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 changes in interest rates; 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 credit unions, "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 or regulatory requirements; the concentration of large deposits from certain clients, including those who have balances above current FDIC insurance limits; changes in local, national and international economic conditions, including the level and impact 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 that resulted in recent bank failures; changes in legal and regulatory requirements, limitations and costs, including in response to the recent bank failures; changes in customers’ acceptance of the Company’s products and services; the occurrence of fraudulent activity, breaches or failures of our or our third-party partners' 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 ongoing Israeli-Palestinian conflict and the Russian invasion of Ukraine, widespread disease or pandemics, 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; potential changes in federal policy and at regulatory agencies as a result of the upcoming 2024 presidential election; talent and labor shortages; and any other risks described in the “Risk Factors” sections of this and other reports filed by the Company with the SEC. The Company undertakes no obligation to revise or update such forward-looking statements to reflect current or future events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. CRITICAL ACCOUNTING POLICIES The discussion and analysis of the Company's financial condition and results of operations are based upon the Company's consolidated financial statements that have been prepared in accordance with GAAP. The preparation of the Company's financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, income and expenses. These estimates are based upon historical experience and on various other assumptions that management believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The estimates and judgments that management believes involve the most complex and subjective estimates and judgments and have the greatest 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/A for the year ended December 31, 2023, as filed with the SEC on February 23, 2024. There have been no significant changes in the critical accounting policies or the assumptions and judgments utilized in applying these policies since December 31, 2023. 31 Table of Contents West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) NON-GAAP FINANCIAL MEASURES This report contains references to financial measures that are not defined in GAAP. Such non-GAAP financial measures include the Company’s presentation of net interest income and net interest margin on a fully taxable equivalent (FTE) basis, 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 for the periods indicated. 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 September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Reconciliation of net interest income and net interest margin on a FTE basis to GAAP: Net interest income (GAAP) $ 17,960 $ 16,634 $ 51,940 $ 52,670 Tax-equivalent adjustment (1) 29 113 166 396 Net interest income on a FTE basis (non-GAAP) 17,989 16,747 52,106 53,066 Average interest-earning assets 3,749,688 3,478,053 3,692,647 3,458,606 Net interest margin on a FTE basis (non-GAAP) 1.91 % 1.91 % 1.88 % 2.05 % Reconciliation of efficiency ratio on an adjusted and FTE basis to GAAP: Net interest income on a FTE basis (non-GAAP) $ 17,989 $ 16,747 $ 52,106 $ 53,066 Noninterest income 2,359 2,822 7,004 8,168 Adjustment for losses on disposal of premises and equipment, net 26 3 47 5 Adjusted income 20,374 19,572 59,157 61,239 Noninterest expense 12,892 11,905 37,954 36,450 Efficiency ratio on an adjusted and FTE basis (non-GAAP) (2) 63.28 % 60.83 % 64.16 % 59.52 % (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. 32 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, 2024 are compared to the results for the same periods in 2023, and the consolidated financial condition of the Company as of September 30, 2024 is compared to that as of December 31, 2023. 