is deemed uncollectible. Concerted efforts are made to maximize subsequent recoveries. The following table summarizes the activity in the Company's allowance for loan losses for the three and nine months ended September 30, 2018 and 2017 and related ratios.



	Three Months Ended September 30,									Nine Months Ended September 30,
	2018			2017			Change			2018			2017			Change
Balance at beginning of period	$	16,518		$	16,486		$	32		$	16,430		$	16,112		$	318
Charge-offs	—			(179		)	179			(209		)	(372		)	163
Recoveries	555			51			504			702			618			84
Net (charge-offs) recoveries	555			(128		)	683			493			246			247
Provision for loan losses charged to operations	(400		)	—			(400		)	(250		)	—			(250		)
Balance at end of period	$	16,673		$	16,358		$	315		$	16,673		$	16,358		$	315

Average loans outstanding	$	1,574,758		$	1,426,115					$	1,529,228		$	1,434,956

Ratio of annualized net (charge-offs) recoveries during the period to average loans outstanding	0.14		%	(0.04		)%				0.04		%	0.02		%

Ratio of allowance for loan losses to average loans outstanding	1.06		%	1.15		%				1.09		%	1.14		%

Ratio of allowance for loan losses to total loans at end of period	1.04		%	1.15		%				1.04		%	1.15		%

In general, the growth rate of the U.S. economy has increased the past two quarters. Average monthly job growth for the first nine months of 2018 exceeded 200,000 based on preliminary estimates, while the national unemployment rate remained low at 3.7 percent as of September 30, 2018. Gross domestic product increased at an annual rate of 4.2 percent in the second quarter of 2018, the highest amount since 2015. Activity in the housing market continues at a moderate pace. Short-term interest rates are expected to continue to gradually rise. Based on the current economic indicators, the Company decided to reduce the economic factors within the allowance for loan losses evaluation by five basis points. In the first nine months of 2018, the Company continued to use experience factors based on the highest losses calculated over a rolling 12-, 16-, or 20-quarter period. The portion of the allowance for loan losses related to loans collectively evaluated for impairment increased $263 to a total of $16,554, or 1.03 percent, as of September 30, 2018 compared to $16,291, or 1.08 percent, as of December 31, 2017. Management believed the resulting allowance for loan losses as of September 30, 2018 was adequate to absorb any losses inherent in the loan portfolio at the end of the quarter.

Table of Contents

West Bancorporation, Inc.

Management's Discussion and Analysis

(in thousands, except share and per share data)

Noninterest Income

The following tables show the variance from the prior year in the noninterest income categories shown in the Consolidated Statements of Income. In addition, accounts within the “Other income” category that represent a significant portion of the total or a significant variance are shown below.



	Three Months Ended September 30,
Noninterest income:	2018			2017		Change			Change %
Service charges on deposit accounts	$	649		$	715	$	(66	)	(9.23	)%
Debit card usage fees	422			435		(13		)	(2.99	)%
Trust services	445			436		9			2.06	%
Increase in cash value of bank-owned life insurance	158			167		(9		)	(5.39	)%
Realized investment securities gains (losses), net	(78		)	197		(275		)	(139.59	)%
Other income:
Guarantee fees	254			—		254			N/A
All other income	264			314		(50		)	(15.92	)%
Total other income	518			314		204			64.97	%
Total noninterest income	$	2,114		$	2,264	$	(150	)	(6.63	)%

	Nine Months Ended September 30,
Noninterest income:	2018			2017		Change			Change %
Service charges on deposit accounts	$	1,925		$	1,946	$	(21	)	(1.08	)%
Debit card usage fees	1,254			1,333		(79		)	(5.93	)%
Trust services	1,465			1,264		201			15.90	%
Increase in cash value of bank-owned life insurance	468			484		(16		)	(3.31	)%
Gain from bank-owned life insurance	—			307		(307		)	(100.00	)%
Realized investment securities gains (losses), net	(103		)	423		(526		)	(124.35	)%
Other income:
Gain on sale of other assets	—			88		(88		)	(100.00	)%
Guarantee fees	254			—		254			N/A
All other income	787			895		(108		)	(12.07	)%
Total other income	1,041			983		58			5.90	%
Total noninterest income	$	6,050		$	6,740	$	(690	)	(10.24	)%

