WEST BANCORPORATION, INC. "SAFE HARBOR" CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to the Company's business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meanings of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Forward-looking statements may appear throughout this report. These forward-looking statements are generally identified by the words "believes," "expects," "intends," "anticipates," "projects," "future," "may," "should," "will," "strategy," "plan," "opportunity," "will be," "will likely result," "will continue" or similar references, or references to estimates, predictions or future events. Such forward-looking statements are based upon certain underlying assumptions, risks and uncertainties. Because of the possibility that the underlying assumptions are incorrect or do not materialize as expected in the future, actual results could differ materially from these forward-looking statements. Risks and uncertainties that may affect future results include: the effects of the COVID-19 pandemic, including its potential effects on the economic environment, our customers and our operations, as well as any changes to federal, state or local government laws, regulations or orders in connection with the pandemic; interest rate risk; competitive pressures; pricing pressures on loans and deposits; changes in credit and other risks posed by the Company's loan and investment portfolios, including declines in commercial or residential real estate values or changes in the allowance for loan losses dictated by new market conditions, accounting standards (including as a result of the future implementation of the current expected credit loss (CECL) accounting standard) or regulatory requirements; actions of bank and nonbank competitors; changes in local, national and international economic conditions; changes in legal and regulatory requirements, limitations and costs; changes in customers' acceptance of the Company's products and services; cyber-attacks; unexpected outcomes of existing or new litigation involving the Company; the monetary, trade and other regulatory policies of theU.S. government; acts of war or terrorism, widespread disease or pandemics, such as the COVID-19 pandemic, or other adverse external events; developments and uncertainty related to the future use and availability of some reference rates, such as the London Interbank Offered Rate, as well as other alternative reference rates; changes toU.S. tax laws, regulations and guidance; and any other risks described in the "Risk Factors" sections of this and other reports filed by the Company with theSEC . The Company undertakes no obligation to revise or update such forward-looking statements to reflect current or future events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of the Company's financial condition and results of operations are based upon the Company's consolidated financial statements that have been prepared in accordance with GAAP. The preparation of the Company's financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, income and expenses. These estimates are based upon historical experience and on various other assumptions that management believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The estimates and judgments that management believes involve the most complex and subjective estimates and judgments and have the most effect on the Company's reported financial position and results of operations are described as critical accounting policies in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 , as filed with theSEC onMarch 1, 2021 . There have been no significant changes in the critical accounting policies or the assumptions and judgments utilized in applying these policies sinceDecember 31, 2020 . 30
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West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) NON-GAAP FINANCIAL MEASURES This report contains references to financial measures that are not defined in GAAP. Such non-GAAP financial measures include the Company's presentation of net interest income and net interest margin on a fully taxable equivalent (FTE) basis, the presentation of the efficiency ratio on an adjusted and FTE basis, excluding certain income and expenses, and the presentation of the allowance for loan losses ratio, excluding PPP loans. Management believes these non-GAAP financial measures provide useful information to both management and investors to analyze and evaluate the Company's financial performance. These measures are considered standard measures of comparison within the banking industry. Additionally, management believes providing measures on a FTE basis enhances the comparability of income arising from taxable and nontaxable sources. Limitations associated with non-GAAP financial measures include the risks that persons might disagree as to the appropriateness of items included in these measures and that different companies might calculate these measures differently. These non-GAAP disclosures should not be considered an alternative to the Company's GAAP results. The following table reconciles the non-GAAP financial measures of net interest income and net interest margin on a fully taxable equivalent basis, efficiency ratio on an adjusted and FTE basis, loans, net of PPP loans and allowance for loan losses ratio, excluding PPP loans to their most directly comparable measures under GAAP. Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Reconciliation of net interest income and net interest margin on a FTE basis to GAAP: Net interest income (GAAP)$ 22,850
270 194 499 372
Net interest income on a FTE basis (non-GAAP) 23,120 20,941 46,470 39,583
Average interest-earning assets 3,102,649 2,572,211 3,041,519 2,496,354
Net interest margin on a FTE basis (non-GAAP) 2.99 % 3.27 % 3.08 % 3.19 %
Reconciliation of efficiency ratio on an adjusted and FTE basis to GAAP: Net interest income on a FTE basis (non-GAAP)
$ 23,120
2,515 1,775 4,980 4,295
Adjustment for realized securities (gains) losses, net
(36) 69 (40) 75
Adjustment for losses on disposal of premises &
equipment, net 5 - 29 2
Adjusted income 25,604 22,785 51,439 43,955
Noninterest expense 10,526 9,417 20,797 19,080
Efficiency ratio on an adjusted and FTE basis
(non-GAAP) (2) 41.11 % 41.33 % 40.43 % 43.41 %
June 30, 2021 December 31, 2020Reconciliation of allowance for loan losses ratio, excluding PPP loans: Loans outstanding (GAAP)
$ 2,309,527 $ 2,280,575 Less: PPP loans (84,573) (180,757) Loans, net of PPP loans (non-GAAP) 2,224,954 2,099,818 Allowance for loan losses 28,042 29,436 Allowance for loan losses ratio, excluding PPP loans (non-GAAP) 1.26 % 1.40 % (1) Computed on a tax-equivalent basis using a federal income tax rate of 21 percent, adjusted to reflect the effect of the nondeductible interest expense associated with owning tax-exempt securities and loans. Management believes the presentation of this non-GAAP measure provides supplemental useful information for proper understanding of the financial results, as it enhances the comparability of income arising from taxable and nontaxable sources. (2) The efficiency ratio expresses noninterest expense as a percent of fully taxable equivalent net interest income and noninterest income, excluding specific noninterest income and expenses. Management believes the presentation of this non-GAAP measure provides supplemental useful information for proper understanding of the Company's financial performance. It is a standard measure of comparison within the banking industry. 31
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West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) OVERVIEW The following discussion describes the consolidated operations and financial condition of the Company,West Bank andWest Bank's special purpose subsidiaries (which are invested in new markets tax credit activities). Results of operations for the three and six months endedJune 30, 2021 are compared to the results for the same periods in 2020, and the consolidated financial condition of the Company as ofJune 30, 2021 is compared to that as ofDecember 31, 2020 . This discussion and analysis should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 , filed with theSEC onMarch 1, 2021 . The Company conducts business from its main office inWest Des Moines, Iowa and through its branch offices in centralIowa , which is generally the greaterDes Moines metropolitan area; easternIowa , which is the area including and surroundingIowa City andCoralville ; and southernMinnesota , which includes the cities ofRochester ,Owatonna ,Mankato andSt. Cloud .
IMPACT OF COVID-19
We continue to monitor the impact COVID-19 has on the local economies we operate in and the uncertainty of the long-term ramifications to our customers and operations. Within our markets, vaccinations have become readily available, infection positivity rates are relatively low, and the restrictions on businesses have been fully lifted. However, the lasting effects of government aid programs are relatively unknown as stimulus packages begin to taper, and the ultimate ramifications of the business shutdowns that occurred as a result of COVID-19 are uncertain in many sectors of the economy. The potential impact of COVID-19 variants, such as the Delta variant, remains unknown at this time. TheFederal Reserve , in response to the economic risks resulting from the COVID-19 pandemic, returned to a zero-interest rate policy inMarch 2020 . This was after most broader market rates decreased significantly in response to evolving news about the COVID-19 pandemic. Many areas of consumer and business spending have rebounded in recent months, but there remains uncertainty about the longer lasting impact on local businesses as well as the travel and entertainment industries resulting from the COVID-19 pandemic. This could cause a longer recovery time for all sectors of the economy and could make it challenging for sectors that have had better recoveries to maintain those recoveries in the long run. At the onset of the COVID-19 pandemic, the Bank lowered its offered rates on all deposit products and experienced an immediate positive impact on our cost of deposits. We responded to lower market rates for lending by lowering rates offered on our loan products. Given current rates offered on new loans and prepayments on existing loans, the yield on the total loan portfolio is likely to continue to decrease. With significant cash inflows realized from growth in deposit balances and forgiveness of PPP loans, the current yields on reinvested funds into new securities are lower than existing portfolio yields. Considering the low market interest rates and the ongoing economic uncertainty, our net interest margin could decrease in future periods. Certain industries have been particularly impacted by shutdowns, capacity restrictions, quarantines and social distancing that were put in place in response to COVID-19. Those industries include travel, hospitality and entertainment. AtJune 30, 2021 ,West Bank's commercial real estate and commercial operating loan exposure to the hotel, restaurant and movie theater industries was approximately$218,964 ,$19,705 and$17,393 , respectively. Collectively, atJune 30, 2021 , those exposures made up approximately 11.1 percent of the total loan portfolio. Hotel occupancy rates have been steadily increasing and restaurants and theaters have been allowed to return to normal operations. We do not have any loans atJune 30, 2021 that are under COVID-19-related modifications.
SUMMARY
Net income for the three months endedJune 30, 2021 was$13,239 , or$0.79 per diluted common share, compared to$7,969 , or$0.48 per diluted common share, for the three months endedJune 30, 2020 . The Company's annualized return on average assets and return on average equity for the three months endedJune 30, 2021 were 1.65 percent and 22.20 percent, respectively, compared to 1.19 percent and 15.68 percent, respectively, for the three months endedJune 30, 2020 . The increase in net income for the three months endedJune 30, 2021 compared to the same period in 2020 was primarily due to a decrease in the provision for loan losses and an increase in net interest income and noninterest income, partially offset by an increase in noninterest expense. 32
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West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) Net interest income for the three months endedJune 30, 2021 grew$2,103 , or 10.1 percent, compared to the three months endedJune 30, 2020 . The increase in net interest income was primarily due to the increase in interest income on loans and decrease in interest expense on deposits and borrowed funds. The Company recorded a negative provision for loan losses of$2,000 during the three months endedJune 30, 2021 , compared to a provision of$3,000 for the three months endedJune 30, 2020 . The provision in 2020 was due to uncertainty surrounding economic conditions as a result of the COVID-19 pandemic. The negative provision recorded in the second quarter of 2021 was due to the improvements in economic conditions and removal of pandemic-related restrictions for businesses, in addition to the lack of loan losses for the Company since the onset of the COVID-19 pandemic. Noninterest income increased$740 during the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 , primarily due to an increase in trust services revenue and debit card usage fees. Noninterest expense increased$1,109 during the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 , primarily due to increases in salaries and employee benefits andFDIC insurance expense. Net income for the six months endedJune 30, 2021 was$24,991 , or$1.49 per diluted common share, compared to$16,058 , or$0.97 per diluted common share, for the six months endedJune 30, 2020 . The Company's annualized return on average assets and return on average equity for the six months endedJune 30, 2021 were 1.59 percent and 21.50 percent, respectively, compared to 1.23 percent and 15.61 percent, respectively, for the first six months of 2020. The increase in net income for the six months endedJune 30, 2021 compared to the same period in 2020 was primarily due to a decrease in the provision for loan losses and increases in net interest income and noninterest income, partially offset by an increase in noninterest expenses. Net interest income for the six months endedJune 30, 2021 grew$6,760 , or 17.2 percent, compared to the six months endedJune 30, 2020 . The increase in net interest income was primarily due to the increase in interest income on loans and decrease in interest expense on deposits and borrowed funds. The Company recorded a negative provision for loan losses of$1,500 during the six months endedJune 30, 2021 , compared to a provision of$4,000 for the six months endedJune 30, 2020 . The provision in 2020 was due to uncertainty surrounding economic conditions as a result of the COVID-19 pandemic. The negative provision in 2021 was due to the improvement in economic conditions and removal of pandemic-related restrictions on businesses, along with the lack of loan losses for the Company since the onset of the COVID-19 pandemic. Noninterest income increased$685 during the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 , due primarily to the increase in trust services revenue. Noninterest expense increased$1,717 for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 , primarily due to increases in salaries and benefits andFDIC insurance expenses. Total loans outstanding increased$28,952 , or 1.3 percent, during the first six months of 2021. Excluding the impact of PPP loan activity, total loans outstanding increased$125,136 , or 6.0 percent, during the first six months of 2021. As ofJune 30, 2021 , the allowance for loan losses was 1.21 percent of outstanding loans, compared to 1.29 percent as ofDecember 31, 2020 . AtJune 30, 2021 , the allowance for loan losses was 1.26 percent of outstanding loans, excluding$84,573 of PPP loans (a non-GAAP financial measure), which are 100 percent guaranteed by the SBA, compared to 1.40 percent of outstanding loans, excluding$180,757 of PPP loans, as ofDecember 31, 2020 . Management believed the allowance for loan losses atJune 30, 2021 was adequate to absorb any losses inherent in the loan portfolio as of that date. 33
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West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) On a quarterly basis, the Company compares three key performance metrics to those of our identified peer group. The peer group for 2021 consists of 21 Midwestern, publicly traded financial institutions including Bank First Corporation, Civista Bancshares, Inc., CrossFirst Bankshares, Inc., Equity Bancshares, Inc., Farmers National Banc Corp., Farmers & Merchants Bancorp., First Business Financial Services, Inc., First Financial Corp., First Mid Bancshares, Inc., German American Bancorp, Inc., Hills Bancorporation, Isabella Bank Corporation, LCNB Corp., Level One Bancorp, Inc., Macatawa Bank Corporation, Mackinac Financial Corporation, Mercantile Bank Corporation, MidWestOne Financial Group, Inc., Nicolet Bankshares, Inc., Peoples Bancorp, Inc., and Southern Missouri Bancorp, Inc. The Company is in the middle of the group in terms of asset size. The Company's goal is to perform at or near the top of this peer group relative to what we consider to be three key metrics: return on average equity, efficiency ratio andTexas ratio. We believe these measures encompass the factors that define the performance of a community bank. Company and peer results for the key financial performance measures are summarized below. West Bancorporation, Inc. Peer Group Range(3) As of and for the six As of and for the three As of and for the three months ended June 30, months ended March 31, months ended March 31, 2021 2021 2021 Return on average equity 21.50% 20.77% 2.78% - 18.48% Efficiency ratio(1) (2) 40.43% 39.75% 41.92% - 72.31% Texas ratio(2) 5.31% 9.38% 2.03% - 18.89% (1) The efficiency ratio is a non-GAAP financial measure. For further information, refer to the Non-GAAP Financial Measures section of this report. (2) A lower ratio is more desirable. (3) Latest data available. At its meeting onJuly 28, 2021 , the Company's Board of Directors declared a quarterly cash dividend of$0.24 per common share. The dividend is payable onAugust 25, 2021 , to stockholders of record onAugust 11, 2021 . 34
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West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) RESULTS OF OPERATIONS
The following table shows selected financial results and measures for the three
and six months ended
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 Change Change % 2021 2020 Change Change %
Net income $ 13,239 $ 7,969 $ 5,270 66.13 % $ 24,991 $ 16,058 $ 8,933 55.63 %
Average assets 3,224,318 2,700,720 523,598 19.39 % 3,167,401 2,616,175 551,226 21.07 %
Average stockholders' equity 239,218 204,387 34,831 17.04 % 234,372 206,896 27,476 13.28 %
Return on average assets 1.65 % 1.19 % 0.46 % 1.59 % 1.23 % 0.36 %
Return on average equity 22.20 % 15.68 % 6.52 % 21.50 % 15.61 % 5.89 %
Net interest margin (1) 2.99 % 3.27 % (0.28) % 3.08 % 3.19 % (0.11) %
Efficiency ratio (1) (2) 41.11 % 41.33 % (0.22) % 40.43 % 43.41 % (2.98) %
Dividend payout ratio 30.01 % 43.40 % (13.39) % 30.40 % 42.96 % (12.56) %
Average equity to average assets
ratio 7.42 % 7.57 % (0.15) % 7.40 % 7.91 % (0.51) %
As of June 30,
2021 2020 Change
Texas ratio (2) 5.31 % 0.17 % 5.14 %
Equity to assets ratio 7.54 % 7.62 % (0.08) %
Tangible common equity ratio 7.54 % 7.62 % (0.08) %
(1) Amounts are presented on a FTE basis. These are non-GAAP financial measures.
For further information, refer to the Non-GAAP Financial Measures section of
this report.
(2) A lower ratio is more desirable.
Definitions of ratios:
•Return on average assets - annualized net income divided by average assets.
•Return on average equity - annualized net income divided by average
stockholders' equity.
•Net interest margin - annualized tax-equivalent net interest income divided by
average interest-earning assets.
•Efficiency ratio - noninterest expense (excluding other real estate owned
expense and write-down of premises) divided by noninterest income (excluding net
securities gains (losses) and gains/losses on disposition of premises and
equipment) plus tax-equivalent net interest income.
•Dividend payout ratio - dividends paid to common stockholders divided by net
income.
•Average equity to average assets ratio - average equity divided by average
assets.
•Texas ratio - total nonperforming assets divided by tangible common equity plus
the allowance for loan losses.
•Equity to assets ratio - equity divided by assets.
•Tangible common equity ratio - common equity less intangible assets (none held)
divided by tangible assets.
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West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) Net Interest Income The following tables present average balances and related interest income or interest expense, with the resulting annualized average yield or rate by category of interest-earning assets or interest-bearing liabilities. Interest income and the resulting net interest income are shown on an FTE basis.
Data for the three months ended
Average Balance Interest Income/Expense Yield/Rate
Change- Change-
2021 2020 Change % 2021 2020 Change % 2021 2020 Change
Interest-earning assets:
Loans: (1) (2)
Commercial $ 553,401 $ 582,605 $ (29,204) (5.01) % $ 5,383 $ 5,362 $ 21 0.39 % 3.90 % 3.70 % 0.20 %
Real estate (3) 1,750,198 1,559,152 191,046 12.25 % 17,807 17,022 785 4.61 % 4.08 % 4.39 % (0.31) %
Consumer and other 4,112 6,215 (2,103) (33.84) % 53 66 (13) (19.70) % 5.13 % 4.29 % 0.84 %
Total loans 2,307,711 2,147,972 159,739 7.44 % 23,243 22,450 793 3.53 % 4.04 % 4.20 % (0.16) %
Securities:
Taxable 376,165 329,780 46,385 14.07 % 1,895 1,994 (99) (4.96) % 2.01 % 2.42 % (0.41) %
Tax-exempt (3) 141,819 45,488 96,331 211.77 % 879 395 484 122.53 % 2.47 % 3.46 % (0.99) %
Total securities 517,984 375,268 142,716 38.03 % 2,774 2,389 385 16.12 % 2.14 % 2.55 % (0.41) %
Federal funds sold 276,955 48,971 227,984 465.55 % 75 12 63 525.00 % 0.11 % 0.10 % 0.01 %
Total interest-earning assets (3)
$ 530,439 20.62 % 26,092 24,851 1,241 4.99 % 3.37 % 3.89 % (0.52) % Interest-bearing liabilities: Deposits: Interest-bearing demand, savings and money market$ 1,828,394 $ 1,453,322 $ 375,072 25.81 % 1,536 1,317 219 16.63 % 0.34 % 0.36 % (0.02) % Time deposits 240,988 237,951 3,037 1.28 % 459 1,034 (575) (55.61) % 0.76 % 1.75 % (0.99) % Total deposits 2,069,382 1,691,273 378,109 22.36 % 1,995 2,351 (356) (15.14) % 0.39 % 0.56 % (0.17) % Other borrowed funds 181,890 229,847 (47,957) (20.86) % 976 1,559 (583) (37.40) % 2.15 % 2.73 % (0.58) % Total interest-bearing liabilities$ 2,251,272 $ 1,921,120 $ 330,152 17.19 % 2,971 3,910 (939) (24.02) % 0.53 % 0.82 % (0.29) % Net interest income (FTE) (4)$ 23,121 $ 20,941 $ 2,180 10.41 % Net interest spread (FTE) 2.84 % 3.07 % (0.23) % Net interest margin (FTE) (4) 2.99 % 3.27 % (0.28) % 36
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West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) Data for the six months endedJune 30 : Average Balance Interest Income/Expense Yield/Rate Change- Change- 2021 2020 Change % 2021 2020 Change % 2021 2020 Change Interest-earning assets: Loans: (1) (2) Commercial$ 559,975 $ 508,963 $ 51,012 10.02 %$ 12,193 $ 10,378 $ 1,815 17.49 % 4.39 % 4.10 % 0.29 % Real estate (3) 1,727,198 1,541,142 186,056 12.07 % 35,080 34,350 730 2.13 % 4.10 % 4.48 % (0.38) % Consumer and other 4,744 6,547 (1,803) (27.54) % 107 146 (39) (26.71) % 4.55 % 4.50 % 0.05 % Total loans 2,291,917 2,056,652 235,265 11.44 % 47,380 44,874 2,506 5.58 % 4.17 % 4.39 % (0.22) % Securities: Taxable 351,584 341,866 9,718 2.84 % 3,540 4,377 (837) (19.12) % 2.01 % 2.56 % (0.55) % Tax-exempt (3) 121,519 43,413 78,106 179.91 % 1,566 757 809 106.87 % 2.58 % 3.49 % (0.91) % Total securities 473,103 385,279 87,824 22.79 % 5,106 5,134 (28) (0.55) % 2.16 % 2.67 % (0.51) % Federal funds sold 276,499 54,423 222,076 408.06 % 144 241 (97) (40.25) % 0.11 % 0.89 % (0.78) %
Total interest-earning assets (3)
$ 545,165 21.84 % 52,630 50,249 2,381 4.74 % 3.49 % 4.05 % (0.56) % Interest-bearing liabilities: Deposits: Interest-bearing demand, savings and money market$ 1,794,044 $ 1,433,888 $ 360,156 25.12 % 3,020 4,953 (1,933) (39.03) % 0.34 % 0.69 % (0.35) % Time deposits 214,239 249,615 (35,376) (14.17) % 852 2,444 (1,592) (65.14) % 0.80 % 1.97 % (1.17) % Total deposits 2,008,283 1,683,503 324,780 19.29 % 3,872 7,397 (3,525) (47.65) % 0.39 % 0.88 % (0.49) % Other borrowed funds 201,836 231,167 (29,331) (12.69) % 2,288 3,269 (981) (30.01) % 2.29 % 2.84 % (0.55) % Total interest-bearing liabilities$ 2,210,119 $ 1,914,670 $ 295,449 15.43 % 6,160 10,666 (4,506) (42.25) % 0.56 % 1.12 % (0.56) % Net interest income (FTE) (4)$ 46,470 $ 39,583 $ 6,887 17.40 % Net interest spread (FTE) 2.93 % 2.93 % - % Net interest margin (FTE) (4) 3.08 % 3.19 % (0.11) % (1)Average loan balances include nonaccrual loans. Interest income recognized on nonaccrual loans has been included. (2)Interest income on loans includes amortization of loan fees and costs and prepayment penalties collected, which are not material. (3)Tax-exempt income has been adjusted to a tax-equivalent basis using a federal income tax rate of 21 percent and is adjusted to reflect the effect of the nondeductible interest expense associated with owning tax-exempt securities and loans. (4)Net interest income (FTE) and net interest margin (FTE) are non-GAAP financial measures. For further information, refer to the Non-GAAP Financial Measures section of this report. The Company's largest component of net income is net interest income, which is the difference between interest earned on interest-earning assets, consisting primarily of loans and securities, and interest paid on interest-bearing liabilities, consisting of deposits and borrowings. Fluctuations in net interest income can result from the combination of changes in the average balances of asset and liability categories and changes in interest rates. Interest rates earned and paid are affected by general economic conditions, particularly changes in market interest rates, and by competitive factors, government policies and actions of regulatory authorities. TheFederal Reserve decreased the targeted federal funds interest rate by a total of 150 basis points inMarch 2020 , reaching its current range of 0.0 - 0.25 percent. This decrease impacts the comparability of net interest income between 2020 and 2021. 37
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West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) Net interest margin, a non-GAAP financial measure, is a measure of the net return on interest-earning assets and is computed by dividing annualized tax-equivalent net interest income by total average interest-earning assets for the period. The net interest margin for the three and six months endedJune 30, 2021 decreased by 28 and 11 basis points, respectively, compared to the three and six months endedJune 30, 2020 . The primary driver of the decrease in the net interest margin was a decrease in yield on loans and securities, partially offset by a decrease in the interest rates paid on deposits and other borrowed funds. The higher average balances of federal funds sold also contributed to a lower net interest margin. Tax-equivalent net interest income for the three and six months endedJune 30, 2021 increased$2,180 and$6,887 , respectively, compared to the same time periods in 2020. The increase in net interest income for the three and six months endedJune 30, 2021 compared to the three and six months endedJune 30, 2020 was primarily due to increases in average loans and securities balances and decreases in deposit interest rates, partially offset by increases in average deposit balances and decreases in yields on loans and securities. Tax-equivalent interest income on loans increased$793 for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 . Included in commercial loans were PPP loans with interest income of$1,387 and$1,073 and yields of 4.00 percent and 2.47 percent for the three months endedJune 30, 2021 andJune 30, 2020 , respectively. For the six months endedJune 30, 2021 , tax-equivalent interest income on loans increased$2,506 compared to the same period in 2020. Included in commercial loans were PPP loans with interest income of$4,229 and$1,073 and yields of 5.80 percent and 2.47 percent for the six months endedJune 30, 2021 andJune 30, 2020 , respectively. The PPP loan interest income in 2021 included accelerated origination fees recognized at the time of loan forgiveness. Exclusive of the PPP loans, the yield on loans was 4.00 percent and 4.30 percent for the three months endedJune 30, 2021 andJune 30, 2020 , respectively, and 4.06 percent and 4.49 percent for the six months endedJune 30, 2021 andJune 30, 2020 , respectively. Management believes interest income on loans and the yield on loans could decline during the second half of 2021 if the low interest rate environment and strong competition persist. The Company continues to focus on expanding existing and entering into new customer relationships while maintaining strong credit quality. The yield on the Company's loan portfolio is affected by the portfolio's loan mix, the interest rate environment, the effects of competition, the level of nonaccrual loans and reversals of previously accrued interest on charged-off