WEST BANCORPORATION INC 10-Q

Item 1. Financial Statements West Bancorporation, Inc. and Subsidiary Consolidated Balance Sheet (unaudited) (in thousands, except share and per share data) September 30, 2022 December 31, 2021 ASSETS Cash and due from banks $ 58,342 $ 17,555 Federal funds sold 1,049 175,270 Cash and cash equivalents 59,391 192,825 Securities available for sale, at fair value 671,752 758,822 Federal Home Loan Bank stock, at cost 18,350 9,965 Loans 2,614,145 2,456,196 Allowance for loan losses ( 25,418 ) ( 28,364 ) Loans, net 2,588,727 2,427,832 Premises and equipment, net 44,592 34,568 Accrued interest receivable 10,786 8,890 Bank-owned life insurance 44,318 43,609 Deferred tax assets, net 38,327 10,819 Other assets 41,274 12,871 Total assets $ 3,517,517 $ 3,500,201 LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits: Noninterest-bearing demand $ 712,722 $ 720,136 Interest-bearing demand 469,257 548,242 Savings and money market 1,252,694 1,550,636 Time 388,174 196,991 Total deposits 2,822,847 3,016,005 Federal funds purchased 204,500 2,880 Subordinated notes, net 79,303 20,465 Federal Home Loan Bank advances 125,000 125,000 Long-term debt 51,486 51,521 Accrued expenses and other liabilities 35,617 24,002 Total liabilities 3,318,753 3,239,873 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, 2022 and December 31, 2021 — — Common stock, no par value; authorized 50,000,000 shares; 16,640,413 and 16,554,846 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively 3,000 3,000 Additional paid-in capital 31,152 30,183 Retained earnings 262,776 237,782 Accumulated other comprehensive loss ( 98,164 ) ( 10,637 ) Total stockholders' equity 198,764 260,328 Total liabilities and stockholders' equity $ 3,517,517 $ 3,500,201 See Notes to Consolidated Financial Statements. 4 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) 2022 2021 2022 2021 Interest income: Loans, including fees $ 28,102 $ 24,229 $ 76,236 $ 71,406 Securities: Taxable 3,147 2,412 9,126 5,952 Tax-exempt 890 762 2,640 2,032 Federal funds sold 30 82 179 226 Total interest income 32,169 27,485 88,181 79,616 Interest expense: Deposits 6,289 2,021 11,586 5,893 Federal funds purchased 655 2 812 4 Subordinated notes 1,106 254 1,748 754 Federal Home Loan Bank advances 649 656 1,914 2,288 Long-term debt 466 66 1,050 220 Total interest expense 9,165 2,999 17,110 9,159 Net interest income 23,004 24,486 71,071 70,457 Provision for loan losses — — ( 2,500 ) ( 1,500 ) Net interest income after provision for loan losses 23,004 24,486 73,571 71,957 Noninterest income: Service charges on deposit accounts 553 589 1,718 1,749 Debit card usage fees 498 490 1,477 1,443 Trust services 780 695 2,031 2,038 Increase in cash value of bank-owned life insurance 246 230 709 690 Loan swap fees 835 — 835 42 Realized securities gains, net — 11 — 51 Other income 364 386 1,173 1,368 Total noninterest income 3,276 2,401 7,943 7,381 Noninterest expense: Salaries and employee benefits 6,578 6,018 19,286 17,298 Occupancy 1,315 1,203 3,643 3,630 Data processing 644 616 1,924 1,835 FDIC insurance 127 528 753 1,358 Professional fees 250 212 669 763 Director fees 209 176 599 581 Other expenses 2,335 1,959 6,512 6,044 Total noninterest expense 11,458 10,712 33,386 31,509 Income before income taxes 14,822 16,175 48,128 47,829 Income taxes 3,220 3,469 10,675 10,132 Net income $ 11,602 $ 12,706 $ 37,453 $ 37,697 Basic earnings per common share $ 0.70 $ 0.77 $ 2.25 $ 2.28 Diluted earnings per common share $ 0.69 $ 0.76 $ 2.23 $ 2.25 See Notes to Consolidated Financial Statements. 5 Table of Contents West Bancorporation, Inc. and Subsidiary Consolidated Statements of Comprehensive Income (Loss) (unaudited) Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 Net income $ 11,602 $ 12,706 $ 37,453 $ 37,697 Other comprehensive income (loss): Unrealized gains (losses) on securities: Unrealized holding losses arising during the period ( 42,621 ) ( 6,172 ) ( 141,629 ) ( 10,462 ) Plus: reclassification adjustment for net gains realized in net income — ( 11 ) — ( 51 ) Other ( 11 ) — ( 11 ) — Income tax benefit 10,569 1,558 35,618 2,649 Other comprehensive loss on securities ( 32,063 ) ( 4,625 ) ( 106,022 ) ( 7,864 ) Unrealized gains (losses) on derivatives: Unrealized holding gains arising during the period 8,637 359 23,239 5,801 Plus: reclassification adjustment for net (gains) losses realized in net income ( 259 ) 1,105 1,428 7,173 Income tax expense ( 2,051 ) ( 369 ) ( 6,172 ) ( 3,269 ) Other comprehensive income on derivatives 6,327 1,095 18,495 9,705 Total other comprehensive income (loss) ( 25,736 ) ( 3,530 ) ( 87,527 ) 1,841 Comprehensive income (loss) $ ( 14,134 ) $ 9,176 $ ( 50,074 ) $ 39,538 See Notes to Consolidated Financial Statements. 6 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, 2022 Accumulated Additional Other Preferred Common Stock Paid-In Retained Comprehensive Stock Shares Amount Capital Earnings Income (Loss) Total Balance, June 30, 2022 $ — 16,640,413 $ 3,000 $ 30,283 $ 255,334 $ ( 72,428 ) $ 216,189 Net income — — — — 11,602 — 11,602 Other comprehensive loss, net of tax — — — — — ( 25,736 ) ( 25,736 ) Cash dividends declared, $ 0.25 per common share — — — — ( 4,160 ) — ( 4,160 ) Stock-based compensation costs — — — 869 — — 869 Balance, September 30, 2022 $ — 16,640,413 $ 3,000 $ 31,152 $ 262,776 $ ( 98,164 ) $ 198,764 Three Months Ended September 30, 2021 Accumulated Additional Other Preferred Common Stock Paid-In Retained Comprehensive Stock Shares Amount Capital Earnings Income (Loss) Total Balance, June 30, 2021 $ — 16,554,846 $ 3,000 $ 28,888 $ 221,113 $ ( 6,475 ) $ 246,526 Net income — — — — 12,706 — 12,706 Other comprehensive loss, net of tax — — — — — ( 3,530 ) ( 3,530 ) Cash dividends declared, $ 0.24 per common share — — — — ( 3,974 ) — ( 3,974 ) Stock-based compensation costs — — — 648 — — 648 Balance, September 30, 2021 $ — 16,554,846 $ 3,000 $ 29,536 $ 229,845 $ ( 10,005 ) $ 252,376 See Notes to Consolidated Financial Statements. 