WTBA West Bancorporation

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
			For the quarterly period ended September 30, 2020
or
☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
			For the transition period from __________ to __________

Commission File Number:  0-49677

WEST BANCORPORATION, INC.

(Exact Name of Registrant as Specified in its Charter)

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

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

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

Securities registered or to be registered pursuant to Section 12(b) of the Act:

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

Yes  ☒                      No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes  ☒                      No  o

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

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

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

Yes  ☐                      No  ☒

As of October 28, 2020, there were 16,469,272 shares of common stock, no par value, outstanding.

						Page
PART I.			FINANCIAL INFORMATION
Item 1.			Financial Statements			4
			Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019			4
			Consolidated Statements of Income for the three and nine months ended September 30, 2020 and 2019			5
			Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2020 and 2019			6
			Consolidated Statements of Stockholders' Equity for the three and nine months ended September 30, 2020 and 2019			7
			Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019			9
			Notes to Consolidated Financial Statements			10
Item 2.			Management's Discussion and Analysis of Financial Condition and Results of Operations			31
			"Safe Harbor" Concerning Forward-Looking Statements			31
			Critical Accounting Policies			31
			Non-GAAP Financial Measures			32
			Overview			33
			Significant Developments - Impact of COVID-19			33
			Summary			36
			Results of Operations			38
			Financial Condition			46
Item 3.			Quantitative and Qualitative Disclosures About Market Risk			51
Item 4.			Controls and Procedures			51
PART II.			OTHER INFORMATION
Item 1.			Legal Proceedings			51
Item 1A.			Risk Factors			51
Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds			52
Item 3.			Defaults Upon Senior Securities			52
Item 4.			Mine Safety Disclosures			52
Item 5.			Other Information			52
Item 6.			Exhibits			54
			Signatures			55

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

West Bancorporation, Inc. and Subsidiary

Consolidated Balance Sheet

(unaudited)

(in thousands, except share and per share data)						September 30, 2020						December 31, 2019
ASSETS
Cash and due from banks						$	49,445					$	37,808
Federal funds sold						16,398						15,482
Cash and cash equivalents						65,843						53,290
Investment securities available for sale, at fair value						374,387						398,578
Federal Home Loan Bank stock, at cost						11,905						12,491
Loans						2,247,425						1,941,663
Allowance for loan losses						(25,403)						(17,235)
Loans, net						2,222,022						1,924,428
Premises and equipment, net						28,099						29,680
Accrued interest receivable						11,071						7,134
Bank-owned life insurance						42,520						34,893
Deferred tax assets, net						10,809						5,361
Other assets						9,227						7,836
Total assets						$	2,775,883					$	2,473,691
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing demand						$	619,346					$	380,079
Interest-bearing demand						363,430						346,307
Savings						1,130,582						996,836
Time of $250 or more						54,241						81,871
Other time						129,181						209,663
Total deposits						2,296,780						2,014,756
Federal funds purchased						2,350						2,660
Subordinated notes, net						20,448						20,438
Federal Home Loan Bank advances, net						175,000						179,365
Long-term debt						22,213						22,925
Accrued expenses and other liabilities						43,772						21,727
Total liabilities						2,560,563						2,261,871
COMMITMENTS AND CONTINGENCIES (NOTE 8)
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value; authorized 50,000,000 shares; no shares issued and outstanding at September 30, 2020 and December 31, 2019						—						—
Common stock, no par value; authorized 50,000,000 shares; 16,469,272     and 16,379,752 shares issued and outstanding at September 30, 2020     and December 31, 2019, respectively						3,000						3,000
Additional paid-in capital						28,227						27,260
Retained earnings						198,622						184,821
Accumulated other comprehensive loss						(14,529)						(3,261)
Total stockholders' equity						215,320						211,820
Total liabilities and stockholders' equity						$	2,775,883					$	2,473,691

See Notes to Consolidated Financial Statements.

