What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-24 compared with 2021-03-01 · 264 added, 477 removed, 478 unchanged (61% of the section changed)

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3.10 % 6.40 % 0.23 %

Net interest margin (2)

3.05 % 3.20 % 2.95 %

Dividends and Per Share Data

Cash dividends per common share $ 0.84 $ 0.83 $ 0.78

Basic earnings per common share $ 3.00 $ 1.99 $ 1.75

Diluted earnings per common share 2.95 1.98 1.74

Cash dividends per common share 0.94 0.84 0.83

Dividend payout ratio 31.33 % 42.23 % 47.33 %

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Total assets 3,500,201 3,185,744 2,473,691

Securities available for sale 758,822 420,571 398,578

Loans 2,456,196 2,280,575 1,941,663

Deposits 3,016,005 2,700,994 2,014,756

Borrowings 199,866 222,385 225,388

Stockholders’ equity 260,328 223,695 211,820

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• Texas ratio - total nonperforming assets divided by tangible common equity plus the allowance for loan losses.

• Net interest margin - tax-equivalent net interest income divided by average interest-earning assets.

• Dividend payout ratio - dividends paid to common stockholders divided by net income.

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For further information, refer to the section "Non-GAAP Financial Measures" of this item.

(3) As of December 31.

(dollars in thousands, except per share amounts)

The Company’s 2021 net income was $49,607 compared to $32,712 in 2020.

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The dividend declared and paid in the first quarter of 2022 was $0.25 per common share compared to $0.24 per common share for the fourth quarter of 2021, and was the highest quarterly dividend ever paid by the Company.

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Our loan portfolio grew to $2,456,196 as of December 31, 2021, from $2,280,575 as of December 31, 2020.

This loan growth included $180,757 of PPP loans as of December 31, 2020.

Loans included $22,206 of PPP loans as of December 31, 2021, compared to $180,757 as of December 31, 2020.

Deposits increased to $3,016,005 as of December 31, 2021, from $2,700,994 as of December 31, 2020.

The growth in deposit balances was primarily due to changes in customer behavior as a result of the COVID-19 pandemic and our customers’ desire to retain liquidity, as well as a result of additional funds provided to individuals and businesses by government relief programs.

The increase in deposit balances had a direct impact on our asset balances and liquidity position at year end as funds were deployed in loan originations, investment security purchases and federal funds sold.

The increase in deposit balances had a direct impact on our asset balances and liquidity position during 2021 as funds were deployed in loan originations, investment security purchases and federal funds sold.

Total assets were $3,500,201 at December 31, 2021, compared to $3,185,744 at December 31, 2020, a 9.9 percent increase.

Our balance sheet may decrease and the mix of assets and liabilities may change in 2021.

Loans and deposits may decrease as customer behavior adjusts to economic uncertainties created by the duration of the COVID pandemic, reductions in broad-based government relief programs and the efficiency of the rollout of COVID-19 vaccinations.

The Company has a quantitative peer analysis program in place for evaluating its results.

The peer group is periodically reviewed, and was revised in the first quarter of 2020 after evaluating financial institutions that we believe better reflect our Company, particularly in terms of market capitalization, asset size, employee headcount and loan portfolio composition.

The Company compares three key performance metrics to those of an identified peer group for evaluating its results.

The peer group for 2021 consists of 20 Midwestern, publicly traded financial institutions including Bank First Corporation, Civista Bancshares, Inc., CrossFirst Bankshares, Inc., Equity Bancshares, Inc., Farmers National Banc Corp., Farmers & Merchants Bancorp., First Business Financial Services, Inc., First Financial Corp., First Mid Bancshares, Inc., German American Bancorp, Inc., Hills Bancorporation, Isabella Bank Corporation, LCNB Corp., Level One Bancorp, Inc., 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 group of 21 Midwestern, publicly traded, peer financial institutions against which we compared our performance for 2020 consisted of Bank First Corporation, Civista Bancshares, Inc., CrossFirst Bankshares, Inc., Equity Bancshares, Inc., Farmers National Banc Corp., Farmers & Merchants Bancorp, First Business Financial Services, Inc., First Financial Corp., First Mid Bancshares, Inc., German American Bancorp, Inc., Hills Bancorporation, Isabella Bank Corporation, LCNB Corp., Level One Bancorp, Inc., Macatawa Bank Corporation, Mackinac Financial Corporation, Mercantile Bank Corporation, MidWestOne Financial Group, Inc., Nicolet Bankshares, Inc., Peoples Bancorp, Inc., and Southern Missouri Bancorp, Inc.

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 Texas ratio.

return on average equity, efficiency ratio and average Texas ratio.

We believe these measures encompass the factors that define the performance of a community bank.

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Texas ratio* (3)

5.26% 1.95% - 17.29%

* A lower ratio is better.

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(2) Latest data available.

(3) The Texas ratios reported in this table are the average of the quarter-end Texas ratios for the respective periods presented.

Our earnings outlook is positive, and we have strong capital resources.

We anticipate the Company will be profitable in 2022 at a level that compares with that of our peers.

The amount of our future profit is dependent, in large part, on our ability to continue to grow the loan portfolio, the amount of loan losses we incur, fluctuations in market interest rates, the strength of the local and national economy, and the economic recovery from the COVID-19 pandemic.

The amount of our future profit is dependent, in large part, on our ability to continue to grow the loan portfolio, the amount of loan losses we incur, fluctuations in market interest rates and the strength of the local and national economy.

We continue to monitor the impact COVID-19 is having on the local economies we operate in and the uncertainty of the long-term ramifications to our customers and operations.

Current considerations include the lasting effects of government aid programs as stimulus packages taper, the ability to control COVID-19 variants globally, increasing inflationary pressures, supply chain disruptions and labor shortages.

At the onset of the COVID-19 pandemic in 2020, the Bank lowered its rates on all deposit products and experienced an immediate positive impact on our cost of deposits.

We responded to lower market rates for lending by lowering rates offered on our loan products.

Given the rates offered by the Bank in 2021 on new loans and prepayments on existing loans, the yield on the total loan portfolio continued to decrease.

With significant cash inflows realized from growth in deposit balances and forgiveness of PPP loans, the yields on reinvested funds into new securities were lower than existing investment portfolio yields.

If short term rates increase in 2022, as the Federal Reserve has indicated, that could improve reinvestment rates for loans and investments and it could increase our cost of deposits and borrowed funds.

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The following discussion describes the consolidated operations and financial condition of the Company, including its subsidiary West Bank and West Bank’s special purpose subsidiaries.

Results of operations for the year ended December 31, 2021 are compared to the results for the year ended December 31, 2020 and the consolidated financial condition of the Company as of December 31, 2021 is compared to December 31, 2020.

Results of operations for the year ended December 31, 2019 compared to the results for the year ended December 31, 2018 can be found in Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company’s 2019 annual report on Form 10-K filed with the SEC on February 27, 2020.

SIGNIFICANT DEVELOPMENTS - IMPACT OF COVID-19

The COVID-19 pandemic, and efforts to contain it, have had a complex and significant adverse impact on the economy, the banking industry and the Company.

The impact on future fiscal periods is subject to a high degree of uncertainty.

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Effects on Our Market Areas.

Our commercial and consumer banking products and services are offered primarily in Iowa and Minnesota, where individual and government responses to the COVID-19 pandemic led to broad curtailment of economic activity beginning in March 2020.

In Iowa and Minnesota, schools closed for the remainder of the school year, most retail establishments, including restaurants and entertainment venues, were ordered to close for varying lengths of time, and travel and non-critical healthcare services were significantly curtailed.

Since the initial shut down in March 2020, phased reopening plans began in mid-May subject to public health reopening guidelines, including social distancing and limitations on capacity.

Schools and colleges have reopened under various in-person, online and hybrid learning models.

Recent increases in COVID-19 transmission has lead to additional targeted closures and restrictions.

These measures have had a lasting impact on the economies of and customers located in these states.

The Bank remained open during the closures as banks had been identified as essential services.

Initially, the Bank continued to serve its customers through its drive-ups and Video Teller Machines and inside its branch offices by appointment only.

Our full service branch lobbies reopened to walk-in customer activity in June 2020.

Both states in our market areas experienced increases in unemployment levels in 2020 as a result of the curtailment of business activities.

Unemployment in Iowa was 3.1 percent in December 2020, after peaking at 11.0 percent in April 2020, according to the Iowa Workforce Development.

Unemployment in Minnesota was 4.4 percent in December 2020, after peaking at 9.9 percent in May 2020, according to the Minnesota Department of Employment and Economic Development.

Policy and Regulatory Developments .

Federal, state and local governments and regulatory authorities have enacted and issued a range of policy responses to the COVID-19 pandemic, including the following:

• The Federal Reserve decreased the range for the federal funds target rate by 0.5 percent on March 3, 2020, and by another 1.0 percent on March 16, 2020, reaching a current range of 0.0 - 0.25 percent.

• On March 27, 2020, President Trump signed the CARES Act, which established a $2 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the SBA, referred to as the PPP.

After the initial $349 billion in funds for the PPP was exhausted, an additional $310 billion in funding for PPP loans was authorized.

As of December 31, 2020 the Bank originated $224,489 in PPP loans as a lender in the program in 2020.

In addition, on December 27, 2020, President Trump signed the Consolidated Appropriations Act, 2021, a $900.0 billion COVID-19 relief package that included an additional $284.0 billion in PPP funding.

• In addition, the CARES Act, as extended by the Coronavirus Response and Relief Supplemental Appropriation Act of 2021 (a part of the Consolidated Appropriations Act, 2021), provides financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time to account for the effects of COVID-19.

See Note 4 to the consolidated financial statements included in Item 8 of this Form 10-K for additional disclosure of TDRs.

• On April 7, 2020, federal banking regulators issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19, and stated that institutions generally do not need to categorize COVID-19-related modifications as TDRs and that the agencies will not direct supervised institutions to automatically categorize all COVID-19-related loan modifications as TDRs.

See Note 4 to the consolidated financial statements included in Item 8 of this Form 10-K for additional disclosure of TDRs.

On April 9, 2020, the Federal Reserve announced additional measures aimed at supporting small and mid-sized businesses, as well as state and local governments impacted by COVID-19.

The Federal Reserve announced the Main Street Business Lending Program, which established two new loan facilities intended to facilitate lending to small and mid-sized businesses:

(1) the Main Street New Loan Facility, or MSNLF, and (2) the Main Street Expanded Loan Facility, or MSELF.

MSNLF loans are unsecured term loans originated on or after April 8, 2020, while MSELF loans are provided as upsized tranches of existing loans originated before April 8, 2020.

The combined size of the program is authorized up to $600 billion.

• On August 3, 2020, the FFIEC issued a Joint Statement on Additional Loan Accommodations Related to COVID-19, which, among other things, encouraged financial institutions to consider prudent additional loan accommodation options when borrowers are unable to meet their obligations due to continuing financial challenges.