7 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, 2022 Accumulated Additional Other Preferred Common Stock Paid-In Retained Comprehensive Stock Shares Amount Capital Earnings Income (Loss) Total Balance, December 31, 2021 $ — 16,554,846 $ 3,000 $ 30,183 $ 237,782 $ ( 10,637 ) $ 260,328 Net income — — — — 37,453 — 37,453 Other comprehensive loss, net of tax — — — — — ( 87,527 ) ( 87,527 ) Cash dividends declared, $ 0.75 per common share — — — — ( 12,459 ) — ( 12,459 ) Stock-based compensation costs — — — 2,488 — — 2,488 Issuance of common stock upon vesting of restricted stock units, net of shares withheld for payroll taxes — 85,567 — ( 1,519 ) — — ( 1,519 ) Balance, September 30, 2022 $ — 16,640,413 $ 3,000 $ 31,152 $ 262,776 $ ( 98,164 ) $ 198,764 Nine Months Ended September 30, 2021 Accumulated Additional Other Preferred Common Stock Paid-In Retained Comprehensive Stock Shares Amount Capital Earnings Income (Loss) Total Balance, December 31, 2020 $ — 16,469,272 $ 3,000 $ 28,823 $ 203,718 $ ( 11,846 ) $ 223,695 Net income — — — — 37,697 — 37,697 Other comprehensive income, net of tax — — — — — 1,841 1,841 Cash dividends declared, $ 0.70 per common share — — — — ( 11,570 ) — ( 11,570 ) Stock-based compensation costs — — — 1,926 — — 1,926 Issuance of common stock upon vesting of restricted stock units, net of shares withheld for payroll taxes — 85,574 — ( 1,213 ) — — ( 1,213 ) Balance, September 30, 2021 $ — 16,554,846 $ 3,000 $ 29,536 $ 229,845 $ ( 10,005 ) $ 252,376 See Notes to Consolidated Financial Statements. 8 Table of Contents West Bancorporation, Inc. and Subsidiary Consolidated Statements of Cash Flows (unaudited) Nine Months Ended September 30, (in thousands) 2022 2021 Cash Flows from Operating Activities: Net income $ 37,453 $ 37,697 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses ( 2,500 ) ( 1,500 ) Net amortization and accretion 2,247 1,459 Securities gains, net — ( 51 ) Stock-based compensation 2,488 1,926 Increase in cash value of bank-owned life insurance ( 709 ) ( 690 ) Depreciation 1,091 1,143 Provision for deferred income taxes 1,928 380 Change in assets and liabilities: Increase in accrued interest receivable ( 1,896 ) ( 541 ) Decrease in other assets 930 2,299 Increase in accrued expenses and other liabilities 7,889 312 Net cash provided by operating activities 48,921 42,434 Cash Flows from Investing Activities: Proceeds from sales of securities available for sale — 30,374 Proceeds from maturities and calls of securities available for sale 63,353 65,784 Purchases of securities available for sale ( 120,077 ) ( 420,744 ) Purchases of Federal Home Loan Bank stock ( 46,884 ) ( 2,325 ) Proceeds from redemption of Federal Home Loan Bank stock 38,499 2,504 Net increase in loans ( 158,395 ) ( 78,830 ) Purchases of premises and equipment ( 12,056 ) ( 6,410 ) Net cash used in investing activities ( 235,560 ) ( 409,647 ) Cash Flows from Financing Activities: Net increase (decrease) in deposits ( 193,158 ) 35,929 Net increase in federal funds purchased 201,620 34,005 Proceeds from issuance of subordinated debt, net of issuance costs 58,756 — Net decrease in Federal Home Loan Bank advances — ( 50,000 ) Principal payments on long-term debt ( 35 ) ( 3,904 ) Common stock dividends paid ( 12,459 ) ( 11,570 ) Restricted stock units withheld for payroll taxes ( 1,519 ) ( 1,213 ) Net cash provided by financing activities 53,205 3,247 Net decrease in cash and cash equivalents ( 133,434 ) ( 363,966 ) Cash and Cash Equivalents: Beginning 192,825 396,435 Ending $ 59,391 $ 32,469 Supplemental Disclosures of Cash Flow Information: Cash payments for: Interest $ 15,259 $ 9,596 Income taxes 7,490 9,220 Supplemental Disclosure of Noncash Investing and Financing Activities: Purchase of securities available for sale, pending settlement $ — $ 30,151 See Notes to Consolidated Financial Statements. 9 Table of Contents West Bancorporation, Inc. and Subsidiary Notes to Consolidated Financial Statements (unaudited) (dollars in thousands, except per share data) 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, 2021 filed with the SEC on February 24, 2022. 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, 2022 and December 31, 2021, net income, comprehensive income (loss) and changes in stockholders' equity for the three and nine months ended September 30, 2022 and 2021, and cash flows for the nine months ended September 30, 2022 and 2021. 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 special purpose subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. In accordance with GAAP, West Bancorporation Capital Trust I is recorded on the books of the Company using the equity method of accounting and is not consolidated. Current accounting developments : In 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 update, 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 is determined in a similar manner to other financial assets measured at amortized cost basis; however, the initial allowance for credit losses is added to the purchase price rather than being reported as a credit loss expense. Only subsequent changes in the allowance for credit losses are recorded as a credit loss expense for these assets. Off-balance-sheet arrangements such as commitments to extend credit, guarantees, and standby letters of credit that are not considered derivatives under ASC 815 and are not unconditionally cancellable are also within the scope of this update. Credit losses relating to available for sale debt securities should be recorded through an allowance for credit losses. The FASB has also issued multiple updates to ASU No. 2016-13 as codified in Topic 326, including ASU No. 2019-04, ASU No. 2019-05, ASU No. 2019-11, ASU No. 2020-02, and ASU No. 2020-03. These ASUs have provided for various minor technical corrections and improvements to the codification as well as other transition matters. 