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) June 30, 2023 December 31, 2022 ASSETS Cash and due from banks $ 29,776 $ 24,896 Interest-bearing deposits 1,968 1,643 Cash and cash equivalents 31,744 26,539 Securities available for sale, at fair value 645,091 664,115 Federal Home Loan Bank stock, at cost 22,488 19,336 Loans 2,807,075 2,742,836 Allowance for credit losses ( 27,938 ) ( 25,473 ) Loans, net 2,779,137 2,717,363 Premises and equipment, net 66,683 53,124 Accrued interest receivable 11,785 11,988 Bank-owned life insurance 43,328 44,573 Deferred tax assets, net 36,106 36,609 Other assets 42,193 39,571 Total assets $ 3,678,555 $ 3,613,218 LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits: Noninterest-bearing demand $ 568,029 $ 693,563 Interest-bearing demand 459,030 536,226 Savings and money market 1,416,610 1,237,954 Time 392,656 412,665 Total deposits 2,836,325 2,880,408 Federal funds purchased and other short-term borrowings 184,150 200,000 Subordinated notes, net 79,500 79,369 Federal Home Loan Bank advances 280,000 155,000 Long-term debt 50,236 51,486 Accrued expenses and other liabilities 31,218 35,843 Total liabilities 3,461,429 3,402,106 COMMITMENTS AND CONTINGENCIES (NOTE 8) STOCKHOLDERS' EQUITY Preferred stock, $ 0.01 par value; authorized 50,000,000 shares; no shares issued and outstanding at June 30, 2023 and December 31, 2022 — — Common stock, no par value; authorized 50,000,000 shares; 16,725,094 and 16,640,413 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively 3,000 3,000 Additional paid-in capital 32,642 32,021 Retained earnings 269,301 267,562 Accumulated other comprehensive loss ( 87,817 ) ( 91,471 ) Total stockholders' equity 217,126 211,112 Total liabilities and stockholders' equity $ 3,678,555 $ 3,613,218 See Notes to Consolidated Financial Statements. 4 Table of Contents West Bancorporation, Inc. and Subsidiary Consolidated Statements of Income (unaudited) Three Months Ended June 30, Six Months Ended June 30, (in thousands, except per share data) 2023 2022 2023 2022 Interest income: Loans, including fees $ 35,011 $ 24,848 $ 67,959 $ 48,134 Securities: Taxable 3,432 3,090 6,748 5,979 Tax-exempt 883 892 1,768 1,750 Interest-bearing deposits 25 67 55 149 Total interest income 39,351 28,897 76,530 56,012 Interest expense: Deposits 16,277 3,146 29,616 5,297 Federal funds purchased and other short-term borrowings 2,264 157 4,343 157 Subordinated notes 1,109 394 2,215 642 Federal Home Loan Bank advances 1,621 635 2,883 1,265 Long-term debt 739 326 1,437 584 Total interest expense 22,010 4,658 40,494 7,945 Net interest income 17,341 24,239 36,036 48,067 Credit loss expense (benefit) — ( 1,750 ) — ( 2,500 ) Net interest income after credit loss expense (benefit) 17,341 25,989 36,036 50,567 Noninterest income: Service charges on deposit accounts 458 585 920 1,165 Debit card usage fees 511 507 997 979 Trust services 749 622 1,455 1,251 Increase in cash value of bank-owned life insurance 250 236 507 463 Gain from bank-owned life insurance — — 691 — Other income 421 328 776 809 Total noninterest income 2,389 2,278 5,346 4,667 Noninterest expense: Salaries and employee benefits 7,029 6,410 13,896 12,708 Occupancy and equipment 1,322 1,242 2,649 2,328 Data processing 729 656 1,364 1,280 Technology and software 579 492 1,092 968 FDIC insurance 420 289 836 626 Professional fees 287 202 537 419 Director fees 251 222 456 390 Other expenses 1,857 1,753 3,715 3,209 Total noninterest expense 12,474 11,266 24,545 21,928 Income before income taxes 7,256 17,001 16,837 33,306 Income taxes 1,394 4,334 3,131 7,455 Net income $ 5,862 $ 12,667 $ 13,706 $ 25,851 Basic earnings per common share $ 0.35 $ 0.76 $ 0.82 $ 1.56 Diluted earnings per common share $ 0.35 $ 0.75 $ 0.82 $ 1.54 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 June 30, Six Months Ended June 30, (in thousands) 2023 2022 2023 2022 Net income $ 5,862 $ 12,667 $ 13,706 $ 25,851 Other comprehensive income (loss): Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during the period ( 8,837 ) ( 44,413 ) 2,830 ( 99,008 ) Income tax (expense) benefit 2,192 11,236 ( 719 ) 25,049 Other comprehensive income (loss) on securities ( 6,645 ) ( 33,177 ) 2,111 ( 73,959 ) Unrealized gains (losses) on derivatives: Unrealized holding gains arising during the period 8,102 4,066 6,468 14,602 Plus: reclassification adjustment for net (gains) losses realized in net income ( 2,467 ) 642 ( 4,425 ) 1,687 Income tax expense ( 1,382 ) ( 1,191 ) ( 500 ) ( 4,121 ) Other comprehensive income on derivatives 4,253 3,517 1,543 12,168 Total other comprehensive income (loss) ( 2,392 ) ( 29,660 ) 3,654 ( 61,791 ) Comprehensive income (loss) $ 3,470 $ ( 16,993 ) $ 17,360 $ ( 35,940 ) 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 June 30, 2023 Accumulated Additional Other Preferred Common Stock Paid-In Retained Comprehensive Stock Shares Amount Capital Earnings Income (Loss) Total Balance, March 31, 2023 $ — 16,712,257 $ 3,000 $ 31,797 $ 267,620 $ ( 85,425 ) $ 216,992 Net income — — — — 5,862 — 5,862 Other comprehensive loss, net of tax — — — — — ( 2,392 ) ( 2,392 ) Cash dividends declared, $ 0.25 per common share — — — — ( 4,181 ) — ( 4,181 ) Stock-based compensation costs — — — 845 — — 845 Issuance of common stock upon vesting of restricted stock units, net of shares withheld for payroll taxes — 12,837 — — — — — Balance, June 30, 2023 $ — 16,725,094 $ 3,000 $ 32,642 $ 269,301 $ ( 87,817 ) $ 217,126 Three Months Ended June 30, 2022 Accumulated Additional Other Preferred Common Stock Paid-In Retained Comprehensive Stock Shares Amount Capital Earnings Income (Loss) Total Balance, March 31, 2022 $ — 16,631,413 $ 3,000 $ 29,421 $ 246,827 $ ( 42,768 ) $ 236,480 Net income — — — — 12,667 — 12,667 Other comprehensive loss, net of tax — — — — — ( 29,660 ) ( 29,660 ) Cash dividends declared, $ 0.25 per common share — — — — ( 4,160 ) — ( 4,160 ) Stock-based compensation costs — — — 862 — — 862 Issuance of common stock upon vesting of restricted stock units, net of shares withheld for payroll taxes — 9,000 — — — — — Balance, June 30, 2022 $ — 16,640,413 $ 3,000 $ 30,283 $ 255,334 $ ( 72,428 ) $ 216,189 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) Six Months Ended June 30, 2023 Accumulated Additional Other Preferred Common Stock Paid-In Retained Comprehensive Stock Shares Amount Capital Earnings Income (Loss) Total