WEST BANCORPORATION INC 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. "SAFE HARBOR" CONCERNING FORWARD-LOOKING STATEMENTS Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to the Company’s business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meanings of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Forward-looking statements may appear throughout this report. These forward-looking statements are generally identified by the words “believes,” “expects,” “intends,” “anticipates,” “projects,” “future,” “may,” “should,” “will,” “strategy,” “plan,” “opportunity,” “will be,” “will likely result,” “will continue” or similar references, or references to estimates, predictions or future events. Such forward-looking statements are based upon certain underlying assumptions, risks and uncertainties. Because of the possibility that the underlying assumptions are incorrect or do not materialize as expected in the future, actual results could differ materially from these forward-looking statements. Risks and uncertainties that may affect future results include: the continuing effects of the COVID-19 pandemic, including its potential effects on the economic environment, our customers and our operations, including due to supply chain disruptions, 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, including from non-bank competitors such as "fintech" companies; 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; changes in local, national and international economic conditions, including rising rates of inflation; 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 the U.S. government, including recent and anticipated interest rate increases; acts of war or terrorism, including the Russian invasion of Ukraine, 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 to U.S. tax laws, regulations and guidance; talent and labor shortages; and any other risks described in the “Risk Factors” sections of this and other reports filed by the Company with the SEC. The Company undertakes no obligation to revise or update such forward-looking statements to reflect current or future events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. CRITICAL ACCOUNTING POLICIES The discussion and analysis of the Company's financial condition and results of operations are based upon the Company's consolidated financial statements that have been prepared in accordance with GAAP. The preparation of the Company's financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, income and expenses. These estimates are based upon historical experience and on various other assumptions that management believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The estimates and judgments that management believes involve the most complex and subjective estimates and judgments and have the most effect on the Company's reported financial position and results of operations are described as critical accounting policies in the Company's Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on February 24, 2022. There have been no significant changes in the critical accounting policies or the assumptions and judgments utilized in applying these policies since December 31, 2021. 31 Table of Contents West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) NON-GAAP FINANCIAL MEASURES This report contains references to financial measures that are not defined in GAAP. Such non-GAAP financial measures include the Company’s presentation of net interest income and net interest margin on a fully taxable equivalent (FTE) basis, the presentation of the efficiency ratio on an adjusted and FTE basis, excluding certain income and expenses, loans, net of PPP loans, 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, 2022 2021 2022 2021 Reconciliation of net interest income and net interest margin on a FTE basis to GAAP: Net interest income (GAAP) $ 24,239 $ 22,850 $ 48,067 $ 45,971 Tax-equivalent adjustment (1) 326 270 655 499 Net interest income on a FTE basis (non-GAAP) 24,565 23,120 48,722 46,470 Average interest-earning assets 3,362,313 3,102,649 3,397,021 3,041,519 Net interest margin on a FTE basis (non-GAAP) 2.93 % 2.99 % 2.89 % 3.08 % Reconciliation of efficiency ratio on an adjusted and FTE basis to GAAP: Net interest income on a FTE basis (non-GAAP) $ 24,565 $ 23,120 $ 48,722 $ 46,470 Noninterest income 2,278 2,515 4,667 4,980 Adjustment for realized securities gains, net — (36) — (40) Adjustment for losses on disposal of premises and equipment, net 9 5 27 29 Adjusted income 26,852 25,604 53,416 51,439 Noninterest expense 11,266 10,526 21,928 20,797 Efficiency ratio on an adjusted and FTE basis (non-GAAP) (2) 41.96 % 41.11 % 41.05 % 40.43 % June 30, 2022 December 31, 2021 June 30, 2021 Reconciliation of allowance for loan losses ratio, excluding PPP loans: Loans outstanding (GAAP) $ 2,573,129 $ 2,456,196 $ 2,309,527 Less: PPP loans (3,196) (22,206) (84,573) Loans, net of PPP loans (non-GAAP) 2,569,933 2,433,990 2,224,954 Allowance for loan losses 25,434 28,364 28,042 Allowance for loan losses ratio, excluding PPP loans (non-GAAP) (3) 0.99 % 1.17 % 1.26 % (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. 32 Table of Contents West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) (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. A lower ratio is more desirable. (3) Management believes that presenting the allowance for loan losses as a percentage of total loans excluding PPP loans is useful in assessing the credit quality of the Company's core portfolio. 33 Table of Contents 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 and West Bank's special purpose subsidiaries (which are invested in new markets tax credit activities). Results of operations for the three and six months ended June 30, 2022 are compared to the results for the same periods in 2021, and the consolidated financial condition of the Company as of June 30, 2022 is compared to that as of December 31, 2021. 