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/A for the year ended December 31, 2023, filed with the SEC on February 23, 2024. The Company conducts business from its headquarters building 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, 2024 was $5,952, or $0.35 per diluted common share, compared to $5,906, or $0.35 per diluted common share, for the three months ended September 30, 2023. The Company's annualized return on average assets and return on average equity for the three months ended September 30, 2024 were 0.60 percent and 10.41 percent, respectively, compared to 0.64 percent and 10.89 percent, respectively, for the three months ended September 30, 2023. Net interest income for the three months ended September 30, 2024 increased $1,326, or 8.0 percent, compared to the three months ended September 30, 2023. The increase in net interest income was primarily due to the increase in interest income on loans and decrease in interest expense on federal funds purchased and other short-term borrowings, partially offset by the increase in interest expense on deposits. Noninterest income decreased $463 for the three months ended September 30, 2024 compared to the same period in 2023, due to $431 in loan swap fees earned during the three months ended September 30, 2023. Noninterest expense increased $987 during the three months ended September 30, 2024 compared to the three months ended September 30, 2023, primarily due to increases in occupancy and equipment, technology and software expense and FDIC insurance, partially offset by a decrease in business development expenses. Net income for the nine months ended September 30, 2024 was $16,953, or $1.00 per diluted common share, compared to $19,612, or $1.17 per diluted common share, for the nine months ended September 30, 2023. The Company's annualized return on average assets and return on average equity for the nine months ended September 30, 2024 were 0.59 percent and 10.18 percent, respectively, compared to 0.72 percent and 12.22 percent, respectively, for the nine months ended September 30, 2023. Net interest income for the nine months ended September 30, 2024 declined $730, or 1.4 percent, compared to the nine months ended September 30, 2023. The decrease in net interest income was primarily due to the increase in interest expense on deposits, resulting from rising short-term interest rates and changes in deposit mix, partially offset by an increase in interest income on loans. Noninterest income decreased $1,164 for the nine months ended September 30, 2024 compared to the same period in 2023, primarily due to loan swap fees and a nonrecurring gain from bank-owned life insurance in 2023. Noninterest expense increased $1,504 during the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023, primarily due to increases in occupancy and equipment, technology and software expense and FDIC insurance, partially offset by a decrease in business development expenses. The Company recorded a provision for credit losses on loans of $1,000 for the three and nine months ended September 30, 2024, compared to $200 for the three and nine months ended September 30, 2023. The provision for credit losses recorded in 2024 was due to changes in the forecasted loss rates, driven by increases in the forecasted unemployment rates. The Company also recorded a negative provision for credit losses on unfunded commitments of $1,000 for the three and nine months ended September 30, 2024, compared to no provision for the three and nine months ended September 30, 2023. The negative provision for unfunded commitments recorded in 2024 was due to the decrease in balances of unfunded commitments resulting primarily from the funding of construction loans. 33 Table of Contents West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) Total loans outstanding increased $93,686, or 3.2 percent, during the first nine months of 2024. 