10 Table of Contents West Bancorporation, Inc. and Subsidiary Notes to Consolidated Financial Statements (unaudited) (dollars in thousands, except per share data) In December 2019, the FASB issued ASU No. 2019-10, Financial Instruments-Credit Losses (Topic 326). This update amends the effective date of ASU No. 2016-13 for certain entities, including smaller reporting companies until fiscal years beginning after December 15, 2022, including interim periods within those fiscal periods. Early adoption is permitted. The one-time determination date for identifying as a smaller reporting company was November 15, 2019. The Company met the definition of a smaller reporting company as of that date and plans to adopt the standard with the amended effective date. The Company continues to develop it's methodology and work through model validation and implementation considerations. While we currently cannot reasonably estimate the impact of adopting this standard, we expect the impact will be influenced by the composition, characteristics and quality of our loan and securities portfolios, as well as the general economic conditions and forecasts as of the adoption date. In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments - Credit Losses (ASC 326): Troubled Debt Restructurings and Vintage Disclosures . The amendments in this ASU improve the usefulness of information provided to investors about certain loan refinancings, restructurings, and write-offs. The amendments eliminate the accounting guidance for troubled debt restructurings (TDRs) by creditors that have adopted ASU No. 2016-13. It also enhances disclosure requirements for certain loan refinancings and restructurings by creditors made to borrowers experiencing financial difficulty. Lastly, the amendments require that a public business entity disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases. The Company is currently evaluating the impact of the ASU on the Company's consolidated financial statements. In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. They provide optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact of the reference rate reform on the Company’s consolidated financial statements. In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope . The amendments in this update refine the scope for certain optional expedients and exceptions for contract modifications and hedge accounting to apply to derivative contra cts and certain hedging relationships affected by the discounting transition. T he amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact of the reference rate reform on the Company's consolidated financial statements. 11 Table of Contents West Bancorporation, Inc. and Subsidiary Notes to Consolidated Financial Statements (unaudited) (dollars in thousands, except per share data) 2. Earnings per Common Share Basic earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per common share reflect the potential dilution that could occur if the Company's outstanding restricted stock units were vested. The dilutive effect was computed using the treasury stock method, which assumes all stock-based awards were exercised and the hypothetical proceeds from exercise were used by the Company to purchase common stock at the average market price during the period. The incremental shares, to the extent they would have been dilutive, were included in the denominator of the diluted earnings per common share calculation. The calculations of earnings per common share and diluted earnings per common share for the three and nine months ended September 30, 2022 and 2021 are presented in the following table. Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except per share data) 2022 2021 2022 2021 Net income $ 11,602 $ 12,706 $ 37,453 $ 37,697 Weighted average common shares outstanding 16,640 16,555 16,613 16,527 Weighted average effect of restricted stock units outstanding 154 248 200 245 Diluted weighted average common shares outstanding 16,794 16,803 16,813 16,772 Basic earnings per common share $ 0.70 $ 0.77 $ 2.25 $ 2.28 Diluted earnings per common share $ 0.69 $ 0.76 $ 2.23 $ 2.25 Number of anti-dilutive common stock equivalents excluded from diluted earnings per share computation 183 — 112 — 12 Table of Contents West Bancorporation, Inc. and Subsidiary Notes to Consolidated Financial Statements (unaudited) (dollars in thousands, except per share data) 3. Securities Available for Sale The following tables show the amortized cost, gross unrealized gains and losses, and fair value of securities available for sale, by security type as of September 30, 2022 and December 31, 2021. September 30, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized (Losses) Fair Value Securities available for sale: State and political subdivisions $ 243,440 $ — $ ( 58,322 ) $ 185,118 Collateralized mortgage obligations (1) 352,414 — ( 55,462 ) 296,952 Mortgage-backed securities (1) 172,553 — ( 31,319 ) 141,234 Collateralized loan obligations 37,948 — ( 1,564 ) 36,384 Corporate notes 13,750 — ( 1,686 ) 12,064 $ 820,105 $ — $ ( 148,353 ) $ 671,752 December 31, 2021 Amortized Cost Gross Unrealized Gains Gross Unrealized (Losses) Fair Value Securities available for sale: State and political subdivisions $ 231,903 $ 3,161 $ ( 2,617 ) $ 232,447 Collateralized mortgage obligations (1) 325,406 1,627 ( 6,260 ) 320,773 Mortgage-backed securities (1) 157,607 167 ( 2,714 ) 155,060 Collateralized loan obligations 37,880 59 ( 157 ) 37,782 Corporate notes 12,750 62 ( 52 ) 12,760 $ 765,546 $ 5,076 $ ( 11,800 ) $ 758,822 (1) Collateralized mortgage obligations and mortgage-backed securities consist of residential and commercial mortgage pass-through securities and collateralized mortgage obligations guaranteed by FNMA, FHLMC, GNMA and SBA. Securities with an amortized cost of approximately $ 299,397 and $ 295,961 as of September 30, 2022 and December 31, 2021, respectively, were pledged to secure access to the Federal Reserve discount window, for public fund deposits, and for other purposes as required or permitted by law or regulation. The amortized cost and fair value of securities available for sale as of September 30, 2022, by contractual maturity, are shown below. Certain securities have call features that allow the issuer to call the securities prior to maturity. Expected maturities may differ from contractual maturities for collateralized mortgage obligations and mortgage-backed securities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Therefore, collateralized mortgage obligations and mortgage-backed securities are not included in the maturity categories within the following maturity summary. September 30, 2022 Amortized Cost Fair Value Due after five years through ten years $ 66,063 $ 60,079 Due after ten years 229,075 173,487 295,138 233,566 Collateralized mortgage obligations and mortgage-backed securities 524,967 438,186 $ 820,105 $ 671,752 13 Table of Contents West Bancorporation, Inc. and Subsidiary Notes to Consolidated Financial Statements (unaudited) (dollars in thousands, except per share data) The details of the sales of securities available for sale for the three and nine months ended September 30, 2022 and 2021 are summarized in the following table. Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Proceeds from sales $ — $ 1,413 $ — $ 30,374 Gross gains on sales — 11 — 283 Gross losses on sales — — — 232 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, 2022 and December 31, 2021. September 30, 2022 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 $ 82,826 $ ( 21,448 ) $ 102,292 $ ( 36,874 ) $ 185,118 $ ( 58,322 ) Collateralized mortgage obligations 163,344 ( 24,668 ) 133,608 ( 30,794 ) 296,952 ( 55,462 ) Mortgage-backed securities 55,118 ( 10,180 ) 86,116 ( 21,139 ) 141,234 ( 31,319 ) Collateralized loan obligations 26,648 ( 1,300 ) 9,736 ( 264 ) 36,384 ( 1,564 ) Corporate notes 10,272 ( 1,478 ) 1,792 ( 208 ) 12,064 ( 1,686 ) $ 338,208 $ ( 59,074 ) $ 333,544 $ ( 89,279 ) $ 671,752 $ ( 148,353 ) December 31, 2021 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 $ 121,574 $ ( 1,223 ) $ 33,894 $ ( 1,394 ) $ 155,468 $ ( 2,617 ) Collateralized mortgage obligations 241,320 ( 6,149 ) 2,352 ( 111 ) 243,672 ( 6,260 ) Mortgage-backed securities 140,168 ( 2,714 ) — — 140,168 ( 2,714 ) Collateralized loan obligations 22,821 ( 157 ) — — 22,821 ( 157 ) Corporate notes 4,198 ( 52 ) — — 4,198 ( 52 ) $ 530,081 $ ( 10,295 ) $ 36,246 $ ( 1,505 ) $ 566,327 $ ( 11,800 ) As of September 30, 2022, securities available for sale with unrealized losses included 118 state and political subdivision securities, 79 collateralized mortgage obligation securities, 27 mortgage-backed securities, six collateralized loan obligation securities and eight corporate notes. Collateralized loan obligation securities are debt securities backed by pools of senior secured commercial loans to a diverse group of companies across a broad spectrum of industries. At September 30, 2022, the Company only owned collateralized loan obligations that were AAA- or AA-rated. The Company believes the unrealized losses on securities available for sale as of September 30, 2022 were due to market interest rate conditions rather than reduced estimated cash flows. At September 30, 2022, the Company did not intend to sell these securities, did not anticipate that these securities will be required to be sold before anticipated recovery, and expected 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, 2022. 14 Table of Contents West Bancorporation, Inc. and Subsidiary Notes to Consolidated Financial Statements (unaudited) (dollars in thousands, except per share data) 4. Loans and Allowance for Loan Losses Loans consisted of the following segments as of September 30, 2022 and December 31, 2021. September 30, 2022 December 31, 2021 Commercial $ 526,336 $ 492,815 Real estate: Construction, land and land development 341,549 359,258 1-4 family residential first mortgages 69,991 66,216 Home equity 10,271 8,422 Commercial 1,661,907 1,530,218 Consumer and other 7,884 3,797 2,617,938 2,460,726 Net unamortized fees and costs ( 3,793 ) ( 4,530 ) $ 2,614,145 $ 2,456,196 Included in commercial loans at September 30, 2022 and December 31, 2021, were $ 1,119 and $ 22,206 , respectively, of loans originated in the Paycheck Protection Program (PPP). The PPP was established by the Coronavirus Aid, Relief and Economic Security Act (CARES Act), enacted on March 27, 2020, and expanded by the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, enacted on December 27, 2020 and the American Rescue Plan Act, enacted on March 11, 2021, in response to the Coronavirus Disease 2019 (COVID-19) pandemic. The PPP is administered by the Small Business Administration (SBA). PPP loans may be forgiven by the SBA and are 100 percent guaranteed by the SBA. Therefore, no allowance for loan losses is allocated to PPP loans. Real estate loans of approximately $ 1,240,000 and $ 1,190,000 were pledged as security for Federal Home Loan Bank (FHLB) advances as of September 30, 2022 and December 31, 2021, 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 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. 15 Table of Contents West Bancorporation, Inc. and Subsidiary Notes to Consolidated Financial Statements (unaudited) (dollars in thousands, except per share data) 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 specific component of the allowance for loan losses. TDR loans totaled $ 0 and $ 8,599 as of September 30, 2022 and December 31, 2021, respectively, and were included in the nonaccrual category. There were no loan modifications considered to be TDR that occurred during the three and nine months ended September 30, 2022. There were six loan modifications related to one borrower considered to be TDR, with a pre- and post-modification recorded investment of $ 14,044 , that occurred during the three and nine months ended September 30, 2021. A specific reserve of $ 0 and $ 2,500 related to TDR loans was recorded at September 30, 2022 and December 31, 2021, respectively. No TDR loans that were modified within the 12 months preceding September 30, 2022 and 2021 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. 16 Table of Contents West Bancorporation, Inc. and Subsidiary Notes to Consolidated Financial Statements (unaudited) (dollars in thousands, except per share data) The following table summarizes the 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, 2022 and December 31, 2021. September 30, 2022 December 31, 2021 Recorded Investment Unpaid Principal Balance Related Allowance Recorded Investment Unpaid Principal Balance Related Allowance With no related allowance recorded: Commercial $ — $ — $ — $ — $ — $ — Real estate: Construction, land and land development — — — — — — 1-4 family residential first mortgages 329 329 — 349 349 — Home equity — — — — — — Commercial — — — — — — Consumer and other — — — — — — 329 329 — 349 349 — With an allowance recorded: Commercial — — — — — — Real estate: Construction, land and land development — — — — — — 1-4 family residential first mortgages — — — — — — Home equity — — — — — — Commercial — — — 8,599 8,599 2,500 Consumer and other — — — — — — — — — 8,599 8,599 2,500 Total: Commercial — — — — — — Real estate: Construction, land and land development — — — — — — 1-4 family residential first mortgages 329 329 — 349 349 — Home equity — — — — — — Commercial — — — 8,599 8,599 2,500 Consumer and other — — — — — — $ 329 $ 329 $ — $ 8,948 $ 8,948 $ 2,500 The Company has no commitments to advance additional funds on any of the impaired loans. 