What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-10-27 compared with 2022-07-28 · 132 added, 128 removed, 472 unchanged (36% of the section changed)

7 unchanged sentences

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;

interest rate risk, including the effects of recent rate increases by the Federal Reserve;

fluctuations in the values of the securities held in our investment portfolio, including as a result of rising interest rates;

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 credit and other risks posed by the Company’s loan portfolio, 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;

4 unchanged sentences

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;

3 unchanged sentences

talent and labor shortages;

the new 1% excise tax on stock buybacks by publicly traded companies;

and any other risks described in the “Risk Factors” sections of this and other reports filed by the Company with the SEC.

19 unchanged sentences

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,

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

15 unchanged sentences

43.16 % 39.41 % 41.75 % 40.08 %

June 30, 2022 December 31, 2021 June 30, 2021

September 30, 2022 December 31, 2021 September 30, 2021

Reconciliation of allowance for loan losses ratio, excluding PPP loans:

19 unchanged sentences

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.

Results of operations for the three and nine months ended September 30, 2022 are compared to the results for the same periods in 2021, and the consolidated financial condition of the Company as of September 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.

2 unchanged sentences

and southern Minnesota, which includes the cities of Rochester, Owatonna, Mankato and St.

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.

Net income for the three months ended September 30, 2022 was $11,602, or $0.69 per diluted common share, compared to $12,706, or $0.76 per diluted common share, for the three months ended September 30, 2021.

The Company's annualized return on average assets and return on average equity for the three months ended September 30, 2022 were 1.32 percent and 21.01 percent, respectively, compared to 1.52 percent and 20.02 percent, respectively, for the three months ended September 30, 2021.

The decrease in net income for the three months ended September 30, 2022 compared to the same period in 2021 was primarily due to a decrease in net interest income and an increase in salaries and employee benefits, partially offset by an increase in loan swap fees and a decrease in FDIC insurance expense.

Net interest income for the three months ended September 30, 2022 decreased $1,482, or 6.1 percent, compared to the three months ended September 30, 2021.

The decrease in net interest income was primarily due to an increase in interest expense on deposits and borrowed funds due to rising interest rates, partially offset by an increase in interest income on securities and loans.

Noninterest income increased for the three months ended September 30, 2022 compared to the same period in 2021 due to loan swap fees earned in the third quarter of 2022.

Noninterest expense increased $746 during the three months ended September 30, 2022 compared to the three months ended September 30, 2021, primarily due to an increase in salaries and employee benefits and occupancy expense, partially offset by a decrease in FDIC insurance expense.

Net income for the nine months ended September 30, 2022 was $37,453, or $2.23 per diluted common share, compared to $37,697, or $2.25 per diluted common share, for the nine months ended September 30, 2021.

The Company's annualized return on average assets and return on average equity for the nine months ended September 30, 2022 were 1.43 percent and 21.57 percent, respectively, compared to 1.56 percent and 20.98 percent, respectively, for the nine months ended September 30, 2021.

The decrease in net income for the nine months ended September 30, 2022 compared to the same period in 2021 was primarily due to an increase in noninterest expense and income tax expense, partially offset by a larger negative provision for loan losses and increases in net interest income and noninterest income.

Income tax expense for the nine months ended September 30, 2022 included a one-time increase in state income tax expense of $671 for the reduction in deferred tax assets upon the enactment of changes in the Iowa bank franchise tax rates.

Net interest income for the nine months ended September 30, 2022 grew $614, or 0.9 percent, compared to the nine months ended September 30, 2021.

The Company recorded a negative provision for loan losses of $2,500 during the nine months ended September 30, 2022, compared to a negative provision of $1,500 for the nine months ended September 30, 2021.

The negative provision in 2021 was due to the improvement in economic conditions and removal of pandemic-related restrictions on businesses, in addition to lack of loan losses for the Company since the onset of the COVID-19 pandemic.

West Bancorporation, Inc.

1 unchanged sentence

(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.

Noninterest income increased for the nine months ended September 30, 2022 compared to the same period in 2021 due to the loan swap fees earned in the third quarter of 2022.

Noninterest expense increased $1,877 during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily due to an increase in salaries and employee benefits expense, partially offset by a decrease in FDIC insurance expense.

Total loans outstanding increased $157,949, or 6.4 percent, during the first nine months of 2022.

Excluding the impact of PPP loan activity, total loans outstanding increased $179,036, or 7.4 percent, during the first nine months of 2022.

As of September 30, 2022, the allowance for loan losses was 0.97 percent of total outstanding loans, compared to 1.15 percent as of December 31, 2021.