loans. The political and economic environments can also influence the volume of new loan originations and the mix of variable-rate versus fixed-rate loans. We anticipate that our interest income could be adversely affected in future periods as a result of the long-term impact of the COVID-19 pandemic, including the possibility of decreases in the size of our loan portfolio and declining credit quality, the effect of lower interest rates, and the potential for an increase in nonaccrual loans. The average balance of interest-bearing demand, savings and money market deposits increased for the three and six months endedJune 30, 2021 , compared to the three and six months endedJune 30, 2020 , primarily due to an increase in average balances of money market and interest-bearing demand accounts. The increase in average balances was primarily due to changes in customer behavior as a result of the COVID-19 pandemic and our customers' desire to retain liquidity, as well as a result of additional funds provided to individuals and businesses by government relief programs. The average rate paid on interest-bearing demand, savings and money market deposits for the three and six months endedJune 30, 2021 decreased 2 and 35 basis points, respectively, compared to the three and six months endedJune 30, 2020 . The average rate paid on time deposits decreased 99 and 117 basis points, respectively, for the three and six months endedJune 30, 2021 compared to the three and six months endedJune 30, 2020 . The decreases were primarily due to decreasing interest rates on all deposit products in response to the unprecedented decrease in the targeted federal funds rate that occurred inMarch 2020 . The average balance of other borrowed funds decreased$47,957 and$29,331 , respectively, for the three and six months endedJune 30, 2021 compared to the three and six months endedJune 30, 2020 . The rate paid on borrowed funds declined by 58 and 55 basis points, respectively, for the three and six months endedJune 30, 2021 compared to the three and six months endedJune 30, 2020 . These declines are primarily due to the repayment of$50,000 of FHLB advances in the second quarter of 2021 and the maturity of long-term, high rate FHLB advances in the second and third quarters of 2020.
As a result of the historically low interest rate environment, we expect that our net interest income and net interest margin could decrease in future periods.
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West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) Provision for Loan Losses and the Related Allowance for Loan Losses The provision for loan losses represents a charge made to earnings to maintain an adequate allowance for loan losses. The adequacy of the allowance for loan losses is evaluated quarterly by management and reviewed by the Board of Directors. The allowance for loan losses is management's best estimate of probable losses inherent in the loan portfolio as of the balance sheet date. The provision for loan losses were negative$2,000 and negative$1,500 for the three and six months endedJune 30, 2021 , compared to a provision of$3,000 and$4,000 for the three and six months endedJune 30, 2020 . The provisions in 2020 were due to uncertainty surrounding economic conditions as a result of the COVID-19 pandemic, while the negative provisions recorded in 2021 were due to the improvement in economic conditions and removal of pandemic-related restrictions for businesses, in addition to the lack of loan losses for the Company since the onset of the COVID-19 pandemic. Factors considered in establishing an appropriate allowance include: the borrower's financial condition; the value and adequacy of loan collateral; the condition of the local economy and the borrower's specific industry; the levels and trends of loans by segment; and a review of delinquent and classified loans. In response to COVID-19, the Company increased its monitoring efforts of certain segments of the loan portfolio that management believed were under increased stress, including hotel and movie theater exposures. Ongoing communication with customers regarding revenue and cash flow expectations continue to be used to monitor risks and stress in the loan portfolio. For example, customers in the hotel industry provide monthly updates on occupancy rates. The quarterly evaluation of the allowance focuses on factors such as specific loan reviews, changes in the components of the loan portfolio given the current and forecasted economic conditions, and historical loss experience. Any one of the following conditions may result in the review of a specific loan: concern about whether the customer's cash flow or net worth is sufficient to repay the loan; delinquency status; criticism of the loan in a regulatory examination; the suspension of interest accrual; or other factors, including whether the loan has other special or unusual characteristics that suggest special monitoring is warranted. The Company's concentration risks include geographic concentrations in central and easternIowa and southernMinnesota . The local economies in those markets are composed primarily of service industries and state and county governments.West Bank has a significant portion of its loan portfolio in commercial real estate loans, commercial lines of credit, commercial term loans, and construction and land development loans.West Bank's typical commercial borrower is a small- or medium-sized, privately owned business entity. Compared to residential mortgages or consumer loans, commercial loans typically have larger balances and repayment usually depends on the borrowers' successful business operations. Commercial loans generally are not fully repaid over the loan period and may require refinancing or a large payoff at maturity. When the economy turns downward, commercial borrowers may not be able to repay their loans, and the value of their assets, which are usually pledged as collateral, may decrease rapidly and significantly. While management uses available information to recognize losses on loans, further reduction in the carrying amounts of loans may be necessary based on changes in circumstances, changes in the overall economy in the markets we currently serve, or later acquired information. Identifiable sectors within the general economy are subject to additional volatility, which at any time may have a substantial impact on the loan portfolio. In addition, regulatory agencies, as integral parts of their examination processes, periodically review the credit quality of the loan portfolio and the level of the allowance for loan losses. Such agencies may requireWest Bank to recognize additional charge-offs or provision for loan losses based on such agencies' review of information available to them at the time of their examinations. 39
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West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data)West Bank's policy is to charge off loans when, in management's opinion, a loan or a portion of a loan is deemed uncollectible. Concerted efforts are made to maximize subsequent recoveries. The following table summarizes the activity in the Company's allowance for loan losses for the three and six months endedJune 30, 2021 and 2020 and related ratios. Three Months Ended June 30, Six Months Ended June 30, 2021 2020 Change 2021 2020 Change
Balance at beginning of period
$ 11,676 $ 29,436 $ 17,235 $ 12,201 Charge-offs - - - - (1) 1 Recoveries 34 31 3 106 129 (23) Net recoveries 34 31 3 106 128 (22) Provision for loan losses charged to operations (2,000) 3,000 (5,000) (1,500) 4,000 (5,500) Balance at end of period$ 28,042 $ 21,363
Average loans outstanding$ 2,307,711 $ 2,147,972 $ 2,291,917 $ 2,056,652 Ratio of annualized net (charge-offs) recoveries during the period to average loans outstanding 0.01 % 0.01 % 0.01 % 0.02 % Ratio of allowance for loan losses to average loans outstanding 1.22 % 0.99 % 1.22 % 1.04 % Ratio of allowance for loan losses to total loans at end of period 1.21 % 0.97 % 1.21 % 0.97 % Ratio of allowance for loan losses to total loans at end of period, excluding PPP loans(1) 1.26 % 1.08 % 1.26 % 1.08 %
(1) A non-GAAP financial measure. For further information, refer to the Non-GAAP Financial Measures section of this report.