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 September 30, 2024 and December 31, 2023. As of both September 30, 2024 and December 31, 2023, the allowance for credit losses was 0.97 percent of total outstanding loans. Management believed the allowance for credit losses at September 30, 2024 was adequate to absorb expected losses in the loan portfolio as of that date. On a quarterly basis, the Company compares three key performance metrics to those of our identified peer group. The peer group for 2024 consists of 21 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., Mercantile Bank Corporation, MidWest One 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 nine months ended September 30, 2024 As of and for the six months ended June 30, 2024 As of and for the six months ended June 30, 2024 Return on average equity 10.18% 10.07% 2.37% - 15.11% Efficiency ratio (1) 64.16% 64.62% 47.40% - 79.76% Nonperforming assets to total assets 0.01% 0.01% 0.01% - 0.65% (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 23, 2024, the Company's Board of Directors declared a regular quarterly cash dividend of $0.25 per common share. The dividend is payable on November 20, 2024, to stockholders of record on November 6, 2024. 34 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, 2024 compared with the same periods in 2023. Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 Change Change % 2024 2023 Change Change % Net income $ 5,952 $ 5,906 $ 46 0.78 % $ 16,953 $ 19,612 $ (2,659) (13.56) % Average assets 3,973,824 3,679,541 294,283 8.00 % 3,916,919 3,647,777 269,142 7.38 % Average stockholders' equity 227,513 215,230 12,283 5.71 % 222,392 214,599 7,793 3.63 % Return on average assets 0.60 % 0.64 % (0.04) % 0.59 % 0.72 % (0.13) % Return on average equity 10.41 % 10.89 % (0.48) % 10.18 % 12.22 % (2.04) % Net interest margin (1) 1.91 % 1.91 % — % 1.88 % 2.05 % (0.17) % Efficiency ratio (1) (2) 63.28 % 60.83 % 2.45 % 64.16 % 59.52 % 4.64 % Dividend payout ratio 70.71 % 70.79 % (0.08) % 74.31 % 63.85 % 10.46 % Average equity to average assets ratio 5.73 % 5.85 % (0.12) % 5.68 % 5.88 % (0.20) % As of September 30, 2024 2023 Change Nonperforming assets to total assets (2) 0.01 % 0.01 % — % Equity to assets ratio 5.90 % 5.51 % 0.39 % Tangible common equity ratio 5.90 % 5.51 % 0.39 % (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. 35 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 2024 2023 Change Change- % 2024 2023 Change Change- % 2024 2023 Change Interest-earning assets: Loans: (1) (2) Commercial $ 507,127 $ 525,596 $ (18,469) (3.51) % $ 8,514 $ 8,332 $ 182 2.18 % 6.68 % 6.29 % 0.39 % Real estate (3) 2,469,145 2,278,129 191,016 8.38 % 33,721 28,310 5,411 19.11 % 5.43 % 4.93 % 0.50 % Consumer and other 15,000 9,488 5,512 58.09 % 282 173 109 63.01 % 7.48 % 7.24 % 0.24 % Total loans 2,991,272 2,813,213 178,059 6.33 % 42,517 36,815 5,702 15.49 % 5.65 % 5.19 % 0.46 % Securities: Taxable 468,100 514,488 (46,388) (9.02) % 3,261 3,427 (166) (4.84) % 2.79 % 2.66 % 0.13 % Tax-exempt (3) 141,214 148,531 (7,317) (4.93) % 822 934 (112) (11.99) % 2.33 % 2.52 % (0.19) % Total securities 609,314 663,019 (53,705) (8.10) % 4,083 4,361 (278) (6.37) % 2.68 % 2.63 % 0.05 % Interest-bearing deposits 149,102 1,821 147,281 8,087.92 % 2,041 29 2,012 6,937.93 % 5.45 % 6.36 % (0.91) % Total interest-earning assets (3) $ 3,749,688 $ 3,478,053 $ 271,635 7.81 % 48,641 41,205 7,436 18.05 % 5.16 % 4.70 % 0.46 % Interest-bearing liabilities: Deposits: Interest-bearing demand $ 453,589 $ 434,649 $ 18,940 4.36 % 2,167 1,680 487 28.99 % 1.90 % 1.53 % 0.37 % Savings and money market 1,609,695 1,329,963 279,732 21.03 % 15,566 11,080 4,486 40.49 % 3.85 % 3.31 % 0.54 % Time deposits 665,938 427,545 238,393 55.76 % 8,343 4,396 3,947 89.79 % 4.98 % 4.08 % 0.90 % Total deposits 2,729,222 2,192,157 537,065 24.50 % 26,076 17,156 8,920 51.99 % 3.80 % 3.10 % 0.70 % Borrowed Funds: Federal funds purchased and other short-term borrowings 8,132 248,065 (239,933) (96.72) % 115 3,165 (3,050) (96.37) % 5.62 % 5.06 % 0.56 % Subordinated notes, net 79,792 79,533 259 0.33 % 1,112 1,113 (1) (0.09) % 5.55 % 5.55 % — % Federal Home Loan Bank advances 315,000 302,119 12,881 4.26 % 2,748 2,329 419 17.99 % 3.47 % 3.06 % 0.41 % Long-term debt 44,407 49,448 (5,041) (10.19) % 601 695 (94) (13.53) % 5.38 % 5.57 % (0.19) % Total borrowed funds 447,331 679,165 (231,834) (34.14) % 4,576 7,302 (2,726) (37.33) % 4.07 % 4.27 % (0.20) % Total interest-bearing liabilities $ 3,176,553 $ 2,871,322 $ 305,231 10.63 % 30,652 24,458 6,194 25.33 % 3.84 % 3.38 % 0.46 % Net interest income (FTE) (4) $ 17,989 $ 16,747 $ 1,242 7.42 % Net interest spread (FTE) 1.32 % 1.32 % — % Net interest