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 ended December 31, 2021, filed with the SEC on February 24, 2022. The Company conducts business from its main office in West Des Moines, Iowa and through its branch offices in central Iowa, which is generally the greater Des Moines metropolitan area; eastern Iowa, which is the area including and surrounding Iowa City and Coralville; and southern Minnesota, which includes the cities of Rochester, Owatonna, Mankato and St. Cloud. Net income for the three months ended June 30, 2022 was $12,667, or $0.75 per diluted common share, compared to $13,239, or $0.79 per diluted common share, for the three months ended June 30, 2021. The Company's annualized return on average assets and return on average equity for the three months ended June 30, 2022 were 1.45 percent and 22.81 percent, respectively, compared to 1.65 percent and 22.20 percent, respectively, for the three months ended June 30, 2021. The decrease in net income for the three months ended June 30, 2022 compared to the same period in 2021 was primarily due to a one-time increase in state income tax expense, a smaller negative provision for loan losses and an increase in salaries and employee benefits, partially offset by an increase in net interest income. Net interest income for the three months ended June 30, 2022 grew $1,389, or 6.1 percent, compared to the three months ended June 30, 2021. The increase in net interest income was primarily due to the increase in interest income on securities and loans, partially offset by an increase in interest expense on deposits and borrowed funds. The Company recorded a negative provision for loan losses of $1,750 during the three months ended June 30, 2022, compared to a negative provision of $2,000 for the three months ended June 30, 2021. The negative provision recorded in 2021 was due to improvements in economic conditions and removal of pandemic-related restrictions for businesses, in addition to lack of loan losses for the Company since the onset of the COVID-19 pandemic. The negative provision in 2022 was due primarily to the reversal of a specific reserve on an impaired loan. Noninterest expense increased $740 during the three months ended June 30, 2022 compared to the three months ended June 30, 2021, primarily due to an increase in salaries and employee benefits expense. Income tax expense increased due to the revaluation of net deferred tax assets as a result of enacted changes in Iowa bank franchise tax rates. Net income for the six months ended June 30, 2022 was $25,851, or $1.54 per diluted common share, compared to $24,991, or $1.49 per diluted common share, for the six months ended June 30, 2021. The Company's annualized return on average assets and return on average equity for the six months ended June 30, 2022 were 1.48 percent and 21.83 percent, respectively, compared to 1.59 percent and 21.50 percent, respectively, for the six months ended June 30, 2021. The increase in net income for the six months ended June 30, 2022 compared to the same period in 2021 was primarily due to a larger negative provision for loan losses and an increase in net interest income, partially offset by an increase in noninterest expense. Net interest income for the six months ended June 30, 2022 grew $2,096, or 4.6 percent, compared to the six months ended June 30, 2021. The increase in net interest income was primarily due to the increase in interest income on securities and loans and the decrease in interest expense on FHLB advances, partially offset by an increase in interest expense on deposits and other borrowings. The Company recorded a negative provision for loan losses of $2,500 during the six months ended June 30, 2022, compared to a negative provision of $1,500 for the six months ended June 30, 2021. 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. The negative provision in 2022 was due to the reversal of a specific reserve on an impaired loan and the sustained performance of loans after the expiration of COVID modifications and sustained improvement in classified loans. Noninterest expense increased $1,131 during the six months ended June 30, 2022 compared to the six months ended June 30, 2021, primarily due to an increase in salaries and employee benefits expense, partially offset by a decrease in FDIC insurance expense. 34 Table of Contents West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) Total loans outstanding increased $116,933, or 4.8 percent, during the first six months of 2022. Excluding the impact of PPP loan activity, total loans outstanding increased $135,944, or 5.6 percent, during the first six months of 2022. As of June 30, 2022, the allowance for loan losses was 0.99 percent of total outstanding loans, compared to 1.15 percent as of December 31, 2021. At June 30, 2022, the allowance for loan losses was 0.99 percent of total outstanding loans, excluding $3,196 of PPP loans (a non-GAAP financial measure), which are 100 percent guaranteed by the SBA, compared to 1.17 percent of outstanding loans, excluding $22,206 of PPP loans, as of December 31, 2021. Management believed the allowance for loan losses at June 30, 2022 was adequate to absorb any losses inherent in the loan portfolio as of that date. On June 14, 2022, the Company issued $60,000 of subordinated notes. The net proceeds were used to make a capital injection into West Bank. On a quarterly basis, the Company compares three key performance metrics to those of our identified peer group. The peer group for 2022 consists of 19 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., Macatawa Bank Corporation, Mercantile Bank Corporation, MidWestOne Financial Group, Inc., Nicolet Bankshares, Inc., Peoples Bancorp, Inc., and Southern Missouri Bancorp, Inc. Level One Bancorp, Inc., previously included in the peer group, was acquired in April 2022. 