Accommodation options should be based on prudent risk management and consumer protection principles.

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• In addition to the policy responses described above, the federal bank regulatory agencies, along with their state counterparts, have issued a stream of guidance in response to the COVID-19 pandemic and have taken a number of unprecedented steps to help banks navigate the pandemic and mitigate its impact.

These include, without limitation:

requiring banks to focus on business continuity and pandemic planning;

adding pandemic scenarios to stress testing;

encouraging bank use of capital buffers and reserves in lending programs;

permitting certain regulatory reporting extensions;

reducing margin requirements on swaps;

permitting certain otherwise prohibited investments in investment funds;

issuing guidance to encourage banks to work with customers affected by the pandemic and encourage loan workouts;

and providing credit under the CRA for certain pandemic related loans, investments and public service.

Moreover, because of the need for social distancing measures, the agencies revamped the manner in which they conducted periodic examinations of their regular institutions, including making greater use of off-site reviews.

The Federal Reserve also issued guidance encouraging banking institutions to utilize its discount window for loans and intraday credit extended by its Reserve Banks to help households and businesses impacted by the pandemic and announced numerous funding facilities.

The FDIC has also acted to mitigate the deposit insurance assessment effects of participating in the PPP and the Federal Reserve's PPP Liquidity Facility and Money Market Mutual Fund Liquidity Facility.

Effects on Our Business.

The COVID-19 pandemic and the specific developments referred to above have had and will continue to have a significant impact on our business.

In particular, we anticipate that a significant portion of the Bank’s borrowers in the hotel, restaurant, retail and movie theater industries will continue to endure significant economic distress, which has caused, and may continue to cause, them to draw on their existing lines of credit and adversely affect their ability to repay existing indebtedness, and may adversely impact the value of collateral.

These developments, together with economic conditions generally, are also expected to impact our commercial real estate portfolio, particularly with respect to real estate with exposure to these industries, and the value of certain collateral securing our loans.

As a result, our financial condition, capital levels and results of operations could be adversely affected, as described in further detail below.

Our Response .

We took numerous steps in 2020 in response to the COVID-19 pandemic, including the following:

• We actively worked with loan customers to evaluate prudent loan modification terms.

In 2020, West Bank provided loan modification for nearly 300 loans totaling over $550,000.

As of December 31, 2020, 35 loans totaling $139,940, or 6.1 percent of total loans, were in payment deferral status under COVID-19-related modifications.

The modifications included a deferral of principal and/or interest payments.

Expiration of the deferrals range from January 2021 through June 2021.

As of December 31, 2020, the modifications are for hotel loans totaling $64,449, movie theater loans totaling $17,863, mixed-use commercial real estate loans totaling $38,177 and other commercial and commercial real estate loans totaling $19,451.

• In 2020, West Bank originated 925 PPP loans totaling $224,489.

As of December 31, 2020, total outstanding PPP loans were $180,757.

Borrowers are in the process of filing for forgiveness with the SBA.

When the borrower applies for loan forgiveness, the Bank has 60 days to submit the application to the SBA.

The SBA then has 90 days to approve the loan forgiveness.

We expect the forgiveness process to extend into the second quarter of 2021.

Additionally, a second round of PPP loans began in January 2021, and the Company is a participating lender in this program.

As of February 19, 2021, West Bank has originated 256 loans totaling approximately $43,100 in the second round program.

• From mid-March through the end of June 2020, we limited all branch activity to drive-up and appointment only services.

We continue to promote our digital banking options through our website, and encourage customers to utilize our online and mobile banking services.

Our customer service and retail banking departments have remained fully staffed and available to assist customers through our various digital channels.

As we reopened our lobbies for customer activity, we implemented various social distancing and cleaning protocols recommended by governmental health departments to protect the health and safety of our employees and customers.

We have successfully deployed a modified working strategy, including emphasis on social distancing and remote work as necessary to emphasize the safety of our teams and continuity of our business processes.

We continue to pay all employees according to their normal work schedule, even if their workload has been altered.

No employees have been furloughed or laid off as a result of COVID-19.

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Liquidity and Capital Strength.

We maintain access to multiple sources of liquidity and continually review these sources in preparation for any unforeseen funding needs due to COVID-19.

The Company has funding available from the FHLB, along with access to federal funds lines with various correspondent banks and access to the brokered certificate of deposit market.

In addition, the Company has borrowing capacity at the Federal Reserve discount window and has access to the Paycheck Protection Program Liquidity Facility established by the Federal Reserve.

If an extended recession causes large numbers of the Company’s deposit customers to withdraw their funds, the Company might become more reliant on volatile or more expensive sources of wholesale funding, which could have an adverse effect on the Company's net interest margin.

The Company's capital ratios continue to exceed the highest required regulatory benchmark levels.

We have, in recent years, raised our quarterly dividend in the second quarter of each year.

However, due to the uncertainty facing our economy, our Board of Directors kept the dividend at the 2019 level of $0.21 per share for all of 2020.

In the first quarter of 2021, the Company’s Board of Directors declared a regular quarterly dividend of $0.22 per common share, an increase of $0.01 from the quarterly dividends paid in 2020.

Exposure to Stressed Industries.

Certain industries have been particularly impacted by shutdowns, capacity restrictions, quarantines and social distancing guidelines in response to COVID-19 and efforts to contain it.

The most significant impact to our customer base has been in the hospitality and entertainment industries.

At December 31, 2020, West Bank's total commercial real estate and commercial operating loan exposure to the hotel, retail, restaurant and movie theater industries was approximately $197,199 $104,515, $23,671 and $17,863, respectively.

Collectively, at December 31, 2020, those exposures made up approximately 15.1 percent of the total loan portfolio.

Because of the significant uncertainties related to the duration of the COVID-19 pandemic and its potential effects on our customers, and on the national and local economy as a whole, there can be no assurances as to how the crisis may ultimately affect the Company's loan portfolio.

Results of operations for the year ended December 31, 2020 compared to the results for the year ended December 31, 2019 can be found in Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company’s 2020 annual report on Form 10-K filed with the SEC on March 1, 2021.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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When financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value and are classified as Level 1.

When financial instruments, such as investment securities and derivatives, are not actively traded, the Company determines fair value based on various sources and may apply matrix pricing with observable prices for similar instruments where a price for the identical instrument is not observable.

When financial instruments, such as securities and derivatives, are not actively traded, the Company determines fair value based on various sources and may apply matrix pricing with observable prices for similar instruments where a price for the identical instrument is not observable.

The fair values of these financial instruments, which are classified as Level 2, are determined by pricing models that consider observable market data such as interest rate volatilities, yield curves, credit spreads, prices from external market data providers and/or nonbinding broker-dealer quotations.

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Imprecision in estimating fair values can impact the carrying value of assets and the amount of revenue or loss recorded.

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The allowance for loan losses is established through a provision for loan losses charged to expense.

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On a quarterly basis, management reviews the appropriate level for the allowance for loan losses, incorporating a variety of risk considerations, both quantitative and qualitative.

Quantitative factors include the Company’s historical loss experience, delinquency and charge-off trends, collateral values, known information about individual loans and other factors.

Qualitative factors include the general economic environment in the Company’s market areas and the expected trend of those economic conditions.

Quantitative factors include the Company’s historical loss experience.

Qualitative factors include the general economic environment in the Company’s market areas and the expected trend of those economic conditions, delinquency and charge-off trends, collateral values, known information about individual loans and other factors.

While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions or the other factors considered.

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The historical net loan loss experience had virtually no impact on the measurement of the allowance for loan losses as West Bank has had cumulative net loan recoveries over the past five years.

Management’s assessment of qualitative factors applied to loans collectively evaluated for impairment were influenced by the impact of the COVID-19 pandemic on borrowers and broader economic conditions.

The portion of the allowance for loan losses related to loans collectively evaluated for impairment increase d $9,201 t o a total of $26,436, or 1.16 percent of outstanding loans, as of December 31, 2020 compared to $17,235, or 0.89 percent of outstanding loans, as of December 31, 2019.

As of December 31, 2020, there were $3,000 in specific reserves related to loans individually evaluated for impairment compared to none as of December 31, 2019.

The specific reserves resulted from the downgrade in credit quality of one borrower due to the severe economic impact of COVID-19 on its business.

Management’s assessment of qualitative factors applied to loans collectively evaluated for impairment were influenced by economic conditions, trends in past due and classified loans and loan mix.

The portion of the allowance for loan losses related to loans collectively evaluated for impairment decreased $572 t o a total of $25,864, or 1.05 percent of outstanding loans, as of December 31, 2021 compared to $26,436, or 1.16 percent of outstanding loans, as of December 31, 2020.

As of December 31, 2021, there were $2,500 in specific reserves related to loans individually evaluated for impairment compared to $3,000 as of December 31, 2020.

The specific reserves in both periods were related to the credit quality of one borrower due to the severe economic impact of COVID-19 on its business.

The specific impairment was determined after evaluating the value of the underlying collateral.

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This report contains references to financial measures that are not defined in GAAP.

Such non-GAAP financial measures include the Company’s presentation of net interest income and net interest margin on a fully taxable equivalent (FTE) basis, the presentation of the efficiency ratio on an FTE basis, excluding certain income and expenses, and the presentation of the allowance for loan losses ratio, excluding PPP loans.

Such non-GAAP financial measures include the Company’s presentation of net interest income and net interest margin on a fully taxable equivalent (FTE) basis, the presentation of the efficiency ratio on an adjusted and FTE basis, excluding certain income and expenses, loans, net of PPP loans, and the presentation of the allowance for loan losses ratio, excluding PPP loans.

Management believes these non-GAAP financial measures provide useful information to both management and investors to analyze and evaluate the Company’s financial performance.

Net interest income and net interest margin on an FTE basis and the efficiency ratio on an FTE basis are considered standard measures of comparison within the banking industry.

Allowance for loan losses to total loans, excluding PPP loans is a non-GAAP measure that serves as a useful measurement to evaluate the allowance for loan losses without the impact of SBA guaranteed PPP loans.

These measures are considered standard measures of comparison within the banking industry.

Additionally, management believes providing measures on an 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, net interest margin, and efficiency ratio on an FTE basis, loans, net of PPP loans and allowance for loan losses ratio, excluding PPP loans to their most directly comparable measures under GAAP.

The following table reconciles the non-GAAP financial measures of net interest income and net interest margin on a fully taxable equivalent basis, efficiency ratio on an adjusted and FTE basis, loans, net of PPP loans and allowance for loan losses ratio, excluding PPP loans to their most directly comparable measures under GAAP.

As and for the Years Ended December 31

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Noninterest income 9,729 9,602 8,318

Adjustment for realized investment securities (gains) losses, net

Adjustment for realized securities (gains) losses, net (51) (77) 87

Adjustment for losses on disposal of premises and

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Noninterest expense 43,380 39,054 38,406

Adjustment for write-down of premises — — (333)

Adjusted expense $ 39,054 $ 38,406 $ 34,659

Efficiency ratio on an adjusted and FTE basis (non-GAAP) (2)

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Allowance for loan losses ratio, excluding PPP loans (non-GAAP) (3)

1.17 % 1.40 % 0.89 %

(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.

