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: 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 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; 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; 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; 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. 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. 32 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 September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Reconciliation of net interest income and net interest margin on a FTE basis to GAAP: Net interest income (GAAP) $ 23,004 $ 24,486 $ 71,071 $ 70,457 Tax-equivalent adjustment (1) 270 306 925 805 Net interest income on a FTE basis (non-GAAP) 23,274 24,792 71,996 71,262 Average interest-earning assets 3,322,521 3,212,283 3,371,915 3,099,066 Net interest margin on a FTE basis (non-GAAP) 2.78 % 3.06 % 2.85 % 3.07 % Reconciliation of efficiency ratio on an adjusted and FTE basis to GAAP: Net interest income on a FTE basis (non-GAAP) $ 23,274 $ 24,792 $ 71,996 $ 71,262 Noninterest income 3,276 2,401 7,943 7,381 Adjustment for realized securities gains, net — (11) — (51) Adjustment for losses on disposal of premises and equipment, net — — 27 29 Adjusted income 26,550 27,182 79,966 78,621 Noninterest expense 11,458 10,712 33,386 31,509 Efficiency ratio on an adjusted and FTE basis (non-GAAP) (2) 43.16 % 39.41 % 41.75 % 40.08 % September 30, 2022 December 31, 2021 September 30, 2021 Reconciliation of allowance for loan losses ratio, excluding PPP loans: Loans outstanding (GAAP) $ 2,614,145 $ 2,456,196 $ 2,359,567 Less: PPP loans (1,119) (22,206) (47,416) Loans, net of PPP loans (non-GAAP) 2,613,026 2,433,990 2,312,151 Allowance for loan losses 25,418 28,364 28,098 Allowance for loan losses ratio, excluding PPP loans (non-GAAP) (3) 0.97 % 1.17 % 1.22 % (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. 33 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. 34 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 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. 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 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 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 due to rising interest rates. 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. 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 continued improvement in classified loans. 35 Table of Contents West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) 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. 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 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% Efficiency ratio (1) 41.75% 41.05% 43.14% - 65.65% Nonperforming assets to total assets 0.01% 0.01% 0.10% - 1.11% (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 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. 36 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 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 % Net income $ 11,602 $ 12,706 $ (1,104) (8.69) % $ 37,453 $ 37,697 $ (244) (0.65) % Average assets 3,475,894 3,325,522 150,372 4.52 % 3,507,796 3,220,687 287,109 8.91 % Average stockholders' equity 219,065 251,770 (32,705) (12.99) % 232,177 240,235 (8,058) (3.35) % Return on average assets 1.32 % 1.52 % (0.20) % 1.43 % 1.56 % (0.13) % Return on average equity 21.01 % 20.02 % 0.99 % 21.57 % 20.98 % 0.59 % Net interest margin (1) 2.78 % 3.06 % (0.28) % 2.85 % 3.07 % (0.22) % Efficiency ratio (1) (2) 43.16 % 39.41 % 3.75 % 41.75 % 40.08 % 1.67 % Dividend payout ratio 35.86 % 31.27 % 4.59 % 33.27 % 30.69 % 2.58 % Average equity to average assets ratio 6.30 % 7.57 % (1.27) % 6.62 % 7.46 % (0.84) % As of September 30, 2022 2021 Change Nonperforming assets to total assets (2) 0.01 % 0.28 % (0.27) % Equity to assets ratio 5.65 % 7.77 % (2.12) % Tangible common equity ratio 5.65 % 7.77 % (2.12) % (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. 37 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 September 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 $ 498,268 $ 496,485 $ 1,783 0.36 % $ 6,144 $ 5,687 $ 457 8.04 % 4.89 % 4.54 % 0.35 % Real estate (3) 2,074,692 1,837,251 237,441 12.92 % 21,981 18,632 3,349 17.97 % 4.20 % 4.02 % 0.18 % Consumer and other 6,902 3,619 3,283 90.72 % 86 39 47 120.51 % 5.01 % 4.30 % 0.71 % Total loans 2,579,862 2,337,355 242,507 10.38 % 28,211 24,358 3,853 15.82 % 4.34 % 4.13 % 0.21 % Securities: Taxable 584,721 506,746 77,975 15.39 % 3,147 2,412 735 30.47 % 2.15 % 1.90 % 0.25 % Tax-exempt (3) 153,187 155,806 (2,619) (1.68) % 1,051 940 111 11.81 % 2.74 % 2.41 % 0.33 % Total securities 737,908 662,552 75,356 11.37 % 4,198 3,352 846 25.24 % 2.28 % 2.02 % 0.26 % Federal funds sold 4,751 212,376 (207,625) (97.76) % 30 82 (52) (63.41) % 2.51 % 0.15 % 2.36 % Total interest-earning assets (3) $ 3,322,521 $ 3,212,283 $ 110,238 3.43 % 32,439 27,792 4,647 16.72 % 3.87 % 3.43 % 0.44 % Interest-bearing liabilities: Deposits: Interest-bearing demand $ 476,145 $ 490,653 $ (14,508) (2.96) % 679 208 471 226.44 % 0.57 % 0.17 % 0.40 % Savings and money market 1,327,935 1,444,633 (116,698) (8.08) % 4,461 1,452 3,009 207.23 % 1.33 % 0.40 % 0.93 % Time deposits 343,862 210,465 133,397 63.38 % 1,149 361 788 218.28 % 1.33 % 0.68 % 0.65 % Total deposits 2,147,942 2,145,751 2,191 0.10 % 6,289 2,021 4,268 211.18 % 1.16 % 0.37 % 0.79 % Borrowed Funds: Federal funds purchased 105,431 5,069 $ 100,362 1,979.92 % 655 2 653 32,650.00 % 2.46 % 0.12 % 2.34 % Subordinated notes, net 79,285 20,460 58,825 287.51 % 1,106 254 852 335.43 % 5.54 % 4.93 % 0.61 % Federal Home Loan Bank advances 125,000 125,000 — — % 649 656 (7) (1.07) % 2.06 % 2.08 % (0.02) % Long-term debt 51,486 18,654 32,832 176.01 % 466 66 400 606.06 % 3.60 % 1.40 % 2.20 % Total borrowed funds 361,202 169,183 192,019 113.50 % 2,876 978 1,898 194.07 % 3.16 % 2.29 % 0.87 % Total interest-bearing liabilities $ 2,509,144 $ 2,314,934 $ 194,210 8.39 % 9,165 2,999 8,064 205.60 % 1.45 % 0.51 % 0.94 % Net interest income (FTE) (4) $ 23,274 $ 24,793 $ (1,519) (6.13) % Net interest spread (FTE) 2.42 % 2.92 % (0.50) % Net interest margin (FTE) (4) 2.78 % 3.06 % (0.28) % 38 Table of Contents West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) Data for the nine months ended September 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 $ 479,723 $ 538,579 $ (58,856) (10.93) % $ 15,751 $ 17,880 $ (2,129) (11.91) % 4.39 % 4.44 % (0.05) % Real estate (3) 2,037,779 1,764,285 273,494 15.50 % 60,678 53,712 6,966 12.97 % 3.98 % 4.07 % (0.09) % Consumer and other 5,154 4,365 789 18.08 % 173 146 27 18.49 % 4.50 % 4.48 % 0.02 % Total loans 2,522,656 2,307,229 215,427 9.34 % 76,602 71,738 4,864 6.78 % 4.06 % 4.16 % (0.10) % Securities: Taxable 611,647 403,873 207,774 51.45 % 9,126 5,952 3,174 53.33 % 1.99 % 1.96 % 0.03 % Tax-exempt (3) 160,226 133,074 27,152 20.40 % 3,199 2,506 693 27.65 % 2.66 % 2.51 % 0.15 % Total securities 771,873 536,947 234,926 43.75 % 12,325 8,458 3,867 45.72 % 2.13 % 2.10 % 0.03 % Federal funds sold 77,386 254,890 (177,504) (69.64) % 179 226 (47) (20.80) % 0.31 % 0.12 % 0.19 % Total interest-earning assets (3) $ 3,371,915 $ 3,099,066 $ 272,849 8.80 % 89,106 80,422 8,684 10.80 % 3.53 % 3.47 % 0.06 % Interest-bearing liabilities: Deposits: Interest-bearing demand $ 513,106 $ 471,781 $ 41,325 8.76 % 1,253 561 692 123.35 % 0.33 % 0.16 % 0.17 % Savings and money market 1,505,834 1,369,861 135,973 9.93 % 8,520 4,119 4,401 106.85 % 0.76 % 0.40 % 0.36 % Time deposits 248,628 212,967 35,661 16.74 % 1,813 1,213 600 49.46 % 0.97 % 0.76 % 0.21 % Total deposits 2,267,568 2,054,609 212,959 10.36 % 11,586 5,893 5,693 96.61 % 0.68 % 0.38 % 0.30 % Borrowed funds: Federal funds purchased 50,796 4,850 45,946 947.34 % 812 4 808 20,200.00 % 2.14 % 0.11 % 2.03 % Subordinated notes, net 43,955 20,457 23,498 114.87 % 1,748 754 994 131.83 % 5.32 % 4.93 % 0.39 % Federal Home Loan Bank advances 125,000 145,421 (20,421) (14.04) % 1,914 2,288 (374) (16.35) % 2.05 % 2.10 % (0.05) % Long-term debt 51,490 20,104 31,386 156.12 % 1,050 220 830 377.27 % 2.73 % 1.46 % 1.27 % Total borrowed funds 271,241 190,832 80,409 42.14 % 5,524 3,266 2,258 69.14 % 2.72 % 2.29 % 0.43 % Total interest-bearing liabilities $ 2,538,809 $ 2,245,441 $ 293,368 13.07 % 17,110 9,159 7,951 86.81 % 0.90 % 0.55 % 0.35 % Net interest income (FTE) (4) $ 71,996 $ 71,263 $ 733 1.03 % Net interest spread (FTE) 2.63 % 2.92 % (0.29) % Net interest margin (FTE) (4) 2.85 % 3.07 % (0.22) % (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. 39 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 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 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 $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. 40 Table of Contents West Bancorporation, Inc. Management's Discussion and Analysis (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 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. 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, 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: 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. 41 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 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 Balance at beginning of period $ 25,434 $ 28,042 $ (2,608) $ 28,364 $ 29,436 $ (1,072) Charge-offs (31) — (31) (482) — (482) Recoveries 15 56 (41) 36 162 (126) Net (charge-offs) recoveries (16) 56 (72) (446) 162 (608) 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) Average loans outstanding $ 2,579,862 $ 2,337,355 $ 2,522,656 $ 2,307,229 Ratio of annualized net (charge-offs) recoveries during the period to average loans outstanding 0.00 % 0.01 % (0.02) % 0.01 % Ratio of allowance for loan losses to average loans outstanding 0.99 % 1.20 % 1.01 % 1.22 % Ratio of allowance for loan losses to total loans at end of period 0.97 % 1.19 % 0.97 % 1.19 % Ratio of allowance for loan losses to total loans at end of period, excluding PPP loans (1) 0.97 % 1.22 % 0.97 % 1.22 % (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 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. 42 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 September 30, Noninterest income: 2022 2021 Change Change % Service charges on deposit accounts $ 553 $ 589 $ (36) (6.11) % Debit card usage fees 498 490 8 1.63 % Trust services 780 695 85 12.23 % Increase in cash value of bank-owned life insurance 246 230 16 6.96 % Loan swap fees 835 — 835 N/A Realized securities gains, net — 11 (11) (100.00) % Other income: All other income 364 386 (22) (5.70) % Total other income 364 386 (22) (5.70) % Total noninterest income $ 3,276 $ 2,401 $ 875 36.44 % Nine Months Ended September 30, Noninterest income: 2022 2021 Change Change % Service charges on deposit accounts $ 1,718 $ 1,749 $ (31) (1.77) % Debit card usage fees 1,477 1,443 34 2.36 % Trust services 2,031 2,038 (7) (0.34) % Increase in cash value of bank-owned life insurance 709 690 19 2.75 % Loan swap fees 835 42 793 1,888.10 % Realized securities gains, net — 51 (51) (100.00) % Other income: All other income 1,173 1,368 (195) (14.25) % Total other income 1,173 1,368 (195) (14.25) % Total noninterest income $ 7,943 $ 7,381 $ 562 7.61 % 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. 43 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 September 30, Noninterest expense: 2022 2021 Change Change % Salaries and employee benefits $ 6,578 $ 6,018 $ 560 9.31 % Occupancy 1,315 1,203 112 9.31 % Data processing 644 616 28 4.55 % FDIC insurance 127 528 (401) (75.95) % Professional fees 250 212 38 17.92 % Director fees 209 176 33 18.75 % Other expenses: Subscriptions and service contracts 651 424 227 53.54 % Business development 305 229 76 33.19 % Insurance expense 198 127 71 55.91 % Trust 137 181 (44) (24.31) % Consulting fees 66 70 (4) (5.71) % Marketing 60 54 6 11.11 % Charitable contributions — 60 (60) (100.00) % Low income housing projects amortization 116 203 (87) (42.86) % New markets tax credit project amortization and management fees 230 230 — — % All other 572 381 191 50.13 % Total other expenses 2,335 1,959 376 19.19 % Total noninterest expense $ 11,458 $ 10,712 $ 746 6.96 % Nine Months Ended September 30, Noninterest expense: 2022 2021 Change Change % Salaries and employee benefits $ 19,286 $ 17,298 $ 1,988 11.49 % Occupancy 3,643 3,630 13 0.36 % Data processing 1,924 1,835 89 4.85 % FDIC insurance 753 1,358 (605) (44.55) % Professional fees 669 763 (94) (12.32) % Director fees 599 581 18 3.10 % Other expenses: Subscriptions and service contracts 1,619 1,269 350 27.58 % Business development 832 676 156 23.08 % Insurance expense 505 371 134 36.12 % Trust 412 459 (47) (10.24) % Consulting fees 241 223 18 8.07 % Marketing 184 156 28 17.95 % Charitable contributions — 180 (180) (100.00) % Low income housing projects amortization 388 529 (141) (26.65) % New markets tax credit project amortization and management fees 689 689 — — % All other 1,642 1,492 150 10.05 % Total other expenses 6,512 6,044 468 7.74 % Total noninterest expense $ 33,386 $ 31,509 $ 1,877 5.96 % 44 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 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 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 $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 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 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. 45 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 $3,517,517 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 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 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 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 $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 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. 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. September 30, 2022 December 31, 2021 Change Nonaccrual loans $ 329 $ 8,948 $ (8,619) Loans past due 90 days and still accruing interest — — — Troubled debt restructured loans (1) — — — Total nonperforming loans 329 8,948 (8,619) Other real estate owned — — — Total nonperforming assets $ 329 $ 8,948 $ (8,619) 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 September 30, 2022. There were six TDR loans related to one borrower as of December 31, 2021, categorized as nonaccrual. 46 Table of Contents West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) Premises and Equipment 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. 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 $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. 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 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 2.41 percent, 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 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. 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 $59,391 as of September 30, 2022 compared with $192,825 as of December 31, 2021. 47 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 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 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 $3,707 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. Capital 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 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, 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. 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 September 30, 2022. 48 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 September 30, 2022: Total Capital (to Risk-Weighted Assets) Consolidated $ 402,346 12.34 % $ 260,881 8.00 % $ 342,407 10.50 % $ 326,102 10.00 % West Bank 436,158 13.38 % 260,716 8.00 % 342,189 10.50 % 325,894 10.00 % Tier 1 Capital (to Risk-Weighted Assets) Consolidated 316,928 9.72 % 195,661 6.00 % 277,187 8.50 % 260,881 8.00 % West Bank 410,740 12.60 % 195,537 6.00 % 277,010 8.50 % 260,716 8.00 % Common Equity Tier 1 Capital (to Risk-Weighted Assets) Consolidated 296,928 9.11 % 146,746 4.50 % 228,271 7.00 % 211,966 6.50 % West Bank 410,740 12.60 % 146,652 4.50 % 228,126 7.00 % 211,831 6.50 % Tier 1 Capital (to Average Assets) Consolidated 316,928 8.85 % 143,286 4.00 % 143,286 4.00 % 179,108 5.00 % West Bank 410,740 11.47 % 143,221 4.00 % 143,221 4.00 % 179,026 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 September 30, 2022, the capital ratios for the Company and West Bank were sufficient to meet the conservation buffer. 49 Table of Contents