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 and nonperforming assets to total assets. 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 (2) As of and for the six months ended June 30, 2022 As of and for the three months ended March 31, 2022 As of and for the three months ended March 31, 2022 Return on average equity 21.83% 20.96% 4.88% - 15.16% Efficiency ratio (1) 41.05% 40.14% 43.69% - 67.47% Nonperforming assets to total assets 0.01% 0.25% 0.13% - 1.13% (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) Latest data available. At its meeting on July 27, 2022, the Company's Board of Directors declared a quarterly cash dividend of $0.25 per common share. The dividend is payable on August 24, 2022, to stockholders of record on August 10, 2022. 35 Table of Contents West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) RESULTS OF OPERATIONS The following table shows selected financial results and measures for the three and six months ended June 30, 2022 compared with the same periods in 2021. Three Months Ended June 30, Six Months Ended June 30, 2022 2021 Change Change % 2022 2021 Change Change % Net income $ 12,667 $ 13,239 $ (572) (4.32) % $ 25,851 $ 24,991 $ 860 3.44 % Average assets 3,503,686 3,224,318 279,368 8.66 % 3,524,012 3,167,401 356,611 11.26 % Average stockholders' equity 222,731 239,218 (16,487) (6.89) % 238,841 234,372 4,469 1.91 % Return on average assets 1.45 % 1.65 % (0.20) % 1.48 % 1.59 % (0.11) % Return on average equity 22.81 % 22.20 % 0.61 % 21.83 % 21.50 % 0.33 % Net interest margin (1) 2.93 % 2.99 % (0.06) % 2.89 % 3.08 % (0.19) % Efficiency ratio (1) (2) 41.96 % 41.11 % 0.85 % 41.05 % 40.43 % 0.62 % Dividend payout ratio 32.84 % 30.01 % 2.83 % 32.10 % 30.40 % 1.70 % Average equity to average assets ratio 6.36 % 7.42 % (1.06) % 6.78 % 7.40 % (0.62) % As of June 30, 2022 2021 Change Nonperforming assets to total assets (2) 0.01 % 0.45 % (0.44) % Equity to assets ratio 6.22 % 7.54 % (1.32) % Tangible common equity ratio 6.22 % 7.54 % (1.32) % (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. • Nonperforming assets to total assets - total nonperforming assets divided by total assets. • Equity to assets ratio - equity divided by assets. • Tangible common equity ratio - common equity less intangible assets (none held) divided by tangible assets. 36 Table of Contents West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) Net Interest Income The following tables present average balances and related interest income or interest expense, with the resulting annualized average yield or rate by category of interest-earning assets or interest-bearing liabilities. Interest income and the resulting net interest income are shown on a FTE basis. Data for the three months ended June 30: Average Balance Interest Income/Expense Yield/Rate 2022 2021 Change Change- % 2022 2021 Change Change- % 2022 2021 Change Interest-earning assets: Loans: (1) (2) Commercial $ 470,486 $ 553,401 $ (82,915) (14.98) % $ 4,949 $ 5,383 $ (434) (8.06) % 4.22 % 3.90 % 0.32 % Real estate (3) 2,061,700 1,750,198 311,502 17.80 % 19,972 17,807 2,165 12.16 % 3.89 % 4.08 % (0.19) % Consumer and other 4,966 4,112 854 20.77 % 53 53 — — % 4.23 % 5.13 % (0.90) % Total loans 2,537,152 2,307,711 229,441 9.94 % 24,974 23,243 1,731 7.45 % 3.95 % 4.04 % (0.09) % Securities: Taxable 617,104 376,165 240,939 64.05 % 3,090 1,895 1,195 63.06 % 2.00 % 2.01 % (0.01) % Tax-exempt (3) 156,788 141,819 14,969 10.56 % 1,092 879 213 24.23 % 2.78 % 2.47 % 0.31 % Total securities 773,892 517,984 255,908 49.40 % 4,182 2,774 1,408 50.76 % 2.16 % 2.14 % 0.02 % Federal funds sold 51,269 276,955 (225,686) (81.49) % 67 75 (8) (10.67) % 0.52 % 0.11 % 0.41 % Total interest-earning assets (3) $ 3,362,313 $ 3,102,650 $ 259,663 8.37 % 29,223 26,092 3,131 12.00 % 3.49 % 3.37 % 0.12 % Interest-bearing liabilities: Deposits: Interest-bearing demand $ 517,707 $ 471,845 $ 45,862 9.72 % 324 184 140 76.09 % 0.25 % 0.16 % 0.09 % Savings and money market 1,582,033 1,356,549 225,484 16.62 % 2,439 1,352 1,087 80.40 % 0.62 % 0.40 % 0.22 % Time deposits 204,755 240,988 (36,233) (15.04) % 383 459 (76) (16.56) % 0.75 % 0.76 % (0.01) % Total deposits 2,304,495 2,069,382 235,113 11.36 % 3,146 1,995 1,151 57.69 % 0.55 % 0.39 % 0.16 % Borrowed Funds: Federal funds purchased 44,309 4,098 $ 40,211 981.23 % 157 1 156 15,600.00 % 1.42 % 0.10 % 1.32 % Subordinated notes, net 31,469 20,457 11,012 53.83 % 394 251 143 56.97 % 5.02 % 4.93 % 0.09 % Federal Home Loan Bank advances 125,000 136,813 (11,813) (8.63) % 635 649 (14) (2.16) % 2.04 % 1.90 % 0.14 % Long-term debt 51,486 20,522 30,964 150.88 % 326 75 251 334.67 % 2.54 % 1.48 % 1.06 % Total borrowed funds 252,264 181,890 70,374 38.69 % 1,512 976 536 54.92 % 2.40 % 2.15 % 0.25 % Total interest-bearing liabilities $ 2,556,759 $ 2,251,272 $ 305,487 13.57 % 4,658 2,971 2,223 56.78 % 0.73 % 0.53 % 0.20 % Net interest income (FTE) (4) $ 24,565 $ 23,121 $ 1,444 6.25 % Net interest spread (FTE) 2.76 % 2.84 % (0.08) % Net interest margin (FTE) (4) 2.93 % 2.99 % (0.06) % 37 Table of Contents West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) Data for the six months ended June 30: Average Balance Interest Income/Expense Yield/Rate 2022 2021 Change Change- % 2022 2021 Change Change- % 2022 2021 Change Interest-earning assets: Loans: (1) (2) Commercial $ 470,296 $ 559,975 $ (89,679) (16.01) % $ 9,607 $ 12,193 $ (2,586) (21.21) % 4.12 % 4.39 % (0.27) % Real estate (3) 2,019,017 1,727,198 291,819 16.90 % 38,697 35,080 3,617 10.31 % 3.87 % 4.10 % (0.23) % Consumer and other 4,266 4,744 (478) (10.08) % 87 107 (20) (18.69) % 4.09 % 4.55 % (0.46) % Total loans 2,493,579 2,291,917 201,662 8.80 % 48,391 