In 2020, theU.S. economy deteriorated significantly as a result of the COVID-19 pandemic and the impact of economic uncertainties. The national unemployment rate jumped from 4.4 percent inMarch 2020 to 14.8 percent inApril 2020 amid nationwide shutdowns and other restrictions in the interest of public health and safety. In 2021, the economy has begun to recover; however some economic measures still lag pre-pandemic levels. Additionally, certain industries, including travel, hospitality and entertainment had been particularly impacted by shutdowns, capacity restrictions, and social distancing requirements that occurred in response to COVID-19. There remains uncertainty about recovery times and the long term impact on local businesses as well as the travel and entertainment industries. The Company increased the economic factors within the allowance for loan losses evaluation in 2020 in response to the COVID-19 pandemic. Based on the continued improvement in national and local economic performances measures, the relative success of vaccination efforts and the lifting of pandemic-related restrictions, the Company decreased the economic factors within the allowance for loan losses evaluation in the second quarter of 2021. 40
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West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) Noninterest Income
The following table shows the variance from the prior year in the noninterest income categories shown in the Consolidated Statements of Income.
Three Months Ended June 30,
Noninterest income: 2021 2020 Change Change %
Service charges on deposit accounts $ 578 $ 531 $ 47 8.85 %
Debit card usage fees 511 391 120 30.69 %
Trust services 691 461 230 49.89 %
Increase in cash value of bank-owned life
insurance 240 136 104 76.47 %
Loan swap fees 42 3 39 1,300.00 %
Realized securities gains (losses), net 36 (69) 105 152.17 %
Other income:
All other income 417 322 95 29.50 %
Total other income 417 322 95 29.50 %
Total noninterest income $ 2,515 $ 1,775 $ 740 41.69 %
Six Months Ended June 30,
Noninterest income: 2021 2020 Change Change %
Service charges on deposit accounts $ 1,160 $ 1,134 $ 26 2.29 %
Debit card usage fees 953 773 180 23.29 %
Trust services 1,343 924 419 45.35 %
Increase in cash value of bank-owned life
insurance 460 294 166 56.46 %
Loan swap fees 42 589 (547) (92.87) %
Realized securities gains (losses), net 40 (75) 115 153.33 %
Other income:
All other income 982 656 326 49.70 %
Total other income 982 656 326 49.70 %
Total noninterest income $ 4,980 $ 4,295 $ 685 15.95 %
Debit card usage fees increased for the three and six months months ended June
30, 2021 when compared to the same periods ended June 30, 2020 , due to an
increase in transaction volume as consumers respond to the reopening of the
economy. Revenue from trust services increased for the three and six months
ended June 30, 2021 when compared to the same periods ended June 30, 2020 ,
primarily as a result of an increase in the value of trust assets in 2021
compared to 2020. The increase in cash value of bank-owned life insurance was
driven by the purchase of additional life insurance in the third quarter of
2020, increasing total life insurance investments for the three and six months
ended June 30, 2021 in comparison to the three and six months ended June 30,
2020 . The Company offers loan level interest rate swaps to its customers and
offsets its exposure from such contracts by entering into mirror image swaps
with a swap counterparty (back-to-back swap program). Loan swap fees consist of
fees earned in the back-to-back swap program at contract origination and are
dependent on the timing and volume of customer activity.
The increase in other income for the six months ended June 30, 2021 compared to
the six months ended June 30, 2020 was primarily due to the recognition of net
swap termination gains totaling $181 in March 2021 . Interest rate swaps with a
total notional amount of $150,000 were terminated and the pre-tax gains and
losses were recorded in other noninterest income. Refer to Note 5 to the
financial statements for additional information.
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West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) Noninterest Expense The following table shows the variance from the prior year in the noninterest expense categories shown in the Consolidated Statements of Income. In addition, accounts within the "Other expenses" category that represent a significant portion of the total or a significant variance are shown below. Three Months Ended June 30, Noninterest expense: 2021 2020 Change Change % Salaries and employee benefits$ 5,672 $ 5,318 $ 354 6.66 % Occupancy 1,199 1,217 (18) (1.48) % Data processing 617 554 63 11.37 % FDIC insurance 426 292 134 45.89 % Professional fees 268 200 68 34.00 % Director fees 214 194 20 10.31 % Other expenses: Marketing 57 44 13 29.55 % Business development 261 137 124 90.51 % Insurance expense 123 110 13 11.82 % Charitable contributions 60 45 15 33.33 % Subscriptions and service contracts 467 317 150 47.32 % Trust 137 103 34 33.01 % Consulting fees 78 89 (11) (12.36) % Low income housing projects amortization 192 102 90 88.24 % New markets tax credit project amortization and management fees 229 229 - - % All other 526 466 60 12.88 % Total other expenses 2,130 1,642 488 29.72 % Total noninterest expense$ 10,526 $ 9,417 $ 1,109 11.78 % Six Months Ended June 30, Noninterest expense: 2021 2020 Change Change % Salaries and employee benefits$ 11,280 $ 10,602 $ 678 6.40 % Occupancy 2,427 2,430 (3) (0.12) % Data processing 1,219 1,184 35 2.96 % FDIC insurance 830 529 301 56.90 % Professional fees 551 439 112 25.51 % Director fees 405 428 (23) (5.37) % Other expenses: Marketing 102 88 14 15.91 % Business development 447 404 43 10.64 % Insurance expense 244 214 30 14.02 % Charitable contributions 120 90 30 33.33 % Subscriptions and service contracts 845 631 214 33.91 % Trust 278 220 58 26.36 % Consulting fees 153 166 (13) (7.83) % Low income housing projects amortization 326 205 121 59.02 % New markets tax credit project amortization and management fees 459 459 - - % All other 1,111 991 120 12.11 % Total other expenses 4,085 3,468 617 17.79 % Total noninterest expense$ 20,797 $ 19,080 $ 1,717 9.00 % 42
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West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) Salaries and employee benefits increased for the three and six months endedJune 30, 2021 when compared to the three and six months endedJune 30, 2020 , primarily due to an increase in expenses related to restricted stock units.FDIC insurance expense increased during the three and six months endedJune 30, 2021 when compared to the same time periods in 2020 due to increases in both the Company's average assets and assessment rate. Business development expense increased for the three months endedJune 30, 2021 in comparison to the three months endedJune 30, 2020 . Business development activities have increased in the second quarter of 2021 as local economies return to normal activities. Business development activities were significantly limited during COVID-19 shutdowns and social distancing guidelines that began in the second quarter of 2020. All other expenses were higher for the six months endedJune 30, 2021 when compared to the six months endedJune 30, 2020 , due primarily to the settlement of a loss on a check fraud scheme.