Balance, December 31, 2022 $ — 16,640,413 $ 3,000 $ 32,021 $ 267,562 $ ( 91,471 ) $ 211,112 Cumulative effect of change in accounting principle (1) — — — — ( 3,626 ) — ( 3,626 ) Net income — — — — 13,706 — 13,706 Other comprehensive income, net of tax — — — — — 3,654 3,654 Cash dividends declared, $ 0.50 per common share — — — — ( 8,341 ) — ( 8,341 ) Stock-based compensation costs — — — 1,556 — — 1,556 Issuance of common stock upon vesting of restricted stock units, net of shares withheld for payroll taxes — 84,681 — ( 935 ) — — ( 935 ) Balance, June 30, 2023 $ — 16,725,094 $ 3,000 $ 32,642 $ 269,301 $ ( 87,817 ) $ 217,126 Six Months Ended June 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 — — — — 25,851 — 25,851 Other comprehensive loss, net of tax — — — — — ( 61,791 ) ( 61,791 ) Cash dividends declared, $ 0.50 per common share — — — — ( 8,299 ) — ( 8,299 ) Stock-based compensation costs — — — 1,619 — — 1,619 Issuance of common stock upon vesting of restricted stock units, net of shares withheld for payroll taxes — 85,567 — ( 1,519 ) — — ( 1,519 ) Balance, June 30, 2022 $ — 16,640,413 $ 3,000 $ 30,283 $ 255,334 $ ( 72,428 ) $ 216,189 (1) Cumulative effect adjustment pursuant to adoption of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . See Note 1 for additional information. See Notes to Consolidated Financial Statements. 8 Table of Contents West Bancorporation, Inc. and Subsidiary Consolidated Statements of Cash Flows (unaudited) Six Months Ended June 30, (in thousands) 2023 2022 Cash Flows from Operating Activities: Net income $ 13,706 $ 25,851 Adjustments to reconcile net income to net cash provided by operating activities: Credit loss expense (benefit) — ( 2,500 ) Net amortization and accretion 1,638 1,409 Stock-based compensation 1,556 1,619 Increase in cash value of bank-owned life insurance ( 507 ) ( 463 ) Gain from bank-owned life insurance ( 691 ) — Depreciation 808 680 Provision for deferred income taxes 462 1,885 Change in assets and liabilities: (Increase) decrease in accrued interest receivable 203 ( 473 ) (Increase) decrease in other assets ( 947 ) 1,448 Increase (decrease) in accrued expenses and other liabilities ( 5,964 ) 4,189 Net cash provided by operating activities 10,264 33,645 Cash Flows from Investing Activities: Proceeds from principal paydowns, maturities and calls of securities available for sale 20,326 46,529 Purchases of securities available for sale — ( 120,077 ) Purchases of Federal Home Loan Bank stock ( 60,394 ) ( 21,003 ) Proceeds from redemption of Federal Home Loan Bank stock 57,242 15,436 Net increase in loans ( 64,232 ) ( 117,363 ) Purchases of premises and equipment ( 15,000 ) ( 8,548 ) Proceeds of principal and earnings from bank-owned life insurance 2,458 — Net cash used in investing activities ( 59,600 ) ( 205,026 ) Cash Flows from Financing Activities: Net decrease in deposits ( 44,083 ) ( 173,554 ) Net increase (decrease) in federal funds purchased and other short-term borrowings ( 15,850 ) 130,120 Proceeds from issuance of subordinated debt, net of issuance costs — 58,783 Net increase in Federal Home Loan Bank advances 125,000 — Principal payments on long-term debt ( 1,250 ) ( 35 ) Common stock dividends paid ( 8,341 ) ( 8,299 ) Restricted stock units withheld for payroll taxes ( 935 ) ( 1,519 ) Net cash provided by financing activities 54,541 5,496 Net increase (decrease) in cash and cash equivalents 5,205 ( 165,885 ) Cash and Cash Equivalents: Beginning 26,539 192,825 Ending $ 31,744 $ 26,940 Supplemental Disclosures of Cash Flow Information: Cash payments for: Interest $ 39,277 $ 7,526 Income taxes 2,250 3,890 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, 2022 filed with the SEC on February 23, 2023. 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 June 30, 2023 and December 31, 2022, and net income, comprehensive income (loss) and changes in stockholders' equity for the three and six months ended June 30, 2023 and 2022, and cash flows for the six months ended June 30, 2023 and 2022. 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 credit 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 collectability 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 related to available for sale debt securities should be recorded through an allowance for credit losses. In December 2019, the FASB issued ASU No. 2019-10, Financial Instruments-Credit Losses (Topic 326). This update amended 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 was 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 was not required to adopt the standard until January 1, 2023. 10 Table of Contents West Bancorporation, Inc. and Subsidiary Notes to Consolidated Financial Statements (unaudited) (dollars in thousands, except per share data) 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 adopted ASU No. 2016-13 using the modified retrospective method for financial assets measured at amortized cost and off-balance-sheet credit exposures. Results for the periods beginning after January 1, 2023 are presented under ASU No. 2016-13, while prior period amounts are reported in accordance with the previously applicable accounting standards. The Company recorded a reduction to retained earnings of $3,626 upon adoption of ASU No. 2016-13. The transition adjustment included an increase to the allowance for credit losses on loans of $2,458 and established an allowance for credit losses on off-balance sheet credit exposures of $2,344. There was no allowance for credit losses recorded for available-for-sale debt securities. The transition adjustment included corresponding increases in deferred tax assets of $1,176. The following table illustrates the impact of ASC 326 adoption. January 1, 2023 Pre-ASC 326 Adoption Impact of ASC 326 Adoption As Reported Under ASC 326 Assets: Commercial $ 4,804 $ 677 $ 5,481 Real estate: Construction, land and land development 3,548 ( 234 ) 3,314 1-4 family residential first mortgages 357 121 478 Home equity 101 ( 8 ) 93 Commercial 16,575 1,911 18,486 Consumer and other 88 ( 9 ) 79 Allowance for credit losses on loans $ 25,473 $ 2,458 $ 27,931 Liabilities: Liability for off-balance sheet credit exposures $ — $ 2,344 $ 2,344 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 were effective for all entities as of March 12, 2020 through December 31, 2022. 