47,380 1,011 2.13 % 3.91 % 4.17 % (0.26) % Securities: Taxable 625,333 351,584 273,749 77.86 % 5,979 3,540 2,439 68.90 % 1.91 % 2.01 % (0.10) % Tax-exempt (3) 163,804 121,519 42,285 34.80 % 2,148 1,566 582 37.16 % 2.62 % 2.58 % 0.04 % Total securities 789,137 473,103 316,034 66.80 % 8,127 5,106 3,021 59.17 % 2.06 % 2.16 % (0.10) % Federal funds sold 114,305 276,499 (162,194) (58.66) % 149 144 5 3.47 % 0.26 % 0.11 % 0.15 % Total interest-earning assets (3) $ 3,397,021 $ 3,041,519 $ 355,502 11.69 % 56,667 52,630 4,037 7.67 % 3.36 % 3.49 % (0.13) % Interest-bearing liabilities: Deposits: Interest-bearing demand $ 531,893 $ 462,189 $ 69,704 15.08 % 574 353 221 62.61 % 0.22 % 0.15 % 0.07 % Savings and money market 1,596,257 1,331,855 264,402 19.85 % 4,059 2,667 1,392 52.19 % 0.51 % 0.40 % 0.11 % Time deposits 200,221 214,239 (14,018) (6.54) % 664 852 (188) (22.07) % 0.67 % 0.80 % (0.13) % Total deposits 2,328,371 2,008,283 320,088 15.94 % 5,297 3,872 1,425 36.80 % 0.46 % 0.39 % 0.07 % Borrowed funds: Federal funds purchased 23,026 4,739 18,287 385.88 % 157 2 155 7,750.00 % 1.38 % 0.10 % 1.28 % Subordinated notes, net 25,998 20,455 5,543 27.10 % 642 500 142 28.40 % 4.98 % 4.93 % 0.05 % Federal Home Loan Bank advances 125,000 155,801 (30,801) (19.77) % 1,265 1,632 (367) (22.49) % 2.04 % 2.11 % (0.07) % Long-term debt 51,492 20,841 30,651 147.07 % 584 154 430 279.22 % 2.29 % 1.49 % 0.80 % Total borrowed funds 225,516 201,836 23,680 11.73 % 2,648 2,288 360 15.73 % 2.37 % 2.29 % 0.08 % Total interest-bearing liabilities $ 2,553,887 $ 2,210,119 $ 343,768 15.55 % 7,945 6,160 1,785 28.98 % 0.63 % 0.56 % 0.07 % Net interest income (FTE) (4) $ 48,722 $ 46,470 $ 2,252 4.85 % Net interest spread (FTE) 2.73 % 2.93 % (0.20) % Net interest margin (FTE) (4) 2.89 % 3.08 % (0.19) % (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. 38 Table of Contents West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) 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. The Federal Reserve increased the target federal funds interest rate by a total of 150 basis points in the first six months of 2022 and is expected to continue to raise the target federal funds rate throughout the rest of 2022. These increases will have an impact on the Company's net interest income and net interest margin and will impact the comparability of net interest income between 2022 and 2021. Net interest margin on a FTE basis, 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 ended June 30, 2022 decreased by 6 and 19 basis points, respectively, compared to the three and six months ended June 30, 2021. The primary driver of the decrease in the net interest margin was a decrease in yield on loans and increase in rates paid on deposits and borrowed funds. Tax-equivalent net interest income for the three and six months ended June 30, 2022 increased $1,444 and $2,252, respectively, compared to the same time periods in 2021. The increase in net interest income for the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021 was primarily due to increases in loans and securities balances, partially offset by decreases in yields on loans and increases in rates paid on deposits and borrowed funds. Tax-equivalent interest income on loans increased $1,731 and $1,011 for the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021. This increase in interest income was primarily driven by the increase in the average balance of commercial real estate loans. The comparability of the net interest margin between 2022 and 2021 is also impacted by the interest income from PPP loans, which is included in commercial loans. Included in commercial loans were PPP loans with interest income of $213 and $1,387 and yields of 16.10 percent and 4.00 percent for the three months ended June 30, 2022 and June 30, 2021, respectively. PPP loan interest income was $653 and $4,229 with yields of 13.56 percent and 5.80 percent for the six months ended June 30, 2022 and June 30, 2021, respectively. Exclusive of the PPP loans, the yield on loans was 3.91 percent and 4.00 percent for the three months ended June 30, 2022 and June 30, 2021, respectively, and 3.86 percent and 4.06 percent for the six months ended June 30, 2022 and June 30, 2021, respectively. The decrease in loan yields was due to lower rates on new and renewed loans in 2021 and first quarter 2022 resulting from lower market rates and competitive pressures on loan pricing, partially offset by rate increases in variable-rate loans in response to federal funds rate increases in 2022. The Company continues to focus on expanding existing and entering into new customer relationships while maintaining strong credit quality. The yield on the Company's loan portfolio is affected by the portfolio's loan mix, the interest rate environment, the effects of competition, the level of nonaccrual loans and reversals of previously accrued interest on charged-off loans. The political and economic environments can also influence the volume of new loan originations and the mix of variable-rate versus fixed-rate loans. The average balance of deposits increased $235,113 and $320,088 for the three and six months months ended June 30, 2022, compared to the three and six months months ended June 30, 2021. The rate paid on deposits increased 16 and 7 basis points for the three and six months ended June 30, 2022 compared to the same periods in 2021. The increases were primarily due to increases in certain deposit rates in response to the increases in the target federal funds rate. The average balance of borrowed funds increased $70,374 and $23,680 for the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021. The rate paid on borrowed funds increased 25 and 8 basis points for the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021. These increases were primarily due to increases in subordinated notes and long-term debt. The increase in long-term debt was due to the Company's long-term debt borrowing of $40,000 in December 2021 which bears interest at a variable rate. The cost of borrowed funds may increase in the second half of 2022 as the variable rate on long-term debt may increase if market rates increase, and due to the addition of the subordinated notes in June 2022. In the first six months of 2022, the Federal Reserve increased the target federal funds rate by a total of 150 basis points, and they are expected to make additional rate increases throughout the remainder of 2022. These rate increases could improve reinvestment rates on loans and securities, but could also increase the Company's cost of deposits and borrowed funds and increase the unrealized losses in the Company's securities portfolio. 