17 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, 2022 and 2021. Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 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 $ — $ — $ — $ — $ — $ — $ — $ — Real estate: Construction, land and land development — — — — — — — — 1-4 family residential first mortgages 332 — 360 — 338 — 367 — Home equity — — — — — — — — Commercial — — — — — — — — Consumer and other — — — — — — — — 332 — 360 — 338 — 367 — With an allowance recorded: Commercial — — — — — — — — Real estate: Construction, land and land development — — — — — — — — 1-4 family residential first mortgages — — — — — — — — Home equity — — — — — — — — Commercial — — 12,781 — 5,090 — 14,310 — Consumer and other — — — — — — — — — — 12,781 — 5,090 — 14,310 — Total: Commercial — — — — — — — — Real estate: Construction, land and land development — — — — — — — — 1-4 family residential first mortgages 332 — 360 — 338 — 367 — Home equity — — — — — — — — Commercial — — 12,781 — 5,090 — 14,310 — Consumer and other — — — — — — — — $ 332 $ — $ 13,141 $ — $ 5,428 $ — $ 14,677 $ — 18 Table of Contents West Bancorporation, Inc. and Subsidiary Notes to Consolidated Financial Statements (unaudited) (dollars in thousands, except per share data) The following tables provide an analysis of the payment status of the recorded investment in loans as of September 30, 2022 and December 31, 2021. September 30, 2022 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 $ — $ — $ — $ — $ 526,336 $ — $ 526,336 Real estate: Construction, land and land development — — — — 341,549 — 341,549 1-4 family residential first mortgages — — — — 69,662 329 69,991 Home equity — — — — 10,271 — 10,271 Commercial — — — — 1,661,907 — 1,661,907 Consumer and other — — — — 7,884 — 7,884 Total $ — $ — $ — $ — $ 2,617,609 $ 329 $ 2,617,938 December 31, 2021 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 $ — $ — $ — $ — $ 492,815 $ — $ 492,815 Real estate: Construction, land and land development — — — — 359,258 — 359,258 1-4 family residential first mortgages — — — — 65,867 349 66,216 Home equity — — — — 8,422 — 8,422 Commercial — — — — 1,521,619 8,599 1,530,218 Consumer and other — — — — 3,797 — 3,797 Total $ — $ — $ — $ — $ 2,451,778 $ 8,948 $ 2,460,726 19 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, 2022 and December 31, 2021. September 30, 2022 Pass Watch Substandard Doubtful Total Commercial $ 526,336 $ — $ — $ — $ 526,336 Real estate: Construction, land and land development 341,500 49 — — 341,549 1-4 family residential first mortgages 69,414 150 427 — 69,991 Home equity 10,271 — — — 10,271 Commercial 1,604,317 57,590 — — 1,661,907 Consumer and other 7,884 — — — 7,884 Total $ 2,559,722 $ 57,789 $ 427 $ — $ 2,617,938 December 31, 2021 Pass Watch Substandard Doubtful Total Commercial $ 492,545 $ 270 $ — $ — $ 492,815 Real estate: Construction, land and land development 359,203 55 — — 359,258 1-4 family residential first mortgages 65,596 156 464 — 66,216 Home equity 8,422 — — — 8,422 Commercial 1,458,075 63,544 8,599 — 1,530,218 Consumer and other 3,797 — — — 3,797 Total $ 2,387,638 $ 64,025 $ 9,063 $ — $ 2,460,726 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. 20 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 bankers initiate changes as appropriate for ratings 1 through 5, and changes for ratings 6 through 9 are approved by 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. 21 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, 2022 and 2021. Three Months Ended September 30, 2022 Real Estate Commercial Construction and Land 1-4 Family Residential Home Equity Commercial Consumer and Other Total Beginning balance $ 4,661 $ 4,043 $ 373 $ 95 $ 16,189 $ 73 $ 25,434 Charge-offs — — ( 31 ) — — — ( 31 ) Recoveries 9 — 1 1 4 — 15 Provision (1) 429 ( 557 ) 20 9 82 17 — Ending balance $ 5,099 $ 3,486 $ 363 $ 105 $ 16,275 $ 90 $ 25,418 Three Months Ended September 30, 2021 Real Estate Commercial Construction and Land 1-4 Family Residential Home Equity Commercial Consumer and Other Total Beginning balance $ 4,464 $ 2,950 $ 359 $ 91 $ 20,129 $ 49 $ 28,042 Charge-offs — — — — — — — Recoveries 45 — 1 1 4 5 56 Provision (1) 191 498 ( 5 ) 9 ( 686 ) ( 7 ) — Ending balance $ 4,700 $ 3,448 $ 355 $ 101 $ 19,447 $ 47 $ 28,098 Nine Months Ended September 30, 2022 Real Estate Commercial Construction and Land 1-4 Family Residential Home Equity Commercial Consumer and Other Total Beginning balance $ 4,776 $ 3,646 $ 339 $ 91 $ 19,466 $ 46 $ 28,364 Charge-offs — — ( 31 ) — ( 451 ) — ( 482 ) Recoveries 21 — 2 3 10 — 36 Provision (1) 302 ( 160 ) 53 11 ( 2,750 ) 44 ( 2,500 ) Ending balance $ 5,099 $ 3,486 $ 363 $ 105 $ 16,275 $ 90 $ 25,418 Nine Months Ended September 30, 2021 Real Estate Commercial Construction and Land 1-4 Family Residential Home Equity Commercial Consumer and Other Total Beginning balance $ 4,718 $ 2,634 $ 360 $ 114 $ 21,535 $ 75 $ 29,436 Charge-offs — — — — — — — Recoveries 142 — 2 3 10 5 162 Provision (1) ( 160 ) 814 ( 7 ) ( 16 ) ( 2,098 ) ( 33 ) ( 1,500 ) Ending balance $ 4,700 $ 3,448 $ 355 $ 101 $ 19,447 $ 47 $ 28,098 (1) The negative provisions for the various segments are related to the decline in outstanding balances in each of those portfolio segments during the time periods disclosed and/or improvement in the credit quality factors related to those portfolio segments. 