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 were effective for all entities as of March 12, 2020 through December 31, 2022. In December 2022, the FASB issued ASU No. 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. The amendment in this update extends the period of time preparers can utilize reference rate reform relief guidance in Topic 848, discussed above. ASU No. 2022-06 defers the sunset date from December 31, 2022 to December 31, 2024. The Company does not expect the updates within Topic 848 to have a material impact on our financial statements. 11 Table of Contents West Bancorporation, Inc. and Subsidiary Notes to Consolidated Financial Statements (unaudited) (dollars in thousands, except per share data) In March 2023, the FASB issued ASU No. 2023-02, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using Proportional Amortization Method . The ASU is intended to improve the accounting and disclosures for investments in tax credit structures. It allows reporting entities to elect to adopt for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The Company is currently evaluating the impact of the ASU 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 six months ended June 30, 2023 and 2022 are presented in the following table. Three Months Ended June 30, Six Months Ended June 30, (in thousands, except per share data) 2023 2022 2023 2022 Net income $ 5,862 $ 12,667 $ 13,706 $ 25,851 Weighted average common shares outstanding 16,722 16,638 16,683 16,599 Weighted average effect of restricted stock units outstanding 34 145 46 218 Diluted weighted average common shares outstanding 16,756 16,783 16,729 16,817 Basic earnings per common share $ 0.35 $ 0.76 $ 0.82 $ 1.56 Diluted earnings per common share $ 0.35 $ 0.75 $ 0.82 $ 1.54 Number of anti-dilutive common stock equivalents excluded from diluted earnings per share computation 411 182 416 88 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 June 30, 2023 and December 31, 2022. June 30, 2023 Amortized Cost Gross Unrealized Gains Gross Unrealized (Losses) Fair Value Securities available for sale: State and political subdivisions $ 241,579 $ 4 $ ( 44,187 ) $ 197,396 Collateralized mortgage obligations (1) 324,003 — ( 59,169 ) 264,834 Mortgage-backed securities (1) 163,713 — ( 28,133 ) 135,580 Collateralized loan obligations 37,948 — ( 685 ) 37,263 Corporate notes 13,750 — ( 3,732 ) 10,018 $ 780,993 $ 4 $ ( 135,906 ) $ 645,091 December 31, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized (Losses) Fair Value Securities available for sale: State and political subdivisions $ 242,823 $ 4 $ ( 49,472 ) $ 193,355 Collateralized mortgage obligations (1) 338,875 — ( 57,247 ) 281,628 Mortgage-backed securities (1) 169,451 — ( 29,171 ) 140,280 Collateralized loan obligations 37,948 — ( 1,137 ) 36,811 Corporate notes 13,750 — ( 1,709 ) 12,041 $ 802,847 $ 4 $ ( 138,736 ) $ 664,115 (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 $ 464,361 and $ 293,017 as of June 30, 2023 and December 31, 2022, respectively, were pledged to secure access to FHLB advances and Federal Reserve credit programs, 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 June 30, 2023, 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. June 30, 2023 Amortized Cost Fair Value Due after five years through ten years $ 72,800 $ 65,002 Due after ten years 220,477 179,675 293,277 244,677 Collateralized mortgage obligations and mortgage-backed securities 487,716 400,414 $ 780,993 $ 645,091 13 Table of Contents West Bancorporation, Inc. and Subsidiary Notes to Consolidated Financial Statements (unaudited) (dollars in thousands, except per share data) There were no sales of securities available for sale during the three and six months ended June 30, 2023 and 2022. The following tables show the fair value and gross unrealized losses, aggregated by investment type and length of time that individual securities have been in a continuous loss position, as of June 30, 2023 and December 31, 2022. June 30, 2023 Less than 12 months 12 months or longer Total Fair Value Gross Unrealized (Losses) No. of Securities Fair Value Gross Unrealized (Losses) No. of Securities Fair Value Gross Unrealized (Losses) Securities available for sale: State and political subdivisions $ 9,853 $ ( 273 ) 14 $ 186,848 $ ( 43,914 ) 102 $ 196,701 $ ( 44,187 ) Collateralized mortgage obligations — — — 264,834 ( 59,169 ) 79 264,834 ( 59,169 ) Mortgage-backed securities — — — 135,580 ( 28,133 ) 27 135,580 ( 28,133 ) Collateralized loan obligations — — — 37,263 ( 685 ) 6 37,263 ( 685 ) Corporate notes — — — 10,018 ( 3,732 ) 8 10,018 ( 3,732 ) $ 9,853 $ ( 273 ) 14 $ 634,543 $ ( 135,633 ) 222 $ 644,396 $ ( 135,906 ) December 31, 2022 Less than 12 months 12 months or longer Total Fair Value Gross Unrealized (Losses) No. of Securities Fair Value Gross Unrealized (Losses) No. of Securities Fair Value Gross Unrealized (Losses) Securities available for sale: State and political subdivisions $ 74,676 $ ( 11,556 ) 74 $ 118,487 $ ( 37,916 ) 43 $ 193,163 $ ( 49,472 ) Collateralized mortgage obligations 107,449 ( 14,484 ) 48 174,179 ( 42,763 ) 31 281,628 ( 57,247 ) Mortgage-backed securities 31,350 ( 4,556 ) 8 108,930 ( 24,615 ) 19 140,280 ( 29,171 ) Collateralized loan obligations 14,468 ( 480 ) 3 22,343 ( 657 ) 3 36,811 ( 1,137 ) Corporate notes 9,185 ( 1,315 ) 5 2,856 ( 394 ) 3 12,041 ( 1,709 ) $ 237,128 $ ( 32,391 ) 138 $ 426,795 $ ( 106,345 ) 99 $ 663,923 $ ( 138,736 ) The Company adopted ASU No. 2016-13 effective January 1, 2023 which requires credit losses on available-for-sale securities to be recorded in an allowance for credit losses. If the Company intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis, then the security is written down to fair value through income. As of June 30, 2023, the Company did not have the intent to sell, nor was it more likely than not that we would be required to sell any of the securities in an unrealized loss position prior to recovery. As of June 30, 2023, the Company also determined that no individual securities in an unrealized loss position represented credit losses that would require an allowance for credit losses. The Company concluded that the unrealized losses were primarily attributable to increases in market interest rates since these securities were purchased and other market conditions. Accrued interest receivable is not included in available-for-sale security balances and is presented in the "Accrued interest receivable" line of the Consolidated Balance Sheets. Interest receivable on securities was $ 3,354 as of June 30, 2023, and is excluded from the estimate of credit losses. As of December 31, 2022, the Company believed the unrealized losses on securities available for sale were due to market conditions rather than reduced estimated cash flows. At December 31, 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, under the accounting principles effective at December 31, 2022, the Company did not consider these securities to have other than temporary impairment as of December 31, 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 Credit Losses Loans consisted of the following segments as of June 30, 2023 and December 31, 2022. June 30, 2023 December 31, 2022 Commercial $ 535,085 $ 519,196 Real estate: Construction, land and land development 351,461 363,014 1-4 family residential first mortgages 80,998 75,211 Home equity 12,625 10,322 Commercial 1,820,718 1,771,940 Consumer and other 10,289 7,292 2,811,176 2,746,975 Net unamortized fees and costs ( 4,101 ) ( 4,139 ) $ 2,807,075 $ 2,742,836 Real estate loans of approximately $ 1,390,000 and $ 1,190,000 were pledged as security for Federal Home Loan Bank (FHLB) advances as of June 30, 2023 and December 31, 2022, 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. 15 Table of Contents West Bancorporation, Inc. and Subsidiary Notes to Consolidated Financial Statements (unaudited) (dollars in thousands, except per share data) Allowance for Credit Losses for Loans The Company adopted ASU No. 2016-13 on January 1, 2023, at which time the Company implemented the current expected credit loss model in estimating the allowance for credit losses (ACL) valuation account. The following tables detail the changes in the ACL by loan segment for the three and six months ended June 30, 2023. Three Months Ended June 30, 2023 Real Estate Commercial Construction and Land 1-4 Family Residential Home Equity Commercial Consumer and Other Total Beginning balance $ 5,497 $ 3,166 $ 466 $ 88 $ 18,645 $ 79 $ 27,941 Charge-offs ( 18 ) — — — — — ( 18 ) Recoveries 13 — — 2 — — 15 Provision for credit loss expense (1) 4 118 6 20 ( 176 ) 28 — Ending balance $ 5,496 $ 3,284 $ 472 $ 110 $ 18,469 $ 107 $ 27,938 Six Months Ended June 30, 2023 Real Estate Commercial Construction and Land 1-4 Family Residential Home Equity Commercial Consumer and Other Total Beginning balance $ 4,804 $ 3,548 $ 357 $ 101 $ 16,575 $ 88 $ 25,473 Adoption of CECL 677 ( 234 ) 121 ( 8 ) 1,911 ( 9 ) 2,458 Charge-offs ( 18 ) — — — — — ( 18 ) Recoveries 21 — 1 3 — — 25 Provision for credit loss expense (1) 12 ( 30 ) ( 7 ) 14 ( 17 ) 28 — Ending balance $ 5,496 $ 3,284 $ 472 $ 110 $ 18,469 $ 107 $ 27,938 (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, improvement in qualitative risk factors related to those portfolio segments and/or changes in economic forecasts. 16 Table of Contents West Bancorporation, Inc. and Subsidiary Notes to Consolidated Financial Statements (unaudited) (dollars in thousands, except per share data) Prior to the adoption of ASU No. 2016-13 on January 1, 2023, the Company calculated the allowance for loan losses using the incurred loss methodology. The following tables present the activity in the allowance for loan losses by segment for the three and six months ended June 30, 2022. Three Months Ended June 30, 2022 Real Estate Commercial Construction and Land 1-4 Family Residential Home Equity Commercial Consumer and Other Total Beginning balance $ 4,708 $ 3,998 $ 348 $ 101 $ 18,417 $ 51 $ 27,623 Charge-offs — — — — ( 451 ) — ( 451 ) Recoveries 8 — — 1 3 — 12 Provision for loan losses (1) ( 55 ) 45 25 ( 7 ) ( 1,780 ) 22 ( 1,750 ) Ending balance $ 4,661 $ 4,043 $ 373 $ 95 $ 16,189 $ 73 $ 25,434 Six Months Ended June 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 — — — — ( 451 ) — ( 451 ) Recoveries 12 — 1 2 6 — 21 Provision for loan losses (1) ( 127 ) 397 33 2 ( 2,832 ) 27 ( 2,500 ) Ending balance $ 4,661 $ 4,043 $ 373 $ 95 $ 16,189 $ 73 $ 25,434 (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. The following tables present a breakdown of the allowance for credit losses by segment, disaggregated based on the evaluation method as of June 30, 2023 and December 31, 2022. June 30, 2023 Real Estate Commercial Construction and Land 1-4 Family Residential Home Equity Commercial Consumer and Other Total Ending balance: Individually evaluated for credit losses $ — $ — $ — $ — $ — $ — $ — Collectively evaluated for credit losses 5,496 3,284 472 110 18,469 107 27,938 Total $ 5,496 $ 3,284 $ 472 $ 110 $ 18,469 $ 107 $ 27,938 December 31, 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 4,804 3,548 357 101 16,575 88 25,473 Total $ 4,804 $ 3,548 $ 357 $ 101 $ 16,575 $ 88 $ 25,473 17 Table of Contents West Bancorporation, Inc. and Subsidiary Notes to Consolidated Financial Statements (unaudited) (dollars in thousands, except per share data) The following tables present the recorded investment in loans, exclusive of unamortized fees and costs, disaggregated based on the evaluation method by segment as of June 30, 2023 and December 31, 2022. June 30, 2023 Real Estate Commercial Construction and Land 1-4 Family Residential Home Equity Commercial Consumer and Other Total Ending balance: Individually evaluated for credit losses $ — $ — $ 309 $ — $ — $ — $ 309 Collectively evaluated for credit losses 535,085 351,461 80,689 12,625 1,820,718 10,289 2,810,867 Total $ 535,085 $ 351,461 $ 80,998 $ 12,625 $ 1,820,718 $ 10,289 $ 2,811,176 December 31, 2022 Real Estate Commercial Construction and Land 1-4 Family Residential Home Equity Commercial Consumer and Other Total Ending balance: Individually evaluated for impairment $ — $ — $ 322 $ — $ — $ — $ 322 Collectively evaluated for impairment 519,196 363,014 74,889 10,322 1,771,940 7,292 2,746,653 Total $ 519,196 $ 363,014 $ 75,211 $ 10,322 $ 1,771,940 $ 7,292 $ 2,746,975 Under the current expected credit loss model, the ACL is a valuation account estimated at each balance sheet date and deducted from the amortized cost basis of loans to present the net amount expected to be collected. The Company estimates the ACL based on the underlying loans' amortized cost basis, which is the amount at which the loan is originated or acquired, adjusted for collection of cash and charge-offs, as well as applicable accretion or