The decrease in service charges on deposit accounts for the three and nine months ended September 30, 2018 compared to the three and nine months ended September 30, 2017 was driven primarily by the continued decline in nonsufficient funds fees. For the first nine months of 2018 compared to the same time period of 2017, the decline in nonsufficient funds fees was partially offset by an increase in service charges on retail deposit accounts resulting from the realignment and simplification of the retail checking account products in March and April 2017. During the three and nine months ended September 30, 2018, nonsufficient funds fees declined $26 and $86, respectively, and debit card usage fees declined $13 and $79, respectively, compared to the same time periods in 2017. These declines are consistent with recent trends.

Revenue from trust services was higher during the three and nine months ended September 30, 2018 compared to the three and nine months ended September 30, 2017, primarily due to higher amounts of one-time estate fees. A moderate increase in trust assets since December 31, 2017 also contributed to the increase in trust service fees. Gain from bank-owned life insurance was recognized for the nine months ended September 30, 2017 as the result of a single policy event. The net losses and gains on sales of investment securities during 2018 and 2017 primarily resulted from the Company's strategy to reposition certain components of the investment portfolio into higher yielding securities without significantly increasing the risk profiles and only slightly increasing durations. Sales also occurred in the three months ended September 30, 2018 for liquidity purposes.

Nonrecurring credit-related default guarantee fees were recognized in other income for the three and nine months ended September 30, 2018. Gain on sale of other assets for the nine months ended September 30, 2017 included a nonrecurring gain of $88 related to the final payment received from the 2015 sale of SmartyPig, LLC, which was previously a subsidiary of the Company.

Table of Contents

West Bancorporation, Inc.

Management's Discussion and Analysis

(in thousands, except share and per share data)

Noninterest Expense

The following tables show the variance from the prior year in the noninterest expense categories shown in the Consolidated Statements of Income. In addition, accounts within the “Other expenses” category that represent a significant portion of the total or a significant variance are shown below.



	Three Months Ended September 30,
Noninterest expense:	2018		2017		Change			Change %
Salaries and employee benefits	$	4,774	$	4,430	$	344		7.77	%
Occupancy	1,250		1,087		163			15.00	%
Data processing	670		635		35			5.51	%
FDIC insurance expense	172		151		21			13.91	%
Professional fees	196		184		12			6.52	%
Director fees	248		240		8			3.33	%
Other expenses:
Marketing	46		57		(11		)	(19.30	)%
Business development	205		191		14			7.33	%
Insurance expense	92		89		3			3.37	%
Charitable contributions	—		180		(180		)	(100.00	)%
Postage and courier	72		72		—			—	%
Subscriptions	80		81		(1		)	(1.23	)%
Trust	102		124		(22		)	(17.74	)%
Consulting fees	67		60		7			11.67	%
Low income housing projects amortization	130		102		28			27.45	%
All other	457		337		120			35.61	%
Total other	1,251		1,293		(42		)	(3.25	)%
Total noninterest expense	$	8,561	$	8,020	$	541		6.75	%