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(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 financial performance.

Management believes the presentation of this non-GAAP measure provides supplemental useful information for proper understanding of the Company’s financial performance.

It is a standard measure of comparison within the banking industry.

A lower ratio is more desirable.

(3) Management believes that presenting the allowance for loan losses as a percentage of total loans excluding PPP loans is useful in assessing the credit quality of the Company’s core portfolio.

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Basic and diluted earnings per common share for 2021 were $3.00 and $2.95, respectively, and were $1.99 and $1.98, respectively for 2020.

The increase in 2020 net income compared to 2019 was primarily the result of higher net interest income and noninterest income, partially offset by an increase in provision for loan losses.

The increase in 2021 net income compared to 2020 was primarily the result of a decrease in provision for loan losses and an increase in net interest income, partially offset by an increase in noninterest expense.

Net interest income grew $12,226, or 14.8 percent, in 2021 compared to 2020.

The increase in net interest income was primarily due to the decrease in interest expense on deposits and other borrowings.

Interest expense decreased $14,845, or 46.0 percent, compared to 2019, primarily due to the Federal Reserve’s reductions in the targeted federal funds rate that occurred in March 2020 in response to the COVID-19 pandemic.

In response to the economic conditions and reduction in market interest rates, West Bank lowered its interest rates in March 2020 in almost all deposit categories.

The Company recorded a provision for loan losses of $12,000 in 2020 compared to a provision for loan losses of $600 in 2019.

The increase in the provision for loan losses was due to the uncertainty surrounding economic conditions as a result of the COVID-19 pandemic and slow economic recovery in the hotel and entertainment industries, and an increase in specific reserves on impaired loans.

Noninterest income increased $1,284, or 15.4 percent, in 2020 compared to 2019, primarily due to loan swap fees earned on back-to-back interest rate swaps and realized investment securities gains in 2020, compared to losses in 2019.

Noninterest expense grew $648, or 1.7 percent, in 2020 compared to 2019, primarily due to an increase in FDIC insurance expense.

The Company has consistently used the efficiency ratio as one of its key financial metrics to measure expense control.

For the year ended December 31, 2020, the Company’s efficiency ratio decreased to 41.96 percent from the prior year’s ratio of 50.96 percent.

This ratio is computed by dividing noninterest expense (excluding other real estate owned expense and write-down of premises) by the sum of tax-equivalent net interest income plus noninterest income (excluding net investment securities gains or losses and gains or losses on disposition of premises and equipment), and a lower ratio is better.

The higher efficiency ratio in 2019 was attributable to our expansion of operations in the three new Minnesota markets of Owatonna, Mankato and St.

In March 2019, the Company began operations in these three new Minnesota markets.

The financial results of 2019 included certain operational and business development costs directly related to the Minnesota expansion totaling approximately $2.8 million on a pretax basis, while net interest income and fee income in these markets was approximately $1.1 million in 2019.

The expense drag from the ramp up of these operations resulted in a higher than normal efficiency ratio in 2019.

We entered 2020 with profitable operations in these new markets.

The lower efficiency ratio in 2020, compared to 2019, was primarily the result of profitable operations in the new Minnesota markets and the decrease in interest expense, which was attributable to the Federal Reserve’s reductions in the federal funds rate.

The Texas ratio, which is the ratio of nonperforming assets to tangible common equity plus the allowance for loan losses, increased to 6.40 percent as of December 31, 2020, compared to 0.23 percent as of December 31, 2019.

The increase in net interest income was primarily due to an increase in interest income on loans and securities and a decrease in interest expense on deposits and borrowed funds.

Interest expense in 2021 decreased $5,179, or 29.8 percent, compared to 2020.

The Company recorded a negative provision for loan losses of $1,500 in 2021 compared to a provision for loan losses of $12,000 in 2020.

The provision in 2020 was due primarily to uncertainty surrounding economic conditions as a result of the COVID-19 pandemic.

The negative provision for 2021 was due primarily to the improvement in economic conditions and reduction in specific impairments, offset in part by loan growth.

Noninterest income increased $127, or 1.3 percent, in 2021 compared to 2020, primarily due to an increase in trust revenue and a greater increase in cash value of bank-owned life insurance, partially offset by a decrease in loan swap fees.

Noninterest expense grew $4,326, or 11.1 percent, in 2021 compared to 2020, primarily due to increases in salaries and employee benefits, charitable contributions and FDIC insurance expense.

The Texas ratio, which is the ratio of nonperforming assets to tangible common equity plus the allowance for loan losses, decreased to 3.10 percent as of December 31, 2021, compared to 6.40 percent as of December 31, 2020.

A lower Texas ratio indicates a stronger credit quality condition.

The increase in our Texas ratio in 2020 was primarily due to an increase in nonaccrual loans resulting from the downgrade in the credit quality of one borrower due to the severe economic impact of COVID-19 on its business.

The decrease in our Texas ratio in 2021 was primarily due to a decrease in nonperforming loans resulting from payments received on nonaccrual loans.

For more discussion on loan quality, see the “Loan Portfolio” and “Summary of the Allowance for Loan Losses” sections in this Item of this Form 10-K.

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Net Interest Income

Net interest income increased to $95,059 for 2021 from $82,833 for 2020, as the impact of the growth of interest-earning assets and decrease in average rate paid on interest-bearing liabilities exceeded the effects of an increase in average balance of interest-bearing liabilities and decrease in average yields on interest-earning assets.

The net interest margin for 2020 increased 25 basis points to 3.20 percent compared to 2.95 percent for 2019.

The average yield on earning ass ets decreased by 51 basis points, while the rate paid on interest-bearing liabilitie s decreased by 91 basis points.

The primary driver of the increase in the net interest margin was a decrease in interest rates paid on deposits and other borrowed funds and an increase in average loan balances, partially offset by a decrease in yield on loans and investments.

The Federal Reserve decreased the targeted federal funds rate by a total of 150 basis points during the first quarter of 2020.

Management expects these reductions in the targeted federal funds rate will result in continued low rates paid on deposits and declining yields on loans in 2021.

The net interest margin for 2021 decreased 15 basis points to 3.05 percent compared to 3.20 percent for 2020.

The average yield on earning assets decreased by 42 basis points, while the rate paid on interest-bearing liabilities decreased by 37 basis points.

For additional analysis of net interest income, see the section captioned “Distribution of Assets, Liabilities and Stockholders’ Equity;

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The allowance for loan losses, which totaled $28,364 as of December 31, 2021, represented 1.15 percent of total loans and 316.99 percent of nonperforming loans at year end, compared to 1.29 percent and 181.77 percent, respectively, as of December 31, 2020.

A provision for loan losses of $12,000 was recorded in 2020 compared to $600 in 2019.

The increased provision for loan losses in 2020 was due to the uncertainty surrounding economic conditions as a result of the COVID-19 pandemic and slow economic recovery in the hotel and entertainment industries, and an increase in specific reserves on impaired loans.

We believe the provision for loans losses could increase in future periods based on our belief that the credit quality of our loan portfolio may decline and loan defaults could increase as a result of the duration of the COVID-19 pandemic and the possibility of a prolonged economic recovery.

Nonperforming loans at December 31, 2020 totaled $16,194, or 0.71 percent of total loans, an increase from $538, or 0.03 percent of total loans, at December 31, 2019.

The increase in nonperforming loans at December 31, 2020, compared to December 31, 2019, was primarily due to the downgrade in the credit quality of one borrower due to the severe economic impact of COVID-19 on its business.

This borrower’s loans were classified as watch prior to COVID-19 and were further downgraded to substandard and put on nonaccrual in September 2020.

A negative provision for loan losses of $1,500 was recorded in 2021 compared to a provision of $12,000 in 2020.

The provision in 2020 was due primarily to an increase in certain qualitative factors resulting from the uncertainty surrounding economic conditions as a result of the COVID-19 pandemic and an increase in specific reserves on impaired loans.

The negative provision recorded in 2021 was primarily due to a reduction in certain qualitative factors resulting from improvements in economic conditions and expiration of COVID-19 related payment deferrals, net recoveries of previously charged-off loans and a reduction in specific reserves on impaired loans.

These benefits were partially offset by loan growth.

(dollars in thousands, except per share amounts)

Nonperforming loans at December 31, 2021 totaled $8,948, or 0.36 percent of total loans, a decrease from $16,194, or 0.71 percent of total loans, at December 31, 2020.

The decrease in nonperforming loans at December 31, 2021, compared to December 31, 2020, was due to payments received on nonaccrual loans.

Nonperforming loans include loans on nonaccrual status, loans past due 90 days or more and still accruing interest, and loans that have been considered to be troubled debt restructured (TDR) due to the borrowers’ financial difficulties.

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Increase in cash value of bank-owned life insurance 923 593 330 55.6 %

Loan swap fees 1,572 — 1,572 N/A

Realized investment securities gains (losses), net 77 (87) 164 188.51 %

Loan swap fees 66 1,572 (1,506) (95.8) %

Realized securities gains, net 51 77 (26) 33.8 %

Other income:

Other service charges and fees 1,164 1,039 125 12.03 %

Gain on sale of premises — 307 (307) (100.00) %

All other 1,718 1,290 428 33.2 %

1 unchanged sentence

Total noninterest income $ 9,729 $ 9,602 $ 127 1.3 %

(dollars in thousands, except per share amounts)

Debit card usage fees increased in 2021 compared to 2020, due to an increase in transaction volume as consumers responded to the reopening of the economy.

Revenue from trust services increased in 2021 compared to 2020 primarily as a result of an increase in the value of trust assets in 2021 compared to 2020.

The greater increase in cash value of bank-owned life insurance was driven by the purchase of additional life insurance in the third quarter of 2020, increasing total life insurance investments for 2021 in comparison to 2020.

The Company offers loan level interest rate swaps to its customers and offsets its exposure from such contracts by entering into mirror image swaps with a swap counterparty (back-to-back swap program).

Loan swap fees consist of fees earned in the back-to-back swap program which began in the first quarter of 2020, resulting in income from loan swap fees of $1,572 in 2020 and none in 2019.

These fees are largely dependent on the timing and volume of customer activity and may not reoccur in future periods.

The gain on sale of premises in 2019 was the result of the sale of the Iowa City branch facility after the Company consolidated the Iowa City and Coralville branches.

Service charges on deposit accounts decreased for 2020 when compared to 2019, primarily as a result of the reduction in nonsufficient fund fees.

Loan swap fees consist of fees earned in the back-to-back swap program at contract origination and are dependent on the timing and volume of customer activity.

The increase in other income for 2021 compared to 2020 was partially due to the recognition of net swap termination gains totaling $181 in 2021.