margin (FTE) (4) 1.91 % 1.91 % — % 36 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 2024 2023 Change Change- % 2024 2023 Change Change- % 2024 2023 Change Interest-earning assets: Loans: (1) (2) Commercial $ 525,870 $ 524,231 $ 1,639 0.31 % $ 26,266 $ 23,867 $ 2,399 10.05 % 6.67 % 6.09 % 0.58 % Real estate (3) 2,438,739 2,247,851 190,888 8.49 % 97,438 80,584 16,854 20.91 % 5.34 % 4.79 % 0.55 % Consumer and other 13,916 8,852 5,064 57.21 % 785 453 332 73.29 % 7.53 % 6.84 % 0.69 % Total loans 2,978,525 2,780,934 197,591 7.11 % 124,489 104,904 19,585 18.67 % 5.58 % 5.04 % 0.54 % Securities: Taxable 478,742 526,259 (47,517) (9.03) % 10,071 10,175 (104) (1.02) % 2.80 % 2.58 % 0.22 % Tax-exempt (3) 141,354 149,497 (8,143) (5.45) % 2,501 2,855 (354) (12.40) % 2.36 % 2.55 % (0.19) % Total securities 620,096 675,756 (55,660) (8.24) % 12,572 13,030 (458) (3.51) % 2.70 % 2.57 % 0.13 % Interest-bearing deposits 94,026 1,916 92,110 4,807.41 % 3,855 84 3,771 4,489.29 % 5.48 % 5.86 % (0.38) % Total interest-earning assets (3) $ 3,692,647 $ 3,458,606 $ 234,041 6.77 % 140,916 118,018 22,898 19.40 % 5.10 % 4.56 % 0.54 % Interest-bearing liabilities: Deposits: Interest-bearing demand $ 460,005 $ 472,729 $ (12,724) (2.69) % 6,550 4,882 1,668 34.17 % 1.90 % 1.38 % 0.52 % Savings and money market 1,504,553 1,332,933 171,620 12.88 % 42,054 30,714 11,340 36.92 % 3.73 % 3.08 % 0.65 % Time 622,105 420,513 201,592 47.94 % 22,974 11,176 11,798 105.57 % 4.93 % 3.55 % 1.38 % Total deposits 2,586,663 2,226,175 360,488 16.19 % 71,578 46,772 24,806 53.04 % 3.70 % 2.81 % 0.89 % Borrowed funds: Federal funds purchased and other short-term borrowings 101,166 207,034 (105,868) (51.14) % 4,248 7,508 (3,260) (43.42) % 5.61 % 4.85 % 0.76 % Subordinated notes, net 79,726 79,466 260 0.33 % 3,325 3,328 (3) (0.09) % 5.57 % 5.60 % (0.03) % Federal Home Loan Bank advances 315,000 249,011 65,989 26.50 % 7,791 5,212 2,579 49.48 % 3.30 % 2.80 % 0.50 % Long-term debt 45,674 50,538 (4,864) (9.62) % 1,868 2,132 (264) (12.38) % 5.46 % 5.64 % (0.18) % Total borrowed funds 541,566 586,049 (44,483) (7.59) % 17,232 18,180 (948) (5.21) % 4.25 % 4.15 % 0.10 % Total interest-bearing liabilities $ 3,128,229 $ 2,812,224 $ 316,005 11.24 % 88,810 64,952 23,858 36.73 % 3.79 % 3.09 % 0.70 % Net interest income (FTE) (4) $ 52,106 $ 53,066 $ (960) (1.81) % Net interest spread (FTE) 1.31 % 1.47 % (0.16) % Net interest margin (FTE) (4) 1.88 % 2.05 % (0.17) % (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. 37 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 an additional 100 basis points in 2023. In September 2024, the Federal Reserve reduced the target federal funds interest rate by 50 basis points. The timing and extent of additional interest rate reductions is not known at this time. 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 both the three months ended September 30, 2024 and September 30, 2023 was 1.91 percent, while the net interest margin for the nine months ended September 30, 2024 decreased by 17 basis points, compared to the nine months ended September 30, 2023. Tax-equivalent net interest income for the three months ended September 30, 2024 increased $1,242 when compared to the same period in 2023, and decreased $960 for the nine months ended September 30, 2024, when compared to the nine months ended September 30, 2023. Tax-equivalent interest income on loans increased $5,702 and $19,585 for the three and nine months ended September 30, 2024 compared to the three and nine months ended September 30, 2023. 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 balance of loans for the three and nine months ended September 30, 2024 increased $178,059 and $197,591, respectively, compared to the three and nine months ended September 30, 2023, while loan yields increased 46 and 54 basis points, respectively, during these periods. Higher market interest rates in the first nine months of 2024 compared to the same period in 2023 have resulted in higher rates on variable-rate loans and loan originations and renewals compared to current portfolio rates. 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 flat and rising rate environments as variable-rate loans reprice at higher rates and renewals and new originations are priced at prevailing market rates, which exceed the roll-off rate of principal repayments on existing loans. In a declining rate environment, the yield on variable-rate loans will decline, however as long as market rates remain higher than the yield on the fixed rate portfolio, renewals and originations will continue to increase the yield on the fixed-rate portfolio. 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 $537,065 and $360,488 for the three and nine months ended September 30, 2024 compared to the same periods in 2023. The rate paid on deposits increased 70 and 89 basis points for the three and nine months ended September 30, 2024 compared to the same periods in 2023. 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 that occurred in 2023, the inverted yield curve, increased competition for deposit balances, and changes in deposit mix. Interest expense on borrowed funds decreased $2,726 and $948 for the three and nine months ended September 30, 2024 compared to the three and nine months ended September 30, 2023. The average balance of borrowed funds decreased $231,834 and $44,483 for the three and nine months ended September 30, 2024 compared to the three and nine months ended September 30, 2023. The average balance of federal funds purchased and other short-term borrowings decreased $239,933 and $105,868 for the three and nine months ended September 30, 2024, respectively, compared to the same periods in 2023 primarily due to increases in deposits. The average rate paid on federal funds purchased and other short-term borrowings increased 56 and 76 basis points in the three and nine months ended September 30, 2024 compared to the three and nine months ended September 30, 2023. This increase in average rates paid on federal funds purchased and other short-term borrowings was driven by the higher federal funds rate in the first nine months of 2024 compared to the same period in 2023. The average balance of FHLB advances increased by $65,989 for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. This increase in average balances was primarily due to an increase in rolling one-month FHLB advances that are hedged with long-term interest rate swap agreements to provide fixed cost wholesale funding. 38 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 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. The Company recorded a credit loss expense for loans of $1,000 for the three and nine months ended September 30, 2024, compared to a credit loss expense for loans of $200 for the three and nine months ended September 30, 2023, respectively. The credit loss expense for loans in 2024 was primarily due to the changes in the forecasted loss rates due to increases in forecasted unemployment rates. Additionally, the Company recorded a negative credit loss expense of $1,000 related to unfunded commitments for the three and nine months ended September 30, 2024, primarily due to decreases in the balance of unfunded commitments resulting primarily from the funding of construction loans. Management believed the allowance for credit losses at September 30, 2024 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 provisions for credit losses based on such agencies' review of information available to them at the time of their examinations. 39 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 nine months ended September 30, 2024 and 2023 and related ratios. Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 Change 2024 2023 Change Balance at beginning of period $ 28,422 $ 27,938 $ 484 $ 28,342 $ 25,473 $ 2,869 Adoption of CECL — — — — 2,458 (2,458) Charge-offs (16) — (16) (20) (18) (2) Recoveries 13 9 4 97 34 63 Net (charge-offs) recoveries (3) 9 (12) 77 16 61 Provision for credit losses charged (credited) to operations 1,000 200 800 1,000 200 800 Balance at end of period $ 29,419 $ 28,147 $ 1,272 $ 29,419 $ 28,147 $ 1,272 Average loans outstanding $ 2,991,272 $ 2,813,213 $ 2,978,525 $ 2,780,934 Ratio of annualized net (charge-offs) recoveries during the period to average loans outstanding 0.00 % 0.00 % 0.00 % 0.00 % Ratio of allowance for credit losses for loans to average loans outstanding 0.98 % 1.00 % 0.99 % 1.01 % Ratio of allowance for credit losses for loans to total loans at end of