39 Table of Contents 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 negative provisions for loan losses were $1,750 and $2,500 for the three and six months ended June 30, 2022, respectively, compared to negative provisions of $2,000 and $1,500 for the three and six months ended June 30, 2021, respectively. The negative provisions recorded in 2021 were due to improvements in economic conditions and removal of pandemic-related restrictions for businesses, in addition to lack of loan losses for the Company since the onset of the COVID-19 pandemic. The negative provisions in 2022 were due to the sustained performance of loans after the expiration of the COVID modifications, continued improvement in classified loans and the reversal of a specific reserve on an impaired loan. The impaired loan had a specific reserve of $2,500 and settled in the second quarter of 2022, resulting in a charge-off of $451. Factors management considers in establishing an appropriate allowance include: the borrower's financial condition; the value and adequacy of loan collateral; the condition of the local economy and the borrower's specific industry; the levels and trends of loans by segment; and a review of delinquent and classified loans. The quarterly evaluation 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 eastern Iowa and southern Minnesota. The local economies in those markets are composed primarily of major financial service companies, healthcare providers, educational institutions, technology and agribusiness companies, and state and local 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 require West 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. 40 Table of Contents West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) West Bank's policy is to charge off loans when, in management's opinion, a loan or a portion of a loan is deemed uncollectible. Commercially reasonable 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 ended June 30, 2022 and 2021 and related ratios. Three Months Ended June 30, Six Months Ended June 30, 2022 2021 Change 2022 2021 Change Balance at beginning of period $ 27,623 $ 30,008 $ (2,385) $ 28,364 $ 29,436 $ (1,072) Charge-offs (451) — (451) (451) — (451) Recoveries 12 34 (22) 21 106 (85) Net (charge-offs) recoveries (439) 34 (473) (430) 106 (536) Provision for loan losses charged to operations (1,750) (2,000) 250 (2,500) (1,500) (1,000) Balance at end of period $ 25,434 $ 28,042 $ (2,608) $ 25,434 $ 28,042 $ (2,608) Average loans outstanding $ 2,537,152 $ 2,307,711 $ 2,493,578 $ 2,291,917 Ratio of annualized net (charge-offs) recoveries during the period to average loans outstanding (0.07) % 0.01 % (0.03) % 0.01 % Ratio of allowance for loan losses to average loans outstanding 1.00 % 1.22 % 1.02 % 1.22 % Ratio of allowance for loan losses to total loans at end of period 0.99 % 1.21 % 0.99 % 1.21 % Ratio of allowance for loan losses to total loans at end of period, excluding PPP loans (1) 0.99 % 1.26 % 0.99 % 1.26 % (1) A non-GAAP financial measure. For further information, refer to the Non-GAAP Financial Measures section of this report. The U.S. economy continues to be affected by the Federal Reserve's accommodative monetary policies initiated during the COVID-19 pandemic. Current economic concerns include inflationary trends, continuing supply chain issues and labor shortages, wage pressures, and expectations of further increases in the Federal Reserve target federal funds rate. In response to increasing inflation rates, the Federal Reserve increased the target federal funds rate by a total of 150 basis points in the first six months of 2022. It is expected that additional rate increases will occur throughout the second half of 2022. The Company decreased certain qualitative factors used in the allowance for loan losses evaluation in the first six months of 2022 based upon the sustained performance of loans after the expiration of COVID modifications and sustained improvement in classified loans, no past due loans over 30 days, and the settlement of an impaired loan in June 2022 that previously had a $2,500 specific reserve. This resulted in a negative provision for the three and six months ended June 30, 2022. Management believes the resulting allowance for loan losses as of June 30, 2022 was adequate to absorb any losses inherent in the loan portfolio at the end of the quarter. 41 Table of Contents West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) Noninterest Income The following tables show the variance from the prior year in the noninterest income categories shown in the Consolidated Statements of Income. Three Months Ended June 30, Noninterest income: 2022 2021 Change Change % Service charges on deposit accounts $ 585 $ 578 $ 7 1.21 % Debit card usage fees 507 511 (4) (0.78) % Trust services 622 691 (69) (9.99) % Increase in cash value of bank-owned life insurance 236 240 (4) (1.67) % Loan swap fees — 42 (42) (100.00) % Realized securities gains, net — 36 (36) (100.00) % Other income: All other income 328 417 (89) (21.34) % Total other income 328 417 (89) (21.34) % Total noninterest income $ 2,278 $ 2,515 $ (237) (9.42) % Six Months Ended June 30, Noninterest income: 2022 2021 Change Change % Service charges on deposit accounts $ 1,165 $ 1,160 $ 5 0.43 % Debit card usage fees 979 953 26 2.73 % Trust services 1,251 1,343 (92) (6.85) % Increase in cash value of bank-owned life insurance 463 460 3 0.65 % Loan swap fees — 42 (42) (100.00) % Realized securities gains, net — 40 (40) (100.00) % Other income: All other income 809 982 (173) (17.62) % Total other income 809 982 (173) (17.62) % Total noninterest income $ 4,667 $ 4,980 $ (313) (6.29) % The decrease in other income for the six months ended June 30, 2022 compared to the six months ended June 30, 2021 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. In the first quarter of 2022, the Company also recognized other income of $97 related to the purchase of discounted transferable state income tax credits. 42 Table of Contents West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) Noninterest Expense The following tables show the variance from the prior year in the noninterest expense categories shown in the Consolidated Statements of Income. In addition, accounts within the “other expenses” category that represent a significant portion of the total or a significant variance are shown below. Three Months Ended June 30, Noninterest expense: 2022 2021 Change Change % Salaries and employee benefits $ 6,410 $ 5,672 $ 738 13.01 % Occupancy 1,242 1,199 43 3.59 % Data processing 656 617 39 6.32 % FDIC insurance 289 426 (137) (32.16) % Professional fees 202 268 (66) (24.63) % Director fees 222 214 8 3.74 % Other expenses: Subscriptions and service contracts 492 467 25 5.35 % Business development 291 261 30 11.49 % Insurance expense 156 123 33 26.83 % Trust 138 137 1 0.73 % Consulting fees 125 78 47 60.26 % Marketing 70 57 13 22.81 % Charitable contributions — 60 (60) (100.00) % Low income housing projects amortization 130 192 (62) (32.29) % New markets tax credit project amortization and management fees 229 229 — — % All other 614 526 88 16.73 % Total other expenses 2,245 2,130 115 5.40 % Total noninterest expense $ 11,266 $ 10,526 $ 740 7.03 % Six Months Ended June 30, Noninterest expense: 2022 2021 Change Change % Salaries and employee benefits $ 12,708 $ 11,280 $ 1,428 12.66 % Occupancy 2,328 2,427 (99) (4.08) % Data processing 1,280 1,219 61 5.00 % FDIC insurance 626 830 (204) (24.58) % Professional fees 419 551 (132) (23.96) % Director fees 390 405 (15) (3.70) % Other expenses: Subscriptions and service contracts 968 845 123 14.56 % Business development 527 447 80 17.90 % Insurance expense 307 244 63 25.82 % Trust 275 278 (3) (1.08) % Consulting fees 175 153 22 14.38 % Marketing 124 102 22 21.57 % Charitable contributions — 120 (120) (100.00) % Low income housing projects amortization 272 326 (54) (16.56) % New markets tax credit project amortization and management fees 459 459 — — % All other 1,070 1,111 (41) (3.69) % Total other expenses 4,177 4,085 92 2.25 % Total noninterest expense $ 21,928 $ 20,797 $ 1,131 5.44 % 43 Table of Contents West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) Salaries and employee benefits increased for the three and six months ended June 30, 2022 when compared to the three and six months ended June 30, 2021, primarily due to an increase in expense related to restricted stock units, the addition of two commercial bankers in the third quarter of 2021 and two commercial bankers in the first quarter of 2022, and normal operating increases. FDIC insurance expense decreased during the three and six months ended June 30, 2022 when compared to the same time periods in 2021 primarily due to reductions in the assessment rate resulting from capital injections into the Bank in December 2021 and June 2022. Occupancy expense increased for the three months ended June 30, 2022 compared to the same period in 2021 due primarily to depreciation expense related to the new bank building in St. Cloud, Minnesota that opened in March 2022, partially offset by a reduction in rent expenses. Occupancy expense decreased for the six months ended June 30, 2022 compared to the six months ended June 30, 2021 primarily due to the reduction in rent expense from the consolidation of leased branches in the Des Moines market, partially offset by the increase in depreciation expense related to the new building in St. Cloud, Minnesota. Subscriptions and service contracts increased for the three and six months ended June 30, 2022 when compared to the same time periods in 2021, primarily due to increases in information technology and information security solutions. Business development expenses increased in 2022 as business development efforts have normalized with increased in person activities, and the addition of four commercial bankers. Income Tax Expense The Company recorded income tax expense of $4,334 (25.5 percent of pre-tax income) and $7,455 (22.4 percent of pre-tax income) for the three and six months months ended June 30, 2022, compared with $3,600 (21.4 percent of pre-tax income) and $6,663 (21.0 percent of pre-tax income) for the three and six months ended June 30, 2021. 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. For the three and six months ended June 30, 2022, income tax expense included a one-time increase in state income tax expense related to the June 2022 enactment of changes in the Iowa bank franchise tax rates. This legislation reduces the Iowa bank franchise tax rate applied to apportioned income for 2023 and future years. This future reduction in the state tax rate required the Company to reduce net deferred tax assets as of June 30, 2022 by $671 and in turn caused the one-time increase in 2022 tax expense. Additionally, for the six months ended June 30, 2022 and 2021, a tax benefit of $385 and $233, respectively, was recorded as a result of the increase in fair value of restricted stock over the vesting period. The tax rates for the first six months of 2022 and 2021 were also impacted by year-to-date federal low income housing tax credits and a new markets tax credit of approximately $734 and $684, respectively. 44 Table of Contents West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) FINANCIAL CONDITION The Company had total assets of $3,474,791 as of June 30, 2022, compared to total assets of $3,500,201 as of December 31, 2021. Fluctuations in the balance sheet included increases in loans, deferred tax assets, other assets, federal funds purchased and subordinated debt and decreases in federal funds sold, securities and deposits. Securities Securities available for sale decreased by $26,852 during the six months ended June 30, 2022. In the first three months of 2022, the Company purchased securities to improve the yield on excess liquidity while monitoring duration and interest rate risk. The impact of these purchases was offset by principal paydowns and the decline in the fair value of the portfolio, which declined $99,008 in the first six months of 2022. The decline in fair value was the result of increases in market interest rates and is not an indication of declining credit quality. These are unrealized losses that are recorded in accumulated other comprehensive loss, net of tax. Future increases in market interest rates could result in an increase of the unrealized losses in the securities portfolio. As of June 30, 2022, approximately 66 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 acceptable yields, have little to no credit risk and provide fairly consistent cash flows. Loans and Nonperforming Assets Loans outstanding increased $116,933 from $2,456,196 as of December 31, 2021 to $2,573,129 as of June 30, 2022. Changes in the loan portfolio during the first six months of 2022 included increases of $96,932 in commercial real estate loans and $30,879 in construction, land and land development loans. Commercial loans declined $17,111, which included a $19,010 decline in PPP loans. As of June 30, 2022, PPP loans outstanding totaled $3,196. The Company continues to focus on business development efforts in all of its markets. Exclusive of PPP loans, loan growth in the first six months of 2022 was $135,944, or 5.6 percent. 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 of December 31, 2021 was presented in the Company's Form 10-K filed with the SEC on February 24, 2022, and the Company has not experienced any material changes to that portfolio since December 31, 2021. 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, 2022 December 31, 2021 Change Nonaccrual loans $ 335 $ 8,948 $ (8,613) Loans past due 90 days and still accruing interest — — — Troubled debt restructured loans (1) — — — Total nonperforming loans 335 8,948 (8,613) Other real estate owned — — — Total nonperforming assets $ 335 $ 8,948 $ (8,613) Nonperforming loans to total loans 0.01 % 0.36 % (0.35) % Nonperforming assets to total assets 0.01 % 0.26 % (0.25) % (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 categorized as nonaccrual as of June 30, 2022. There were six TDR loans related to one borrower as of December 31, 2021, categorized as nonaccrual. 45 Table of Contents West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) Premises and Equipment In 2020, the Company began construction of a new office for its St. Cloud, Minnesota branch. Construction was completed in the first quarter of 2022 and the new building opened in March. At that time, the previously leased location was vacated. Additionally, the Company purchased land in the first quarter of 2022 for its new corporate headquarters to be located in West Des Moines, Iowa and construction began in the second quarter of 2022. Construction of a new office in Mankato, Minnesota began in the first quarter of 2022. Deposits Deposits decreased $173,554 during the first six months of 2022. Deposit inflows and outflows are influenced by prevailing market interest rates, competition, local and national economic conditions, and fluctuations in our business customers' own liquidity needs. The decline in deposit balances was not due to the loss of significant customer relationships, but was primarily attributable to customers using their own liquidity to fund business transactions, instead of using debt, and customers seeking higher yielding investment options. During the second quarter of 2022, a large corporate customer completed a significant business transaction that was funded by existing cash balances, accounting for a significant portion of the decrease in deposits. At June 30, 2022, the Company had $196,477 in brokered deposits, compared to $130,032 at December 31, 2021. Brokered deposits included overnight funding, fixed rate deposits with terms through December 2022 and variable rate deposits with terms through February 2024. Subordinated Debt On June 14, 2022, the Company issued $60,000 of subordinated notes (the "Notes"). The Notes initially bear interest at 5.25 percent per annum, with interest payable semi-annually for the first five years of the Notes. Beginning June 15, 2027, the interest rate will reset quarterly to a floating rate per annum that is expected to be three-month term Secured Overnight Financing Rate (SOFR) plus 241 basis points, with payments due quarterly. The Company may redeem the Notes, in whole or in part, on and after June 15, 2027 at a price equal to 100 percent of the principal amount of the Notes being redeemed plus accrued and unpaid interest. The Notes will mature on June 15, 2032 if they are not earlier redeemed. Proceeds from this debt issuance were used to make a $58,650 capital injection into West Bank, the Company's subsidiary. Derivatives At June 30, 2022 and December 31, 2021, the Company had interest rate swap contracts associated with loans, borrowed funds and deposits with a total notional amount of $425,001 and $427,008, respectively. The fair value of these derivative contracts are reported in other assets or other liabilities on the balance sheet. Changes in the fair values of the interest rate swap contracts resulted in a $16,126 increase in other assets and $163 decrease in other liabilities from December 31, 2021 to June 30, 2022 due to projected increases in long-term interest rates. Liquidity 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 $26,940 as of June 30, 2022 compared with $192,825 as of December 31, 2021. 46 Table of Contents West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) Our deposit growth strategy emphasizes core deposit growth. Deposit inflows and outflows can vary widely and are influenced by prevailing market interest rates, competition, local and national economic conditions and fluctuations in our corporate customers' and municipal customers' own liquidity needs. The Company may utilize brokered deposits to supplement core deposit fluctuations. Brokered deposits are obtained through various programs administered by IntraFi, including IntraFi Network Deposits and IntraFi Funding, and through other third parties. At June 30, 2022, the Company had $196,477 in brokered deposits, which included overnight funding, fixed rate deposits with terms through December 2022 and variable rate deposits with terms through February 2024. As of June 30, 2022, West Bank had additional borrowing capacity available from the FHLB of approximately $490,000, as well as approximately $4,000 through the Federal Reserve discount window and $67,000 through unsecured federal funds lines of credit with correspondent banks. Net cash from operating activities contributed $33,645 to liquidity for the six months ended June 30, 2022. Management believed that the combination of high levels of potentially liquid assets, cash flows from operations, and additional borrowing capacity are sufficient to meet our liquidity and capital needs. The Company had remaining commitments to invest in qualified affordable housing projects totaling $3,720 and $3,986 as of June 30, 2022 and December 31, 2021, respectively. Capital The Company's total stockholders' equity decreased to $216,189 at June 30, 2022 from $260,328 at December 31, 2021. The decrease was primarily the result of the increase in accumulated other comprehensive loss, partially offset by net income less dividends paid. At June 30, 2022, the Company's tangible common equity as a percent of tangible assets was 6.22 percent compared to 7.44 percent as of December 31, 2021. The increase in accumulated other comprehensive loss is primarily the result of the negative effect that rising interest rates have had on the unrealized market value adjustment of our available for sale investment portfolio. While accumulated other comprehensive losses reduce tangible common equity, it has no impact on regulatory capital. The Company and West Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements (as shown in the following table) can result in certain mandatory and possibly additional discretionary actions by regulators, which, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and West Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's and West Bank's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Management believed the Company and West Bank met all capital adequacy requirements to which they were subject as of June 30, 2022. 47 Table of Contents West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) The Company's and West Bank's capital amounts and ratios are presented in the following table. Actual For Capital Adequacy Purposes For Capital Adequacy Purposes With Capital Conservation Buffer To Be Well-Capitalized Amount Ratio Amount Ratio Amount Ratio Amount Ratio As of June 30, 2022: Total Capital (to Risk-Weighted Assets) Consolidated $ 394,051 12.53 % $ 251,667 8.00 % $ 330,313 10.50 % $ 314,584 10.00 % West Bank 428,127 13.62 % 251,556 8.00 % 330,167 10.50 % 314,445 10.00 % Tier 1 Capital (to Risk-Weighted Assets) Consolidated 308,617 9.81 % 188,750 6.00 % 267,396 8.50 % 251,667 8.00 % West Bank 402,693 12.81 % 188,667 6.00 % 267,278 8.50 % 251,556 8.00 % Common Equity Tier 1 Capital (to Risk-Weighted Assets) Consolidated 288,617 9.17 % 141,563 4.50 % 220,208 7.00 % 204,479 6.50 % West Bank 402,693 12.81 % 141,500 4.50 % 220,111 7.00 % 204,389 6.50 % Tier 1 Capital (to Average Assets) Consolidated 308,617 8.59 % 143,643 4.00 % 143,643 4.00 % 179,553 5.00 % West Bank 402,693 11.22 % 143,584 4.00 % 143,584 4.00 % 179,480 5.00 % As of December 31, 2021: Total Capital (to Risk-Weighted Assets) Consolidated $ 319,329 10.89 % $ 234,670 8.00 % $ 308,004 10.50 % $ 293,337 10.00 % West Bank 354,846 12.10 % 234,621 8.00 % 307,941 10.50 % 293,277 10.00 % Tier 1 Capital (to Risk-Weighted Assets) Consolidated 290,965 9.92 % 176,002 6.00 % 249,337 8.50 % 234,670 8.00 % West Bank 326,482 11.13 % 175,966 6.00 % 249,284 8.50 % 234,621 8.00 % Common Equity Tier 1 Capital (to Risk-Weighted Assets) Consolidated 270,965 9.24 % 132,002 4.50 % 205,336 7.00 % 190,669 6.50 % West Bank 326,482 11.13 % 131,975 4.50 % 205,294 7.00 % 190,630 6.50 % Tier 1 Capital (to Average Assets) Consolidated 290,965 8.49 % 137,065 4.00 % 137,065 4.00 % 171,331 5.00 % West Bank 326,482 9.53 % 137,011 4.00 % 137,011 4.00 % 171,264 5.00 % The Company and West Bank are subject to 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. At June 30, 2022, the capital ratios for the Company and West Bank were sufficient to meet the conservation buffer. 48 Table of Contents