Income Tax Expense
The Company recorded income tax expense of$3,600 (21.4 percent of pre-tax income) and$6,663 (21.1 percent of pre-tax income) for the three and six months endedJune 30, 2021 , compared with$2,136 (21.1 percent of pre-tax income) and$4,368 (21.4 percent of pre-tax income) for the three and six months endedJune 30, 2020 . The Company's consolidated income tax rate differs from the federal statutory income tax rate in each period, primarily due to tax-exempt interest income, the tax-exempt increase in cash value of bank-owned life insurance, disallowed interest expense, and state income taxes. In addition, for the six months endedJune 30, 2021 , a tax benefit of$233 was recorded as a result of the increase in fair value of restricted stock over the vesting period. Comparatively, for the six months endedJune 30, 2020 , a tax expense of$116 was recorded as a result of the decrease in fair value of restricted stock over the vesting period. The tax rates for the first six months of 2021 and 2020 were also impacted by year-to-date federal low income housing tax credits and a new markets tax credit of approximately$684 and$620 , respectively. 43
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West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) FINANCIAL CONDITION
The Company had total assets of
Securities
The balance of securities available for sale increased by$180,891 during the six months endedJune 30, 2021 . In the first six months of 2021, securities were purchased to improve the yield on excess liquidity. As ofJune 30, 2021 , approximately 58 percent of the available for sale securities portfolio consisted of government agency guaranteed collateralized mortgage obligations and mortgage-backed securities. Management currently believes these securities provide relatively good yields, have little to no credit risk and provide fairly consistent cash flows.
Loans and Nonperforming Assets
Loans outstanding increased$28,952 from$2,280,575 as ofDecember 31, 2020 to$2,309,527 as ofJune 30, 2021 . Changes in the loan portfolio during the first six months of 2021 included increases of$72,505 in commercial real estate loans and$45,661 in construction, land and land development loans. Commercial loans declined$92,652 , which included a$96,184 decline in PPP loans. As ofJune 30, 2021 , PPP loans outstanding totaled$84,573 , which was made up of$13,431 from round one of the program in 2020 and$71,142 from round two in 2021. The Company continues to focus on business development efforts in all of its markets. We believe that loan growth may be lower in 2021 compared to 2020 as a result of the ongoing effects of the COVID-19 pandemic and the related economic impact in our market areas. Nonaccrual loans decreased$1,608 fromDecember 31, 2020 toJune 30, 2021 . The Company'sTexas ratio, which is computed by dividing total nonperforming assets by tangible common equity plus the allowance for loan losses, was 5.31 percent as ofJune 30, 2021 , compared to 6.40 percent as ofDecember 31, 2020 . The watch classification of loans increased to$90,693 as ofJune 30, 2021 from$26,715 as ofDecember 31, 2020 . The increase was primarily due to the addition of$68,424 of hotel, restaurant and other commercial real estate loans related to one borrowing group. This relationship was downgraded to watch classification primarily due to a slower rebound in their hotel occupancy rates compared to other market data. The loans in this downgraded borrowing group are considered well collateralized with a weighted average loan to value ratio of 63 percent. Even though we have seen improvement in economic conditions, we believe the long-term effects of the COVID-19 pandemic could have further adverse affects on the credit quality of our loan portfolio. The duration of business disruptions to our customers in the hotel, restaurant and movie theater industries could result in increased loan delinquencies and defaults. Management believes impaired loans could increase in the future as a result of the long-term economic effects of the COVID-19 pandemic, including the risk of future shutdowns in response to COVID-19 variants. No credit issues are anticipated with PPP loans at this time, as they are 100 percent guaranteed by the SBA. In accordance with regulatory guidelines, the Company exercises heightened risk management practices when non-owner occupied commercial real estate lending exceeds 300 percent of total risk-based capital or construction, land development, and other land loans exceed 100 percent of total risk-based capital. Although the Company's loan portfolio is heavily concentrated in real estate and its real estate portfolio levels exceed these regulatory guidelines, it has established risk management policies and procedures to regularly monitor the commercial real estate portfolio. An analysis of the Company's non-owner occupied commercial real estate portfolio as ofDecember 31, 2020 was presented in the Company's Form 10-K filed with theSEC onMarch 1, 2021 , and the Company has not experienced any material changes to that analysis sinceDecember 31, 2020 . 44
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West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) The following table sets forth the amount of nonperforming assets held by the Company and common ratio measurements of those assets as of the dates shown. June 30, 2021 December 31, 2020 Change Nonaccrual loans$ 14,586 $ 16,194$ (1,608) Loans past due 90 days and still accruing interest - - - Troubled debt restructured loans (1) - - - Total nonperforming loans 14,586 16,194 (1,608) Other real estate owned - - - Total nonperforming assets$ 14,586
$ 16,194
Nonperforming loans to total loans 0.63 % 0.71 % (0.08) % Nonperforming assets to total assets 0.45 % 0.51 % (0.06) % (1)While TDR loans are commonly reported by the industry as nonperforming, those not classified in the nonaccrual category are accruing interest due to payment performance. TDR loans on nonaccrual status are categorized as nonaccrual. There were no TDR loans as ofJune 30, 2021 andDecember 31, 2020 categorized as nonaccrual. Deposits Deposits increased$124,295 during the first six months of 2021. Savings accounts, which include money market accounts, increased by a total of$116,977 fromDecember 31, 2020 toJune 30, 2021 . Interest-bearing demand accounts decreased a total of$66,239 fromDecember 31, 2020 toJune 30, 2021 . Balance fluctuations were primarily due to normal customer activity, as corporate customers' liquidity needs vary at any given time. We believe that deposit levels could decrease in future periods as a result of the end of broad government stimulus programs relating to the COVID-19 pandemic and low interest rates. Borrowed Funds The Company had$128,605 of overnight federal funds purchased and short-term FHLB advances outstanding atJune 30, 2021 , compared to$180,375 as ofDecember 31, 2020 . The Company repaid$50,000 of FHLB advances at maturity in the second quarter of 2021 to reduce unneeded funding as a result of high deposit balances and excess liquidity. Derivatives
