Executive Summary / Key Takeaways

• Strategic Resurgence: West Bancorporation is executing a forecasted turnaround, driven by a disciplined focus on relationship banking and strategic balance sheet management, leading to significant net interest income and margin expansion in the first half of 2025.
• Robust Deposit Growth & Funding Advantage: Tremendous success in attracting core deposits, including a substantial municipal inflow, has enabled WTBA to reduce reliance on expensive wholesale funding, bolstering liquidity and improving its cost of funds.
• Pristine Asset Quality: The company maintains exceptionally strong credit quality, characterized by minimal nonperforming assets and a conservative underwriting philosophy, providing a solid foundation for earnings stability.
• Asset Repricing Tailwinds: WTBA anticipates continued margin and earnings improvement through 2025 and 2026 as its loan portfolio reprices at higher prevailing market rates, offsetting some upward pressure on deposit costs.
• Community-Centric Moat: While lacking a distinct technological differentiator, WTBA leverages its deep community ties, high-touch service, and strategic facility investments to foster strong customer relationships, differentiating itself in competitive Midwest markets.

A Legacy of Relationships: WTBA's Enduring Foundation

West Bancorporation, Inc., established in 1893 and headquartered in West Des Moines, Iowa, has long operated as a community-oriented financial institution. Its core business revolves around providing comprehensive banking and trust services to individuals and small-to-medium-sized businesses across central and eastern Iowa, and southern Minnesota. This deep-rooted presence in thriving local economies, including the greater Des Moines metropolitan area, Iowa City/Coralville, and key Minnesota cities like Rochester (influenced by the Mayo Clinic) and St. Cloud, forms the bedrock of its operational strategy.

The company's overarching philosophy, as articulated by management, is to be "bankers, not lenders." This distinction underscores a commitment to building holistic relationships rather than merely transacting loans. It involves working both sides of the balance sheet—loans and deposits—and offering a multitude of other services, aiming for "comprehensive recommendations" and expanding "wallet share" with existing customers. This relationship-first approach is a critical differentiator in a highly competitive banking landscape.

Technology: Enabling Relationships, Not Defining Them

In an era increasingly defined by digital transformation, West Bancorporation's approach to technology is primarily one of enablement and competitive parity rather than unique differentiation. The company provides standard digital banking services, including online and mobile banking, treasury management, remote deposit, and fraud protection. Investments in technology, reflected in rising "Technology and software expense" (up $146 thousand for H1 2025 compared to H1 2024), are dedicated to "ongoing updates in information technology and security solutions."

While these updates are crucial for maintaining operational efficiency and safeguarding customer assets, they do not represent a distinct technological moat. For instance, more technologically advanced competitors like Western Alliance Bancorp (WAL) emphasize proprietary tech for faster processing, such as AI-driven underwriting, which can lead to significantly quicker loan approvals. Similarly, WaFd Bank (WAFD) likely boasts faster processing speeds due to more robust tech infrastructure, potentially resulting in lower upfront costs per transaction. West Bancorporation acknowledges a "slower digital adoption" compared to some peers, such as MidWestOne Financial Group (MOFG), which can translate to comparatively higher operating costs per unit or longer new product launch cycles. This implies that WTBA's competitive edge does not stem from a technological lead, but rather from how it integrates standard technology to support its core relationship-based model.

Competitive Dynamics: A Niche Defense Strategy

West Bancorporation operates within a fiercely competitive regional banking market, facing direct competition from institutions like Western Alliance Bancorp (WAL), MidWestOne Financial Group (MOFG), and WaFd Bank (WAFD), alongside indirect threats from agile fintech firms and large tech players. While WTBA's estimated market share in U.S. regional banking is modest (0.1-0.2%), its strategy is designed to defend and expand its position through distinct advantages.

WTBA's primary competitive advantage lies in its cost leadership in deposits and its strong regional network. The company's "tremendous deposit gathering success" in 2024, which saw core deposit balances increase by 15.8%, allowed for a reduction of over $200 million in expensive wholesale funding in Q4 2024. This success continued into Q2 2025, with core deposits increasing by approximately $195 million, largely due to a $243 million municipal bond proceeds deposit. This ability to attract and retain low-cost core deposits, even in a challenging rate environment, provides a significant funding advantage, translating to superior margins and better cash flow compared to peers. Management noted a 27 basis point decrease in deposit pricing in Q4 2024, suggesting 5-10% lower operating costs per unit than some competitors.

The company's relationship-based approach and "high-touch retail banking" are key differentiators. WTBA's seasoned bankers focus on "deposit-rich business banking opportunities" and high-value retail deposits, actively "lifting out" key personnel from other financial institutions to bolster their teams. Recent investments in new facilities, including a new headquarters opened in April 2024 and a new Owatonna, Minnesota branch opened in January 2025, are designed with "well-appointed entertainment areas" to foster client engagement and reinforce these strong relationships. This unique approach provides a competitive edge, particularly against larger, more transactional banks that may have "abandoned the regional centers."

However, WTBA faces competitive disadvantages in scale and technological innovation. Its smaller scale can make it more susceptible to economic downturns compared to larger, more diversified banks. The noted "slower digital adoption" and processing speeds compared to peers like WAL and WAFD could lead to higher operating costs per unit and slower new product launches, potentially impacting long-term profitability and market share if not addressed. Despite these challenges, WTBA's disciplined underwriting and conservative philosophy, coupled with its focus on stable, diversified local economies, position it as a resilient player capable of maintaining its niche.

Financial Performance: A Forecasted Turnaround Materializes

West Bancorporation's financial performance in the first half of 2025 clearly demonstrates a significant turnaround, validating management's earlier forecasts of improvement. Net income for the second quarter of 2025 surged to $8.0 million, or $0.47 per diluted common share, a substantial 53.68% increase from $5.2 million, or $0.31 per diluted common share, in the second quarter of 2024. For the first six months of 2025, net income reached $15.8 million, or $0.93 per diluted common share, up 43.81% from $11.0 million, or $0.65 per diluted common share, in the prior year period.

This robust earnings growth was primarily driven by a notable expansion in Net Interest Income (NII) and Net Interest Margin (NIM). NII on a fully taxable equivalent (FTE) basis increased by 24.26% to $21.478 million in Q2 2025, and by 24.28% to $42.399 million for H1 2025, compared to the respective prior year periods. Consequently, the FTE net interest margin improved by 41 basis points to 2.27% in Q2 2025 and by 40 basis points to 2.27% for H1 2025. This improvement was largely attributable to an increase in interest income on deposits with banks and a decrease in interest expense on deposits and borrowed funds.

The company has successfully leveraged the Federal Reserve's 100 basis point rate reduction from September to December 2024 to lower its funding costs. The cost of deposits decreased by 51 basis points to 3.19% in Q2 2025 and by 47 basis points to 3.17% in H1 2025 compared to the same periods in 2024. This was facilitated by the significant growth in core deposits, which allowed for a reduction in more expensive wholesale funding, including a $127 million decrease in brokered funding in Q2 2025.

While total loans outstanding decreased slightly by 1.30% to $2.97 billion in the first six months of 2025 due to payoffs from asset sales and refinancings, the company strategically replaced these assets with new loans at higher interest rates. Management indicated that loans priced in the "three or four" percent range were replaced with new assets in the "high six range," contributing to a continued improvement in the loan portfolio yield to 5.59% in Q2 2025. Noninterest expense increased by $291 thousand in Q2 2025, primarily due to higher incentive compensation accruals and increased occupancy costs from new bank buildings. The efficiency ratio improved significantly to 56.45% in Q2 2025, down from 67.14% in Q2 2024, reflecting enhanced operational leverage.

Pristine Asset Quality: A Core Strength

A hallmark of West Bancorporation's conservative philosophy is its consistently strong asset quality. As of June 30, 2025, the company reported "enviable 0s," including zero other real estate owned (OREO), zero doubtful accounts, zero nonaccruals, and zero substandard loans. The ratio of nonperforming assets to total assets stood at a pristine 0.00% for both June 30, 2025, and December 31, 2024.

The allowance for credit losses (ACL) was 1.03% of total outstanding loans as of June 30, 2025, slightly up from 1.01% at year-end 2024. Management believes this ACL is adequate to absorb expected losses, with no credit loss expense recorded for loans in the first two quarters of 2025. Provisions for credit losses, when made (e.g., $1 million in Q4 2024), are primarily driven by qualitative factors such as the impact of higher repricing rates on debt service coverage ratios, rather than specific credit deterioration.

The loan portfolio's strength is attributed to a rigorous underwriting discipline and a focus on customers with "proven management, good balance sheets and strong and diverse payment abilities." While the commercial real estate (CRE) portfolio, particularly non-owner-occupied properties, exceeds certain regulatory guidelines (e.g., >300% of risk-based capital), it remains within the company's established policy limits. For non-owner-occupied office property, the average loan-to-value is 65% and debt service coverage is 1.35x. Management has proactively stress-tested significant CRE loans due to reprice and does not foresee "significant payment issues at the expected higher rates."

Outlook and Forward Guidance

West Bancorporation's management is confident in its trajectory, reiterating that its "journey back to top performing metrics is continuing as forecasted." The company anticipates continued improvement in its net interest margin and earnings throughout 2025 and 2026, primarily driven by ongoing asset repricing opportunities in the loan portfolio. This benefit is expected to materialize regardless of future Federal Reserve rate actions.

On the funding side, while there has been some "upward pricing pressure on deposits" in certain segments as the Fed has held rates, management expects deposit costs to remain "relatively kind of flat, maybe tick up a couple of basis points" in the second half of 2025, with significant reductions unlikely until the Fed makes further moves. The loan pipeline is described as "pretty robust," with a current focus on C&I activity, though overall loan opportunities are less than in prior years. The company has over $87 million in unfunded commitments for large vertical construction projects, with anticipated draws over the next 12 months, which should contribute to future loan growth.

Regarding expenses, the second quarter 2025 noninterest expense run rate is considered a "good indicator" for the remainder of the year, with no significant one-time items foreseen. The effective tax rate for 2025 is expected to be higher than 2024 due to the expiration of a 7-year new market tax credit at the end of 2024. However, the company is evaluating the potential positive impact of the "One Big Beautiful Bill Act," signed in July 2025, which includes more favorable deductibility of certain business expenses starting in 2025.

Risks and Considerations

Despite a positive outlook, several factors warrant investor attention. Interest rate risk remains paramount, as fluctuations can impact net interest income, cash flows, and the market value of the securities portfolio. While WTBA actively manages this through earnings simulations and hedging instruments like interest rate collars ($75 million notional in Q2 2025) and long-term interest rate swaps for FHLB advances, adverse rate movements could still affect performance.

Competitive pressures are intense, not only from traditional regional banks but also from non-bank competitors, fintech companies, and digital asset service providers. WTBA's acknowledged lag in technological innovation compared to some peers could pose a long-term challenge, potentially impacting market share and operating efficiency if not continuously addressed. The company's reliance on its relationship-based model, while strong, may face increasing pressure from digitally native alternatives.

Economic uncertainty persists, with clients remaining cautious. Concerns about tariffs and supply chain interruptions could impact commercial borrowers, potentially leading to production problems and earnings distress. While WTBA's loan portfolio is strong, the broader distressed office property market, particularly in larger communities like Des Moines, presents a watch item for its multi-tenant properties with expiring leases. Furthermore, the moderation of C&I customer operating profits in 2023 and 2024, compared to prior years, signals a tighter operating environment.

Conclusion

West Bancorporation, Inc. is demonstrating a compelling resurgence, driven by a steadfast commitment to its community banking roots and a disciplined financial strategy. The company's "bankers, not lenders" philosophy, emphasizing deep customer relationships and comprehensive service, has enabled remarkable success in attracting low-cost core deposits. This funding advantage, coupled with the ongoing repricing of its loan portfolio at higher rates, is directly translating into significant net interest income and margin expansion, validating management's forecasted earnings improvement for 2025 and beyond.

WTBA's pristine asset quality, characterized by minimal nonperforming assets and a conservative underwriting approach, provides a robust foundation for sustained profitability. While the company does not boast a distinct technological moat and faces competitive pressures from more digitally advanced rivals, its strategic investments in physical facilities and its "lift-out strategy" for talent acquisition reinforce its relationship-centric competitive edge. For investors, WTBA offers a compelling blend of strong financial performance, a clear path to continued earnings growth through asset repricing, and a substantial dividend yield exceeding 5%, all underpinned by a resilient, relationship-driven business model in its core Midwest markets.