period 0.97 % 0.99 % 0.97 % 0.99 % 40 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: 2024 2023 Change Change % Service charges on deposit accounts $ 459 $ 463 $ (4) (0.86) % Debit card usage fees 500 495 5 1.01 % Trust services 828 831 (3) (0.36) % Increase in cash value of bank-owned life insurance 287 262 25 9.54 % Loan swap fees — 431 (431) (100.00) % Other income 285 340 (55) (16.18) % Total noninterest income $ 2,359 $ 2,822 $ (463) (16.41) % Nine Months Ended September 30, Noninterest income: 2024 2023 Change Change % Service charges on deposit accounts $ 1,381 $ 1,383 $ (2) (0.14) % Debit card usage fees 1,448 1,492 (44) (2.95) % Trust services 2,398 2,286 112 4.90 % Increase in cash value of bank-owned life insurance 839 769 70 9.10 % Gain from bank-owned life insurance — 691 (691) (100.00) % Loan swap fees — 431 (431) (100.00) % Other income 938 1,116 (178) (15.95) % Total noninterest income $ 7,004 $ 8,168 $ (1,164) (14.25) % Revenue from trust services was higher for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 primarily due to increases in one-time estate fees. The gain from bank-owned life insurance that occurred in the nine months ended September 30, 2023 was the result of a death benefit claim. Loan swap fees in 2023 consisted of fees earned in the back-to-back swap program. 41 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 September 30, Noninterest expense: 2024 2023 Change Change % Salaries and employee benefits $ 6,823 $ 6,696 $ 127 1.90 % Occupancy and equipment 1,926 1,359 567 41.72 % Data processing 771 703 68 9.67 % Technology and software 722 573 149 26.00 % FDIC insurance 711 439 272 61.96 % Professional fees 239 254 (15) (5.91) % Director fees 223 196 27 13.78 % Other expenses: Business development 216 287 (71) (24.74) % Insurance expense 197 178 19 10.67 % Trust 168 159 9 5.66 % Consulting fees 61 56 5 8.93 % Marketing 12 34 (22) (64.71) % Charitable contributions — 60 (60) (100.00) % Low income housing projects amortization 123 136 (13) (9.56) % New markets tax credit project amortization and management fees 230 230 — — % All other 470 545 (75) (13.76) % Total other expenses 1,477 1,685 (208) (12.34) % Total noninterest expense $ 12,892 $ 11,905 $ 987 8.29 % Nine Months Ended September 30, Noninterest expense: 2024 2023 Change Change % Salaries and employee benefits $ 20,481 $ 20,592 $ (111) (0.54) % Occupancy and equipment 5,225 4,008 1,217 30.36 % Data processing 2,239 2,067 172 8.32 % Technology and software 2,153 1,665 488 29.31 % FDIC insurance 1,861 1,275 586 45.96 % Professional fees 740 791 (51) (6.45) % Director fees 658 652 6 0.92 % Other expenses: Business development 613 1,035 (422) (40.77) % Insurance expense 592 610 (18) (2.87) % Trust 495 462 33 7.14 % Consulting fees 198 175 23 13.14 % Marketing 75 115 (40) (34.78) % Charitable contributions — 180 (180) (100.00) % Low income housing projects amortization 439 469 (30) (6.40) % New markets tax credit project amortization and management fees 689 689 — — % All other 1,496 1,665 (169) (10.15) % Total other 4,597 5,400 (803) (14.87) % Total noninterest expense $ 37,954 $ 36,450 $ 1,504 4.13 % 42 Table of Contents West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) Occupancy and equipment expense increased for the three and nine months ended September 30, 2024 compared to the same periods in 2023 primarily due to an increase in occupancy costs related to new bank buildings, including the Company's new headquarters building. Technology and software expenses increased for the three and nine months ended September 30, 2024 compared to the three and nine months ended September 30, 2023 due to the addition of new technology, product updates and information security solutions. FDIC insurance expense increased for the three and nine months ended September 30, 2024 compared to the same periods in 2023 primarily due to an increase in assessment rate. Income Tax Expense The Company recorded income tax expense of $1,475 (19.9 percent of pre-tax income) and $4,037 (19.2 percent of pre-tax income) for the three and nine months ended September 30, 2024, compared with $1,445 (19.7 percent of pre-tax income) and $4,576 (18.9 percent of pre-tax income) for the three and nine months ended September 30, 2023. 