At September 30, 2022, the allowance for loan losses was 0.97 percent of total outstanding loans, excluding $1,119 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 September 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.

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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

As of and for the nine months ended September 30, 2022 As of and for the six months ended June 30, 2022 As of and for the six months ended June 30, 2022

Return on average equity 21.57% 21.83% 9.41% - 16.90%

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(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.

At its meeting on October 26, 2022, the Company's Board of Directors declared a quarterly cash dividend of $0.25 per common share.

The dividend is payable on November 23, 2022, to stockholders of record on November 9, 2022.

West Bancorporation, Inc.

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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,

The following table shows selected financial results and measures for the three and nine months ended September 30, 2022 compared with the same periods in 2021.

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 Change Change % 2022 2021 Change Change %

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6.30 % 7.57 % (1.27) % 6.62 % 7.46 % (0.84) %

As of June 30,

As of September 30,

2022 2021 Change

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Interest income and the resulting net interest income are shown on a FTE basis.

Data for the three months ended June 30:

Data for the three months ended September 30:

Average Balance Interest Income/Expense Yield/Rate

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(in thousands, except share and per share data)

Data for the six months ended June 30:

Data for the nine months ended September 30:

Average Balance Interest Income/Expense Yield/Rate

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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.

The Federal Reserve increased the target federal funds interest rate by a total of 300 basis points during the first nine months of 2022 and is expected to continue to raise the target federal funds rate into 2023.

These increases have had 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 net interest margin for the three and nine months ended September 30, 2022 decreased by 28 and 22 basis points, respectively, compared to the three and nine months ended September 30, 2021.

The primary driver of the decrease in the net interest margin was an increase in rates paid on deposits and borrowed funds and an increase in average borrowed funds balances.

Tax-equivalent net interest income decreased $1,519 for the three months ended September 30, 2022 compared to the same time period in 2021.

The decrease in net interest income for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 was primarily due to the increase in the average borrowed funds balances and increases in rates paid on deposits and borrowed funds, partially offset by increases in loans and securities average balances and yields on loans and securities.

The increase in net interest income for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 was primarily due to increases in loans and securities average balances, partially offset by increases in average balances and rates paid on deposits and borrowed funds.

Tax-equivalent interest income on loans increased $3,853 and $4,864 for the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021.

This increase in interest income was primarily driven by the increase in the average balance of commercial real estate loans and, for the three months ended September 30, 2022 compared to the same period in 2021, the increase in loan yields.

The comparability of net interest income and net interest margin between 2022 and 2021 is 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 $101 and $1,590 and yields of 17.89 percent and 9.28 percent for the three months ended September 30, 2022 and September 30, 2021, respectively.

PPP loan interest income was $753 and $5,819 with yields of 14.02 percent and 6.46 percent for the nine months ended September 30, 2022 and September 30, 2021, respectively.

Exclusive of the PPP loans, the yield on loans was 4.33 percent and 3.98 percent for the three months ended September 30, 2022 and September 30, 2021, respectively, and 4.03 percent for both the nine months ended September 30, 2022 and September 30, 2021.

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 yield on the loan portfolio is expected to increase in a rising rate environment as variable rate loans and loan renewals reprice at higher rates.

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.

The average balance of deposits increased $2,191 and $212,959 for the three and nine months ended September 30, 2022, compared to the three and nine months ended September 30, 2021.

The rates paid on deposits increased 79 and 30 basis points for the three and nine months ended September 30, 2022 compared to the same periods in 2021.

The increases in the cost of deposits were primarily due to changes in deposit mix, and increases in certain deposit rates in response to the increases in the target federal funds rate and market interest rate competition.

The cost of deposits could increase further in a rising rate environment.

The average balance of borrowed funds increased $192,019 and $80,409 for the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021.

The Company increased variable-rate long-term debt by $34,500 in December 2021 and issued subordinated debt of $60,000 in June 2022.

Average balances of federal funds purchased increased $100,362 and $45,946 for the three and nine months ended September 30, 2022 compared to the same periods in 2021.

The average rate paid on borrowed funds increased 87 and 43 basis points for the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021.

The cost of borrowed funds may continue to increase as the variable rate on long-term debt and federal funds purchased may increase if market rates continue to increase.

West Bancorporation, Inc.

1 unchanged sentence

(in thousands, except share and per share data)

In the first nine months of 2022, the Federal Reserve increased the target federal funds rate by a total of 300 basis points, and it is expected to make additional rate increases into 2023.

These rate increases could improve reinvestment rates on loans and securities, but also increase the Company's cost of deposits and borrowed funds and increase the unrealized losses in the Company's securities portfolio.

Provision for Loan Losses and the Related Allowance for Loan Losses

2 unchanged sentences

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.

There was no provision for loan losses for the three months ended September 30, 2022 and September 30, 2021.

The negative provisions for loan losses were $2,500 for the nine months ended September 30, 2022, compared to negative provisions of $1,500 for the nine months ended September 30, 2021.

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.

The impaired loan, which had a specific reserve of $2,500, was settled in the second quarter of 2022 resulting in a charge-off of $451.

Factors management considers in establishing an appropriate allowance include:

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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,

The following table summarizes the activity in the Company's allowance for loan losses for the three and nine months ended September 30, 2022 and 2021 and related ratios.

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 Change 2022 2021 Change

3 unchanged sentences

Net (charge-offs) recoveries (16) 56 (72) (446) 162 (608)

Provision for loan losses charged to operations (1,750) (2,000) 250 (2,500) (1,500) (1,000)

Provision for loan losses charged (credited) to operations — — — (2,500) (1,500) (1,000)

Balance at end of period $ 25,418 $ 28,098 $ (2,680) $ 25,418 $ 28,098 $ (2,680)

8 unchanged sentences

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.

Current economic concerns include the impact of sharp increases in interest rates, inflationary trends, continuing supply chain issues and labor shortages, wage pressures, and expectations of additional 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 300 basis points in the first nine months of 2022.

It is expected that additional rate increases will occur into 2023.

The Company decreased certain qualitative factors used in the allowance for loan losses evaluation in the first nine months of 2022 based upon the sustained performance of loans after the expiration of COVID modifications and continued 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 nine months ended September 30, 2022.

Management believes the resulting allowance for loan losses as of September 30, 2022 was adequate to absorb any losses inherent in the loan portfolio at the end of the quarter.

West Bancorporation, Inc.

3 unchanged sentences

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,

Three Months Ended September 30,

Noninterest income:

4 unchanged sentences

Increase in cash value of bank-owned life insurance 246 230 16 6.96 %

Loan swap fees — 42 (42) (100.00) %

Loan swap fees 835 — 835 N/A

Realized securities gains, net — 11 (11) (100.00) %

3 unchanged sentences

Total noninterest income $ 3,276 $ 2,401 $ 875 36.44 %

Six Months Ended June 30,

Nine Months Ended September 30,

Noninterest income:

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Total noninterest income $ 7,943 $ 7,381 $ 562 7.61 %

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.

The increase in noninterest income for the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021 was primarily due to loan swap fees of $835 earned in the third quarter of 2022.

Additionally, revenue from trust services increased for the three months ended September 30, 2022 when compared to the same period in 2021, primarily due to one-time estate fees earned in 2022.

The decrease in other income for the nine months ended September 30, 2022 compared to the same period in 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.

West Bancorporation, Inc.

4 unchanged sentences

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,

Three Months Ended September 30,

Noninterest expense:

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Total noninterest expense $ 11,458 $ 10,712 $ 746 6.96 %

Six Months Ended June 30,

Nine Months Ended September 30,

Noninterest expense:

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(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.

Salaries and employee benefits increased for the three and nine months ended September 30, 2022 when compared to the three and nine months ended September 30, 2021, primarily due to an increase in expense related to restricted stock units, the addition of five commercial bankers from third quarter of 2021 through the third quarter of 2022, and normal operating increases.

FDIC insurance expense decreased during the three and nine months ended September 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 September 30, 2022 compared to the same period in 2021 primarily due to 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.

Subscriptions and service contracts increased for the three and nine months ended September 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 following the initial period of the pandemic with increased in-person activities, and the addition of five 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 recorded income tax expense of $3,220 (21.7 percent of pre-tax income) and $10,675 (22.2 percent of pre-tax income) for the three and nine months ended September 30, 2022, compared with $3,469 (21.4 percent of pre-tax income) and $10,132 (21.2 percent of pre-tax income) for the three and nine months ended September 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.

For the nine months ended September 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.

This future reduction in the state tax rate required the Company to reduce net deferred tax assets by $671 and in turn caused the one-time increase in 2022 tax expense.

Additionally, for the nine months ended September 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 nine 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 $1,101 and $1,026, respectively.

West Bancorporation, Inc.

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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.

The Company had total assets of $3,517,517 as of September 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 available for sale decreased by $26,852 during the six months ended June 30, 2022.