West Bancorporation, Inc. and Subsidiary

Consolidated Statements of Income

(unaudited)

						Three Months Ended September 30,												Nine Months Ended September 30,
(in thousands, except per share data)						2020						2019						2020						2019
Interest income:
Loans, including fees						$	22,489					$	22,203					$	67,132					$	63,699
Investment securities:
Taxable						1,728						2,445						6,105						7,405
Tax-exempt						378						353						994						1,675
Federal funds sold						15						611						256						819
Total interest income						24,610						25,612						74,487						73,598
Interest expense:
Deposits						1,946						6,771						9,343						19,405
Federal funds purchased						2						17						21						219
Subordinated notes						254						258						762						766
Federal Home Loan Bank advances						1,189						1,300						3,702						3,666
Long-term debt						87						150						316						499
Total interest expense						3,478						8,496						14,144						24,555
Net interest income						21,132						17,116						60,343						49,043
Provision for loan losses						4,000						300						8,000						300
Net interest income after provision for loan losses						17,132						16,816						52,343						48,743
Noninterest income:
Service charges on deposit accounts						609						630						1,743						1,841
Debit card usage fees						432						426						1,205						1,235
Trust services						553						572						1,477						1,536
Increase in cash value of bank-owned life insurance						133						168						427						482
Loan swap fees						983						—						1,572						—
Realized investment securities gains (losses), net						156						1						81						(64)
Other income						337						361						993						1,246
Total noninterest income						3,203						2,158						7,498						6,276
Noninterest expense:
Salaries and employee benefits						5,412						5,440						16,014						16,324
Occupancy						1,383						1,379						4,092						3,956
Data processing						614						695						1,882						2,091
FDIC insurance						351						—						880						404
Professional fees						230						204						669						647
Director fees						236						233						664						742
Other expenses						1,833						1,585						4,938						4,666
Total noninterest expense						10,059						9,536						29,139						28,830
Income before income taxes						10,276						9,438						30,702						26,189
Income taxes						2,176						1,912						6,544						5,106
Net income						$	8,100					$	7,526					$	24,158					$	21,083
Basic earnings per common share						$	0.49					$	0.46					$	1.47					$	1.29
Diluted earnings per common share						$	0.49					$	0.46					$	1.46					$	1.28

See Notes to Consolidated Financial Statements.

West Bancorporation, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income

(unaudited)

						Three Months Ended September 30,												Nine Months Ended September 30,
(in thousands)						2020						2019						2020						2019
Net income						$	8,100					$	7,526					$	24,158					$	21,083
Other comprehensive income (loss):
Unrealized gains on investment securities:
Unrealized holding gains arising during the period						357						1,706						6,171						13,673
Plus: reclassification adjustment for net (gains) losses realized in net income						(156)						(1)						(81)						64
Income tax expense						(50)						(426)						(1,522)						(3,434)
Other comprehensive income on investment securities						151						1,279						4,568						10,303
Unrealized gains (losses) on derivatives:
Unrealized holding gains (losses) arising during the period						256						(5,187)						(23,912)						(12,357)
Plus: reclassification adjustment for net (gains) losses on derivatives realized in net income						1,405						(100)						2,768						(351)
Plus: reclassification adjustment for amortization of derivative termination costs						—						24						31						71
Income tax (expense) benefit						(415)						1,315						5,277						3,156
Other comprehensive income (loss) on derivatives						1,246						(3,948)						(15,836)						(9,481)
Total other comprehensive income (loss)						1,397						(2,669)						(11,268)						822
Comprehensive income						$	9,497					$	4,857					$	12,890					$	21,905

See Notes to Consolidated Financial Statements.

 

West Bancorporation, Inc. and Subsidiary

Consolidated Statements of Stockholders' Equity

(unaudited)