Interest rate swaps with a total notional amount of $150,000 were terminated and the pre-tax gains and losses were recorded in other noninterest income.

Additional information on interest rate swaps is included in Note 11 to the consolidated financial statements included in Item 8 of this Form 10-K.

(dollars in thousands, except per share amounts)

Noninterest Expense

11 unchanged sentences

Other expenses:

Marketing 211 230 (19) (8.26) %

Subscriptions and service contracts 1,777 1,333 444 33.3 %

Business development 999 704 295 41.9 %

Insurance expense 440 382 58 15.18 %

Subscriptions 569 394 175 44.42 %

Charitable contributions 890 180 710 394.4 %

Trust 593 462 131 28.4 %

Insurance expense 502 440 62 14.1 %

Consulting fees 302 323 (21) (6.5) %

Postage and courier 328 282 46 16.31 %

Supplies 217 311 (94) (30.23) %

Marketing 224 211 13 6.2 %

Low income housing projects amortization 701 432 269 62.3 %

New market tax credit project amortization and related management fees

919 919 — — %

New markets tax credit project amortization and management fees 919 919 — — %

All other 2,091 2,244 (153) (6.8) %

1 unchanged sentence

Total noninterest expense $ 43,380 $ 39,054 $ 4,326 11.1 %

Salaries and employee benefits decreased in 2020 compared to 2019, primarily due to fewer full time equivalent employees and a decrease in expenses related to restricted stock unit awards and insurance benefits.

These expense reductions were partially offset by normal annual performance raises, one-time staff bonuses for efforts related to the PPP program and an increase in the number of employees eligible for retirement benefit contributions.

The Company has not made, and at this time does not expect to make, any material staffing or compensation changes as a result of the COVID-19 pandemic.

Occupancy expense increased in 2020 compared to 2019 because of the incurrence of a full twelve months of expenses related to the expansion into the cities of Owatonna, Mankato and St.

Cloud, Minnesota, which occurred toward the end of the first quarter of 2019.

Data processing decreased in 2020 compared to 2019, primarily due to a new contract signed with West Bank's core data processing provider.

FDIC insurance expense increased in 2020 compared to 2019, primarily due to the increase in the Company's average assets and assessment rate.

Additionally, the FDIC applied approximately $425 of credits to the Company’s quarterly assessment in 2019, which resulted in no expense in the third and fourth quarters of 2019.

Business development expense decreased in 2020 compared to 2019, primarily due to the limitations placed on business development activities during COVID-19 restrictions and shutdowns.

All other expenses were higher in 2020 compared to 2019, due primarily to losses as a result of check fraud schemes.

(dollars in thousands, except per share amounts)

Salaries and employee benefits increased in 2021 compared to 2020, primarily due to an increase in expense related to restricted stock units and the addition of two commercial bankers in the Des Moines market in the second half of 2021.

FDIC insurance expense increased in 2021 compared to 2020 due to increases in both the Company’s average assets and assessment rate.

Business development expense increased in 2021 compared to 2020.

Business development activities were significantly limited as a result of COVID-19 shutdowns and social distancing guidelines that began in the second quarter of 2020.

Subscriptions and service contracts increased primarily due to increases in information technology and information security solutions.

Business development activities increased in 2021 as local economies returned to more normal activities.

Charitable contributions expense increased in 2021 compared to 2020 due to an increase in the Company’s contribution to the West Bancorporation Foundation and a one-time contribution to a local municipality’s special housing program.

All other expenses were lower for 2021 compared to 2020 due primarily to losses in 2020 from a check fraud incident.

The Company records a provision for income tax expense currently payable, along with a provision for those taxes payable or refundable in the future (deferred taxes).

Deferred taxes arise from differences in the timing of certain items for financial statement reporting compared to income tax reporting and are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

Federal income tax expense for 2020 and 2019 was approximately $6,209 an d $5,095, respectively, while state income tax expense was approximately $2,460 and $1,957, respectively.

Federal income tax expense for 2021 and 2020 was approximately $9,833 and $6,209, respectively, while state income tax expense was approximately $3,468 and $2,460, respectively.

The effective rate of income tax expense as a percent of income before income taxes was 21.2 percent and 20.9 percent, respectively, for 2021 and 2020.

23 unchanged sentences

Total loans 2,325,539 96,126 4.13 % 2,147,154 91,044 4.24 % 1,799,188 85,906 4.77 %

Investment securities:

Taxable 450,910 8,542 1.89 % 322,695 7,818 2.42 % 354,727 10,031 2.83 %

1 unchanged sentence

141,816 3,522 2.48 % 55,589 1,774 3.19 % 69,505 2,462 3.54 %

Total investment securities 378,284 9,592 2.54 % 424,232 12,493 2.94 % 496,244 14,264 2.87 %

Total securities 592,726 12,064 2.04 % 378,284 9,592 2.54 % 424,232 12,493 2.94 %

Federal funds sold 233,873 292 0.12 % 88,904 304 0.34 % 54,041 1,110 2.05 %

10 unchanged sentences

Interest-bearing liabilities:

Savings, interest-bearing

demand and money markets $ 1,499,784 7,755 0.52 % $ 1,337,009 19,548 1.46 % $ 1,266,534 14,369 1.13 %

Interest-bearing demand $ 477,988 769 0.16 % $ 371,153 747 0.20 % $ 318,794 1,688 0.53 %

Savings and money market 1,413,878 5,641 0.40 % 1,128,631 7,008 0.62 % 1,018,215 17,860 1.75 %

Time 208,164 1,538 0.74 % 215,224 3,501 1.63 % 255,770 5,666 2.22 %

Total deposits 2,100,030 7,948 0.38 % 1,715,008 11,256 0.66 % 1,592,779 25,214 1.58 %

Other borrowed funds 227,945 6,144 2.70 % 191,969 7,031 3.66 % 127,836 5,671 4.44 %

Borrowed funds:

Federal funds purchased 4,620 5 0.11 % 4,397 23 0.52 % 10,229 241 2.35 %

Subordinated notes 20,458 1,008 4.93 % 20,445 1,016 4.97 % 20,431 1,022 5.01 %

Federal Home Loan Bank

advances 140,274 2,944 2.10 % 178,191 4,705 2.64 % 137,471 5,131 3.73 %

Long-term debt 20,995 316 1.51 % 24,912 400 1.61 % 23,838 637 2.67 %

Total borrowed funds 186,347 4,273 2.29 % 227,945 6,144 2.70 % 191,969 7,031 3.66 %

Total interest-bearing liabilities 2,286,377 12,221 0.53 % 1,942,953 17,400 0.90 % 1,784,748 32,245 1.81 %

12 unchanged sentences

(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 investment securities and loans.

(4) Net interest income (FTE) and net interest margin (FTE) are non-GAAP financial measures.

2 unchanged sentences

Net Interest Income

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 investment securities, and interest paid on interest-bearing liabilities, consisting of deposits and borrowings.

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 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 the actions of regulatory authorities.

The Federal Reserve decreased the targeted federal funds rate by 75 basis points in the second half of 2019.

In addition, in response to the COVID-19 pandemic, the Federal Reserve decreased the targeted federal funds interest rate by a total of 150 basis points in March 2020.

These decreases impacted the comparability of net interest income between 2019 and 2020.

The Federal Reserve is forecasting to keep the federal funds rate near zero for the next three years.

We expect the short term interest rates to remain unchanged and the yield curve to slightly increase in 2021 compared to 2020.

The Federal Reserve decreased the targeted federal funds interest rate by a total of 150 basis points in March 2020, reaching its current range of 0.0 - 0.25 percent.

The Federal Reserve has signaled that it could increase the targeted federal funds interest rate in 2022.

Net interest margin 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.

1 unchanged sentence

There was an increase of $12,721 in tax-equivalent net interest income in 2021 compared to 2020.

This was primarily due to a decrease in interest rates paid on deposits and other borrowed funds and an increase in average loan balances, partially offset by a decrease in yield on loans and investments.

This was primarily due to a decrease in interest rates paid on deposits and borrowed funds and an increase in average loan and securities balances, partially offset by a decrease in yield on loans and investments.

Rate and Volume Analysis

9 unchanged sentences

Total loans (including fees) 7,395 (2,313) 5,082 15,255 (10,117) 5,138

Investment securities:

Taxable 2,669 (1,945) 724 (856) (1,357) (2,213)

1 unchanged sentence

2,218 (470) 1,748 (460) (228) (688)

Total investment securities (1,316) (1,585) (2,901) (2,834) 1,063 (1,771)

Total securities 4,887 (2,415) 2,472 (1,316) (1,585) (2,901)

Federal funds sold 269 (281) (12) 456 (1,262) (806)

2 unchanged sentences

Interest Expense

Savings, interest-bearing

demand and money market 2,136 (13,929) (11,793) 837 4,342 5,179

Interest-bearing demand 190 (168) 22 241 (1,182) (941)

Savings and money market 1,509 (2,876) (1,367) 1,757 (12,609) (10,852)

Time (111) (1,852) (1,963) (809) (1,356) (2,165)

Total deposits 1,588 (4,896) (3,308) 1,189 (15,147) (13,958)

Other borrowed funds 1,173 (2,060) (887) 2,477 (1,117) 1,360

Borrowed funds:

Federal funds purchased 1 (19) (18) (61) (157) (218)

Subordinated debt 1 (9) (8) 1 (7) (6)

Federal Home Loan Bank advances (897) (864) (1,761) 1,296 (1,722) (426)

Long-term debt (60) (24) (84) (34) (203) (237)

Total borrowed funds (955) (916) (1,871) 1,202 (2,089) (887)

Total interest expense 633 (5,812) (5,179) 2,391 (17,236) (14,845)

2 unchanged sentences

(1) Average balances of nonaccrual loans were included for computational purposes.

(2) Tax-exempt income has been converted to a tax-equivalent basis using a federal income tax rate of 21 percent and is adjusted for the effect of the nondeductible interest expense associated with owning tax-exempt investment securities and loans.

(3) Net interest income (FTE) is a non-GAAP financial measure.

2 unchanged sentences

Tax-equivalent interest income and fees on loans increased $5,082 for the year ended December 31, 2021, compared to 2020.

The improvement was primarily due to an increase of $347,966 in average balance of loans in 2020 compared to 2019, which was sign ificantly offset by the overall decline in loan yields.

The improvement was primarily due to an increase of $178,385 in the average balance of loans in 2021 compared to 2020, which was partially offset by the overall decline in loan yields.

The average yield on loans decreased 11 basis points in 2021 compared to 2020.

Average loan balances for the year ended December 31, 2020 included $151,074 of PPP loans.

Average loan balances for the year ended December 31, 2021 included $98,593 of PPP loans, compared to average PPP loan balances of $151,074 for the year ended December 31, 2020.

Interest income recognized on PPP loans, which includes the amortization of origination fees paid by the SBA, was $6,731 for the year ended December 31, 2021, resulting in a yield of 6.83 percent.

Interest income on PPP loans included approximately $1,000 of accelerated amortization of origination fees upon loan forgiveness and repayment by the SBA.

While the PPP loans contributed to the increase in average loans and interest income, they negatively impacted the overall yield on loans.

The future impact of PPP loans, including the second round of PPP lending, on net interest income and net interest margin will be subject to the timing of loan forgiveness by the SBA and may create volatility in the commercial loan yields during 2021.

Interest income recognized on PPP loans in 2020 was $4,752, resulting in a yield of 3.15 percent.

The PPP loans contributed to the increase in interest income and increase in the yield on commercial loans and had a positive impact on overall net interest margin in 2021.

The Company continues to focus on expanding existing and entering into new customer relationships while maintaining strong credit quality.

1 unchanged sentence

The political and economic environments can also influence the volume of new loan originations and the mix of variable-rate versus fixed-rate loans.

We anticipate that our interest income will be adversely affected in future periods as a result of the COVID-19 pandemic, including the possibility of decreases in the size of our loan portfolio and declining credit quality, the expected continuation of low interest rates, and an increase in nonaccrual loans.

The average balance of investment securities in 2020 was $45,948 lower than in 2019, primarily as a result of securities sold during 2019 and first quarter of 2020 to create liquidity for expected loan growth prior to the COVID-19 pandemic.

The average balance of interest-bearing demand, savings and money market deposits increased $162,775 in 2020 compared to 2019.

The increase was primarily due to an increase in average balances of money market and interest-bearing demand accounts.

The average rate paid on interest-bearing demand, savings and money market deposits in 2020 decreased by 94 basis points compared to 2019.

The average balance of securities available for sale in 2021 was $214,442 higher than in 2020, primarily as a result of securities purchased during 2021 to improve the yield on excess liquidity.

Due to the interest rate environment during 2021 and 2020, securities added to the portfolio have been at significantly lower yields than the existing portfolio holdings, resulting in an overall decline in the securities portfolio yield.

The average balance of federal funds sold increased $144,969 in 2021 compared to 2020.

The higher average balance in 2021 at a yield of 0.12 percent contributed to the decline in the net interest margin in 2021 compared to 2020.

The average balance of savings and money market deposits increased $285,247 in 2021 compared to 2020.

The increase was primarily due to an increase in average balances of money market accounts.

The growth in these deposit balances was primarily due to changes in customer behavior as a result of the COVID-19 pandemic and our customers’ desire to retain liquidity, as well as a result of additional funds provided to individuals and businesses by government relief programs.

The average rate paid on savings and money market deposits in 2021 decreased by 22 basis points compared to 2020.

The average balance of time deposits decreased $7,060 in 2021 compared to 2020.

The average rate paid on time deposits decreased 89 basis points in 2021 compared to 2020.

The decreases in average rates paid were primarily due to decreasing interest rates on all deposit products in response to the unprecedented decrease in the target federal funds rate in March 2020.

The average balance of other borrowed funds increased $35,976 in 2020 compared to 2019.

The rate paid on borrowed funds declined 96 basis points in 2020 compared to 2019, primarily due to the maturity of long-term, high-rate FHLB advances in December 2019 through September 2020 and the reduction of market rates beginning in the second half of 2019 on short-term and variable-rate borrowings.

The Company had a higher than usual amount of liquid assets at December 31, 2020 as a result of unexpected high levels of deposits .

However, the impact of the COVID-19 pandemic and possible decreases in interest-bearing deposits in future periods could result in an increase in borrowed funds.

As a result of the reductions in the targeted federal funds interest rate, as well as the possible impact of the COVID-19 pandemic, such as lower levels of loans or increases in nonaccrual loans, our net interest income and net interest margin could decrease in future periods.

INVESTMENT SECURITIES PORTFOLIO

The following table sets forth the composition of the Company’s investment portfolio as of the dates indicated.

As of December 31

2020 2019 2018

Securities available for sale, at fair value:

State and political subdivisions $ 144,332 $ 47,178 $ 149,156

Collateralized mortgage obligations 140,962 181,921 157,004

Mortgage-backed securities 83,523 73,030 63,378

Asset-backed securities — 17,600 31,903

Collateralized loan obligations 51,754 64,832 —

Trust preferred security — — 1,900

Corporate notes — 14,017 50,417

Total securities available for sale $ 420,571 $ 398,578 $ 453,758

The decreases were primarily due to decreasing interest rates on all deposit products in response to the unprecedented decrease in the targeted federal funds rate that occurred in March 2020.

The average balance of borrowed funds decreased $41,598 in 2021 compared to 2020.

The rate paid on borrowed funds declined 41 basis points in 2021 compared to 2020.

These declines were primarily due to the decrease in average balance of FHLB advances and rate paid on FHLB advances.

The average balance of FHLB advances decreased $37,917 in 2021 compared to 2020, while the rate paid on FHLB advances declined 54 basis points in 2021 compared to 2020.

These declines were primarily due to the repayment of $50,000 of FHLB advances in the second quarter of 2021 and the maturity of long-term, high rate FHLB advances in the second and third quarters of 2020.

If short-term rates increase in 2022, as the Federal Reserve has indicated, that could improve reinvestment rates on loans and securities, but it could also increase our cost of deposits and borrowed funds.

SECURITIES PORTFOLIO

The balance of securities available for sale increased by $338,251 as of December 31, 2021, compared to December 31, 2020.

Throughout 2021, securities were purchased to improve the yield on excess liquidity.

Securities available for sale are a part of the Company’s interest rate risk management strategy and may be repositioned in response to changes in interest rates, changes in prepayment risk, liquidity management and other factors.

The Company continues to evaluate the investment portfolio as part of an overall strategy to produce reasonable and consistent margins where feasible, while attempting to limit risks inherent in the Company’s balance sheet.

(dollars in thousands, except per share amounts)

The investment securities available for sale presented in the following table are reported at fair value and by contractual maturity as of December 31, 2020.

As of December 31, 2021, approximately 63 percent of the available for sale securities portfolio consisted of government agency guaranteed collateralized mortgage obligations and mortgage-backed securities.

Those securities increased by $251,348 as of December 31, 2021, compared to December 31, 2020.

In the current interest rate environment, those securities provide acceptable yields, have little to no credit risk, and provide fairly consistent cash flows.

All collateralized mortgage obligations and mortgage-backed securities consist of residential and commercial mortgage pass-through securities and collateralized mortgage obligations guaranteed by the Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA), Government National Mortgage Association (GNMA), or the SBA.

The securities issued by state and political subdivisions increased by $88,115 as of December 31, 2021, compared to December 31, 2020.

The securities issued by state and political subdivisions are diversified among municipalities in 25 states.

The following table sets forth the weighted average yield by contractual maturity by security type as of December 31, 2021.

Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

The collateralized mortgage obligations and mortgage-backed securities have monthly paydowns that are not reflected in the table.

Investments as of December 31, 2020 Within one

year After one year

3 unchanged sentences

years After ten years Total

State and political subdivisions $ — $ — $ 9,486 $ 134,846 $ 144,332

Collateralized mortgage obligations — — 5,712 135,250 140,962

Mortgage-backed securities — — 2,800 80,723 83,523

Collateralized loan obligations — — 4,988 46,766 51,754

Total $ — $ — $ 22,986 $ 397,585 $ 420,571

Weighted average yield:

Securities available for sale:

State and political subdivisions (1)

3 unchanged sentences

Collateralized loan obligations — — 1.77 — 1.77

Total — % — % 1.82 % 2.32 %

Corporate notes — — 3.27 — 3.27

— % — % 1.91 % 1.81 % 1.83 %

(1) Yields on tax-exempt obligations have been computed on a tax-equivalent basis using a federal income tax rate of 21 percent and are adjusted to reflect the effect of the nondeductible interest expense associated with owning tax-exempt investment securities.

Management’s process for obtaining and validating the fair value of investment securities is discussed in Note 18 to the consolidated financial statements included in Item 8 of this Form 10-K.

As of December 31, 2020, the existing gross unrealized losses o f $1,780 in the Company’s investment portfolio we re considered to be temporary in nature due to market interest rate fluctuations, not reduced estimated cash flows.

As of December 31, 2021, the existing gross unrealized losses of $11,800 in the Company’s securities portfolio were considered to be temporary in nature due to market interest rate fluctuations, not reduced estimated cash flows.

The Company has the ability and the intent to hold the related securities with unrealized losses for a period of time sufficient to allow for a recovery, which may be at maturity.

However, management may decide to sell securities with unrealized losses at a future date for liquidity purposes, to manage interest rate risk, or to enhance interest income.

The balance of investment securities available for sale increased by $21,993 during 2020.

Securities were sold early in 2020 to create liquidity for expected loan growth prior to the COVID-19 pandemic.

Throughout 2020, securities were purchased and sold as part of various reinvestment strategies including reducing our interest rate risk exposure in variable-rate bonds and managing overall interest rate risk and yield.

In the fourth quarter of 2020, excess liquidity was invested in state and political subdivision bonds and collateralized mortgage obligations.

The securities issued by state and political subdivisions are diversified in 24 states.

As of December 31, 2020, the Company did not have securities from a single issuer, except for the United States government or its agencies, that exceeded 10 percent of consolidated stockholders’ equity.

At December 31, 2020, the collateralized loan obligations owned by the Company were rated AAA or AA.

As of December 31, 2020, approximatel y 53 p ercent of the available for sale investment securities portfolio consisted of government agency guaranteed collateralized mortgage obligations and mortgage-backed securities.

In the current interest rate environment, those securities provide relatively good yields, have little to no credit risk, and provide fairly consistent cash flows.

All collateralized mortgage obligations and mortgage-backed securities consist of residential mortgage pass-through securities and real estate mortgage investment conduits guaranteed by the Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA), or Government National Mortgage Association (GNMA), and commercial mortgage pass-through securities guaranteed by the SBA.

The debt obligations were all within the credit ratings acceptable under West Bank’s investment policy.

(dollars in thousands, except per share amounts)

For additional information regarding the Company’s securities portfolio, see Note 3 and Note 18 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K.

LOAN PORTFOLIO

Types of Loans

The following table sets forth the composition of the Company’s loan portfolio by segment as of the dates indicated.

As of December 31

2020 2019 2018 2017 2016

Commercial $ 603,599 $ 431,044 $ 358,763 $ 347,482 $ 334,014

Construction, land and land development 236,093 264,193 245,810 207,451 205,610

1-4 family residential first mortgages 58,912 54,475 49,052 51,044 47,184

Home equity 9,444 12,380 14,469 13,811 18,057

Commercial 1,373,007 1,175,024 1,050,025 886,114 788,000

Consumer and other 5,694 6,787 6,211 6,363 8,355

Total loans 2,286,749 1,943,903 1,724,330 1,512,265 1,401,220

Deferred loan fees, net (6,174) (2,240) (2,500) (1,765) (1,350)

Total loans, net of deferred fees $ 2,280,575 $ 1,941,663 $ 1,721,830 $ 1,510,500 $ 1,399,870

As of December 31, 2020, total loans were approximately 84 percent of total deposits and 72 percent of total assets.