Securities available for sale decreased by $87,070 during the nine months ended September 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 impact of these purchases was offset by principal paydowns and the change in the fair value of the portfolio, which declined $141,629 in the first nine 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.

These unrealized losses are recorded in accumulated other comprehensive loss, net of tax.

Future increases in market interest rates could result in a further increase of the unrealized losses in the securities portfolio.

As of September 30, 2022, approximately 65 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.

Loans outstanding increased $157,949 from $2,456,196 as of December 31, 2021 to $2,614,145 as of September 30, 2022.

Changes in the loan portfolio during the first nine months of 2022 included increases of $131,689 in commercial real estate loans and $33,521 in commercial loans and a decrease of $17,709 in construction, land and land development loans.

Included in the change in commercial loans was a decline of $21,087 in PPP loans.

As of September 30, 2022, PPP loans outstanding totaled $1,119.

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.

Exclusive of PPP loans, loan growth in the first nine months of 2022 was $179,036, or 7.4 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.

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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

September 30, 2022 December 31, 2021 Change

Nonaccrual loans $ 329 $ 8,948 $ (8,619)

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TDR loans on nonaccrual status are categorized as nonaccrual.

There were no TDR loans categorized as nonaccrual as of June 30, 2022.

There were no TDR loans categorized as nonaccrual as of September 30, 2022.

There were six TDR loans related to one borrower as of December 31, 2021, categorized as nonaccrual.

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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.

The Company completed construction of a new office for its St.

Cloud, Minnesota branch which opened in March 2022.

At that time, the previously leased location was vacated.

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Construction of a new office in Mankato, Minnesota began in the first quarter of 2022.

Deposits decreased $173,554 during the first six months of 2022.

Deposits decreased $193,158 during the first nine 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.

A large corporate customer completed significant business transactions during 2022 that were funded by existing cash balances, accounting for a significant portion of the decrease in deposits.

Also, large depositors who had accumulated excess discretionary balances sought higher yields in Treasury securities and other investment options primarily as a result of the sharp increase in shorter term interest rates.

At September 30, 2022, the Company had $258,080 in brokered deposits, compared to $130,032 at December 31, 2021.

Brokered deposits included fixed-rate deposits with terms through September 2024 and variable-rate deposits with terms through February 2024.

Subordinated Debt

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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.

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Proceeds from this debt issuance were used to make a $58,650 capital injection into West Bank, the Company's subsidiary.

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.

At September 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 $535,733 and $427,008, respectively.

The fair values 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 $29,335 increase in other assets and a $4,669 increase in other liabilities from December 31, 2021 to September 30, 2022 due to changes in forecasted yield curves.

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.

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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.

The Company had liquid assets (cash and cash equivalents) of $59,391 as of September 30, 2022 compared with $192,825 as of December 31, 2021.

West Bancorporation, Inc.

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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.

The Company may utilize brokered deposits to supplement core deposit fluctuations and loan growth.

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.

At September 30, 2022, the Company had $258,080 in brokered deposits, which included fixed-rate deposits with terms through September 2024 and variable-rate deposits with terms through February 2024.

As of September 30, 2022, West Bank had additional borrowing capacity available from the FHLB of approximately $430,000, 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 $48,921 to liquidity for the nine months ended September 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.

The Company's total stockholders' equity decreased to $216,189 at June 30, 2022 from $260,328 at December 31, 2021.

The Company had remaining commitments to invest in qualified affordable housing projects totaling $3,707 and $3,986 as of September 30, 2022 and December 31, 2021, respectively.

West Bank has entered into a construction contract for the construction of a new headquarters building in West Des Moines, Iowa.

West Bank will pay the contractor a contract price consisting of the cost of work plus a fee, subject to a guaranteed maximum price of $42,309, with anticipated construction completed in 2024.

As of September 30, 2022, $1,499 has been paid under this construction contract.

The Company's total stockholders' equity decreased to $198,764 at September 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.

At September 30, 2022, the Company's tangible common equity as a percent of tangible assets was 5.65 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.

While accumulated other comprehensive losses reduce tangible common equity, they have no impact on regulatory capital.

The Company and West Bank are subject to various regulatory capital requirements administered by federal and state banking agencies.

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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.

Management believed the Company and West Bank met all capital adequacy requirements to which they were subject as of September 30, 2022.

West Bancorporation, Inc.

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Amount Ratio Amount Ratio Amount Ratio Amount Ratio

As of June 30, 2022:

As of September 30, 2022:

Total Capital (to Risk-Weighted Assets)

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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.

At September 30, 2022, the capital ratios for the Company and West Bank were sufficient to meet the conservation buffer.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis