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,” “confident,” “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 changes in interest rates; competitive pressures, including from non-bank competitors such as "fintech" companies and digital asset service providers; pricing pressures on loans and deposits; our ability to successfully manage liquidity risk; 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 credit losses dictated by new market conditions, accounting standards (including as a result of the implementation of the current expected credit loss (CECL) accounting standard) or regulatory requirements; the concentration of large deposits from certain clients, who have balances above current FDIC insurance limits; changes in local, national and international economic conditions, including rising rates of inflation and possible recession; the effects of recent developments and events in the financial services industry, including the large-scale deposit withdrawals over a short period of time at Silicon Valley Bank, Signature Bank and First Republic Bank that resulted in failure of those institutions; changes in legal and regulatory requirements, limitations and costs, including in response to the recent failures of Silicon Valley Bank, Signature Bank and First Republic Bank; changes in customers’ acceptance of the Company’s products and services; the occurrence of fraudulent activity, breaches or failures of our information security controls or cyber-security related incidents, including as a result of sophisticated attacks using artificial intelligence and similar tools; 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; risks related to climate change and the negative impact it may have on our customers and their business; changes to U.S. tax laws, regulations and guidance; talent and labor shortages; the new 1 percent 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, 2022, as filed with the SEC on February 23, 2023. The Company adopted ASU 2016-13 on January 1, 2023 and replaced the allowance for loan losses "incurred loss" model discussed in the Form 10-K for the year ended December 31, 2022 with the allowance for credit losses "current expected credit loss" model, referred to as the CECL model. Refer to Note 1 and 4 for additional information and accounting policies related to the CECL model. 33 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, and the presentation of the efficiency ratio on an adjusted and FTE basis, excluding certain income and expenses. 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 FTE basis and efficiency ratio on an adjusted and FTE basis to their most directly comparable measures under GAAP. Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Reconciliation of net interest income and net interest margin on a FTE basis to GAAP: Net interest income (GAAP) $ 17,341 $ 24,239 $ 36,036 $ 48,067 Tax-equivalent adjustment (1) 122 326 283 655 Net interest income on a FTE basis (non-GAAP) 17,463 24,565 36,319 48,722 Average interest-earning assets 3,461,313 3,362,313 3,448,722 3,397,021 Net interest margin on a FTE basis (non-GAAP) 2.02 % 2.93 % 2.12 % 2.89 % Reconciliation of efficiency ratio on an adjusted and FTE basis to GAAP: Net interest income on a FTE basis (non-GAAP) $ 17,463 $ 24,565 $ 36,319 $ 48,722 Noninterest income 2,389 2,278 5,346 4,667 Adjustment for losses on disposal of premises and equipment, net 2 9 2 27 Adjusted income 19,854 26,852 41,667 53,416 Noninterest expense 12,474 11,266 24,545 21,928 Efficiency ratio on an adjusted and FTE basis (non-GAAP) (2) 62.83 % 41.96 % 58.91 % 41.05 % (1) Computed on a tax-equivalent basis using a federal income tax rate of 21 percent, adjusted to reflect the effect of the nondeductible interest expense associated with owning tax-exempt securities and loans. Management believes the presentation of this non-GAAP measure provides supplemental useful information for proper understanding of the financial results, as it enhances the comparability of income arising from taxable and nontaxable sources. (2) The efficiency ratio expresses noninterest expense as a percent of fully taxable equivalent net interest income and noninterest income, excluding specific noninterest income and expenses. Management believes the presentation of this non-GAAP measure provides supplemental useful information for proper understanding of the Company's financial performance. It is a standard measure of comparison within the banking industry. A lower ratio is more desirable. 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 six months ended June 30, 2023 are compared to the results for the same periods in 2022, and the consolidated financial condition of the Company as of June 30, 2023 is compared to that as of December 31, 2022. 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, 2022, filed with the SEC on February 23, 2023. The Company conducts business from its main office in West Des Moines, Iowa and through its branch offices in central Iowa, which is generally the greater Des Moines metropolitan area; eastern Iowa, which is the area including and surrounding Iowa City and Coralville; and southern Minnesota, which includes the cities of Rochester, Owatonna, Mankato and St. Cloud. Net income for the three months ended June 30, 2023 was $5,862, or $0.35 per diluted common share, compared to $12,667, or $0.75 per diluted common share, for the three months ended June 30, 2022. The Company's annualized return on average assets and return on average equity for the three months ended June 30, 2023 were 0.64 percent and 11.03 percent, respectively, compared to 1.45 percent and 22.81 percent, respectively, for the three months ended June 30, 2022. The decrease in net income for the three months ended June 30, 2023 compared to the same period in 2022 was primarily due to a decrease in net interest income and increase in salaries and employee benefits. Net interest income for the three months ended June 30, 2023 decreased $6,898, or 28.5 percent, compared to the three months ended June 30, 2022. The decrease in net interest income was primarily due to the increase in interest expense on deposits and other borrowings resulting from rapidly rising short-term interest rates and an inverted yield curve, and changes in funding mix, partially offset by an increase in interest income on loans and securities. Noninterest income increased $111 for the three months ended June 30, 2023, compared to the same period in 2022 primarily due to an increase in trust services revenue. Noninterest expense increased $1,208 during the three months ended June 30, 2023 compared to the three months ended June 30, 2022, primarily due to increases in salaries and employee benefits and FDIC insurance expense. Net income for the six months ended June 30, 2023 was $13,706, or $0.82 per diluted common share, compared to $25,851, or $1.54 per diluted common share, for the six months ended June 30, 2022. The Company's annualized return on average assets and return on average equity for the six months ended June 30, 2023 were 0.76 percent and 12.90 percent, respectively, compared to 1.48 percent and 21.83 percent, respectively, for the six months ended June 30, 2022. The decrease in net income for the six months ended June 30, 2023 compared to the same period in 2022 was primarily due to a decrease in net interest income and an increase in salaries and employee benefits and occupancy costs, partially offset by an increase in trust services revenue and a gain from bank-owned life insurance. Net interest income for the six months ended June 30, 2023 declined $12,031, or 25.0 percent, compared to the six months ended June 30, 2022. The decrease in net interest income was primarily due to the increase in interest expense on deposits and other borrowings resulting from rapidly rising short-term interest rates and an inverted yield curve, and changes in funding mix, partially offset by an increase in interest income on loans and securities. Noninterest income increased $679 for the six months ended June 30, 2023 compared to the same period in 2022 primarily due to a gain from bank-owned life insurance and an increase in trust services revenue. Noninterest expense increased $2,617 during the six months ended June 30, 2023 compared to the six months ended June 30, 2022, primarily due to increases in salaries and employee benefits, occupancy and equipment expense and FDIC insurance expense. Total loans outstanding increased $64,239, or 2.3 percent, during the first six months of 2023. The credit quality of the loan portfolio remained strong, as evidenced by the Company's ratio of nonperforming loans to total assets of 0.01 percent as of both June 30, 2023 and December 31, 2022. As of June 30, 2023, the allowance for credit losses was 1.00 percent of total outstanding loans, compared to 0.93 percent as of December 31, 2022. Management believed the allowance for credit losses at June 30, 2023 was adequate to absorb expected losses in the loan portfolio as of that date. 35 Table of Contents West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) On a quarterly basis, the Company compares three key performance metrics to those of our identified peer group. The peer group for 2023 consists of 22 Midwestern, publicly traded financial institutions, including Bank First Corporation, Bridgewater Bancshares Inc., ChoiceOne Financial Services, Inc., 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., HBT Financial 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. The Company is in the middle of the group in terms of asset size. The Company's goal is to perform at or near the top of this peer group relative to what we consider to be three key metrics: return on average equity, efficiency ratio and nonperforming assets to total assets. We believe these measures encompass the factors that define the performance of a community bank. Company and peer results for the key financial performance measures are summarized below. West Bancorporation, Inc. Peer Group Range (2) As of and for the six months ended June 30, 2023 As of and for the three months ended March 31, 2023 As of and for the three months ended March 31, 2023 Return on average equity 12.90% 14.77% (3.67%) - 19.19% Efficiency ratio (1) 58.91% 55.34% 39.81% - 70.53% Nonperforming assets to total assets 0.01% 0.01% 0.00% - 0.53% (1) The efficiency ratio is a non-GAAP financial measure. For further information, refer to the Non-GAAP Financial Measures section of this report. (2) Latest data available. At its meeting on July 26, 2023, the Company's Board of Directors declared a regular quarterly cash dividend of $0.25 per common share. The dividend is payable on August 23, 2023, to stockholders of record on August 9, 2023. 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 six months ended June 30, 2023 compared with the same periods in 2022. Three Months Ended June 30, Six Months Ended June 30, 2023 2022 Change Change % 2023 2022 Change Change % Net income $ 5,862 $ 12,667 $ (6,805) (53.72) % $ 13,706 $ 25,851 $ (12,145) (46.98) % Average assets 3,645,651 3,503,686 141,965 4.05 % 3,631,632 3,524,012 107,620 3.05 % Average stockholders' equity 213,177 222,731 (9,554) (4.29) % 214,278 238,841 (24,563) (10.28) % Return on average assets 0.64 % 1.45 % (0.81) % 0.76 % 1.48 % (0.72) % Return on average equity 11.03 % 22.81 % (11.78) % 12.90 % 21.83 % (8.93) % Net interest margin (1) 2.02 % 2.93 % (0.91) % 2.12 % 2.89 % (0.77) % Efficiency ratio (1) (2) 62.83 % 41.96 % 20.87 % 58.91 % 41.05 % 17.86 % Dividend payout ratio 71.33 % 32.84 % 38.49 % 60.86 % 32.10 % 28.76 % Average equity to average assets ratio 5.85 % 6.36 % (0.51) % 5.90 % 6.78 % (0.88) % As of June 30, 2023 2022 Change Nonperforming assets to total assets (2) 0.01 % 0.01 % — % Equity to assets ratio 5.90 % 6.22 % (0.32) % Tangible common equity ratio 5.90 % 6.22 % (0.32) % (1) Amounts are presented on a FTE basis. These are non-GAAP financial measures. For further information, refer to the Non-GAAP Financial Measures section of this report. (2) A lower ratio is more desirable. Definitions of ratios: • Return on average assets - annualized net income divided by average assets. • Return on average equity - annualized net income divided by average stockholders' equity. • Net interest margin - annualized tax-equivalent net interest income divided by average interest-earning assets. • Efficiency ratio - noninterest expense (excluding other real estate owned expense and write-down of premises) divided by noninterest income (excluding net securities gains/losses and gains/losses on disposition of premises and equipment) plus tax-equivalent net interest income. • Dividend payout ratio - dividends paid to common stockholders divided by net income. • Average equity to average assets ratio - average equity divided by average assets. • Nonperforming assets to total assets - total nonperforming assets divided by total assets. • Equity to assets ratio - equity divided by assets. • Tangible common equity ratio - common equity less intangible assets (none held) divided by tangible assets. 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 June 30: Average Balance Interest Income/Expense Yield/Rate 2023 2022 Change Change- % 2023 2022 Change Change- % 2023 2022 Change Interest-earning assets: Loans: (1) (2) Commercial $ 525,025 $ 470,486 $ 54,539 11.59 % $ 7,973 $ 4,949 $ 3,024 61.10 % 6.09 % 4.22 % 1.87 % Real estate (3) 2,249,378 2,061,700 187,678 9.10 % 26,941 19,972 6,969 34.89 % 4.80 % 3.89 % 0.91 % Consumer and other 9,059 4,966 4,093 82.42 % 155 53 102 192.45 % 6.85 % 4.23 % 2.62 % Total loans 2,783,462 2,537,152 246,310 9.71 % 35,069 24,974 10,095 40.42 % 5.05 % 3.95 % 1.10 % Securities: Taxable 526,390 617,104 (90,714) (14.70) % 3,432 3,090 342 11.07 % 2.61 % 2.00 % 0.61 % Tax-exempt (3) 149,669 156,788 (7,119) (4.54) % 947 1,092 (145) (13.28) % 2.53 % 2.78 % (0.25) % Total securities 676,059 773,892 (97,833) (12.64) % 4,379 4,182 197 4.71 % 2.59 % 2.16 % 0.43 % Interest-bearing deposits 1,792 51,269 (49,477) (96.50) % 25 67 (42) (62.69) % 5.46 % 0.52 % 4.94 % Total interest-earning assets (3) $ 3,461,313 $ 3,362,313 $ 99,000 2.94 % 39,473 29,223 10,250 35.08 % 4.57 % 3.49 % 1.08 % Interest-bearing liabilities: Deposits: Interest-bearing demand $ 483,870 $ 517,707 $ (33,837) (6.54) % 1,632 324 1,308 403.70 % 1.35 % 0.25 % 1.10 % Savings and money market 1,390,584 1,582,033 (191,449) (12.10) % 10,979 2,439 8,540 350.14 % 3.17 % 0.62 % 2.55 % Time deposits 416,455 204,755 211,700 103.39 % 3,666 383 3,283 857.18 % 3.53 % 0.75 % 2.78 % Total deposits 2,290,909 2,304,495 (13,586) (0.59) % 16,277 3,146 13,131 417.39 % 2.85 % 0.55 % 2.30 % Borrowed Funds: Federal funds purchased and other short-term borrowings 186,024 44,309 $ 141,715 319.83 % 2,264 157 2,107 1,342.04 % 4.88 % 1.42 % 3.46 % Subordinated notes, net 79,466 31,469 47,997 152.52 % 1,109 394 715 181.47 % 5.60 % 5.02 % 0.58 % Federal Home Loan Bank advances 240,110 125,000 115,110 92.09 % 1,621 635 986 155.28 % 2.71 % 2.04 % 0.67 % Long-term debt 50,703 51,486 (783) (1.52) % 739 326 413 126.69 % 5.84 % 2.54 % 3.30 % Total borrowed funds 556,303 252,264 304,039 120.52 % 5,733 1,512 4,221 279.17 % 4.13 % 2.40 % 1.73 % Total interest-bearing liabilities $ 2,847,212 $ 2,556,759 $ 290,453 11.36 % 22,010 4,658 17,352 372.52 % 3.10 % 0.73 % 2.37 % Net interest income (FTE) (4) $ 17,463 $ 24,565 $ (7,102) (28.91) % Net interest spread (FTE) 1.47 % 2.76 % (1.29) % Net interest margin (FTE) (4) 2.02 % 2.93 % (0.91) % 38 Table of Contents West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) Data for the six months ended June 30: Average Balance Interest Income/Expense Yield/Rate 2023 2022 Change Change- % 2023 2022 Change Change- % 2023 2022 Change Interest-earning assets: Loans: (1) (2) Commercial $ 523,538 $ 470,296 $ 53,242 11.32 % $ 15,535 $ 9,607 $ 5,928 61.71 % 5.98 % 4.12 % 1.86 % Real estate (3) 2,232,461 2,019,017 213,444 10.57 % 52,274 38,697 13,577 35.09 % 4.72 % 3.87 % 0.85 % Consumer and other 8,529 4,266 4,263 99.93 % 280 87 193 221.84 % 6.61 % 4.09 % 2.52 % Total loans 2,764,528 2,493,579 270,949 10.87 % 68,089 48,391 19,698 40.71 % 4.97 % 3.91 % 1.06 % Securities: Taxable 532,242 625,333 (93,091) (14.89) % 6,748 5,979 769 12.86 % 2.54 % 1.91 % 0.63 % Tax-exempt (3) 149,988 163,804 (13,816) (8.43) % 1,921 2,148 (227) (10.57) % 2.56 % 2.62 % (0.06) % Total securities 682,230 789,137 (106,907) (13.55) % 8,669 8,127 542 6.67 % 2.54 % 2.06 % 0.48 % Interest-bearing deposits 1,964 114,305 (112,341) (98.28) % 55 149 (94) (63.09) % 5.62 % 0.26 % 5.36 % Total interest-earning assets (3) $ 3,448,722 $ 3,397,021 $ 51,701 1.52 % 76,813 56,667 20,146 35.55 % 4.49 % 3.36 % 1.13 % Interest-bearing liabilities: Deposits: Interest-bearing demand $ 492,086 $ 531,893 $ (39,807) (7.48) % 3,202 574 2,628 457.84 % 1.31 % 0.22 % 1.09 % Savings and money market 1,334,442 1,596,257 (261,815) (16.40) % 19,634 4,059 15,575 383.72 % 2.97 % 0.51 % 2.46 % Time 416,939 200,221 216,718 108.24 % 6,780 664 6,116 921.08 % 3.28 % 0.67 % 2.61 % Total deposits 2,243,467 2,328,371 (84,904) (3.65) % 29,616 5,297 24,319 459.11 % 2.66 % 0.46 % 2.20 % Borrowed funds: Federal funds purchased and other short-term borrowings 186,178 23,026 163,152 708.56 % 4,343 157 4,186 2,666.24 % 4.70 % 1.38 % 3.32 % Subordinated notes, net 79,433 25,998 53,435 205.54 % 2,215 642 1,573 245.02 % 5.62 % 4.98 % 0.64 % Federal Home Loan Bank advances 222,017 125,000 97,017 77.61 % 2,883 1,265 1,618 127.91 % 2.62 % 2.04 % 0.58 % Long-term debt 51,092 51,492 (400) (0.78) % 1,437 584 853 146.06 % 5.67 % 2.29 % 3.38 % Total borrowed funds 538,720 225,516 313,204 138.88 % 10,878 2,648 8,230 310.80 % 4.07 % 2.37 % 1.70 % Total interest-bearing liabilities $ 2,782,187 $ 2,553,887 $ 228,300 8.94 % 40,494 7,945 32,549 409.68 % 2.94 % 0.63 % 2.31 % Net interest income (FTE) (4) $ 36,319 $ 48,722 $ (12,403) (25.46) % Net interest spread (FTE) 1.55 % 2.73 % (1.18) % Net interest margin (FTE) (4) 2.12 % 2.89 % (0.77) % (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 also 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 425 basis points in 2022 and 75 basis points during the first half of 2023. At this time the extent to which additional target federal funds interest rate changes may occur during the remainder of 2023 is unknown. The increases that occurred throughout 2022 and 2023 will have an impact on the comparability of net interest income between 2023 and 2022. 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, 2023 decreased by 91 and 77 basis points, respectively, compared to the three and six months ended June 30, 2022. The primary driver of the decrease in the net interest margin was an increase in rates paid on deposits and borrowed funds, which have repriced faster than loans and securities, and an increase in average borrowed funds balances. Tax-equivalent net interest income for the three and six months ended June 30, 2023 decreased $7,102 and $12,403, respectively, compared to the same time periods in 2022. The decrease in net interest income for the three and six months ended June 30, 2023 compared to the three and six months ended June 30, 2022 was primarily due to the increase in rates paid on deposits and borrowed funds and increases in average borrowed funds balances. Tax-equivalent interest income on loans increased $10,095 and $19,698 for the three and six months ended June 30, 2023 compared to the three and six months ended June 30, 2022. This increase in interest income on loans was driven by a combination of an increase in the average balance of loans and an increase in loan yields. The average balances of loans for the three and six months ended June 30, 2023 increased $246,310 and $270,949, respectively, compared to the three and six months ended June 30, 2022, while loan yields increased 110 and 106 basis points, respectively. Rising market interest rates have resulted in increasing rates on variable-rate loans and higher interest rates on renewed and originated loans. 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 decreased $13,586 and $84,904 for the three and six months ended June 30, 2023, compared to the three and six months ended June 30, 2022. The rates paid on deposits increased 230 and 220 basis points for the three and six months ended June 30, 2023 compared to the same periods in 2022. The increase in the cost of deposits was primarily due to increases in deposit interest rates in response to increases in the target federal funds rate and market interest rates, increased competition for deposit balances, and changes in deposit mix. The Federal Reserve increased the target federal funds rate by a total of 425 basis points in 2022 and 75 basis points in the first six months of 2023. These increases have had an adverse impact on the cost of deposits and have increased market competition. Interest expense on borrowed funds increased $4,221 and $8,230 for the three and six months ended June 30, 2023 compared to the three and six months ended June 30, 2022. The average balance of borrowed funds increased $304,039 and $313,204 for the three and six months ended June 30, 2023 compared to the three and six months ended June 30, 2022. The Company issued $60,000 of subordinated debt in June 2022. Additionally, average balances of federal funds purchased and other short-term borrowings increased $141,715 and $163,152 for the three and six months ended June 30, 2023 compared to the same periods in 2022. The average rate of federal funds purchased and other short-term borrowings increased by 346 and 332 basis points in the three and six months ended June 30, 2023 compared to the three and six months ended June 30, 2022. This increase in average rates paid on federal funds purchased and other short-term borrowings was driven by the increases in the target federal funds rate by the Federal Reserve. The average balances of Federal Home Loan Bank advances increased by $115,110 and $97,017 for the three and six months ended June 30, 2023 compared to the three and six months ended June 30, 2022. This increase in average balances was primarily due to additional rolling one-month FHLB advances added in the first six months of 2023 that are hedged with long-term interest rate swap agreements to provide fixed cost wholesale funding. 40 Table of Contents West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) Credit Loss Expense and the Related Allowance for Credit Losses The Company adopted ASU No. 2016-13 using the modified retrospective method for financial assets measured at amortized cost and off-balance-sheet credit exposures. See Notes 1 and 4 to the Financial Statements for additional information. The credit loss expense recorded on the income statement represents a charge made to earnings to maintain an adequate allowance for credit losses. The adequacy of the allowance for credit losses is evaluated quarterly by management and reviewed by the Board of Directors. The allowance for credit losses is management's estimate of expected lifetime losses in the loan portfolio as of the balance sheet date. There was no provision for credit losses for the three and six months ended June 30, 2023. The credit loss expense was negative $1,750 and negative $2,500 for the three and six months ended June 30, 2022, respectively. The negative credit loss expenses recorded in 2022 were due to sustained improvement in the performance of loans after the expiration of COVID modifications. Management believed the allowance for credit losses at June 30, 2023 was adequate to absorb expected losses in the loan portfolio as of that date. 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 credit losses. Such agencies may require West Bank to recognize additional charge-offs or provision for credit 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 credit losses on loans for the three and six months ended June 30, 2023 and 2022 and related ratios. Three Months Ended June 30, Six Months Ended June 30, 2023 2022 Change 2023 2022 Change Balance at beginning of period $ 27,941 $ 27,623 $ 318 $ 25,473 $ 28,364 $ (2,891) Adoption of CECL — — — 2,458 — 2,458 Charge-offs (18) (451) 433 (18) (451) 433 Recoveries 15 12 3 25 21 4 Net (charge-offs) recoveries (3) (439) 436 7 (430) 437 Provision for credit losses charged (credited) to operations — (1,750) 1,750 — (2,500) 2,500 Balance at end of period $ 27,938 $ 25,434 $ 2,504 $ 27,938 $ 25,434 $ 2,504 Average loans outstanding $ 2,783,463 $ 2,537,152 $ 2,764,527 $ 2,493,578 Ratio of annualized net (charge-offs) recoveries during the period to average loans outstanding 0.00 % (0.07) % 0.00 % (0.03) % Ratio of allowance for credit losses for loans to average loans outstanding 1.00 % 1.00 % 1.01 % 1.02 % Ratio of allowance for credit losses for loans to total loans at end of period 1.00 % 0.99 % 1.00 % 0.99 % 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 June 30, Noninterest income: 2023 2022 Change Change % Service charges on deposit accounts $ 458 $ 585 $ (127) (21.71) % Debit card usage fees 511 507 4 0.79 % Trust services 749 622 127 20.42 % Increase in cash value of bank-owned life insurance 250 236 14 5.93 % Other income: All other income 421 328 93 28.35 % Total other income 421 328 93 28.35 % Total noninterest income $ 2,389 $ 2,278 $ 111 4.87 % Six Months Ended June 30, Noninterest income: 2023 2022 Change Change % Service charges on deposit accounts $ 920 $ 1,165 $ (245) (21.03) % Debit card usage fees 997 979 18 1.84 % Trust services 1,455 1,251 204 16.31 % Increase in cash value of bank-owned life insurance 507 463 44 9.50 % Gain from bank-owned life insurance 691 — 691 N/A Other income: All other income 776 809 (33) (4.08) % Total other income 776 809 (33) (4.08) % Total noninterest income $ 5,346 $ 4,667 $ 679 14.55 % The decline in service charges on deposit accounts is primarily attributable to a higher earnings credit rate on commercial accounts. Revenue from trust services was higher for the three and six months ended June 30, 2023 compared to the three and six months ended June 30, 2022 primarily due to increases in one-time estate fees. An increase in trust assets and accounts since June 30, 2022 also contributed to the increase in trust service fees. The gain from bank-owned life insurance for the six months ended June 30, 2023 was from a death benefit claim. 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 periods in the noninterest expense categories shown in the Consolidated Statements of Income. In addition, accounts within the “other expenses” category that represent a significant portion of the total or a significant variance are shown below. Three Months Ended June 30, Noninterest expense: 2023 2022 Change Change % Salaries and employee benefits $ 7,029 $ 6,410 $ 619 9.66 % Occupancy and equipment 1,322 1,242 80 6.44 % Data processing 729 656 73 11.13 % Technology and software 579 492 87 17.68 % FDIC insurance 420 289 131 45.33 % Professional fees 287 202 85 42.08 % Director fees 251 222 29 13.06 % Other expenses: Business development 415 291 124 42.61 % Insurance expense 217 156 61 39.10 % Trust 138 138 — — % Consulting fees 70 125 (55) (44.00) % Marketing 40 70 (30) (42.86) % Charitable contributions 60 — 60 N/A Low income housing projects amortization 172 130 42 32.31 % New markets tax credit project amortization and management fees 229 229 — — % All other 516 614 (98) (15.96) % Total other expenses 1,857 1,753 104 5.93 % Total noninterest expense $ 12,474 $ 11,266 $ 1,208 10.72 % Six Months Ended June 30, Noninterest expense: 2023 2022 Change Change % Salaries and employee benefits $ 13,896 $ 12,708 $ 1,188 9.35 % Occupancy and equipment 2,649 2,328 321 13.79 % Data processing 1,364 1,280 84 6.56 % Technology and software 1,092 968 124 12.81 % FDIC insurance 836 626 210 33.55 % Professional fees 537 419 118 28.16 % Director fees 456 390 66 16.92 % Other expenses: Business development 748 527 221 41.94 % Insurance expense 432 307 125 40.72 % Trust 303 275 28 10.18 % Charitable contributions 120 — 120 N/A Consulting fees 119 175 (56) (32.00) % Marketing 81 124 (43) (34.68) % Low income housing projects amortization 333 272 61 22.43 % New markets tax credit project amortization and management fees 459 459 — — % All other 1,120 1,070 50 4.67 % Total other expenses 3,715 3,209 506 15.77 % Total noninterest expense $ 24,545 $ 21,928 $ 2,617 11.93 % 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 six months ended June 30, 2023 when compared to the three and six months ended June 30, 2022, due to wage increases in response to market conditions and competition in retaining and recruiting talent. Additionally, there has been an increase in full-time equivalent employees with growth in our commercial banking team and information technology department. Occupancy and equipment expense increased for the six months ended June 30, 2023 compared to the same period in 2022 primarily due to an increase in depreciation expense related to the new bank building in St. Cloud, Minnesota which opened in March 2022 and scheduled increases in rent expense on existing leases. FDIC insurance expense increased during the three and six months ended June 30, 2023 when compared to the same time periods in 2022 primarily due to the FDIC's increase in the minimum assessment rate, which was announced in 2022 and effective for the first quarter of 2023. Technology and software expenses increased for the three and six months ended June 30, 2023 due to inflationary pricing pressures and the addition of new technology, software and information security solutions. Business development expenses increased in 2023 compared to 2022 due to an increase in the size of our commercial banking team and a general increase in sponsorships and business development activity. Insurance expense increased for the three and six months ended June 30, 2023 compared to the same periods in 2022 primarily due to insurance costs related to bank buildings that are under construction. Income Tax Expense The Company recorded income tax expense of $1,394 (19.2 percent of pre-tax income) and $3,131 (18.6 percent of pre-tax income) for the three and six months ended June 30, 2023, compared with $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 ended June 30, 2022. 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, gain from bank-owned life insurance, disallowed interest expense, and state income taxes. For the three and six months ended June 30, 2022, income tax expense included a one-time increase in state income tax expense related to the June 2022 enactment of changes in the Iowa bank franchise tax rates. This legislation reduced the Iowa bank franchise tax rate applied to apportioned income for 2023 and future years. The 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, 2023 a tax expense of $5 was recorded as a result of the decrease in fair value of restricted stock over the vesting period. For the six months ended June 30, 2022, a tax benefit of $385 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 2023 and 2022 were also impacted by year-to-date federal low income housing tax credits and a new markets tax credit of approximately $749 and $734, respectively. FINANCIAL CONDITION The Company had total assets of $3,678,555 as of June 30, 2023, compared to total assets of $3,613,218 as of December 31, 2022. Fluctuations in the balance sheet included increases in loans, premises and equipment, and borrowed funds and a decrease in deposits. Securities Securities available for sale decreased by $19,024 during the six months ended June 30, 2023. This decrease was primarily attributable to principal paydowns on securities, partially offset by a decrease in unrealized losses in the securities portfolio. In the first six months of 2023, net unrealized losses on the available for sale securities portfolio decreased by $2,830. This slight decrease in unrealized losses was due to a combination of lower amortized cost within the securities portfolio and decreases in market yields since December 31, 2022. Management concluded the unrealized losses are primarily attributed to increases in risk-free market interest rates since these securities were purchased and were not credit-related losses. Unrealized losses are recorded in accumulated other comprehensive loss, net of tax. The Company expects the securities portfolio as a percentage of total assets to decrease over time as the proceeds from paydowns and maturities may be used for loan growth or repayment of borrowed funds. As of June 30, 2023, approximately 62 percent of the available for sale securities portfolio consisted of government agency guaranteed collateralized mortgage obligations and mortgage-backed securities. We believe these securities have little to no credit risk and provide cash flows for liquidity and repricing opportunities. 45 Table of Contents West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) Loans and Nonperforming Assets Loans outstanding increased $64,239 from $2,742,836 as of December 31, 2022 to $2,807,075 as of June 30, 2023. Changes in the loan portfolio during the first six months of 2023 included increases of $48,778 in commercial real estate loans and $15,889 in commercial loans. The Company continues to focus on business development efforts in all of its markets. 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 commercial real estate portfolio exceeds these regulatory guidelines, they are within the Company's established policy limits and the Company has appropriate 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, 2022 was presented in the Company's Form 10-K filed with the SEC on February 23, 2023, and the Company has not experienced any material changes to that portfolio since December 31, 2022. 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, 2023 December 31, 2022 Change Nonaccrual loans $ 309 $ 322 $ (13) Loans past due 90 days and still accruing interest — — — Loan restructurings (1) — — — Total nonperforming loans 309 322 (13) Other real estate owned — — — Total nonperforming assets $ 309 $ 322 $ (13) Nonperforming loans to total loans 0.01 % 0.01 % — % Nonperforming assets to total assets 0.01 % 0.01 % — % (1) While loan restructurings made to borrowers experiencing financial difficulty (loan restructurings) are commonly reported by the industry as nonperforming, those not classified in the nonaccrual category are accruing interest due to payment performance. Loan restructurings on nonaccrual status are categorized as nonaccrual. There were no loan restructurings categorized as nonaccrual as of June 30, 2023 or December 31, 2022. Premises and Equipment 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 is expected to be completed in the first half of 2024. Additionally, construction of a new office in Mankato, Minnesota also began in the first quarter of 2022 and is expected to be completed in the fourth quarter of 2023. Deposits Deposits decreased $44,083, or 1.5 percent, during the first six months of 2023. A large part of this decrease was attributable to a decrease in brokered deposits. Brokered deposits decreased to $230,701 at June 30, 2023, from $272,692 at December 31, 2022. Excluding brokered deposits, deposits decreased $2,093, or 0.1 percent, during the first six months of 2023. 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 and may also be influenced by recent developments in the financial services industry. Significant competition for deposits driven by high interest rate alternatives for depositors is currently impacting deposit fluctuations and increasing our cost of deposits. West Bank participates in the IntraFi ® ICS and CDARS reciprocal deposit network which enables depositors to receive FDIC insurance coverage on deposits otherwise exceeding the maximum insurable amount. As of June 30, 2023, estimated uninsured deposits, which excludes deposits in the IntraFi ® reciprocal network, brokered deposits and public funds protected by state programs, were approximately 27.5 percent of total deposits. 46 Table of Contents West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) Borrowed Funds Federal funds purchased and other short-term borrowings decreased from $200,000 at December 31, 2022 to $184,150 as of June 30, 2023. The fluctuations in the balances of federal funds purchased and other short-term borrowings is based on customer loan and deposit activity and the Company's balance sheet management objectives, which from time to time may require the Company to draw on the federal funds purchased lines with our correspondent banks, FHLB advances or other liquidity sources. The Company had $280,000 of short-term FHLB advances outstanding at June 30, 2023, $260,000 of which are associated with long-term interest rate swaps. In the first six months of 2023, the Company entered into six additional long-term interest rate swap agreements hedging interest payments of one-month rolling funding with a total notional amount of $105,000. As of June 30, 2023, the Company had long-term interest rate swap agreements with a total notional amount of $260,000 to hedge the interest payments of one-month rolling funding consisting of FHLB advances or brokered deposits. These interest rate swaps have maturity dates ranging from September 2023 through June 2029 and fixed rates ranging from 1.63 percent to 4.65 percent. This strategy of hedging short-term rolling funding effectively provides fixed cost wholesale funding through the maturity dates of the various interest rate swaps. 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 amortizing securities, federal funds purchased, advances from the FHLB, other wholesale funding 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 $31,744 as of June 30, 2023 compared with $26,539 as of December 31, 2022. 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 business customers' own liquidity needs and may also be influenced by recent developments in the financial services industry. The Company utilizes brokered deposits and other wholesale funding 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, 2023, the Company had $230,701 in brokered deposits, which included fixed-rate deposits with terms through September 2024 and variable-rate deposits with terms through February 2024. As of June 30, 2023, West Bank had additional borrowing capacity available from the FHLB of approximately $549,000, as well as approximately $3,000 through the Federal Reserve discount window, $35,000 through unsecured federal funds lines of credit with correspondent banks, and approximately $99,000 through the new Federal Reserve Bank Term Funding Program. The Bank Term Funding Program was established by the Federal Reserve in March 2023 to provide an additional source of liquidity against high-quality securities. As of June 30, 2023, West Bank had pledged approximately $99,000 in eligible securities to facilitate participation in the program. No funds were borrowed from the Federal Reserve discount window or Bank Term Funding Program during the six months ended June 30, 2023. Net cash from operating activities contributed $10,264 to liquidity for the six months ended June 30, 2023. Management believed that the combination of high levels of potentially liquid assets, unencumbered securities, 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 $2,678 and $3,431 as of June 30, 2023 and December 31, 2022, respectively. West Bank entered into a construction contract in 2022 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 June 30, 2023, there was a remaining commitment of $24,511 under this contract. West Bank is also building a new office in Mankato, Minnesota to be completed in the fourth quarter of 2023, which had a remaining commitment of $3,991 as of June 30, 2023. 47 Table of Contents West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) Capital The Company's total stockholders' equity increased to $217,126 at June 30, 2023 from $211,112 at December 31, 2022. The increase was primarily the result of the decrease in accumulated other comprehensive loss and net income less dividends paid, partially offset by the adjustment made upon the adoption of ASU 2016-13. The decrease in accumulated other comprehensive loss is due to a combination of the reduction in amortized cost of the securities portfolio and a decrease in market yields since December 31, 2022. At June 30, 2023, the Company's tangible common equity as a percent of tangible assets was 5.90 percent compared to 5.84 percent as of December 31, 2022. 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 June 30, 2023. 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 June 30, 2023: Total Capital (to Risk-Weighted Assets) Consolidated $ 415,225 12.15 % $ 273,486 8.00 % $ 358,951 10.50 % $ 341,858 10.00 % West Bank 448,570 13.13 % 273,324 8.00 % 358,737 10.50 % 341,655 10.00 % Tier 1 Capital (to Risk-Weighted Assets) Consolidated 324,943 9.51 % 205,115 6.00 % 290,579 8.50 % 273,486 8.00 % West Bank 418,288 12.24 % 204,993 6.00 % 290,406 8.50 % 273,324 8.00 % Common Equity Tier 1 Capital (to Risk-Weighted Assets) Consolidated 304,943 8.92 % 153,836 4.50 % 239,300 7.00 % 222,208 6.50 % West Bank 418,288 12.24 % 153,745 4.50 % 239,158 7.00 % 222,075 6.50 % Tier 1 Capital (to Average Assets) Consolidated 324,943 8.60 % 151,121 4.00 % 151,121 4.00 % 188,901 5.00 % West Bank 418,288 11.08 % 151,073 4.00 % 151,073 4.00 % 188,841 5.00 % As of December 31, 2022: Total Capital (to Risk-Weighted Assets) Consolidated $ 408,056 12.08 % $ 270,221 8.00 % $ 354,665 10.50 % $ 337,776 10.00 % West Bank 441,628 13.08 % 270,053 8.00 % 354,445 10.50 % 337,566 10.00 % Tier 1 Capital (to Risk-Weighted Assets) Consolidated 322,583 9.55 % 202,666 6.00 % 287,110 8.50 % 270,221 8.00 % West Bank 416,155 12.33 % 202,540 6.00 % 286,931 8.50 % 270,053 8.00 % Common Equity Tier 1 Capital (to Risk-Weighted Assets) Consolidated 302,583 8.96 % 151,999 4.50 % 236,443 7.00 % 219,555 6.50 % West Bank 416,155 12.33 % 151,905 4.50 % 236,296 7.00 % 219,418 6.50 % Tier 1 Capital (to Average Assets) Consolidated 322,583 8.81 % 146,439 4.00 % 146,439 4.00 % 183,049 5.00 % West Bank 416,155 11.37 % 146,367 4.00 % 146,367 4.00 % 182,958 5.00 % The Company and West Bank are subject to a 2.5 percent capital conservation buffer that is added to the minimum requirements for capital adequacy purposes. A banking organization with a capital conservation buffer of less than the required amount will be subject to limitations on capital distributions, including dividend payments, and certain discretionary bonus payments to executive officers. At June 30, 2023, the capital ratios for the Company and West Bank were sufficient to meet the conservation buffer. 49 Table of Contents