WEST BANCORPORATION INC

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.

(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.

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.

(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.

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.

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.

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.

Noninterest Income

The following tables show the variance from the prior year in the noninterest income categories shown in the Consolidated Statements of Income.

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.

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.

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.