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, tax-exempt gain from bank-owned life insurance, disallowed interest expense, and state income taxes. The tax rates for the first nine months of 2024 and 2023 were also impacted by year-to-date federal low income housing tax credits and a new markets tax credit of approximately $1,131 and $1,123, respectively. 43 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 $3,988,566 as of September 30, 2024, compared to total assets of $3,825,758 as of December 31, 2023. Changes in the balance sheet included increases in interest-bearing cash deposits, loans, premises and equipment and total deposits and decreases in securities available for sale and federal funds purchased and other short-term borrowings. Securities Securities available for sale decreased by $26,174 during the nine months ended September 30, 2024. This decrease was due to calls and principal paydowns on securities since December 31, 2023, partially offset by a decrease in unrealized losses on securities. Management concluded unrealized losses in the portfolio as of September 30, 2024 are the result of increases in risk-free market interest rates since the securities were purchased and are not an indication of declining credit quality. 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 September 30, 2024, approximately 61 percent of the available for sale securities portfolio consisted of government agency guaranteed collateralized mortgage obligations and mortgage-backed securities. Management believes these securities have little to no credit risk and provide cash flows for liquidity and repricing opportunities. Loans and Nonperforming Assets Loans outstanding increased $93,686 from $2,927,535 as of December 31, 2023 to $3,021,221 as of September 30, 2024. Changes in the loan portfolio during the first nine months of 2024 included an increase of $107,039 in construction, land and land development loans and a decrease of $18,710 in commercial loans. 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 and land development loans exceed 100 percent of total risk-based capital. Although the commercial real estate portfolio exceeded these regulatory guidelines as of September 30, 2024, they were within the Company's established policy limits and management believes that 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, 2023 was presented in the Company's Form 10-K/A, filed with the SEC on February 23, 2024, and the Company has not experienced any material changes to that portfolio since December 31, 2023. 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, 2024 December 31, 2023 Change Nonaccrual loans $ 233 $ 296 $ (63) Loans past due 90 days and still accruing interest — — — Loan restructurings (1) — — — Total nonperforming loans 233 296 (63) Other real estate owned — — — Total nonperforming assets $ 233 $ 296 $ (63) 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 September 30, 2024 or December 31, 2023. 44 Table of Contents West Bancorporation, Inc. Management's Discussion and Analysis (in thousands, except share and per share data) Deposits Deposits increased $304,774, or 10.2 percent, during the first nine months of 2024. Brokered deposits increased to $425,870 at September 30, 2024, from $305,411 at December 31, 2023. Excluding brokered deposits, deposits increased $184,315, or 6.9 percent, during the first nine months of 2024. Deposit growth included a mix of public funds and commercial and consumer deposits. 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. In particular, significant competition for deposits driven by high interest rate alternatives for depositors has impacted deposit fluctuations and increased 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 September 30, 2024, estimated uninsured deposits, which excludes deposits in the IntraFi ® reciprocal network, brokered deposits and public funds protected by state programs, were approximately 27.8 percent of total deposits. Borrowed Funds Federal funds purchased and other short-term borrowings decreased from $150,270 at December 31, 2023 to $0 as of September 30, 2024. Federal funds purchased and other short-term borrowings were reduced during the first nine months of 2024 as a result of the increase in deposits. The Company had $315,000 of FHLB advances outstanding at September 30, 2024, $295,000 of which are one-month rolling advances hedged with long-term interest rate swaps. The interest rate swaps that hedge the interest rates on these FHLB advances have maturity dates ranging from November 2024 through June 2029 and fixed rates ranging from 1.69 percent to 4.42 percent. Additionally, the Company has one forward starting interest rate swap with a notional amount of $20,000 and a starting date in November 2024, which replaces a maturing swap. 