	Nine Months Ended September 30,
Noninterest expense:	2018		2017		Change			Change %
Salaries and employee benefits	$	14,062	$	13,216	$	846		6.40	%
Occupancy	3,731		3,315		416			12.55	%
Data processing	2,020		2,031		(11		)	(0.54	)%
FDIC insurance	499		514		(15		)	(2.92	)%
Professional fees	608		725		(117		)	(16.14	)%
Director fees	758		697		61			8.75	%
Write-down of premises	333		—		333			N/A
Other expenses:
Marketing	141		176		(35		)	(19.89	)%
Business development	692		609		83			13.63	%
Insurance expense	269		267		2			0.75	%
Charitable contributions	150		180		(30		)	(16.67	)%
Postage and courier	212		238		(26		)	(10.92	)%
Subscriptions	251		212		39			18.40	%
Trust	291		339		(48		)	(14.16	)%
Consulting fees	192		213		(21		)	(9.86	)%
Low income housing projects amortization	394		322		72			22.36	%
All other	1,203		1,181		22			1.86	%
Total other	3,795		3,737		58			1.55	%
Total noninterest expense	$	25,806	$	24,235	$	1,571		6.48	%

Table of Contents

West Bancorporation, Inc.

Management's Discussion and Analysis

(in thousands, except share and per share data)

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

When compared with the three and nine months ended September 30, 2017, occupancy costs increased for the three and nine months ended September 30, 2018, primarily due to a periodic indexed rent adjustment in accordance with the terms of the lease for the Company's main office and an increase in property taxes.

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

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

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

The Company recognized a $333 write-down of premises during the nine months ended September 30, 2018 related to the Iowa City branch facility. The Company plans to consolidate the Iowa City and Coralville branches before the end of 2018.

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

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

All other expenses increased for the three and nine months ended September 30, 2018 when compared to the three and nine months ended September 30, 2017, mainly due to $97 of income tax penalties and interest recorded in the three months ended September 30, 2018 related to the correction of taxable income from January 1, 2014 through December 31, 2016.

Income Tax Expense

The Company recorded income tax expense of $2,507 (26.0 percent of pre-tax income) and $5,615 (20.9 percent of pre-tax income) for the three and nine months ended September 30, 2018, respectively, compared with $2,870 (30.9 percent of pre-tax income) and $8,142 (30.1 percent of pre-tax income) for the three and nine months ended September 30, 2017, respectively. The decline in the percentage of income tax expense to pre-tax income was the result of the enactment of the Tax Act on December 22, 2017. This legislation lowered the federal corporate income tax rate to 21 percent beginning in 2018 from a maximum rate of 35 percent in 2017. The benefit of the lower tax rate in 2018 was partially offset by additional income taxes of $492 recorded in September 2018 related to the correction of taxable income from January 1, 2014 through June 30, 2018. In August 2018, the Company became aware that interest income on one loan had been incorrectly excluded from taxable income during the period from January 1, 2014 through June 30, 2018. The Company's consolidated income tax rate differs from the federal statutory income tax rate in each respective period, primarily due to tax-exempt interest income, the tax-exempt increase in cash value of bank-owned life insurance, tax-exempt gain on bank-owned life insurance, disallowed interest expense, and state income taxes.

In addition, for the nine months ended September 30, 2018 and 2017, a tax benefit of $261 and $285, respectively, was recorded as a result of the increase in fair value of restricted stock over the vesting period. The tax rate for the first nine months of 2018 and 2017 was also impacted by year-to-date federal low income housing tax credits of approximately $375 and $308, respectively.

Table of Contents

West Bancorporation, Inc.

Management's Discussion and Analysis

(in thousands, except share and per share data)

FINANCIAL CONDITION

The Company had total assets of $2,171,666 as of September 30, 2018, an increase of 2.7 percent compared to total assets of $2,114,377 as of December 31, 2017. The most significant changes in the balance sheet were increases in loans and deposits and a decrease in investments. A summary of changes in the balance sheet components is provided below.

Investment Securities

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

The balance of investment securities available for sale, subsequent to the transfer of held to maturity securities, declined by $19,415 during the nine months ended September 30, 2018. Corporate notes increased $20,309 during the nine months ended September 30, 2018. State and political subdivision securities declined by $36,429 during the nine months ended September 30, 2018. Government agency guaranteed collateralized mortgage obligations, mortgage-backed securities and asset-backed securities declined by a total of $3,652 during the nine months ended September 30, 2018. The net unrealized losses in the investment portfolio increased $11,907 during the nine months ended September 30, 2018. The Company believed the unrealized losses on investment securities available for sale as of September 30, 2018 were due to interest rate and market conditions rather than reduced estimated cash flows.

As of September 30, 2018, approximately 56 percent of the available for sale investment securities portfolio consisted of government agency guaranteed collateralized mortgage obligations, mortgage-backed securities and asset-backed securities. Management believes these securities provide relatively good yields, have little to no credit risk and provide fairly consistent cash flows.

Loans and Nonperforming Assets

Loans outstanding increased $90,317 from $1,510,500 as of December 31, 2017 to $1,600,817 as of September 30, 2018. Changes in the loan portfolio during the first nine months of 2018 included an increase of $125,695 in commercial real estate loans, partially offset by a reduction of $31,015 in commercial loans. The commercial and commercial real estate loan portfolios were impacted by a $28,568 payoff when a customer was acquired by an out-of-state buyer in the first quarter of 2018. The Company continues to focus on business development efforts in all its markets. Management believes organic loan growth will occur in all three of our markets during the remainder of 2018.

Credit quality of the Company's loan portfolio remains strong and stable. The Company's Texas ratio, which is computed by dividing total nonperforming assets by tangible common equity plus the allowance for loan losses, was 0.92 percent as of September 30, 2018, compared to 0.32 percent as of December 31, 2017. The increase in the Texas ratio during the nine months ended September 30, 2018 was due to the increase in nonaccrual loans related to two customers. The ratio for both dates was significantly better than the June 30, 2018 peer group average (latest data available), which was approximately 7.75 percent, according to data in the June 2018 Bank Holding Company Performance Report prepared by the Division of Supervision and Regulation of the Federal Reserve.

Table of Contents

West Bancorporation, Inc.

Management's Discussion and Analysis

(in thousands, except share and per share data)

The following table sets forth the amount of nonperforming assets held by the Company and common ratio measurements of those assets as of the dates shown.



	September 30, 2018			December 31, 2017			Change
Nonaccrual loans	$	1,846		$	622		$	1,224
Loans past due 90 days and still accruing interest	—			—			—
Troubled debt restructured loans ⁽¹⁾	—			—			—
Total nonperforming loans	1,846			622			1,224
Other real estate owned	—			—			—
Total nonperforming assets	$	1,846		$	622		$	1,224

Nonperforming loans to total loans	0.12		%	0.04		%	0.08		%
Nonperforming assets to total assets	0.09		%	0.03		%	0.06		%


(1)	While TDR loans are commonly reported by the industry as nonperforming, those not classified in the nonaccrual category are accruing interest due to payment performance. TDR loans on nonaccrual status are categorized as nonaccrual. There were two TDR loans as of September 30, 2018 and one TDR loan as of December 31, 2017 with balances of $687 and $220, respectively, categorized as nonaccrual.

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

Deposits

Deposits increased $28,479 during the first nine months of 2018, or 1.6 percent, compared to December 31, 2017. Interest-bearing demand accounts declined $81,136, while savings accounts, which include money market accounts, increased $93,501 from December 31, 2017 to September 30, 2018. Balance fluctuations were primarily due to normal customer activity, as corporate customers' liquidity needs vary at any given time. Total time deposits increased $15,923 during the first nine months of 2018. As of September 30, 2018, a significant related party relationship maintained total deposit balances with West Bank of approximately $168,986.

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 $27,282 as of September 30, 2018 compared with $47,949 as of December 31, 2017.

As of September 30, 2018, West Bank had additional borrowing capacity available from the FHLB of approximately $343,000, as well as approximately $67,000 through unsecured federal funds lines of credit with correspondent banks. Net cash from operating activities contributed $26,946 to liquidity for the nine months ended September 30, 2018. Management believed that the combination of high levels of potentially liquid assets, cash flows from operations, and additional borrowing capacity provided the Company with strong liquidity as of September 30, 2018.

The Company's total stockholders' equity increased to $184,618 at September 30, 2018 from $178,098 at December 31, 2017. The increase was primarily the result of net income less dividends paid, and was partially offset by a decline in accumulated other comprehensive income. At September 30, 2018, the Company's tangible common equity as a percent of tangible assets was 8.50 percent compared to 8.42 percent as of December 31, 2017.

Table of Contents

West Bancorporation, Inc.

Management's Discussion and Analysis

(in thousands, except share and per share data)

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, 2018.

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, 2018:
Total Capital (to Risk-Weighted Assets)
Consolidated	$	229,805	11.95	%	$	153,819	8.00	%	$	189,870	9.875	%	N/A		N/A
West Bank	243,370		12.67	%	153,628		8.00	%	189,634		9.875	%	$	192,035	10.00	%

Tier 1 Capital (to Risk-Weighted Assets)
Consolidated	213,132		11.08	%	115,364		6.00	%	151,416		7.875	%	N/A		N/A
West Bank	226,697		11.81	%	115,221		6.00	%	151,227		7.875	%	153,628		8.00	%

Common Equity Tier 1 Capital (to Risk-Weighted Assets)
Consolidated	193,132		10.04	%	86,523		4.50	%	122,574		6.375	%	N/A		N/A
West Bank	226,697		11.81	%	86,416		4.50	%	122,422		6.375	%	124,822		6.50	%

Tier 1 Capital (to Average Assets)
Consolidated	213,132		9.59	%	88,922		4.00	%	88,922		4.00	%	N/A		N/A
West Bank	226,697		10.21	%	88,851		4.00	%	88,851		4.00	%	111,064		5.00	%

As of December 31, 2017:
Total Capital (to Risk-Weighted Assets)
Consolidated	$	216,420	11.76	%	$	147,169	8.00	%	$	170,164	9.25	%	N/A		N/A
West Bank	235,570		12.82	%	147,049		8.00	%	170,026		9.25	%	$	183,812	10.00	%

Tier 1 Capital (to Risk-Weighted Assets)
Consolidated	199,990		10.87	%	110,377		6.00	%	133,372		7.25	%	N/A		N/A
West Bank	219,140		11.92	%	110,287		6.00	%	133,263		7.25	%	147,049		8.00	%

Common Equity Tier 1 Capital (to Risk-Weighted Assets)
Consolidated	179,990		9.78	%	82,783		4.50	%	105,778		5.75	%	N/A		N/A
West Bank	219,140		11.92	%	82,715		4.50	%	105,692		5.75	%	119,478		6.50	%

Tier 1 Capital (to Average Assets)
Consolidated	199,990		9.60	%	83,326		4.00	%	83,326		4.00	%	N/A		N/A
West Bank	219,140		10.52	%	83,287		4.00	%	83,287		4.00	%	104,109		5.00	%

Table of Contents

West Bancorporation, Inc.

Management's Discussion and Analysis

(in thousands, except share and per share data)

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

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

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

Part II - OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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

Table of Contents

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:



Exhibits	Description
31.1	Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

Table of Contents

SIGNATURES

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



West Bancorporation, Inc.
(Registrant)


October 25, 2018	By:	/s/ David D. Nelson
Date		David D. Nelson
		Chief Executive Officer and President
		(Principal Executive Officer)

October 25, 2018	By:	/s/ Douglas R. Gulling
Date		Douglas R. Gulling
		Executive Vice President, Treasurer and Chief Financial Officer
		(Principal Financial Officer)

October 25, 2018	By:	/s/ Marie I. Roberts
Date		Marie I. Roberts
		Senior Vice President and Chief Accounting Officer
		(Principal Accounting Officer)