amortization of premiums, discounts, and net deferred fees or costs. The Company's estimate of the ACL reflects losses expected over the remaining contractual life of the assets. The contractual term does not consider extensions, renewals or modifications unless the Company has identified an expected restructuring. In the event that collection of principal becomes uncertain, the Company has policies in place to reverse accrued interest in a timely manner. Therefore, the Company has made a policy election to exclude accrued interest from the measurement of the ACL. Accrued interest on loans of $ 8,430 and $ 8,665 at June 30, 2023 and December 31, 2022, respectively, is included in accrued interest receivable on the balance sheet and is excluded from the estimate of credit losses. Expected credit losses are reflected in the allowance for credit losses through a charge to credit loss expense. When the Company deems all or a portion of a loan to be uncollectible, the appropriate amount is written off and the ACL is reduced by the same amount. The Company applies judgment to determine when a loan is deemed uncollectible; however, generally speaking, a loan will be considered uncollectible no later than when all efforts at collection have been exhausted. Subsequent recoveries, if any, are credited to the ACL when received. The Company measures expected credit losses of loans on a collective (pool) basis when the loans share similar risk characteristics and uses a cash flow based method to estimate expected credit losses for each of these pools. The Company's methodology for estimating the ACL considers available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. The methodologies apply historical loss information, adjusted for asset-specific characteristics, economic conditions at the measurement date, and forecasts about future economic conditions expected to exist through the contractual lives of the financial assets that are reasonable and supportable, to the identified pools of financial assets with similar risk characteristics for which the historical experience was observed. 18 Table of Contents West Bancorporation, Inc. and Subsidiary Notes to Consolidated Financial Statements (unaudited) (dollars in thousands, except per share data) The Company uses the cash flow based model to estimate expected credit losses for all loan segments. For each of the loan segments, the Company calculates a cash flow projection using contractual terms, estimated prepayment speeds, estimated curtailment rates, and other relevant data. The Company uses regression analysis that links historical losses of the Company and its peer group to two economic metrics: national unemployment rate and 10-year treasury rate over 2-year treasury rate spread to establish the loss rates applied to the projected cash flows. For all loan segments, the Company uses a forecast period of four quarters and reverts to a historical rate after four quarters. When estimating prepayment speed and curtailment rates, the modeling is based on historical internal data. Nonaccrual Loans and Delinquency Status Delinquencies are determined based on the payment terms of the individual loan agreements. The accrual of interest on past due and other individually evaluated 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. 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. The following table presents the amortized cost basis of loans on nonaccrual status, loans on nonaccrual status with no allowance for credit losses recorded, and loans past due 90 days or more and still accruing by loan segment. Total Nonaccrual Nonaccrual with no Allowance for Credit Losses 90 Days or More Past Due and Accruing June 30, 2023 December 31, 2022 June 30, 2023 December 31, 2022 June 30, 2023 December 31, 2022 Commercial $ — $ — $ — $ — $ — $ — Real estate: Construction, land and land development — — — — — — 1-4 family residential first mortgages 309 322 309 322 — — Home equity — — — — — — Commercial — — — — — — Consumer and other — — — — — — Total $ 309 $ 322 $ 309 $ 322 $ — $ — There was no interest income recognized on loans that were on nonaccrual for the six months ended June 30, 2023 and June 30, 2022. 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 provide an analysis of the delinquency status of the amortized cost of loans as of June 30, 2023 and December 31, 2022. June 30, 2023 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due Total Past Due Current Total Loans Commercial $ — $ 229 $ — $ — $ 534,856 $ 535,085 Real estate: Construction, land and land development — — — — 351,461 351,461 1-4 family residential first mortgages — — — — 80,998 80,998 Home equity — — — — 12,625 12,625 Commercial — — — — 1,820,718 1,820,718 Consumer and other — — — — 10,289 10,289 Total $ — $ 229 $ — $ — $ 2,810,947 $ 2,811,176 December 31, 2022 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due Total Past Due Current Total Loans Commercial $ — $ — $ — $ — $ 519,196 $ 519,196 Real estate: Construction, land and land development — — — — 363,014 363,014 1-4 family residential first mortgages — — — — 75,211 75,211 Home equity — — — — 10,322 10,322 Commercial — — — — 1,771,940 1,771,940 Consumer and other — — — — 7,292 7,292 Total $ — $ — $ — $ — $ 2,746,975 $ 2,746,975 20 Table of Contents West Bancorporation, Inc. and Subsidiary Notes to Consolidated Financial Statements (unaudited) (dollars in thousands, except per share data) Loan Restructurings Made to Borrowers Experiencing Financial Difficulty As of June 30, 2023 and December 31, 2022, the Company had no loan restructurings made to borrowers experiencing financial difficulty. There were no loan restructurings made to borrowers experiencing financial difficulty for which there was a payment default within twelve months following the modification during the three and six months ended June 30, 2023 and 2022. A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. Credit Quality Indicators 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 analyzed individually to categorize the loan to the appropriate credit risk category. 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. 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. 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. 21 Table of Contents West Bancorporation, Inc. and Subsidiary Notes to Consolidated Financial Statements (unaudited) (dollars in thousands, except per share data) 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 initiated 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. 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 the amortized cost basis of loans by loan segment, credit quality indicator and origination year, and the current period gross write-off by loan segment and origination year, based on the analysis performed as of June 30, 2023 and December 31, 2022. Term Loans by Origination Year As of June 30, 2023 2023 2022 2021 2020 2019 Prior Revolving Loans Total Commercial Pass $ 94,720 $ 140,161 $ 54,141 $ 43,579 $ 8,197 $ 45,173 $ 149,114 $ 535,085 Watch — — — — — — — — Substandard — — — — — — — — Doubtful — — — — — — — — Total $ 94,720 $ 140,161 $ 54,141 $ 43,579 $ 8,197 $ 45,173 $ 149,114 $ 535,085 Current period gross writeoffs $ — $ — $ — $ — $ 18 $ — $ — $ 18 Real estate: Construction, land and land development Pass $ 34,707 $ 120,624 $ 90,414 $ 21,381 $ 1,510 $ 190 $ 82,594 $ 351,420 Watch — 41 — — — — — 41 Substandard — — — — — — — — Doubtful — — — — — — — — Total $ 34,707 $ 120,665 $ 90,414 $ 21,381 $ 1,510 $ 190 $ 82,594 $ 351,461 Current period gross writeoffs $ — $ — $ — $ — $ — $ — $ — $ — 1-4 family residential first mortgages Pass $ 15,101 $ 22,114 $ 21,435 $ 13,031 $ 3,890 $ 4,415 $ 517 $ 80,503 Watch 146 — — — — — — 146 Substandard — 40 — — 309 — — 349 Doubtful — — — — — — — — Total $ 15,247 $ 22,154 $ 21,435 $ 13,031 $ 4,199 $ 4,415 $ 517 $ 80,998 Current period gross writeoffs $ — $ — $ — $ — $ — $ — $ — Home equity Pass $ 347 $ 264 $ 553 $ 395 $ 136 $ 172 $ 10,758 $ 12,625 Watch — — — — — — — — Substandard — — — — — — — — Doubtful — — — — — — — — Total $ 347 $ 264 $ 553 $ 395 $ 136 $ 172 $ 10,758 $ 12,625 Current period gross writeoffs $ — $ — $ — $ — $ — $ — $ — $ — Commercial Pass $ 144,146 $ 530,333 $ 461,039 $ 369,774 $ 89,374 $ 212,507 $ 13,545 $ 1,820,718 Watch — — — — — — — — Substandard — — — — — — — — Doubtful — — — — — — — — Total $ 144,146 $ 530,333 $ 461,039 $ 369,774 $ 89,374 $ 212,507 $ 13,545 $ 1,820,718 Current period gross writeoffs $ — $ — $ — $ — $ — $ — $ — Consumer and other Pass $ 487 $ 539 $ 582 $ 72 $ 51 $ 304 $ 8,254 $ 10,289 Watch — — — — — — — — Substandard — — — — — — — — Doubtful — — — — — — — — Total $ 487 $ 539 $ 582 $ 72 $ 51 $ 304 $ 8,254 $ 10,289 Current period gross writeoffs $ — $ — $ — $ — $ — $ — $ — $ — 23 Table of Contents West Bancorporation, Inc. and Subsidiary Notes to Consolidated Financial Statements (unaudited) (dollars in thousands, except per share data) Term Loans by Origination Year As of December 31, 2022 2022 2021 2020 2019 2018 Prior Revolving Loans Total Commercial Pass $ 166,177 $ 65,148 $ 64,103 $ 9,926 $ 23,771 $ 24,103 $ 165,968 $ 519,196 Watch — — — — — — — — Substandard — — — — — — — — Doubtful — — — — — — — — Total $ 166,177 $ 65,148 $ 64,103 $ 9,926 $ 23,771 $ 24,103 $ 165,968 $ 519,196 Current period gross writeoffs $ — $ — $ — $ — $ — $ — $ — $ — Real estate: Construction, land and land development Pass $ 151,963 $ 96,486 $ 39,604 $ 1,562 $ 196 $ — $ 73,156 $ 362,967 Watch 47 — — — — — — 47 Substandard — — — — — — — — Doubtful — — — — — — — — Total $ 152,010 $ 96,486 $ 39,604 $ 1,562 $ 196 $ — $ 73,156 $ 363,014 Current period gross writeoffs $ — $ — $ — $ — $ — $ — $ — $ — 1-4 family residential first mortgages Pass $ 24,777 $ 24,042 $ 14,879 $ 4,229 $ 1,283 $ 4,267 $ 1,176 $ 74,653 Watch — 148 — — — — — 148 Substandard 88 — — 322 — — — 410 Doubtful — — — — — — — — Total $ 24,865 $ 24,190 $ 14,879 $ 4,551 $ 1,283 $ 4,267 $ 1,176 $ 75,211 Current period gross writeoffs $ — $ — $ — $ — $ — $ 31 $ — $ 31 Home equity Pass $ 413 $ 613 $ 512 $ 130 $ 169 $ — $ 8,485 $ 10,322 Watch — — — — — — — — Substandard — — — — — — — — Doubtful — — — — — — — — Total $ 413 $ 613 $ 512 $ 130 $ 169 $ — $ 8,485 $ 10,322 Current period gross writeoffs $ — $ — $ — $ — $ — $ — $ — $ — Commercial Pass $ 543,138 $ 440,150 $ 405,935 $ 92,304 $ 54,723 $ 169,055 $ 12,599 $ 1,717,904 Watch 22,553 30,573 — 910 — — — 54,036 Substandard — — — — — — — — Doubtful — — — — — — — — Total $ 565,691 $ 470,723 $ 405,935 $ 93,214 $ 54,723 $ 169,055 $ 12,599 $ 1,771,940 Current period gross writeoffs $ — $ 451 $ — $ — $ — $ — $ — $ 451 Consumer and other Pass $ 1,176 $ 1,082 $ 136 $ 86 $ 272 $ 72 $ 4,468 $ 7,292 Watch — — — — — — — — Substandard — — — — — — — — Doubtful — — — — — — — — Total $ 1,176 $ 1,082 $ 136 $ 86 $ 272 $ 72 $ 4,468 $ 7,292 Current period gross writeoffs $ — $ — $ — $ — $ — $ — $ — $ — 24 Table of Contents West Bancorporation, Inc. and Subsidiary Notes to Consolidated Financial Statements (unaudited) (dollars in thousands, except per share data) Collateral Dependent Loans Loans that do not share risk characteristics are evaluated on an individual basis. For collateral dependent loans where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the loans to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. When repayment is expected to be from the operation of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the loan exceeds the present value of expected cash flows from the operation of collateral. When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the loan exceeds the fair value of the underlying collateral less estimated cost to sell. The ACL may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the loan. The following table presents the amortized cost basis of collateral dependent loans, by primary collateral type, which are individually evaluated to determine expected credit losses, and the related ACL allocated to these loans. As of June 30, 2023 Primary Type of Collateral Real Estate Equipment Other Total ACL Allocation 1-4 family residential first mortgages $ 309 $ — $ — $ 309 $ — Total $ 309 $ — $ — $ 309 $ — As of December 31, 2022 Primary Type of Collateral Real Estate Equipment Other Total ACL Allocation 1-4 family residential first mortgages $ 322 $ — $ — $ 322 $ — Total $ 322 $ — $ — $ 322 $ — Allowance for Credit Losses on Off-Balance-Sheet Credit Exposures The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The Company's allowance for credit losses for unfunded commitments was $ 2,344 as of June 30, 2023. The allowance for credit losses for off-balance-sheet credit exposures is presented in the "Accrued expenses and other liabilities" line of the Consolidated Balance Sheets. Changes in the allowance for credit losses for off-balance-sheet credit exposures is reflected in the "Credit loss expense " line of the Consolidated Statements of Income. There were no changes to the allowance for credit losses for off-balance-sheet credit exposures during the six months ended June 30, 2023. 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. 25 Table of Contents West Bancorporation, Inc. and Subsidiary Notes to Consolidated Financial Statements (unaudited) (dollars in thousands, except per share data) 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 $ 435,000 and $ 310,000 at June 30, 2023 and December 31, 2022, respectively. As of June 30, 2023, the Company had swaps with a total notional amount of $ 285,000 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 June 30, 2023, the Company had swaps with a total notional amount of $ 40,000 that effectively converts variable-rate long-term debt to fixed-rate debt and swaps with a total notional amount of $ 110,000 that hedge the interest payments of certain deposit accounts. Derivatives Not Designated as Accounting Hedges: To accommodate customer needs, the Company on occasion offers loan level interest rate swaps to its customers and offsets its exposure from such contracts by entering into mirror image swaps with a swap counterparty (back-to-back swap program). The interest rate swaps are free-standing derivatives and are recorded at fair value. The Company enters into a floating-rate loan and a fixed-rate swap with our customer. Simultaneously, the Company enters into an offsetting fixed-rate swap with a swap counterparty. In connection with each swap transaction, the Company agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on the same notional amount at a fixed interest rate. At the same time, the Company agrees to pay a swap counterparty the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. These transactions allow the Company’s customers to effectively convert variable-rate loans to fixed-rate loans. The customer accommodations and any offsetting swaps are treated as non-hedging derivative instruments which do not qualify for hedge accounting. The table below identifies the balance sheet category and fair values of the Company's derivative instruments as of June 30, 2023 and December 31, 2022. June 30, 2023 December 31, 2022 Cash Flow Hedges: Gross notional amount $ 435,000 $ 310,000 Fair value in other assets 18,386 16,284 Fair value in other liabilities ( 59 ) — Weighted-average floating rate received 5.39 % 4.53 % Weighted-average fixed rate paid 2.85 % 2.25 % Weighted-average maturity in years 3.0 3.3 Non-Hedging Derivatives: Gross notional amount $ 251,601 $ 254,369 Fair value in other assets 14,895 15,309 Fair value in other liabilities ( 14,895 ) ( 15,309 ) 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 six months ended June 30, 2023 and 2022. Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Pre-tax gain recognized in other comprehensive income $ 8,102 $ 4,066 $ 6,468 $ 14,602 Reclassification from AOCI into income: Increase (decrease) in interest expense $ ( 2,467 ) $ 642 $ ( 4,425 ) $ 1,687 26 Table of Contents West Bancorporation, Inc. and Subsidiary Notes to Consolidated Financial Statements (unaudited) (dollars in thousands, except per share data) The Company estimates there will be approximately $ 10,451 reclassified from accumulated other comprehensive income to reduce interest expense through the 12 months ending June 30, 2024 related to cash flow hedges. The Company is exposed to credit risk in the event of nonperformance by interest rate swap counterparties, which is minimized by collateral-pledging provisions in the agreements. Derivative contracts with swap counterparties are executed with a Credit Support Annex, which is a bilateral ratings-sensitive agreement that requires collateral postings at established credit threshold levels. These agreements protect the interests of the Company and its counterparties should either party suffer a credit rating deterioration. As of both June 30, 2023 and December 31, 2022, the Company pledged $ 0 of collateral to the counterparties in the form of cash on deposit. As of June 30, 2023 and December 31, 2022, the Company's counterparties pledged $ 33,880 and $ 31,560 , 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. 6. Income Taxes Net deferred tax assets consisted of the following as of June 30, 2023 and December 31, 2022. June 30, 2023 December 31, 2022 Deferred tax assets: Allowance for credit losses $ 7,419 $ 6,241 Net unrealized losses on securities available for sale 33,838 34,544 Lease liabilities 990 1,147 Accrued expenses 212 434 Restricted stock unit compensation 800 1,038 State net operating loss carryforward 1,609 1,476 Other 174 156 45,042 45,036 Deferred tax liabilities: Right-of-use assets 945 1,099 Deferred loan costs 261 249 Net unrealized gains on interest rate swaps 4,503 4,003 Premises and equipment 1,147 1,219 New markets tax credit loan 346 303 Other 125 78 7,327 6,951 Net deferred tax assets before valuation allowance 37,715 38,085 Valuation allowance ( 1,609 ) ( 1,476 ) Net deferred tax assets $ 36,106 $ 36,609 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 2023 and thereafter. 27 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 six months ended June 30, 2023 and 2022. Unrealized Unrealized Accumulated Gains Gains Other (Losses) on (Losses) on Comprehensive Securities Derivatives Income (Loss) Balance, December 31, 2022 $ ( 103,680 ) $ 12,209 $ ( 91,471 ) Other comprehensive income before reclassifications 2,124 4,881 7,005 Amounts reclassified from accumulated other comprehensive income (loss) ( 13 ) ( 3,338 ) ( 3,351 ) Net current period other comprehensive income 2,111 1,543 3,654 Balance, June 30, 2023 $ ( 101,569 ) $ 13,752 $ ( 87,817 ) Balance, December 31, 2021 $ ( 5,021 ) $ ( 5,616 ) $ ( 10,637 ) Other comprehensive income (loss) before reclassifications ( 73,959 ) 10,908 ( 63,051 ) Amounts reclassified from accumulated other comprehensive income (loss) — 1,260 1,260 Net current period other comprehensive income (loss) ( 73,959 ) 12,168 ( 61,791 ) Balance, June 30, 2022 $ ( 78,980 ) $ 6,552 $ ( 72,428 ) 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 adopted ASU No. 2016-13 effective January 1, 2023 which requires an allowance for credit losses on off-balance sheet credit exposure. See Note 4 for additional information. The Company's commitments consisted of the following amounts as of June 30, 2023 and December 31, 2022. June 30, 2023 December 31, 2022 Commitments to fund real estate construction loans $ 442,446 $ 336,900 Other commitments to extend credit 537,757 727,666 Standby letters of credit 19,161 20,557 $ 999,364 $ 1,085,123 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 $ 21,791 and $ 23,337 at June 30, 2023 and December 31, 2022, respectively. Contractual commitments : The Company had remaining commitments to invest in qualified affordable housing projects totaling $ 2,678 and $ 3,431 as of June 30, 2023 and December 31, 2022, respectively. 28 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 in 2022 for the construction of a new headquarters building in West Des Moines, Iowa. 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 June 30, 2023, there was a remaining commitment of $ 24,511 under this contract. West Bank is also building a new office in Mankato, Minnesota to be completed in the fourth quarter of 2023, which had a remaining commitment of $ 3,991 as of June 30, 2023. Concentrations of credit risk : Substantially all of the Company's loans, commitments to extend credit and standby letters of credit have been granted to customers in the Company's market areas. The concentrations of credit by type of loan are set forth in Note 4. The distribution by type of loan of commitments to extend credit approximates the distribution by type of loan outstanding. Standby letters of credit were granted primarily to commercial borrowers. 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 six months ended June 30, 2023. 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. 29 Table of Contents West Bancorporation, Inc. and Subsidiary Notes to Consolidated Financial Statements (unaudited) (dollars in thousands, except per share data) 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. The following tables present the balances of financial assets and liabilities measured at fair value on a recurring basis by level as of June 30, 2023 and December 31, 2022. June 30, 2023 Total Level 1 Level 2 Level 3 Financial assets: Securities available for sale: State and political subdivisions $ 197,396 $ — $ 197,396 $ — Collateralized mortgage obligations 264,834 — 264,834 — Mortgage-backed securities 135,580 — 135,580 — Collateralized loan obligations 37,263 — 37,263 — Corporate notes 10,018 — 10,018 — Derivative instruments, interest rate swaps 33,281 — 33,281 — Financial liabilities: Derivative instruments, interest rate swaps $ 14,954 $ — $ 14,954 $ — December 31, 2022 Total Level 1 Level 2 Level 3 Financial assets: Securities available for sale: State and political subdivisions $ 193,355 $ — $ 193,355 $ — Collateralized mortgage obligations 281,628 — 281,628 — Mortgage-backed securities 140,280 — 140,280 — Collateralized loan obligations 36,811 — 36,811 — Corporate notes 12,041 — 12,041 — Derivative instruments, interest rate swaps 31,593 — 31,593 — Financial liabilities: Derivative instruments, interest rate swaps $ 15,309 $ — $ 15,309 $ — 30 Table of Contents West Bancorporation, Inc. and Subsidiary Notes to Consolidated Financial Statements (unaudited) (dollars in thousands, except per share data) 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 June 30, 2023 and December 31, 2022, there were no individually evaluated loans with a fair value adjustment. Individually evaluated loans are classified within Level 3 of the fair value hierarchy and are evaluated and valued at the lower of cost or fair value when the loan is individually evaluated. Fair value is based on the value of the collateral securing these loans. In determining the estimated net realizable value of the underlying collateral of individually evaluated 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 individually evaluated loans and because of the relationship between fair value and general economic conditions, the Company considers the fair value of individually evaluated loans to be highly sensitive to changes in market conditions. 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 June 30, 2023 and December 31, 2022. June 30, 2023 Carrying Amount Approximate Fair Value Level 1 Level 2 Level 3 Financial assets: Cash and due from banks $ 29,776 $ 29,776 $ 29,776 $ — $ — Interest-bearing deposits 1,968 1,968 1,968 — — Securities available for sale 645,091 645,091 — 645,091 — Federal Home Loan Bank stock 22,488 22,488 22,488 — — Loans, net 2,779,137 2,644,360 — 2,644,360 — Accrued interest receivable 11,785 11,785 11,785 — — Interest rate swaps 33,281 33,281 — 33,281 — Financial liabilities: Deposits $ 2,836,325 $ 2,836,348 $ — $ 2,836,348 $ — Federal funds purchased and other short-term borrowings 184,150 184,150 184,150 — — Subordinated notes, net 79,500 62,040 — 62,040 — Federal Home Loan Bank advances 280,000 280,000 — 280,000 — Long-term debt 50,236 50,236 — 50,236 — Accrued interest payable 4,477 4,477 4,477 — — Interest rate swaps 14,954 14,954 — 14,954 — Off-balance sheet financial instruments: Commitments to extend credit — — — — — Standby letters of credit — — — — — 31 Table of Contents West Bancorporation, Inc. and Subsidiary Notes to Consolidated Financial Statements (unaudited) (dollars in thousands, except per share data) December 31, 2022 Carrying Amount Approximate Fair Value Level 1 Level 2 Level 3 Financial assets: Cash and due from banks $ 24,896 $ 24,896 $ 24,896 $ — $ — Interest-bearing deposits 1,643 1,643 1,643 — — Securities available for sale 664,115 664,115 — 664,115 — Federal Home Loan Bank stock 19,336 19,336 19,336 — — Loans, net 2,717,363 2,582,911 — 2,582,911 — Accrued interest receivable 11,988 11,988 11,988 — — Interest rate swaps 31,593 31,593 — 31,593 — Financial liabilities: Deposits $ 2,880,408 $ 2,880,495 $ — $ 2,880,495 $ — Federal funds purchased and other short-term borrowings 200,000 200,000 200,000 — — Subordinated notes, net 79,369 68,047 — 68,047 — Federal Home Loan Bank advances 155,000 155,000 — 155,000 — Long-term debt 51,486 51,486 — 51,486 — Accrued interest payable 3,260 3,260 3,260 — — Interest rate swaps 15,309 15,309 — 15,309 — Off-balance sheet financial instruments: Commitments to extend credit — — — — — Standby letters of credit — — — — — 32 Table of Contents West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data)