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 $157,803 as of September 30, 2024 compared with $65,357 as of December 31, 2023. 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. 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 ® , and through other third party brokers. At September 30, 2024, the Company had $425,870 in brokered deposits, which included fixed-rate deposits with terms through February 2029 and variable-rate deposits with terms through September 2025. As of September 30, 2024, West Bank had additional borrowing capacity available from the FHLB of approximately $628,000, as well as approximately $125,000 through the Federal Reserve discount window and $75,000 through unsecured federal funds lines of credit with correspondent banks. Net cash from operating activities contributed $29,056 to liquidity for the nine months ended September 30, 2024. Management believed that the combination of high levels of potentially liquid assets, unencumbered securities, cash flows from operations, and additional borrowing capacity were sufficient to meet our liquidity needs as of September 30, 2024. The Company had remaining commitments to invest in qualified affordable housing projects totaling $1,253 and $1,649 as of September 30, 2024 and December 31, 2023, respectively. 45 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 $235,353 at September 30, 2024 from $225,043 at December 31, 2023. The increase was primarily the result of retained net income and the increase in the market value of our available for sale investment portfolio. While accumulated other comprehensive losses reduce tangible common equity, they have no impact on regulatory capital. At September 30, 2024, the Company's tangible common equity as a percent of tangible assets was 5.90 percent compared to 5.88 percent as of December 31, 2023. 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, 2024. 46 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, 2024 Total Capital (to Risk-Weighted Assets) Consolidated $ 424,648 11.95 % $ 284,190 8.00 % $ 373,000 10.50 % $ 355,238 10.00 % West Bank 452,168 12.73 % 284,089 8.00 % 372,867 10.50 % 355,112 10.00 % Tier 1 Capital (to Risk-Weighted Assets) Consolidated 333,684 9.39 % 213,143 6.00 % 301,952 8.50 % 284,190 8.00 % West Bank 421,204 11.86 % 213,067 6.00 % 301,845 8.50 % 284,089 8.00 % Common Equity Tier 1 Capital (to Risk-Weighted Assets) Consolidated 313,684 8.83 % 159,857 4.50 % 248,667 7.00 % 230,905 6.50 % West Bank 421,204 11.86 % 159,800 4.50 % 248,578 7.00 % 230,823 6.50 % Tier 1 Capital (to Average Assets) Consolidated 333,684 8.15 % 163,803 4.00 % 163,803 4.00 % 204,754 5.00 % West Bank 421,204 10.29 % 163,727 4.00 % 163,727 4.00 % 204,659 5.00 % As of December 31, 2023 Total Capital (to Risk-Weighted Assets) Consolidated $ 419,452 11.88 % $ 282,508 8.00 % $ 370,791 10.50 % $ 353,135 10.00 % West Bank 450,444 12.76 % 282,307 8.00 % 370,527 10.50 % 352,883 10.00 % Tier 1 Capital (to Risk-Weighted Assets) Consolidated 328,566 9.30 % 211,881 6.00 % 300,164 8.50 % 282,508 8.00 % West Bank 419,558 11.89 % 211,730 6.00 % 299,951 8.50 % 282,307 8.00 % Common Equity Tier 1 Capital (to Risk-Weighted Assets) Consolidated 308,566 8.74 % 158,911 4.50 % 247,194 7.00 % 229,537 6.50 % West Bank 419,558 11.89 % 158,797 4.50 % 247,018 7.00 % 229,374 6.50 % Tier 1 Capital (to Average Assets) Consolidated 328,566 8.50 % 154,628 4.00 % 154,628 4.00 % 193,285 5.00 % West Bank 419,558 10.86 % 154,571 4.00 % 154,571 4.00 % 193,213 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, 2024, the capital ratios for the Company and West Bank were sufficient to meet the conservation buffer. 47 Table of Contents