At
InMarch 2021 , the Company terminated interest rate swaps with a total notional amount of$150,000 . Of the total notional amount of$150,000 ,$100,000 were forward-starting interest rate swaps originated inJanuary 2021 and$50,000 were interest rate swaps hedging the interest cash flows of FHLB advances. The net termination gains were recorded in other noninterest income. 45
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West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) Liquidity and Capital Resources The objectives of liquidity management are to ensure the availability of sufficient cash flows to meet all financial commitments and to capitalize on opportunities for profitable business expansion. The Company's principal source of funds is deposits. Other sources include loan principal repayments, proceeds from the maturity and sale of securities, principal payments on collateralized mortgage obligations and mortgage-backed securities, federal funds purchased, advances from the FHLB, and funds provided by operations. Liquidity management is conducted on both a daily and a long-term basis. Investments in liquid assets are adjusted based on expected loan demand, projected loan and securities maturities and payments, expected deposit flows and the objectives set by the Company's asset-liability management policy. The Company had liquid assets (cash and cash equivalents) of$270,823 as ofJune 30, 2021 compared with$396,435 as ofDecember 31, 2020 . As ofJune 30, 2021 ,West Bank had additional borrowing capacity available from the FHLB of approximately$575,000 , as well as approximately$20,000 through theFederal Reserve discount window and$67,000 through unsecured federal funds lines of credit with correspondent banks. Net cash from operating activities contributed$28,508 to liquidity for the six months endedJune 30, 2021 . Management believed that the combination of high levels of potentially liquid assets, cash flows from operations, and additional borrowing capacity provided the Company with strong liquidity as ofJune 30, 2021 . The Company's total stockholders' equity increased to$246,526 atJune 30, 2021 from$223,695 atDecember 31, 2020 . The increase was primarily the result of net income less dividends paid and an increase in fair value of derivatives, partially offset by a decrease in the fair value of securities. AtJune 30, 2021 , the Company's tangible common equity as a percent of tangible assets was 7.54 percent compared to 7.02 percent as ofDecember 31, 2020 . The Company had remaining commitments to invest in qualified affordable housing projects totaling$3,294 and$3,505 as ofJune 30, 2021 andDecember 31, 2020 , respectively. During 2020, the Company began construction on a new office inSartell, Minnesota , which had a remaining construction commitment of$5,729 and$8,324 as ofJune 30, 2021 andDecember 31, 2020 , respectively. The Company andWest Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements (as shown in the following table) can result in certain mandatory and possibly additional discretionary actions by regulators, which, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company andWest Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's andWest Bank's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Management believed the Company andWest Bank met all capital adequacy requirements to which they were subject as ofJune 30, 2021 . 46
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West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) The Company's andWest Bank's capital amounts and ratios are presented in the following table. For Capital For Capital Adequacy Purposes With Capital Actual Adequacy Purposes Conservation Buffer To Be Well-Capitalized Amount Ratio Amount Ratio Amount Ratio Amount Ratio As ofJune 30, 2021 : Total Capital (to Risk-Weighted Assets) Consolidated$ 301,043 11.32 %$ 212,746 8.00 %$ 279,230 10.50 % $ 265,933 10.00 %West Bank 305,420 11.49 % 212,670 8.00 % 279,130 10.50 % 265,838 10.00 % Tier 1 Capital (to Risk-Weighted Assets) Consolidated 273,001 10.27 % 159,560 6.00 % 226,043 8.50 % 212,746 8.00 %West Bank 277,378 10.43 % 159,503 6.00 % 225,962 8.50 % 212,670 8.00 % Common Equity Tier 1 Capital (to Risk-Weighted Assets) Consolidated 253,001 9.51 % 119,670 4.50 % 186,153 7.00 % 172,856 6.50 %West Bank 277,378 10.43 % 119,627 4.50 % 186,087 7.00 % 172,795 6.50 % Tier 1 Capital (to Average Assets) Consolidated 273,001 8.47 % 128,896 4.00 % 128,896 4.00 % 161,120 5.00 %West Bank 277,378 8.61 % 128,817 4.00 % 128,817 4.00 % 161,022 5.00 % As ofDecember 31, 2020 : Total Capital (to Risk-Weighted Assets) Consolidated$ 284,977 11.45 %$ 199,092 8.00 %$ 261,308 10.50 % $ 248,865 10.00 %West Bank 290,677 11.69 % 198,995 8.00 % 261,181 10.50 % 248,744 10.00 % Tier 1 Capital (to Risk-Weighted Assets) Consolidated 255,541 10.27 % 149,319 6.00 % 211,535 8.50 % 199,092 8.00 %West Bank 261,241 10.50 % 149,246 6.00 % 211,431 8.50 % 198,995 8.00 % Common Equity Tier 1 Capital (to Risk-Weighted Assets) Consolidated 235,541 9.46 % 111,989 4.50 % 174,205 7.00 % 161,762 6.50 %West Bank 261,241 10.50 % 111,935 4.50 % 174,120 7.00 % 161,683 6.50 % Tier 1 Capital (to Average Assets) Consolidated 255,541 8.66 % 118,053 4.00 % 118,053 4.00 % 147,567 5.00 %West Bank 261,241 8.86 % 117,946 4.00 % 117,946 4.00 % 147,433 5.00 % The Company andWest Bank are subject to the rules of the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act. The rules include the implementation of a 2.5 percent capital conservation buffer that is added to the minimum requirements for capital adequacy purposes. A banking organization with a capital conservation buffer of less than the required amount will be subject to limitations on capital distributions, including dividend payments, and certain discretionary bonus payments to executive officers. AtJune 30, 2021 , the capital ratios for the Company andWest Bank were sufficient to meet the conservation buffer. 47
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