22 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, 2022 and December 31, 2021. September 30, 2022 Real Estate Commercial Construction and Land 1-4 Family Residential Home Equity Commercial Consumer and Other Total Ending balance: Individually evaluated for impairment $ — $ — $ — $ — $ — $ — $ — Collectively evaluated for impairment 5,099 3,486 363 105 16,275 90 25,418 Total $ 5,099 $ 3,486 $ 363 $ 105 $ 16,275 $ 90 $ 25,418 December 31, 2021 Real Estate Commercial Construction and Land 1-4 Family Residential Home Equity Commercial Consumer and Other Total Ending balance: Individually evaluated for impairment $ — $ — $ — $ — $ 2,500 $ — $ 2,500 Collectively evaluated for impairment 4,776 3,646 339 91 16,966 46 25,864 Total $ 4,776 $ 3,646 $ 339 $ 91 $ 19,466 $ 46 $ 28,364 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, 2022 and December 31, 2021. September 30, 2022 Real Estate Commercial Construction and Land 1-4 Family Residential Home Equity Commercial Consumer and Other Total Ending balance: Individually evaluated for impairment $ — $ — $ 329 $ — $ — $ — $ 329 Collectively evaluated for impairment 526,336 341,549 69,662 10,271 1,661,907 7,884 2,617,609 Total $ 526,336 $ 341,549 $ 69,991 $ 10,271 $ 1,661,907 $ 7,884 $ 2,617,938 December 31, 2021 Real Estate Commercial Construction and Land 1-4 Family Residential Home Equity Commercial Consumer and Other Total Ending balance: Individually evaluated for impairment $ — $ — $ 349 $ — $ 8,599 $ — $ 8,948 Collectively evaluated for impairment 492,815 359,258 65,867 8,422 1,521,619 3,797 2,451,778 Total $ 492,815 $ 359,258 $ 66,216 $ 8,422 $ 1,530,218 $ 3,797 $ 2,460,726 23 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 has entered into various interest rate swap agreements as part of its interest rate risk management strategy. The Company uses interest rate swaps to manage its interest rate risk exposure on certain loans, variable-rate and short-term borrowings, and deposits due to interest rate movements. The notional amounts of the interest rate swaps do not represent amounts exchanged by the counterparties, but rather, the notional amount is used to determine, along with other terms of the derivative, the amounts to be exchanged between the counterparties. Interest Rate Swaps Designated as a Cash Flow Hedge: The Company had interest rate swaps designated as cash flow hedges with total notional amounts of $ 280,000 and $ 255,000 at September 30, 2022 and December 31, 2021, respectively. As of September 30, 2022, the Company had swaps with a total notional amount of $ 150,000 that hedge the interest payments of rolling fixed-rate one-month funding consisting of FHLB advances or brokered deposits. One of these swaps with a total notional amount of $ 25,000 is a forward-starting swap with a starting date in September 2023. Also as of September 30, 2022, the Company had a swap with a total notional amount of $ 20,000 that effectively converts variable-rate junior subordinated notes to fixed-rate debt and swaps with a total notional amount of $ 110,000 that hedge the interest payments of certain deposit accounts. In March 2021, the Company terminated interest rate swaps with a total notional amount of $ 50,000 . In the second quarter of 2021, the Company repaid $ 50,000 of FHLB advances related to these terminated swaps as a result of excess liquidity and in response to market conditions. Pre-tax losses of $ 3,600 were reclassified from accumulated other comprehensive income (AOCI) and recorded in noninterest income at termination. Derivatives Not Designated as Accounting Hedges: To accommodate customer needs, the Company on occasion offers loan level interest rate swaps to its customers and offsets its exposure from such contracts by entering into mirror image swaps with a swap counterparty (back-to-back swap program). The interest rate swaps are free-standing derivatives and are recorded at fair value. The Company enters into a floating-rate loan and a fixed-rate swap with our customer. Simultaneously, the Company enters into an offsetting fixed-rate swap with a swap counterparty. In connection with each swap transaction, the Company agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on the same notional amount at a fixed interest rate. At the same time, the Company agrees to pay a swap counterparty the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. These transactions allow the Company’s customers to effectively convert variable-rate loans to fixed-rate loans. The customer accommodations and any offsetting swaps are treated as non-hedging derivative instruments which do not qualify for hedge accounting. The Company entered into forward-starting interest rate swaps with a total notional amount of $ 100,000 in January 2021 that were not accounting hedges. These swaps were terminated in March 2021, and the resulting gains of $ 3,781 were recorded in noninterest income. The table below identifies the balance sheet category and fair values of the Company's derivative instruments as of September 30, 2022 and December 31, 2021. September 30, 2022 December 31, 2021 Cash Flow Hedges: Gross notional amount $ 280,000 $ 255,000 Fair value in other assets 17,149 — Fair value in other liabilities — ( 7,517 ) Weighted-average floating rate received 3.12 % 0.39 % Weighted-average fixed rate paid 2.09 % 2.09 % Weighted-average maturity in years 3.5 4.2 Non-Hedging Derivatives: Gross notional amount $ 255,733 $ 172,008 Fair value in other assets 16,073 3,887 Fair value in other liabilities ( 16,073 ) ( 3,887 ) 24 Table of Contents West Bancorporation, Inc. and Subsidiary Notes to Consolidated Financial Statements (unaudited) (dollars in thousands, except per share data) The following table identifies the pre-tax gains or losses recognized on the Company's derivative instruments designated as cash flow hedges for the three and nine months ended September 30, 2022 and 2021. Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Pre-tax gain recognized in other comprehensive income $ 8,637 $ 359 $ 23,239 $ 5,801 Reclassification from AOCI into income: Increase (decrease) in interest expense $ ( 259 ) $ ( 1,105 ) $ 1,428 $ ( 3,573 ) Decrease in noninterest income, swap termination fees — — — ( 3,600 ) The Company estimates there will be approximately $ 2,615 reclassified from accumulated other comprehensive income to reduce interest expense through the 12 months ending September 30, 2023 related to cash flow hedges. The Company is exposed to credit risk in the event of nonperformance by interest rate swap counterparties, which is minimized by collateral-pledging provisions in the agreements. Derivative contracts with swap counterparties are executed with a Credit Support Annex, which is a bilateral ratings-sensitive agreement that requires collateral postings at established credit threshold levels. These agreements protect the interests of the Company and its counterparties should either party suffer a credit rating deterioration. As of September 30, 2022 and December 31, 2021, the Company pledged $ 0 and $ 4,500 , respectively, of collateral to the counterparties in the form of cash on deposit. As of September 30, 2022 and December 31, 2021, the Company's counterparties pledged $ 32,390 and $ 0 , respectively, of collateral to the Company in the form of cash on deposit. The interest rate swap product with the borrower is cross-collateralized with the underlying loan and therefore there is no pledged cash collateral under swap contracts with customers. 