(in thousands, except share and per share data)
						Three Months Ended September 30, 2020
																																				Accumulated
																								Additional												Other
						Preferred						Common Stock												Paid-In						Retained						Comprehensive
						Stock						Shares						Amount						Capital						Earnings						Income (Loss)						Total
Balance, June 30, 2020						$	—					16,469,272						$	3,000					$	27,632					$	193,981					$	(15,926)					$	208,687
Net income						—						—						—						—						8,100						—						8,100
Other comprehensive income, net of tax						—						—						—						—						—						1,397						1,397
Cash dividends declared, $0.21 per common share						—						—						—						—						(3,459)						—						(3,459)
Stock-based compensation costs						—						—						—						595						—						—						595
Balance, September 30, 2020						$	—					16,469,272						$	3,000					$	28,227					$	198,622					$	(14,529)					$	215,320
						Three Months Ended September 30, 2019
																																				Accumulated
																								Additional												Other
						Preferred						Common Stock												Paid-In						Retained						Comprehensive
						Stock						Shares						Amount						Capital						Earnings						Income (Loss)						Total
Balance, June 30, 2019						$	—					16,379,752						$	3,000					$	25,691					$	176,567					$	(3,323)					$	201,935
Net income						—						—						—						—						7,526						—						7,526
Other comprehensive loss, net of tax						—						—						—						—						—						(2,669)						(2,669)
Cash dividends declared, $0.21 per common share						—						—						—						—						(3,439)						—						(3,439)
Stock-based compensation costs						—						—						—						784						—						—						784
Balance, September 30, 2019						$	—					16,379,752						$	3,000					$	26,475					$	180,654					$	(5,992)					$	204,137
See Notes to Consolidated Financial Statements.

West Bancorporation, Inc. and Subsidiary

Consolidated Statements of Stockholders' Equity

(unaudited)

(in thousands, except share and per share data)
						Nine Months Ended September 30, 2020
																																				Accumulated
																								Additional												Other
						Preferred						Common Stock												Paid-In						Retained						Comprehensive
						Stock						Shares						Amount						Capital						Earnings						Loss						Total
Balance, December 31, 2019						$	—					16,379,752						$	3,000					$	27,260					$	184,821					$	(3,261)					$	211,820
Net income						—						—						—						—						24,158						—						24,158
Other comprehensive loss,    net of tax						—						—						—						—						—						(11,268)						(11,268)
Cash dividends declared, $0.63 per common share						—						—						—						—						(10,357)												(10,357)
Stock-based compensation costs						—						—						—						1,716						—						—						1,716
Issuance of common stock upon vesting of restricted stock units, net of shares withheld for payroll taxes						—						89,520						—						(749)						—						—						(749)
Balance, September 30, 2020						$	—					16,469,272						$	3,000					$	28,227					$	198,622					$	(14,529)					$	215,320
						Nine Months Ended September 30, 2019
																																				Accumulated
																								Additional												Other
						Preferred						Common Stock												Paid-In						Retained						Comprehensive
						Stock						Shares						Amount						Capital						Earnings						Income (Loss)						Total
Balance, December 31, 2018						$	—					16,295,494						$	3,000					$	25,128					$	169,709					$	(6,814)					$	191,023
Net income						—						—						—						—						21,083						—						21,083
Other comprehensive income, net of tax						—						—						—						—						—						822						822
Cash dividends declared, $0.62 per common share						—						—						—						—						(10,138)						—						(10,138)
Stock-based compensation costs						—						—						—						2,208						—						—						2,208
Issuance of common stock upon vesting of restricted stock units, net of shares withheld for payroll taxes						—						84,258						—						(861)						—						—						(861)
Balance, September 30, 2019						$	—					16,379,752						$	3,000					$	26,475					$	180,654					$	(5,992)					$	204,137

See Notes to Consolidated Financial Statements.

West Bancorporation, Inc. and Subsidiary

Consolidated Statements of Cash Flows

(unaudited)

						Nine Months Ended September 30,
(in thousands)						2020						2019
Cash Flows from Operating Activities:
Net income						$	24,158					$	21,083
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses						8,000						300
Net amortization and accretion						1,628						2,895
Investment securities (gains) losses, net						(81)						64
Stock-based compensation						1,716						2,208
Increase in cash value of bank-owned life insurance						(427)						(482)
Gain on sale of premises						—						(307)
Depreciation						1,131						1,060
(Benefit) provision for deferred income taxes						(1,693)						155
Change in assets and liabilities:
Increase in accrued interest receivable						(3,937)						(364)
Increase in other assets						(231)						(932)
Increase in accrued expenses and other liabilities						798						1,623
Net cash provided by operating activities						31,062						27,303
Cash Flows from Investing Activities:
Proceeds from sales of securities available for sale						133,212						156,437
Proceeds from maturities and calls of securities available for sale						54,736						33,477
Purchases of securities available for sale						(158,540)						(134,548)
Purchases of Federal Home Loan Bank stock						(9,334)						(23,378)
Proceeds from redemption of Federal Home Loan Bank stock						9,920						23,730
Net increase in loans						(305,594)						(114,847)
Purchase of bank-owned life insurance						(7,200)						—
Proceeds from sale of premises						—						604
Purchases of premises and equipment						(605)						(708)
Net cash used in investing activities						(283,405)						(59,233)
Cash Flows from Financing Activities:
Net increase in deposits						282,024						130,278
Net decrease in federal funds purchased						(310)						(16,450)
Net increase (decrease) in Federal Home Loan Bank advances						(5,000)						15,000
Principal payments on long-term debt						(712)						(4,086)
Common stock dividends paid						(10,357)						(10,138)
Restricted stock units withheld for payroll taxes						(749)						(861)
Net cash provided by financing activities						264,896						113,743
Net increase in cash and cash equivalents						12,553						81,813
Cash and Cash Equivalents:
Beginning						53,290						47,474
Ending						$	65,843					$	129,287
Supplemental Disclosures of Cash Flow Information:
Cash payments for:
Interest						$	15,034					$	23,726
Income taxes						7,590						3,280
Supplemental Disclosure of Noncash Investing Activities:
Establishment of lease liability and right-of-use asset						$	—					$	10,435