The Company seeks to create growth in commercial lending, which primarily includes commercial real estate, multi-family, and commercial and industrial lending, by offering customer-focused products and competitive pricing and by capitalizing on the positive trends in its market area.

It is the objective of the Company’s credit policies to diversify the commercial loan portfolio to limit concentrations in any single industry.

As of December 31, 2021, the majority of all loans were originated directly by West Bank to borrowers within West Bank’s principal market areas.

As of December 31, 2021, total loans were approximately 81.4 percent of total deposits and 70.2 percent of total assets.

Loans outstanding at the end of 2021 increased 7.7 percent compared to the end of 2020.

Changes in the loan portfolio during 2020 included an increase of $197,983 in commercial real estate loans and a decrease of $28,100 in construction, land and land development loans.

Commercial loans, excluding PPP loans, declined $8,202.

As of December 31, 2020, PPP loans outstanding totaled $180,757, all of which were included in commercial loans.

The Company continues to focus on business development efforts in all of its operating markets.

We anticipate that loan growth may slow down in 2021 as a result of the duration of the COVID-19 pandemic and the related economic uncertainties.

Changes in the loan portfolio during 2021 included increases of $157,211 in commercial real estate loans and $123,165 in construction, land and land development loans.

Commercial loans declined $110,784, which included a $158,551 decline in PPP loans.

As of December 31, 2021, PPP loans outstanding totaled $22,206, which was made up of $1,118 from round one of the program originated in 2020 and $21,088 from round two originated in 2021.

Exclusive of PPP loans, loan growth in 2021 was $334,172, or 15.9 percent.

The Company continues to focus on business development efforts in all of its markets.

We believe that loan growth could slow down in 2022 as a result of anticipated increases in the targeted federal funds rate and economic conditions, including high inflation and labor shortages.

(dollars in thousands, except per share amounts)

For a description of the loan segments, see Note 4 to the consolidated financial statements included in Item 8 of this Form 10-K.

7 unchanged sentences

Loan officer lending authorities vary according to the individual loan officer’s experience and expertise.

During 2020 and 2021, the Company provided short-term loan modifications and additional accommodations to borrowers in response to the COVID-19 pandemic.

At December 31, 2021, there were no longer any loans subject to a COVID-19 related loan modification.

All COVID-19-related modifications expired during 2021 and those loans returned to regular payment status.

As of December 31, 2021, there were no loans that were past due 30 days or more.

Nonperforming loans declined to $8,948 at December 31, 2021, compared to $16,194 at December 31, 2020.

The decrease was due to payments received on nonaccrual loans.

The nonperforming loans at both December 31, 2021 and 2020 consisted of two borrowing relationships.

The watch classification of loans increased to $64,025 as of December 31, 2021 from $26,715 as of December 31, 2020.

The increase was primarily due to the addition of hotel loans related to one borrowing group.

This relationship was downgraded to watch classification primarily due to a slower rebound in its hotel occupancy rates compared to other market data.

The loans in this borrowing group are considered well collateralized with a weighted average loan to value ratio of 62 percent and no required payments are past due.

Loans Secured by Real Estate

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The lending policy also includes guidelines for real estate appraisals and evaluations, including minimum appraisal and evaluation standards.

(dollars in thousands, except per share amounts)

Although repayment risk exists on all loans, different factors influence repayment risk for each type of loan.

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Although the Company’s loan portfolio is heavily concentrated in real estate and its real estate portfolio levels exceed these regulatory guidelines, it has established risk management policies and procedures to regularly monitor the commercial real estate portfolio.

(dollars in thousands, except per share amounts)

Commercial loans secured by real estate, including construction, land and land development, totaled $1,889,476, or 76.8 percent of total loans, at December 31, 2021.

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As of December 31

Non-owner occupied commercial real estate

Balance % of CRE Portfolio Weighted Average LTV Balance % of CRE Portfolio Weighted Average LTV

Balance % of CRE non-owner occupied Portfolio Weighted Average LTV Balance % of CRE non-owner occupied Portfolio Weighted Average LTV

Non-owner occupied:

Multifamily $ 435,097 27.8 % 71 % $ 313,205 24.0 % 69 %

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Warehouse & trucking 153,022 9.8 69 146,178 11.2 69

Hotel 164,721 12.6 % 64 % 138,898 11.8 % 69 %

Hotels 203,967 13.0 68 164,721 12.6 64

Mixed use 72,039 4.6 63 83,681 6.4 74

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All other 249,265 15.9 not available 183,106 14.1 not available

Total $ 1,304,489 100.0 % $ 1,175,134 100.0 %

(dollars in thousands, except per share amounts)

The following table summarizes non-owner occupied commercial real estate loans by property type and risk rating as of December 31, 2020.

$ 1,564,909 100.0 % $ 1,304,489 100.0 %

The following table summarizes non-owner occupied commercial real estate loans by property type by risk rating as of December 31, 2021.

Risk ratings are defined in Note 4 to the consolidated financial statements included in Item 8 of this Form 10-K.

1 unchanged sentence

Total 1-3 4 5 6 7 8

Non-owner occupied:

Multifamily $ 435,097 $ 25,759 $ 325,115 $ 70,136 $ 14,087 $ — $ —

6 unchanged sentences

All other 249,265 28,115 214,404 6,746 — — —

Total $ 1,304,489 $ 233,050 $ 789,586 $ 257,169 $ 24,684 $ — $ —

$ 1,564,909 $ 227,024 $ 1,044,422 $ 230,852 $ 62,611 $ — $ —

As of December 31, 2021, there were no non-owner occupied commercial real estate loans that were past due 30 days or more.

(dollars in thousands, except per share amounts)

Maturities of Loans

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Actual repayments may differ from contractual maturities because individual borrowers may have the right to prepay loans with or without prepayment penalties.

Loans as of December 31, 2020 Within one

As of December 31, 2021

year After one but

years After five

within five years After five but

within 15 years After 15 years Total

Commercial $ 167,713 $ 214,514 $ 71,223 $ 39,365 $ 492,815

4 unchanged sentences

Consumer and other 2,135 1,662 — — 3,797

Total loans $ 369,830 $ 1,297,420 $ 619,499 $ 2,286,749

$ 394,697 $ 1,167,236 $ 815,778 $ 83,015 $ 2,460,726

After one but

years After five

within five years After five but

within 15 years After 15 years

Loan maturities after one year with:

Fixed rates $ 1,139,267 $ 338,811

Commercial $ 157,259 $ 49,720 $ —

Construction, land and land development 155,976 3,798 —

1-4 family residential first mortgages 55,470 1,833 —

Home equity 1,303 — —

Commercial 642,944 510,792 12,830

Consumer and other 1,233 — —

Total fixed rate loans 1,014,185 566,143 12,830

Variable rates

$ 1,297,420 $ 619,499

(dollars in thousands, except per share amounts)

Risk Elements

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 indicated.

Years Ended December 31

Commercial 57,255 21,503 39,365

Construction, land and land development 52,719 3,796 18,513

1-4 family residential first mortgages 2,042 1,909 —

Home equity 4,558 — —

Commercial 36,048 222,427 12,307

Consumer and other 429 — —

Total variable rate loans 153,051 249,635 70,185

$ 1,167,236 $ 815,778 $ 83,015

Nonaccrual loans $ 16,194 $ 538 $ 1,928 $ 622 $ 1,022

Loans past due 90 days and still accruing interest — — — — —

Troubled debt restructured loans (1)

Total nonperforming loans 16,194 538 1,928 622 1,022

Other real estate owned — — — — —

Total nonperforming assets $ 16,194 $ 538 $ 1,928 $ 622 $ 1,022

Nonperforming loans to total loans 0.71 % 0.03 % 0.11 % 0.04 % 0.07 %

Nonperforming assets to total assets 0.51 % 0.02 % 0.08 % 0.03 % 0.06 %

(1) While TDR loans are commonly reported by the industry as nonperforming, those not classified in the nonaccrual category are accruing interest due to payment performance.

TDR loans on nonaccrual status, if any, are included in the nonaccrual category.

Nonperforming loans increase d $15,656 from December 31, 2019 to December 31, 2020.

The increase in nonperforming loans was the result of a downgrade in the credit quality of one borrower due to the severe economic impact of COVID-19 on its business.

This borrower’s loans were classified as watch prior to COVID-19 and were further downgraded to substandard and put on nonaccrual in September 2020.

The borrower had sufficient cash flow to service its debt prior to COVID-19;

however its cash flows decreased significantly as a result of forced closures and other operating restrictions and its ineligibility for PPP loans during 2020.

The borrower has been evaluating debt reduction options, including downsizing its operations.

The Company’s Texas ratio, which is computed by dividing nonperforming assets by tangible common equity plus allowance for loan losses, was 6.40 percent as of December 31, 2020, compared to 0.23 percent as of December 31, 2019.

We believe the COVID-19 pandemic may have an adverse effect on the credit quality of our loan portfolio in 2021.

Further disruption to our customers in the hotel, retail, restaurant and movie theater industries could result in increased loan delinquencies.

Management believes impaired loans may increase in the future as a result of the COVID-19 pandemic and efforts to contain it.

No credit issues are anticipated with PPP loans at this time, as they are 100 percent guaranteed by the SBA.

The accrual of interest on past due and other impaired loans is generally discontinued when loan payments are 90 days past due or when, in the opinion of management, the borrower may be unable to make all payments pursuant to contractual terms.

Interest income is subsequently recognized only to the extent cash payments are received.

Generally, all payments received while a loan is on nonaccrual status are applied to the principal balance of the loan.

For the years ended December 31, 2020, 2019 and 2018, interest income that would have been recorded during the nonaccrual period under the original terms of such loans was approximately $235, $25 and $96, respectively.

Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

In certain cases, interest may continue to accrue on loans past due more than 90 days when the value of the collateral is sufficient to cover both the principal amount of the loan and accrued interest and the loan is in the process of collection.

Interest income on other impaired loans is based upon the terms of the underlying loan agreement.

However, the recorded net investment in impaired loans, including accrued interest, is limited to the present value of the expected cash flows of the impaired loan or the observable fair market value of the loan’s collateral.

The average balance of all impaired loans during 2020 was approximately $5,651.

Interest income recognized on impaired loans in 2020, 2019 and 2018 was approximately $24, $75 and $6, respectively.

(dollars in thousands, except per share amounts)

A loan is classified as a TDR loan when the Company separately concludes that a borrower is experiencing financial difficulties and a concession is granted that would not have otherwise been considered.

Concessions may include restructuring of the loan terms to alleviate the burden of the borrower’s cash requirements, such as an extension of the payment terms beyond the original maturity date or a change in the interest rate charged.

The payment history of the borrower, along with a current analysis of its cash flows, is used to determine the restructured terms.

Underwriting procedures are similar to those of new loan originations, and renewals of performing loans in that current financial information is obtained and analyzed.

A current assessment of collateral is performed.

The approval process for TDR loans is the same as that for new loans.

The TDR loans with extended terms are accounted for as impaired until performance is established.

A change to the interest rate would change the classification of a loan to a TDR loan if the restructured loan yields a rate that is below a market rate for that of a new loan with comparable risk.

TDR loans with below-market rates are considered impaired until fully collected.

TDR loans may also be reported as nonaccrual or 90 days past due if they are not performing per the restructured terms.

The CARES Act provided financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time in certain circumstances.

This temporary suspension may only be applied to modifications of loans that were not more than 30 days past due as of December 31, 2019 and may not be applied to modifications that are not related to the COVID-19 pandemic.

If elected, the temporary suspension may be applied to eligible modifications executed during the period beginning on March 1, 2020 and, as extended by the Coronavirus Response and Relief Supplemental Appropriations Act of 2021, ending on the earlier of January 1, 2022 or 60 days after the termination of the COVID-19 national emergency.

In 2020, federal banking regulators, in consultation with FASB, issued interagency statements that included similar guidance on their approach for the accounting of loan modifications in light of the economic impact of the COVID-19 pandemic that provide that short-term modifications and additional accommodations made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs.

During 2020, West Bank provided COVID-19-related modifications for nearly 300 loans totaling over $550,000.

As of December 31, 2020, West Bank’s COVID-19-related modifications totaled $139,940.

These modifications included the deferral of principal and/or interest payments.

None of these modifications were considered TDRs, in accordance with the CARES Act and other interpretive guidance provided by bank regulatory interagency statements.

As of December 31, 2020, $15,817 of these loans were classified as substandard, considered impaired and were on nonaccrual.

The following table shows the industry concentrations of COVID-19 modifications as of December 31, 2020.

Hotels $ 64,449

Mixed use and retail 38,177

Theaters 17,863

Restaurants 2,938

The following table shows the expiration of the modification periods as of December 31, 2020.

January 2021 $ 24,613

February 2021 13,889

March 2021 519

April 2021 34,299

May 2021 48,757

June 2021 17,863

(dollars in thousands, except per share amounts)

SUMMARY OF THE ALLOWANCE FOR LOAN LOSSES

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The Company’s concentration risks include geographic concentration in central and eastern Iowa and southern Minnesota.

The local economies are composed primarily of service industries and state and county governments.

The local economies are composed primarily of agriculture, service industries and state and county 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.

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(dollars in thousands, except per share amounts)

Change in the Allowance for Loan Losses

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.

Concerted efforts are made to maximize subsequent recoveries.

The following table summarizes activity in the Company’s allowance for loan losses by loan segment for the years indicated, including amounts of loans charged off, recoveries, additions to the allowance charged to income and related ratios.

The following table shows the ratio of net (charge-offs) recoveries to loans outstanding, broken out by loan segment, along with ratios of the allowance and nonaccrual loans to total loans at the end of the period.

Analysis of the Allowance for Loan Losses for the Years Ended December 31

2021 2020 2019

Balance at beginning of period $ 17,235 $ 16,689 $ 16,430 $ 16,112 $ 14,967

Commercial — (452) (208) (199) (125)

Construction, land and land development — — — — (141)

1-4 family residential first mortgages — — — — (93)

Home equity (1) — (24) (176) —

Commercial — — — — —

Consumer and other — — (3) — (47)

Total charge-offs (1) (452) (235) (375) (406)

Ratio of net (charge-offs) recoveries during the

period to average loans outstanding by segment:

Commercial 0.02 % — % (0.01) %

4 unchanged sentences

Consumer and other — — —

Total recoveries 202 398 744 693 551

Net (charge-offs) recoveries 201 (54) 509 318 145

Provision for loan losses charged to operations 12,000 600 (250) — 1,000

Balance at end of period $ 29,436 $ 17,235 $ 16,689 $ 16,430 $ 16,112

Average loans outstanding $ 2,147,154 $ 1,799,188 $ 1,553,673 $ 1,443,885 $ 1,336,156

Ratio of net (charge-offs) recoveries during the

period to average loans outstanding 0.01 % 0.00 % 0.03 % 0.02 % 0.01 %

Ratio of allowance for loan losses to

average loans outstanding 1.37 % 0.96 % 1.07 % 1.14 % 1.21 %

Total 0.02 % 0.01 % 0.00 %

Ratio of allowance for loan losses to total

3 unchanged sentences

1.17 % 1.40 % 0.89 %

Ratio of nonaccrual loans to total loans at

end of period 0.36 % 0.71 % 0.03 %

Ratio of allowance for loan losses to total

nonaccrual loans at the end of period 316.99 % 181.77 % 3,203.53 %

Ratio of net (charge-offs) recoveries to total

loans at end of period 0.02 % 0.01 % 0.00 %

(1) As presented, this is a non-GAAP financial measure.

For further information, refer to the section “Non-GAAP Financial Measures” of this item.

(dollars in thousands, except per share amounts)

Breakdown of Allowance for Loan Losses by Category

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2021 2020 2019

Amount %* Amount %* Amount %* Amount %* Amount %*

Amount %* Amount %* Amount %*

Balance at end of

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* Percent of loans in each category to total loans.

(dollars in thousands, except per share amounts)

The allocation of the allowance for loan losses is dependent upon the change in balances outstanding in the various categories;

1 unchanged sentence

specific reserves for loans considered impaired;

and management’s assessment of economic factors that may influence potential losses in the loan portfolio.

In March 2020, the U.S.

economy deteriorated as a result of the COVID-19 pandemic.

While job growth averaged approximately 232,000 per month for the first two months of 2020, approximately 22 million jobs were lost in March and April of 2020.

Additionally, the national unemployment rate increased from 4.4 percent as of March 31, 2020 to 6.7 percent a s of December 31, 2020 and peaked at 14.8 percent in April 2020.

Additionally, the Federal Open Market Committee reduced the targeted federal funds rate range to 0.0 - 0.25 percent in March 2020.

To establish the allowance for loan losses, the Company continued to use experience factors based on the highest losses calculated over a rolling 12-, 16- or 20-quarter period.

Management believes that using the highest of these time periods will select the factor that best represents where we are in the economic cycle.

For instance, if the economy worsens, the more recent activity should be more representative of the current environment.

As the economy improves, the averages over a longer period of time should be more representative.

No allowance for loan losses has been allocated to PPP loans, as these are 100 percent guaranteed by the SBA.

and management’s assessment of economic and other qualitative factors that may influence potential losses in the loan portfolio.

In 2020, the U.S.

economy deteriorated rapidly and significantly as a result of the COVID-19 pandemic and the impact of economic uncertainties.

The national unemployment rate jumped from 4.4 percent in March 2020 to 14.8 percent in April 2020 amid nationwide shutdowns and other governmental restrictions implemented in the interest of public health and safety.

In 2021, the economy began to recover;

however some economic measures still lag pre-pandemic levels.

The Company increased certain qualitative factors used in the allowance for loan losses evaluation in 2020 in response to the COVID-19 pandemic.

Based on improvement in national and local economic performance measures, the relative success of vaccination efforts and the lifting or easing of pandemic-related restrictions in the Company’s market areas, the Company decreased certain qualitative factors used in the allowance for loan losses evaluation in 2021.

However, the qualitative factors overall remain higher at December 31, 2021 than they were prior to the 2020 COVID-19 pandemic related adjustments because new COVID-19 variants, increasing inflationary trends, labor shortages and supply chain issues in 2021 have created new stresses on the economy.

As of December 31, 2021, there were $2,500 in specific reserves related to loans individually evaluated for impairment.

2 unchanged sentences

The specific impairment was determined after evaluating the value of the underlying collateral.

As of December 31, 2020, the allowance for loan losses was 1.40 percent of outstanding loans, excluding $180,757 of PPP loans.

Based upon the quarterly evaluations, management determined a provision for loan losses of $12,000 was appropriate for the year ended December 31, 2020.

This provision for loan losses was due to the uncertainty surrounding economic conditions as a result of the COVID-19 pandemic and slow economic recovery in the hotel and entertainment industries, and the increase in specific reserves on impaired loans.

The portion of the allowance for loan losses related to loans collectively evaluated for impairment decreased $572 to a total of $25,864, or 1.05 percent of outstanding loans, as of December 31, 2021 compared to $26,436, or 1.16 percent of outstanding loans, as of December 31, 2020.

As of December 31, 2021, the allowance for loan losses was 1.17 percent of outstanding loans, excluding $22,206 of PPP loans, compared to 1.40 percent, excluding $180,757 of PPP loans as of December 31, 2020.

Based upon the quarterly evaluations, management determined a provision for loan losses of negative $1,500 was appropriate for the year ended December 31, 2021.

This negative provision was primarily due to the reduction of certain qualitative factors, a reduction in specific reserves, and net recoveries, which was partially offset by loan growth.

Management believed the allowance for loan losses as of December 31, 2021 was adequate to absorb the losses inherent in the loan portfolio.

1 unchanged sentence

(dollars in thousands, except per share amounts)

Deposits totaled $2,700,994 as of December 31, 2020, which was 34.1 percent higher than the to tal as of December 31, 2019.

Deposits totaled $3,016,005 as of December 31, 2021, which was 11.7 percent higher than the total as of December 31, 2020.

Funds disbursed under the PPP program were deposited into customer deposit accounts and will impact overall deposit fluctuations as customers spend those funds according to the PPP rules.

Deposits increased $404,214 in the fourth quarter of 2020.

This increase resulted from a mix of new business customers and growth in balances of existing customers.

We believe that deposit levels could decrease in 2021 as a result of the distressed economic conditions in our market areas relating to the COVID-19 pandemic, low interest rates and customers’ utilization of liquidity.

The balance of time deposits decreased during 2020, primarily due to the maturity of brokered CDs totaling $50,000.

West Bank continues to offer the Certificate of Deposit Account Registry Service (CDARS) program.

The CDARS program is a reciprocal program providing FDIC insurance coverage for all participating deposits.

CDARS time deposits made up approximately 40 percent of total time deposits at December 31, 2020.

Approximately 86 percent of the total time deposits issued by West Bank mature in the next year.

It is anticipated that a significant portion of these time deposits will be renewed.

In the event a substantial volume of time deposits is not renewed, management believes the Company has sufficient liquid assets and borrowing lines to fund the potential runoff.

The following table shows the amounts and remaining maturities of time certificates of deposit with balances of $100 or more as of December 31, 2020.

3 months or less $ 45,036

Over 3 through 6 months 32,402

Over 6 through 12 months 53,393

Over 12 months 12,881

We believe that deposit levels could decrease in 2022 as a result of the end of broad government stimulus programs relating to the COVID-19 pandemic.

The following table sets forth the average balances for each major category of deposits and the weighted average interest rate paid for those deposits during the years indicated.