25 Table of Contents West Bancorporation, Inc. and Subsidiary Notes to Consolidated Financial Statements (unaudited) (dollars in thousands, except per share data) 6. Income Taxes Net deferred tax assets consisted of the following as of September 30, 2022 and December 31, 2021. September 30, 2022 December 31, 2021 Deferred tax assets: Allowance for loan losses $ 6,202 $ 7,176 Net unrealized losses on securities available for sale 36,790 1,701 Net unrealized losses on interest rate swaps — 1,903 Lease liabilities 1,219 1,502 Accrued expenses 364 395 Restricted stock unit compensation 822 821 State net operating loss carryforward 1,401 1,276 Other 153 139 46,951 14,913 Deferred tax liabilities: Right-of-use assets 1,172 1,450 Net deferred loan fees and costs 246 247 Net unrealized gains on interest rate swaps 4,199 — Premises and equipment 1,251 809 Other 355 312 7,223 2,818 Net deferred tax assets before valuation allowance 39,728 12,095 Valuation allowance ( 1,401 ) ( 1,276 ) Net deferred tax assets $ 38,327 $ 10,819 The Company has recorded a valuation allowance against the tax effect of the state net operating loss carryforwards, as management believes it is more likely than not that these carryforwards will expire without being utilized. The state net operating loss carryforwards expire in 2022 and thereafter. In the second quarter of 2022, the Company recorded a one-time increase in state income tax expense related to the June 2022 enactment of changes in the Iowa bank franchise tax rates. This legislation reduces the Iowa bank franchise tax rate applied to apportioned income for 2023 and future years. This future reduction in the state tax rate required the Company to reduce net deferred tax assets as of June 30, 2022 by $ 671 and in turn caused the one-time increase in 2022 tax expense. The effective tax rate for the nine months ended September 30, 2022 was 22.18 percent. Excluding this one-time state tax expense, the effective tax rate for the nine months ended September 30, 2022 would have been 20.79 percent. 26 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, 2022 and 2021. Unrealized Unrealized Accumulated Gains Gains Other (Losses) on (Losses) on Comprehensive Securities Derivatives Income (Loss) Balance, December 31, 2021 $ ( 5,021 ) $ ( 5,616 ) $ ( 10,637 ) Other comprehensive income (loss) before reclassifications ( 106,011 ) 17,486 ( 88,525 ) Amounts reclassified from accumulated other comprehensive income ( 11 ) 1,009 998 Net current period other comprehensive income (loss) ( 106,022 ) 18,495 ( 87,527 ) Balance, September 30, 2022 $ ( 111,043 ) $ 12,879 $ ( 98,164 ) Balance, December 31, 2020 $ 5,994 $ ( 17,840 ) $ ( 11,846 ) Other comprehensive income (loss) before reclassifications ( 7,826 ) 4,340 ( 3,486 ) Amounts reclassified from accumulated other comprehensive income ( 38 ) 5,365 5,327 Net current period other comprehensive income (loss) ( 7,864 ) 9,705 1,841 Balance, September 30, 2021 $ ( 1,870 ) $ ( 8,135 ) $ ( 10,005 ) 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 amounts as of September 30, 2022 and December 31, 2021. September 30, 2022 December 31, 2021 Commitments to fund real estate construction loans $ 405,058 $ 294,580 Other commitments to extend credit 697,725 585,678 Standby letters of credit 18,397 17,391 $ 1,121,180 $ 897,649 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. The outstanding balance of mortgage loans sold under the MPF Program was $ 24,197 and $ 31,552 at September 30, 2022 and December 31, 2021, respectively. Contractual commitments : The Company had remaining commitments to invest in qualified affordable housing projects totaling $ 3,707 and $ 3,986 as of September 30, 2022 and December 31, 2021, respectively. 27 Table of Contents West Bancorporation, Inc. and Subsidiary Notes to Consolidated Financial Statements (unaudited) (dollars in thousands, except per share data) West Bank entered into a construction contract for the construction of a new headquarters building in West Des Moines, Iowa subsequent to quarter-end. West Bank will pay the contractor a contract price consisting of the cost of work plus a fee, subject to a guaranteed maximum price of $42,309, with anticipated construction completed in 2024. As of September 30, 2022, $1,499 has been paid under this construction contract. 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 Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts business. The Company's balance sheet contains 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, 2022. The following is a description of valuation methodologies used for financial assets and liabilities recorded at fair value on a recurring basis. Securities available for sale: When available, quoted market prices are used to determine the fair value of 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, yield curves, credit spreads, prices from market makers and live trading systems. Management obtains the fair value of 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 securities by obtaining pricing from an independent financial market data vendor and comparing the two sets of fair values. Any significant variances are reviewed and investigated. For a sample of securities, prices are further validated by management 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 securities were properly classified in the fair value hierarchy. Derivative instruments: The Company's derivative instruments consist of interest rate swaps accounted for as cash flow hedges, as well as interest rate swaps which are accounted for as non-hedging derivatives. The Company's derivative positions are classified within Level 2 of the fair value hierarchy and are valued using models generally accepted in the financial services industry and that use actively quoted or observable market input values from external market data providers and/or non-binding broker-dealer quotations. The fair value of the derivatives is determined using discounted cash flow models. These models’ key assumptions include the contractual terms of the respective contract along with significant observable inputs, including interest rates, yield curves, nonperformance risk and volatility. 28 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, 2022 and December 31, 2021. September 30, 2022 Total Level 1 Level 2 Level 3 Financial assets: Securities available for sale: State and political subdivisions $ 185,118 $ — $ 185,118 $ — Collateralized mortgage obligations 296,952 — 296,952 — Mortgage-backed securities 141,234 — 141,234 — Collateralized loan obligations 36,384 — 36,384 — Corporate notes 12,064 — 12,064 — Derivative instruments, interest rate swaps 33,222 — 33,222 — Financial liabilities: Derivative instruments, interest rate swaps $ 16,073 $ — $ 16,073 $ — December 31, 2021 Total Level 1 Level 2 Level 3 Financial assets: Securities available for sale: State and political subdivisions $ 232,447 $ — $ 232,447 $ — Collateralized mortgage obligations 320,773 — 320,773 — Mortgage-backed securities 155,060 — 155,060 — Collateralized loan obligations 37,782 — 37,782 — Corporate notes 12,760 — 12,760 — Derivative instruments, interest rate swaps 3,887 — 3,887 — Financial liabilities: Derivative instruments, interest rate swaps $ 11,404 $ — $ 11,404 $ — 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). Impaired loans with a net book value of $ 6,099 for which a fair value adjustment was recorded were classified as Level 3 as of December 31, 2021. As of December 31, 2021, impaired loans with a carrying value of $ 8,599 were reduced by a specific reserve of $ 2,500 , resulting in a reported fair value of $ 6,099 . As of September 30, 2022, there were no loans for which a fair value adjustment was recorded. In determining the estimated net realizable value of the underlying collateral of impaired loans, the Company primarily uses third-party appraisals or broker opinions which may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available and include consideration of variations in location, size, and income production capacity of the property. Additionally, the appraisals are periodically further adjusted by the Company in consideration of charges that may be incurred in the event of foreclosure and are based on management’s historical knowledge, changes in business factors and changes in market conditions. Because of the high degree of judgment required in estimating the fair value of collateral underlying impaired loans and because of the relationship between fair value and general economic conditions, the Company considers the fair value of impaired loans to be highly sensitive to changes in market conditions. 29 Table of Contents West Bancorporation, Inc. and Subsidiary Notes to Consolidated Financial Statements (unaudited) (dollars in thousands, except per share data) The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis. Valuation Technique Unobservable Inputs Range (Weighted Average) September 30, 2022 Impaired loans — — — December 31, 2021 Impaired loans Appraisal of collateral Appraisal adjustment 50%, including selling costs 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, 2022 and December 31, 2021. September 30, 2022 Carrying Amount Approximate Fair Value Level 1 Level 2 Level 3 Financial assets: Cash and due from banks $ 58,342 $ 58,342 $ 58,342 $ — $ — Federal funds sold 1,049 1,049 1,049 — — Securities available for sale 671,752 671,752 — 671,752 — Federal Home Loan Bank stock 18,350 18,350 18,350 — — Loans, net 2,588,727 2,445,989 — 2,445,989 — Accrued interest receivable 10,786 10,786 10,786 — — Interest rate swaps 33,222 33,222 — 33,222 — Financial liabilities: Deposits $ 2,822,847 $ 2,822,099 $ — $ 2,822,099 $ — Federal funds purchased 204,500 204,500 204,500 — — Subordinated notes, net 79,303 71,013 — 71,013 — Federal Home Loan Bank advances 125,000 125,000 — 125,000 — Long-term debt 51,486 51,486 — 51,486 — Accrued interest payable 2,370 2,370 2,370 — — Interest rate swaps 16,073 16,073 — 16,073 — Off-balance sheet financial instruments: Commitments to extend credit — — — — — Standby letters of credit — — — — — 30 Table of Contents West Bancorporation, Inc. and Subsidiary Notes to Consolidated Financial Statements (unaudited) (dollars in thousands, except per share data) December 31, 2021 Carrying Amount Approximate Fair Value Level 1 Level 2 Level 3 Financial assets: Cash and due from banks $ 17,555 $ 17,555 $ 17,555 $ — $ — Federal funds sold 175,270 175,270 175,270 — — Securities available for sale 758,822 758,822 — 758,822 — Federal Home Loan Bank stock 9,965 9,965 9,965 — — Loans, net 2,427,832 2,453,081 — 2,446,982 6,099 Accrued interest receivable 8,890 8,890 8,890 — — Interest rate swaps 3,887 3,887 — 3,887 — Financial liabilities: Deposits $ 3,016,005 $ 3,016,305 $ — $ 3,016,305 $ — Federal funds purchased 2,880 2,880 2,880 — — Subordinated notes, net 20,465 17,122 — 17,122 — Federal Home Loan Bank advances 125,000 125,000 — 125,000 — Long-term debt 51,521 51,521 — 51,521 — Accrued interest payable 519 519 519 — — Interest rate swaps 11,404 11,404 — 11,404 — Off-balance sheet financial instruments: Commitments to extend credit — — — — — Standby letters of credit — — — — — 10. Subordinated Notes On June 14, 2022, the Company issued $ 60,000 of subordinated notes (the Notes). The Notes initially bear interest at 5.25 percent per annum, with interest payable semi-annually for the first five years of the Notes. Beginning June 15, 2027, the interest rate will reset quarterly to a floating rate per annum that is expected to be three-month term Secured Overnight Financing Rate (SOFR) plus 2.41 percent with payments due quarterly . The Company may redeem the Notes, in whole or in part, on and after June 15, 2027 at a price equal to 100 percent of the principal amount of the Notes being redeemed plus accrued and unpaid interest. The Notes will mature on June 15, 2032 if they are not earlier redeemed. Proceeds from this debt issuance were used to make a $ 58,650 capital injection into the Company's subsidiary, West Bank. 31 Table of Contents West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data)