See Notes to Consolidated Financial Statements.

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, 2019 filed with the SEC on February 27, 2020. In the opinion of management, the accompanying consolidated financial statements of the Company contain all adjustments necessary to fairly present its financial position as of September 30, 2020 and December 31, 2019, net income, comprehensive income and changes in stockholders' equity for the three and nine months ended September 30, 2020 and 2019, and cash flows for the nine months ended September 30, 2020 and 2019. The results for these interim periods may not be indicative of results for the entire year or for any other period.

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

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 this date and plans to adopt the standard with the amended effective date. The Company does not plan to early adopt this standard, but continues to work through implementation. The Company continues collecting and retaining loan and credit data and evaluating various loss estimation models. While we currently cannot reasonably estimate the impact of adopting this standard, we expect the 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 August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this update modify the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The update is effective for interim and annual periods in fiscal years beginning after December 15, 2019, with early adoption permitted for the removed disclosures and delayed adoption until the fiscal year 2020 permitted for the new disclosures. The removed and modified disclosures will be adopted on a retrospective basis, and the new disclosures will be adopted on a prospective basis. The adoption did not have a material effect on the Company’s consolidated financial statements.

In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Financial Instruments - Credit Losses (ASC 326), Derivatives and Hedging (ASC 815), and Financial Instruments (ASC 825). The amendments in the ASU improve the Codification by eliminating inconsistencies and providing clarifications. The amended guidance in this ASU related to the credit losses will be effective for the Company for fiscal years and interim periods beginning after December 15, 2022. 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. It provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact of the reference rate reform on the Company’s consolidated financial statements.

In October 2020, the FASB issued ASU No. 2020-08, Codification Improvements to Subtopic 310-20, Receivables-Nonrefundable Fees and Other Costs. The amendments in this update clarify that an entity should reevaluate whether a callable debt security is within the scope of ASC paragraph 310-20-35-33 for each reporting period. The amendments in this update are effective for public business entities beginning after December 15, 2020. The Company does not expect the guidance to have a material impact on the Company's consolidated financial statements.

2.  Earnings per Common Share

Basic earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per common share reflect the potential dilution that could occur if the Company's outstanding restricted stock units were vested. The dilutive effect was computed using the treasury stock method, which assumes all stock-based awards were exercised and the hypothetical proceeds from exercise were used by the Company to purchase common stock at the average market price during the period. The incremental shares, to the extent they would have been dilutive, were included in the denominator of the diluted earnings per common share calculation. The calculations of earnings per common share and diluted earnings per common share for the three and nine months ended September 30, 2020 and 2019 are presented in the following table.

West Bancorporation, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

(dollars in thousands, except per share data)

3.  Investment Securities

The following tables show the amortized cost, gross unrealized gains and losses, and fair value of investment securities, by investment security type as of September 30, 2020 and December 31, 2019.

			September 30, 2020
			Amortized Cost						Gross Unrealized Gains						Gross Unrealized (Losses)						Fair Value
Securities available for sale:
State and political subdivisions			$	106,200					$	2,482					$	(492)					$	108,190
Collateralized mortgage obligations (1)			132,859						6,058						—						138,917
Mortgage-backed securities (1)			74,710						730						(24)						75,416
Collateralized loan obligations			52,820						65						(1,321)						51,564
Corporate notes and other investments			300						—						—						300
			$	366,889					$	9,335					$	(1,837)					$	374,387
			December 31, 2019
			Amortized Cost						Gross Unrealized Gains						Gross Unrealized (Losses)						Fair Value
Securities available for sale:
State and political subdivisions			$	45,442					$	1,736					$	—					$	47,178
Collateralized mortgage obligations (1)			180,899						1,651						(629)						181,921
Mortgage-backed securities (1)			73,038						225						(233)						73,030
Asset-backed securities (2)			17,551						66						(17)						17,600
Collateralized loan obligations			64,939						21						(128)						64,832
Corporate notes and other investments			15,300						—						(1,283)						14,017
			$	397,169					$	3,699					$	(2,290)					$	398,578

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

(2)Pass-through asset-backed securities guaranteed by the SBA, representing participating interests in pools of commercial working capital and equipment loans.

Investment securities with an amortized cost of approximately $165,424 and $148,257 as of September 30, 2020 and December 31, 2019, respectively, were pledged to secure access to the Federal Reserve discount window, for public fund deposits, and for other purposes as required or permitted by law or regulation.

The amortized cost and fair value of investment securities available for sale as of September 30, 2020, by contractual maturity, are shown below. Certain securities have call features that allow the issuer to call the securities prior to maturity. Expected maturities may differ from contractual maturities for collateralized mortgage obligations 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.

The details of the sales of investment securities available for sale for the three and nine months ended September 30, 2020 and 2019 are summarized in the following table.

West Bancorporation, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

(dollars in thousands, except per share data)

The following tables show the fair value and gross unrealized losses, aggregated by investment type and length of time that individual securities have been in a continuous loss position, as of September 30, 2020 and December 31, 2019.

			September 30, 2020
			Less than 12 months												12 months or longer												Total
			Fair Value						Gross Unrealized (Losses)						Fair Value						Gross Unrealized (Losses)						Fair Value						Gross Unrealized (Losses)
Securities available for sale:
State and political subdivisions			$	30,977					$	(492)					$	—					$	—					$	30,977					$	(492)
Mortgage-backed securities			14,432						(24)						—						—						14,432						(24)
Collateralized loan obligations			31,907						(907)						14,581						(414)						46,488						(1,321)
			$	77,316					$	(1,423)					$	14,581					$	(414)					$	91,897					$	(1,837)
			December 31, 2019
			Less than 12 months												12 months or longer												Total
			Fair Value						Gross Unrealized (Losses)						Fair Value						Gross Unrealized (Losses)						Fair Value						Gross Unrealized (Losses)
Securities available for sale:
Collateralized mortgage obligations			$	54,521					$	(335)					$	35,546					$	(294)					$	90,067					$	(629)
Mortgage-backed securities			45,132						(174)						4,687						(59)						49,819						(233)
Asset-backed securities			3,641						(4)						7,075						(13)						10,716						(17)
Collateralized loan obligations			42,823						(128)						—						—						42,823						(128)
Corporate notes and other investments			4,499						(501)						9,518						(782)						14,017						(1,283)
			$	150,616					$	(1,142)					$	56,826					$	(1,148)					$	207,442					$	(2,290)

As of September 30, 2020, securities available for sale with unrealized losses included 11 state and political subdivision securities, one mortgage-backed security and eight collateralized loan obligation securities. Collateralized loan obligations are debt securities backed by pools of senior secured commercial loans to a diverse group of companies across a broad spectrum of industries. At September 30, 2020, the Company only owned collateralized loan obligations that were AAA or AA rated. The Company believed the unrealized losses on securities available for sale as of September 30, 2020 were due to market conditions rather than reduced estimated cash flows. At September 30, 2020, 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, 2020.

West Bancorporation, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

(dollars in thousands, except per share data)

4. Loans and Allowance for Loan Losses

Loans consisted of the following segments as of September 30, 2020 and December 31, 2019.

			September 30, 2020						December 31, 2019
Commercial			$	641,873					$	431,044
Real estate:
Construction, land and land development			307,328						264,193
1-4 family residential first mortgages			59,043						54,475
Home equity			10,566						12,380
Commercial			1,230,335						1,175,024
Consumer and other			6,051						6,787
			2,255,196						1,943,903
Net unamortized fees and costs			(7,771)						(2,240)
			$	2,247,425					$	1,941,663

Included in commercial loans at September 30, 2020, were $224,489 of loans originated in the Paycheck Protection Program (PPP), which was established by the Coronavirus Aid, Relief and Economic Security Act (CARES Act), enacted on March 27, 2020, in response to the Coronavirus Disease 2019 (COVID-19) pandemic. The PPP is administered by the Small Business Administration (SBA). PPP loans may be forgiven by the SBA and are 100 percent guaranteed by the SBA. Therefore, no allowance for loan losses is allocated to PPP loans.

Real estate loans of approximately $990,000 and $910,000 were pledged as security for Federal Home Loan Bank (FHLB) advances as of September 30, 2020 and December 31, 2019, respectively.

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

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

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

The CARES Act also provided financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time in certain circumstances. This temporary suspension may only be applied to modifications of loans that were not more than 30 days past due as of December 31, 2019 and may not be applied to modifications that are not related to the COVID-19 pandemic. If elected, the temporary suspension may be applied to eligible modifications executed during the period beginning on March 1, 2020 and ending on the earlier of December 31, 2020 or 60 days after the termination of the COVID-19 national emergency. On March 22, 2020, April 7, 2020 and August 3, 2020, federal banking regulators in consultation with FASB issued interagency statements that included similar guidance on their approach for the accounting of loan modifications in light of the economic impact of the COVID-19 pandemic that provide that short-term modifications and additional accommodations made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs.

At September 30, 2020, COVID-19-related loan modifications totaled approximately $434,361. The initial modifications primarily included a delay of principal and/or interest payments for up to six months. Additional modifications, including payment deferrals for up to an additional six months, have been made for one hotel company totaling $7,364 and one movie theater company totaling $16,195 as of September 30, 2020. Additional modifications are expected to be made for approximately $67,000 of loans in the hotel industry in mid-November 2020, at the end of the term for the initial modifications. Modified loans continue to accrue interest and are evaluated for past due status based on the revised payment terms.

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

TDR loans totaled $0 and $4 as of September 30, 2020 and December 31, 2019, 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, 2020 and 2019. No TDR loans that were modified within the twelve months preceding September 30, 2020 and 2019 have subsequently had a payment default. A TDR loan is considered to have a payment default when it is past due 30 days or more. As noted above, COVID-19 related loan modifications are not reported as TDRs.

West Bancorporation, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

(dollars in thousands, except per share data)

The following table summarizes the recorded investment in impaired loans by segment, broken down by loans with no related allowance for loan losses and loans with a related allowance and the amount of that allowance as of September 30, 2020 and December 31, 2019.

			September 30, 2020																		December 31, 2019
			Recorded Investment						Unpaid Principal Balance						Related Allowance						Recorded Investment						Unpaid Principal Balance						Related Allowance
With no related allowance recorded:
Commercial			$	—					$	—					$	—					$	91					$	91					$	—
Real estate:
Construction, land and land development			—						—						—						—						—						—
1-4 family residential first mortgages			383						383						—						411						411						—
Home equity			—						—						—						31						31						—
Commercial			15,915						15,915						—						5						5						—
Consumer and other			—						—						—						—						—						—
			16,298						16,298						—						538						538						—
With an allowance recorded:
Commercial			1,474						1,474						210						—						—						—
Real estate:
Construction, land and land development			—						—						—						—						—						—
1-4 family residential first mortgages			—						—						—						—						—						—
Home equity			—						—						—						—						—						—
Commercial			—						—						—						—						—						—
Consumer and other			—						—						—						—						—						—
			1,474						1,474						210						—						—						—
Total:
Commercial			1,474						1,474						210						91						91						—
Real estate:
Construction, land and land development			—						—						—						—						—						—
1-4 family residential first mortgages			383						383						—						411						411						—
Home equity			—						—						—						31						31						—
Commercial			15,915						15,915						—						5						5						—
Consumer and other			—						—						—						—						—						—
			$	17,772					$	17,772					$	210					$	538					$	538					$	—