14 unchanged sentences

$ 2,809,039 $ 2,259,220 $ 1,972,010

Management expects the average interest rates on deposits to remain low in 2021 as the Federal Reserve is forecasting to keep the federal funds rate near zero for the next three years.

To limit the Company’s exposure to market interest rate changes, interest rate swaps are in place o n $110,000 of deposit balances that effectively convert certain customer deposits with variable rates to fixed-rate instruments.

Management expects the average interest rates on deposits could increase in 2022 as the Federal Reserve is signaling increases to the targeted federal funds rate.

To limit the Company’s exposure to market interest rate changes, interest rate swaps are in place on $110,000 of deposit balances that effectively convert certain customer deposits with variable rates to fixed-rate instruments.

The following table shows the amounts and remaining maturities of time certificates of deposit with balances of $100 or more as of December 31, 2021.

3 months or less $ 59,051

Over 3 through 6 months 25,209

Over 6 through 12 months 63,276

Over 12 months 13,983

Approximately 88 percent of the total time deposits issued by West Bank mature in the next year.

It is anticipated that a significant portion of these time deposits will be renewed.

In the event a substantial volume of time deposits is not renewed, management believes the Company has sufficient liquid assets and borrowing lines to fund the potential runoff.

Time deposits as of December 31, 2021 and 2020, included $92,210 and $71,286, respectively, of Certificate of Deposit Account Registry Service deposits, which is a program that coordinates, on a reciprocal basis, a network of banks to spread deposits exceeding the FDIC insurance coverage limits out to numerous institutions in order to provide insurance coverage for all participating deposits.

The following table shows the portion of time deposits in excess of the insurance limit by maturity.

3 months or less $ 19,126

Over 3 through 6 months 2,320

Over 6 through 12 months 7,495

Over 12 months 3,078

(dollars in thousands, except per share amounts)

Also included in total deposits as of December 31, 2021 and 2020, were $178,366 and $85,348, respectively, of Insured Cash Sweep (ICS) interest-bearing checking and $412,027 and $304,077, respectively, of ICS money market deposits.

These are also reciprocal programs providing insurance coverage for all participating deposits.

Total uninsured deposits were $1,312,933, $1,297,848 and $784,057 as of December 31, 2021, 2020 and 2019, respectively.

BORROWED FUNDS

The following table summarizes the outstanding principal balances, net of any discount or debt issuance costs, and the weighted average effective rate for each category of borrowed funds as of the dates indicated.

As of December 31

2020 2019 2018

Balance Rate Balance Rate Balance Rate

Federal funds purchased $ 5,375 0.10 % $ 2,660 1.25 % $ 19,985 2.61 %

Subordinated notes, net (1)

20,452 4.93 % 20,438 4.99 % 20,425 5.02 %

FHLB advances, net (1)

175,000 2.27 % 179,365 2.90 % 137,878 3.97 %

Long-term debt, net 21,558 1.53 % 22,925 2.33 % 27,040 2.92 %

$ 222,385 2.39 % $ 225,388 3.01 % $ 205,328 3.79 %

(1) The effective interest rates include the effects of interest rate swaps and amortization of origination and discount fees.

The following tables set forth the average principal balance, net of any discount or debt issuance costs, the average effective rate paid, and the maximum outstanding balance for each category of borrowed funds for the years indicated.

Years Ended December 31

2020 2019 2018

Balance Average

Federal funds purchased $ 6,806 0.34 % $ 10,229 2.35 % $ 9,139 2.06 %

Subordinated notes, net (1)

20,445 4.97 % 20,431 5.01 % 20,418 5.27 %

FHLB advances, net (1)

178,191 2.64 % 137,471 3.73 % 78,673 4.64 %

Long-term debt, net 22,503 1.78 % 23,838 2.67 % 19,606 3.86 %

$ 227,945 2.70 % $ 191,969 3.66 % $ 127,836 4.44 %

(1) The effective interest rates include the effects of interest rate swaps and amortization of origination and discount fees.

2020 2019 2018

Maximum amount outstanding at any

month-end during the year:

Federal funds purchased $ 32,340 $ 61,545 $ 51,820

Subordinated notes, net 20,452 20,438 20,425

FHLB advances, net 179,967 179,365 137,878

Long-term debt, net 22,915 27,030 27,040

The fluctuation in the balances of federal funds purchased is dependent upon the activity of our downstream correspondent banks and in the Company’s liquidity needs, which from time to time may require the Company to draw on the federal funds purchased lines with our correspondent banks or on overnight FHLB advances.

Depending on which has the lower interest rate, the Company may utilize either source of funding.

In October 2018, an interest rate swap with a notional amount of $20,000 became effective and converted variable-rate subordinated notes to fixed-rate debt.

The interest rate is a variable rate based on the 3-month LIBOR plus 3.05 percent.

This interest rate swap has a fixed rate of 4.81 percent and matures in September 2026.

In a strategy to manage its exposures to the variability in interest payments on wholesale funding sources due to interest rate movements, the Company has entered into seven long-term interest rate swap agreements with a total notional amount of $175,000 to hedge the interest payments of rolling one- or three-month funding consisting of FHLB advances or brokered deposits.

The fluctuation in the balances of federal funds purchased 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 or on overnight FHLB advances.

The Company had $125,000 of short-term FHLB advances outstanding at December 31, 2021.

The Company repaid $50,000 of FHLB advances at maturity in the second quarter of 2021 to reduce unneeded funding as a result of high deposit balances and excess liquidity.

The Company has entered into long-term interest rate swap agreements with a total notional amount of $125,000 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 2.01 percent.

As part of this strategy, the Company has one-month and three-month FHLB advances totaling $175,000 as of December 31, 2020.

This strategy effectively provides fixed cost wholesale funding through the maturity dates of the various interest rate swaps.

Additionally, the Company had short-term brokered CDs totaling $50,000 that matured and were not renewed during 2020.

These brokered CDs were not being hedged by interest rate swaps but were a part of the Company’s short-term funding strategy.

(dollars in thousands, except per share amounts)

On May 25, 2017, the Company entered into a credit agreement with an unaffiliated commercial bank and borrowed $25,000.

The borrowing was used to make a capital injection into West Bank in 2017.

In June 2019, the Company modified the principal payment requirements of the credit agreement.

Under the terms of the modification, required quarterly principal payments of $625 resumed in August 2020, with the balance due in May 2022.

This strategy of hedging short-term rolling funding effectively provides fixed cost wholesale funding through the maturity dates of the various interest rate swaps.

On December 15, 2021, the Company entered into a credit agreement with an unaffiliated commercial bank and borrowed $40,000.

This credit agreement replaced a prior credit agreement with the same commercial bank that had a remaining balance of $5,500.

The additional borrowing was used to make a capital injection into the Company’s subsidiary, West Bank.

Interest is payable quarterly over five years with the first payment due February 2022.

Required quarterly principal payments begin in May 2023.

The Company may make additional principal payments without penalty.

The interest rate is variable at 1.95 percent over the 30-day LIBOR rate.

In December 2018, West Bank’s new markets tax credit special purpose subsidiary entered into a credit agreement for $11,486.

The interest rate is variable at the Wall Street Journal Prime Rate minus 1.00 percent.

The Company has an interest rate swap with a notional amount of $20,000 which converts variable-rate subordinated notes to fixed-rate debt.

The interest rate is a variable rate based on the 3-month LIBOR plus 3.05 percent.

This interest rate swap has a fixed rate of 4.81 percent and matures in September 2026.

West Bank’s new markets tax credit special purpose subsidiary has a credit agreement for $11,486.

Interest is payable monthly over the term of the agreement with an interest rate of 1.00 percent.

8 unchanged sentences

Off-balance sheet commitments are more fully discussed in Note 17 to the consolidated financial statements included in Item 8 of this Form 10-K.

(dollars in thousands, except per share amounts)

LIQUIDITY AND CAPITAL RESOURCES

4 unchanged sentences

Investments in liquid assets are adjusted based on expected loan demand, projected loan and investment securities maturities and payments, expected deposit flows and the objectives set by West Bank’s asset-liability management policy.

The Company experienced a significant increase in deposits in the fourth quarter of 2020.

Those deposits resulted in a significant increase in liquidity and total assets as of December 31, 2020 compared to December 31, 2019.

The Company believes there could be potential stresses on liquidity management on a longer-term basis as a direct result of the duration of the COVID-19 pandemic.

As customers manage their own liquidity needs, we could experience an increase in the utilization of existing lines of credit.

In addition, the Bank is participating in the PPP under the CARES Act and the Coronavirus Response and Relief Supplemental Appropriations Act of 2021.

The Federal Reserve Bank established a PPP Liquidity Facility that would provide funding specifically for loans made under the PPP, which would allow us to retain existing sources of liquidity for our traditional operations.

PPP loans would be pledged as collateral on any of the Bank's borrowings under the PPP Liquidity Facility.

The Bank has not utilized the Federal Reserve Bank's PPP Liquidity Facility to date.

The Company experienced significant increases in deposits in 2021 and 2020.

Those deposits resulted in a significant increase in liquidity and total assets as of December 31, 2021 and 2020, compared to December 31, 2019.

We believe that deposit levels could decrease in 2022 as a result of the end of broad government stimulus programs.

As of December 31, 2021, West Bank had additional borrowing capacity available from the FHLB of approximately $556,000, as well as approximately $16,258 at the Federal Reserve discount window and $67,000 through unsecured federal funds lines of credit with correspondent banks.

2 unchanged sentences

Management believed that the combination of high levels of potentially liquid assets, cash flows from operations and additional borrowing capacity provided the Company with sufficient liquidity as of December 31, 2021.

(dollars in thousands, except per share amounts)

The Company’s total stockholders’ equity increased to $260,328 as of December 31, 2021 from $223,695 as of December 31, 2020.

The increase was primarily the result of net income less dividends paid, partially offset by the decline in fair value of derivatives.

The increase was primarily the result of net income less dividends paid.

At December 31, 2021, tangible common equity as a percent of tangible assets was 7.44 percent compared to 7.02 percent as of December 31, 2020.

As of December 31, 2021 and 2020, the Company had no intangible assets.

The decrease in the tangible common equity ratio was primarily due to the unprecedented asset growth of the Company propelled by the impacts of the COVID-19 pandemic and a decrease in accumulated other comprehensive income which was the result of a decline in the fair value of interest rate swaps.

The Company and West Bank are subject to various regulatory capital requirements administered by federal and state banking agencies.

2 unchanged sentences

Also, as of December 31, 2021, the ratios for the Company and West Bank were sufficient to meet the fully phased-in capital conservation buffer.

During 2020, the Company began construction on a new office in Sartell, Minnesota, which had a commitment of $8,324 as of December 31, 2020.

EFFECTS OF NEW STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS

A discussion of the effects of new financial accounting standards and developments as they relate to the Company is located in Note 1 to the consolidated financial statements included in Item 8 of this Form 10-K.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required for smaller reporting companies.

West Bancorporation, Inc.

and Subsidiary

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis