WEST BANCORPORATION INC 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (dollars in thousands, except per share amounts) INTRODUCTION The Company’s financial highlights and key performance measures are presented in the table below. As of and for the Years Ended December 31 2021 2020 2019 Performance Ratios Return on average assets 1.52 % 1.19 % 1.20 % Return on average equity 20.33 % 15.49 % 14.34 % Efficiency ratio (1)(2) 40.91 % 41.96 % 50.96 % Texas ratio (1)(3) 3.10 % 6.40 % 0.23 % Net interest margin (2) 3.05 % 3.20 % 2.95 % Dividends and Per Share Data 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 % Dividend yield 3.03 % 4.35 % 3.24 % Operating Results and Year-End Balances Net income $ 49,607 $ 32,712 $ 28,690 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 Average equity to average assets ratio 7.46 % 7.71 % 8.38 % Definition of ratios: • Return on average assets - net income divided by average assets. • Return on average equity - net income divided by average equity. • Efficiency ratio - noninterest expense (excluding other real estate owned expense and write-down of premises) divided by noninterest income (excluding net securities gains/losses and gains/losses on disposition of premises and equipment) plus tax-equivalent net interest income. • 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. • Dividend yield - dividends per share paid to common stockholders divided by closing year-end stock price. • Average equity to average assets ratio - average equity divided by average assets. (1) A lower ratio is better. (2) As presented, this is a non-GAAP financial measure. For further information, refer to the section "Non-GAAP Financial Measures" of this item. (3) As of December 31. 30 Table of Contents (dollars in thousands, except per share amounts) The Company’s 2021 net income was $49,607 compared to $32,712 in 2020. Net income for 2021 was a record for the Company. Basic and diluted earnings per common share for 2021 were $3.00 and $2.95, respectively, compared to $1.99 and $1.98, respectively, in 2020. During 2021, we paid our common stockholders $15,543 ($0.94 per common share) in dividends compared to $13,815 ($0.84 per common share) in 2020. 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. Our loan portfolio grew to $2,456,196 as of December 31, 2021, from $2,280,575 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 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. 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 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 average Texas ratio. We believe these measures encompass the factors that define the performance of a community bank. Company and peer results for the key financial performance measures are summarized below. West Bancorporation, Inc. Peer Group Range As of and for the year ended December 31, 2021 As of and for the nine months ended September 30, 2021 (2) Return on average equity 20.33% 4.43% - 17.00% Efficiency ratio* (1) 40.91% 42.88% - 64.71% Texas ratio* (3) 5.26% 1.95% - 17.29% * A lower ratio is better. (1) As presented, this is a non-GAAP financial measure. For further information, refer to the section “Non-GAAP Financial Measures” of this Item. (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 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. 31 Table of Contents (dollars in thousands, except per share amounts) 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, 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 This report is based on the Company’s audited consolidated financial statements that have been prepared in accordance with GAAP established by the FASB. The preparation of the Company’s financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, income and expenses. These estimates are based upon historical experience and on various other assumptions that management believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company’s significant accounting policies are described in the Notes to Consolidated Financial Statements. Based on its consideration of accounting policies that involve the most complex and subjective estimates and judgments, management has identified its most critical accounting policies to be those related to the fair value of financial instruments and the allowance for loan losses. The fair value of a financial instrument is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts business. A framework has been established for measuring the fair value of financial instruments that considers the attributes specific to particular assets or liabilities and includes a three-level hierarchy for determining fair value based on the transparency of inputs to each valuation as of the measurement date. The Company estimates the fair value of financial instruments using a variety of valuation methods. 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 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. When observable inputs do not exist, the Company estimates fair value based on available market data, and these values are classified as Level 3. Imprecision in estimating fair values can impact the carrying value of assets and the amount of revenue or loss recorded. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that collectability of the principal is unlikely. The Company has policies and procedures for evaluating the overall credit quality of its loan portfolio, including timely identification of potential problem loans. 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. 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. To the extent that actual results differ from forecasts and management’s judgment, the allowance for loan losses may be greater or less than future charge-offs. The measurement of the allowance for loan losses at December 31, 2021 included quantitative and qualitative factors. 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 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. 32 Table of Contents (dollars in thousands, except per share amounts) NON-GAAP FINANCIAL MEASURES This report contains references to financial measures that are not defined in GAAP. Such non-GAAP financial measures include the Company’s presentation of net interest income and net interest margin on a fully taxable equivalent (FTE) basis, 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. 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 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 2021 2020 2019 Reconciliation of net interest income and net interest margin on an FTE basis to GAAP: Net interest income (GAAP) $ 95,059 $ 82,833 $ 66,430 Tax-equivalent adjustment (1) 1,202 707 834 Net interest income on an FTE basis (non-GAAP) 96,261 83,540 67,264 Average interest-earning assets 3,152,138 2,614,342 2,277,461 Net interest margin on an FTE basis (non-GAAP) 3.05 % 3.20 % 2.95 % Reconciliation of efficiency ratio on an FTE basis to GAAP: Net interest income on an FTE basis (non-GAAP) $ 96,261 $ 83,540 $ 67,264 Noninterest income 9,729 9,602 8,318 Adjustment for realized securities (gains) losses, net (51) (77) 87 Adjustment for losses on disposal of premises and equipment, net 84 9 — Adjustment for gain on sale of premises — — (307) Adjusted income 106,023 93,074 75,362 Noninterest expense 43,380 39,054 38,406 Efficiency ratio on an adjusted and FTE basis (non-GAAP) (2) 40.91 % 41.96 % 50.96 % Reconciliation of allowance for loan losses ratio, excluding PPP loans: Loans outstanding (GAAP) $ 2,456,196 $ 2,280,575 $ 1,941,663 Less: PPP loans (22,206) (180,757) — Loans, net of PPP loans (non-GAAP) 2,433,990 2,099,818 1,941,663 Allowance for loan losses 28,364 29,436 17,235 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. Management believes the presentation of this non-GAAP measure provides supplemental useful information for proper understanding of the financial results, as it enhances the comparability of income arising from taxable and nontaxable sources. (2) The efficiency ratio expresses noninterest expense as a percent of fully taxable equivalent net interest income and noninterest income, excluding specific noninterest income and expenses. Management believes the presentation of this non-GAAP measure provides supplemental useful information for proper understanding of the Company’s financial performance. It is a standard measure of comparison within the banking industry. A lower ratio is more desirable. (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. 33 Table of Contents (dollars in thousands, except per share amounts) RESULTS OF OPERATIONS - 2021 COMPARED TO 2020 OVERVIEW Net income for the year ended December 31, 2021 was $49,607, compared to $32,712 for the year ended December 31, 2020. 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 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 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 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. 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 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; Interest Rates; and Interest Differential” in this Item of this Form 10-K. Provision for Loan Losses and Loan Quality 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 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. 34 Table of Contents (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. The Company held no other real estate owned properties as of December 31, 2021 or 2020. Noninterest Income The following table shows the variance from the prior year in the noninterest income categories shown in the Consolidated Statements of Income. In addition, accounts within the “Other income” category that represent a significant portion of the total or a significant variance are shown. Years ended December 31 Noninterest income: 2021 2020 Change Change % Service charges on deposit accounts $ 2,352 $ 2,360 $ (8) (0.3) % Debit card usage fees 1,948 1,632 316 19.4 % Trust services 2,671 2,078 593 28.5 % Increase in cash value of bank-owned life insurance 923 593 330 55.6 % Loan swap fees 66 1,572 (1,506) (95.8) % Realized securities gains, net 51 77 (26) 33.8 % Other income: All other 1,718 1,290 428 33.2 % Total other income 1,718 1,290 428 33.2 % Total noninterest income $ 9,729 $ 9,602 $ 127 1.3 % 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 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. 35 Table of Contents (dollars in thousands, except per share amounts) Noninterest Expense The following table shows the variance from the prior year in the noninterest expense categories shown in the Consolidated Statements of Income. In addition, accounts within the “Other expenses” category that represent a significant portion of the total or a significant variance are shown. Years ended December 31 Noninterest expense: 2021 2020 Change Change % Salaries and employee benefits $ 23,226 $ 21,591 $ 1,635 7.6 % Occupancy 5,162 4,879 283 5.8 % Data processing 2,465 2,331 134 5.7 % FDIC insurance 1,818 1,210 608 50.2 % Professional fees 946 927 19 2.0 % Director fees 765 868 (103) (11.9) % Other expenses: Subscriptions and service contracts 1,777 1,333 444 33.3 % Business development 999 704 295 41.9 % 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) % Marketing 224 211 13 6.2 % Low income housing projects amortization 701 432 269 62.3 % New markets tax credit project amortization and management fees 919 919 — — % All other 2,091 2,244 (153) (6.8) % Total other 8,998 7,248 1,750 24.1 % Total noninterest expense $ 43,380 $ 39,054 $ 4,326 11.1 % 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. Income Taxes 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 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. The effective income tax rates differ from the federal statutory income tax rates primarily due to tax-exempt interest income, the tax-exempt increase in cash value of bank-owned life insurance, disallowed interest expense, stock compensation and state income taxes. The effective tax rate for both 2021 and 2020 was also impacted by federal income tax credits, including low income housing tax credits and a new markets tax credit from West Bank’s investment in a qualified community development entity, of approximately $1,368 and $1,239, respectively. The Company continues to maintain a valuation allowance against the tax effect of state net operating losses carryforwards as management believes it is likely that such carryforwards will expire without being utilized. 36 Table of Contents (dollars in thousands, except per share amounts) DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS’ EQUITY; INTEREST RATES; AND INTEREST DIFFERENTIAL Average Balances and an Analysis of Average Rates Earned and Paid The following table shows average balances and interest income or interest expense, with the resulting average yield or rate by category of average interest-earning assets or interest-bearing liabilities for the years indicated. Interest income and the resulting net interest income are shown on a fully taxable basis. Interest expense includes the effect of interest rate swaps, if applicable. 2021 2020 2019 Average Balance Revenue/ Expense Yield/ Rate Average Balance Revenue/ Expense Yield/ Rate Average Balance Revenue/ Expense Yield/ Rate Assets Interest-earning assets: Loans: (1) (2) Commercial $ 525,228 $ 23,365 4.45 % $ 566,593 $ 22,328 3.94 % $ 387,137 $ 19,493 5.04 % Real estate (3) 1,796,118 72,579 4.04 % 1,574,339 68,444 4.35 % 1,405,175 66,078 4.70 % Consumer and other 4,193 182 4.34 % 6,222 272 4.36 % 6,876 335 4.87 % Total loans 2,325,539 96,126 4.13 % 2,147,154 91,044 4.24 % 1,799,188 85,906 4.77 % Securities: Taxable 450,910 8,542 1.89 % 322,695 7,818 2.42 % 354,727 10,031 2.83 % Tax-exempt (3) 141,816 3,522 2.48 % 55,589 1,774 3.19 % 69,505 2,462 3.54 % 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 % Total interest-earning assets (3) 3,152,138 108,482 3.44 % 2,614,342 100,940 3.86 % 2,277,461 99,509 4.37 % Noninterest-earning assets: Cash and due from banks 41,141 53,874 41,036 Premises and equipment, net 31,291 28,957 30,351 Other, less allowance for loan losses 46,612 42,610 37,793 Total noninterest-earning assets 119,044 125,441 109,180 Total assets $ 3,271,182 $ 2,739,783 $ 2,386,641 Liabilities and Stockholders’ Equity Interest-bearing liabilities: Deposits: 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 % 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 % Noninterest-bearing liabilities: Demand deposits 709,009 544,211 379,231 Other liabilities 31,783 41,399 22,647 Stockholders’ equity 244,013 211,220 200,015 Total liabilities and stockholders’ equity $ 3,271,182 $ 2,739,783 $ 2,386,641 Net interest income (4) /net interest spread (3) $ 96,261 2.91 % $ 83,540 2.96 % $ 67,264 2.56 % Net interest margin (3) (4) 3.05 % 3.20 % 2.95 % (1) Average loan balances include nonaccrual loans. Interest income recognized on nonaccrual loans has been included. (2) Interest income on loans includes amortization of loan fees and costs and prepayment penalties collected, which are not material. (3) Tax-exempt income has been adjusted to a tax-equivalent basis using a federal income tax rate of 21 percent and is adjusted to reflect the effect of the nondeductible interest expense associated with owning tax-exempt securities and loans. (4) Net interest income (FTE) and net interest margin (FTE) are non-GAAP financial measures. For further information, refer to the section “Non-GAAP Financial Measures” of this Item. 37 Table of Contents (dollars in thousands, except per share amounts) 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 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 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. For the years ended December 31, 2021, 2020 and 2019, the Company’s net interest margin on a tax-equivalent basis was 3.05, 3.20 and 2.95 percent, respectively. 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 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 The rate and volume analysis shown below, on a tax-equivalent basis, is used to determine how much of the change in interest income or expense is the result of a change in volume or a change in interest yield or rate. The change in interest that is due to both volume and rate has been allocated to the change due to volume and the change due to rate in proportion to the absolute value of the change in each. 2021 Compared to 2020 2020 Compared to 2019 Volume Rate Total Volume Rate Total Interest Income Loans: (1) Commercial $ (1,706) $ 2,743 $ 1,037 $ 7,699 $ (4,864) $ 2,835 Real estate (2) 9,189 (5,054) 4,135 7,586 (5,220) 2,366 Consumer and other (88) (2) (90) (30) (33) (63) Total loans (including fees) 7,395 (2,313) 5,082 15,255 (10,117) 5,138 Securities: Taxable 2,669 (1,945) 724 (856) (1,357) (2,213) Tax-exempt (2) 2,218 (470) 1,748 (460) (228) (688) Total securities 4,887 (2,415) 2,472 (1,316) (1,585) (2,901) Federal funds sold 269 (281) (12) 456 (1,262) (806) Total interest income (2) 12,551 (5,009) 7,542 14,395 (12,964) 1,431 Interest Expense Deposits: 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) 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) Net interest income (2) (3) $ 11,918 $ 803 $ 12,721 $ 12,004 $ 4,272 $ 16,276 (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 securities and loans. (3) Net interest income (FTE) is a non-GAAP financial measure. For further information, refer to the section “Non-GAAP Financial Measures” of this Item. 38 Table of Contents (dollars in thousands, except per share amounts) 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 $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, 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 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. The yield on the Company's loan portfolio is affected by the portfolio's loan mix, the interest rate environment, the effects of competition, the level of nonaccrual loans and reversals of previously accrued interest on charged-off loans. The political and economic environments can also influence the volume of new loan originations and the mix of variable-rate versus fixed-rate loans. The average balance of 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 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. 39 Table of Contents (dollars in thousands, except per share amounts) 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. Within one year After one year but within five years After five years but within ten years After ten years Total Securities available for sale: State and political subdivisions (1) — % — % 1.53 % 2.41 % 2.38 % Collateralized mortgage obligations — — — 1.48 1.48 Mortgage-backed securities — — 1.68 1.60 1.62 Collateralized loan obligations — — 1.77 — 1.77 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. 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. 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 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 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. 40 Table of Contents (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. The interest rates charged on loans vary with the degree of risk and the amount and terms of the loan. Competitive pressures, the creditworthiness of the borrower, market interest rates, the availability of funds, and government regulations further influence the rate charged on a loan. The Company follows a loan policy approved by West Bank’s Board of Directors. The loan policy is reviewed at least annually and is updated as considered necessary. The policy establishes lending limits, review criteria and other guidelines for loan administration and the allowance for loan losses, among other things. Loans are approved by West Bank’s Board of Directors and/or designated officers in accordance with the applicable guidelines and underwriting policies. Loans to any one borrower are limited by state banking laws. 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 The commercial real estate market continues to be a significant source of business for West Bank. Management places a strong emphasis on monitoring the composition of the Company’s commercial real estate loan portfolio. The Company has an established lending policy which includes a number of underwriting factors to be considered in making a commercial real estate loan, including, but not limited to, location, loan-to-value ratio (LTV), cash flow, collateral and the credit history of the borrower. The lending policy also includes guidelines for real estate appraisals and evaluations, including minimum appraisal and evaluation standards. Although repayment risk exists on all loans, different factors influence repayment risk for each type of loan. The primary risks associated with commercial real estate loans are the quality of the borrower’s management and the health of the national and regional economies. Underwriting on commercial properties is primarily based on the economic viability of the project with heavy consideration given to the creditworthiness and experience of the borrower. Recognizing that debt is paid via cash flow, the projected cash flows of the project are critical in underwriting because these determine the ultimate value of the property and the ability to service debt. Therefore, in most commercial real estate projects, we generally require a minimum stabilized debt service coverage ratio of 1.20 to 1.35, depending on the real estate type. Exceptions to this policy can be made for certain borrowers that exhibit other credit quality strengths. Exceptions to the policy are monitored by management. Our strategy with respect to the management of these types of risks is to consistently follow prudent loan policies and underwriting practices. The Company recognizes that a diversified loan portfolio contributes to reducing risk. The specific loan portfolio mix is subject to change based on loan demand, the business environment and various economic factors. The Company actively monitors concentrations within the loan portfolio to ensure appropriate diversification is maintained. In addition, management tracks the level of owner occupied commercial real estate loans versus non-owner occupied commercial real estate loans. Owner occupied commercial real estate loans are generally considered to have less risk than non-owner occupied commercial real estate loans. In accordance with regulatory guidelines, the Company exercises heightened risk management practices when non-owner occupied commercial real estate lending exceeds 300 percent of total risk-based capital or construction, land development, and other land loans exceed 100 percent of total risk-based capital. 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. 41 Table of Contents (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. Non-owner occupied commercial real estate loan concentrations and the weighted average LTV by property type as of December 31, 2021 and 2020 are shown in the following table. LTV is determined using the maximum credit exposure of the loan compared to the most recent appraisal data on the property obtained in accordance with the Company’s lending policies. As of December 31 2021 2020 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 % Medical & senior care facilities 220,726 14.1 59 203,954 15.6 65 Warehouse & trucking 153,022 9.8 69 146,178 11.2 69 Hotels 203,967 13.0 68 164,721 12.6 64 Mixed use 72,039 4.6 63 83,681 6.4 74 Offices 134,106 8.6 70 140,299 10.8 72 Land for development 96,687 6.2 63 69,345 5.3 59 All other 249,265 15.9 not available 183,106 14.1 not available $ 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. As of December 31, 2021 Risk Rating Total 1-3 4 5 6 7 8 Non-owner occupied: Multifamily $ 435,097 $ 25,759 $ 325,115 $ 70,136 $ 14,087 $ — $ — Medical & senior care facilities 220,726 90,698 101,265 28,763 — — — Warehouse & trucking 153,022 56,031 86,601 9,640 750 — — Hotel 203,967 — 83,748 85,445 34,774 — — Mixed use 72,039 11,021 28,570 24,503 7,945 — — Offices 134,106 15,400 113,859 4,847 — — — Land for development 96,687 — 90,860 772 5,055 — — All other 249,265 28,115 214,404 6,746 — — — $ 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. 42 Table of Contents (dollars in thousands, except per share amounts) Maturities of Loans The contractual maturities of the Company’s loan portfolio are shown in the following tables. Actual repayments may differ from contractual maturities because individual borrowers may have the right to prepay loans with or without prepayment penalties. As of December 31, 2021 Within one year After one but within five years After five but within 15 years After 15 years Total Commercial $ 167,713 $ 214,514 $ 71,223 $ 39,365 $ 492,815 Real estate: Construction, land and land development 124,456 208,695 7,594 18,513 359,258 1-4 family residential first mortgages 4,962 57,512 3,742 — 66,216 Home equity 2,561 5,861 — — 8,422 Commercial 92,870 678,992 733,219 25,137 1,530,218 Consumer and other 2,135 1,662 — — 3,797 $ 394,697 $ 1,167,236 $ 815,778 $ 83,015 $ 2,460,726 After one but within five years After five but within 15 years After 15 years Loan maturities after one year with: Fixed rates Commercial $ 157,259 $ 49,720 $ — Real estate: 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 Commercial 57,255 21,503 39,365 Real estate: 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 43 Table of Contents (dollars in thousands, except per share amounts) SUMMARY OF THE ALLOWANCE FOR LOAN LOSSES The provision for loan losses represents charges made to earnings to maintain an adequate allowance for loan losses. The adequacy of the allowance for loan losses is evaluated quarterly by management and reviewed by the Board of Directors. The allowance for loan losses is management’s best estimate of probable losses inherent in the loan portfolio as of the balance sheet date. Factors considered in establishing an appropriate allowance include: the borrower’s financial condition; the value and adequacy of loan collateral; the condition of the local economy and the borrower’s specific industry; the levels and trends of loans by segment; and a review of delinquent and classified loans. The quarterly evaluation focuses on factors such as specific loan reviews, changes in the components of the loan portfolio given economic conditions, and historical loss experience. Any one of the following conditions may result in the review of a specific loan: concern about whether the customer’s cash flow or net worth is sufficient to repay the loan; delinquency status; criticism of the loan in a regulatory examination; the suspension of interest accrual; or other factors, including whether the loan has other special or unusual characteristics that suggest special monitoring is warranted. The Company’s concentration risks include geographic concentration in central and eastern Iowa and southern Minnesota. 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. West Bank’s typical commercial borrower is a small- or medium-sized, privately owned business entity. Compared to residential mortgages or consumer loans, commercial loans typically have larger balances and repayment usually depends on the borrowers’ successful business operations. Commercial loans also generally are not fully repaid over the loan period and, thus, may require refinancing or a large payoff at maturity. When the general economy turns downward, commercial borrowers may not be able to repay their loans, and the value of their assets, which are usually pledged as collateral, may decrease rapidly and significantly. While management uses available information to recognize losses on loans, further reduction in the carrying amounts of loans may be necessary based on changes in circumstances, changes in the overall economy in the markets we currently serve, or later acquired information. Identifiable sectors within the general economy are subject to additional volatility, which at any time may have a substantial impact on the loan portfolio. In addition, regulatory agencies, as integral parts of their examination processes, periodically review the credit quality of the loan portfolio and the level of the allowance for loan losses. Such agencies may require West Bank to recognize additional losses based on such agencies’ review of information available to them at the time of their examinations. 44 Table of Contents (dollars in thousands, except per share amounts) 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 Ratio of net (charge-offs) recoveries during the period to average loans outstanding by segment: Commercial 0.02 % — % (0.01) % Real estate: Construction, land and land development — — — 1-4 family residential first mortgages — — — Home equity — — — Commercial — — — Consumer and other — — — Total 0.02 % 0.01 % 0.00 % Ratio of allowance for loan losses to total loans at the end of period 1.15 % 1.29 % 0.89 % Ratio of allowance for loan losses to total loans at the end of period, excluding PPP loans (1) 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. Breakdown of Allowance for Loan Losses by Category The following table sets forth information concerning the Company’s allocation of the allowance for loan losses by loan segment as of the dates indicated. As of December 31 2021 2020 2019 Amount %* Amount %* Amount %* Balance at end of period applicable to: Commercial $ 4,776 20.03 % $ 4,718 26.40 % $ 3,875 22.17 % Real estate: Construction, land and land development 3,646 14.60 2,634 10.32 2,375 13.59 1-4 family residential first mortgages 339 2.69 360 2.58 216 2.80 Home equity 91 0.34 114 0.41 127 0.64 Commercial 19,466 62.19 21,535 60.04 10,565 60.45 Consumer and other 46 0.15 75 0.25 77 0.35 $ 28,364 100.00 % $ 29,436 100.00 % $ 17,235 100.00 % * Percent of loans in each category to total loans. 45 Table of Contents (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; the historical net loss experience by category, which can vary over time; specific reserves for loans considered impaired; 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. 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. The borrower has been evaluating debt reduction options, including downsizing its operations. The specific impairment was determined after evaluating the value of the underlying collateral. 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. Additional details on the allowance for loan losses is included in Note 4 to the consolidated financial statements included in Item 8 of this Form 10-K. 46 Table of Contents (dollars in thousands, except per share amounts) DEPOSITS Deposits totaled $3,016,005 as of December 31, 2021, which was 11.7 percent higher than the total 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. 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. Years ended December 31 2021 2020 2019 Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate Noninterest-bearing demand $ 709,009 — % $ 544,211 — % $ 379,231 — % Interest-bearing demand: Reward Me checking 52,960 0.08 47,435 0.15 44,206 0.41 Insured cash sweep 125,402 0.34 94,042 0.46 79,976 1.20 Other interest-bearing demand 299,626 0.10 229,677 0.11 194,612 0.28 Money market: Insured cash sweep 308,136 0.36 266,837 0.60 256,670 2.11 Other money market 959,314 0.45 737,801 0.70 649,032 1.85 Savings 146,428 0.14 123,993 0.18 112,513 0.40 Time 208,164 0.74 215,224 1.63 255,770 2.22 $ 2,809,039 $ 2,259,220 $ 1,972,010 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 $ 161,519 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 $ 32,019 47 Table of Contents (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 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. 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 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. Monthly principal payments begin in January 2026, and the agreement matures in December 2048. OFF-BALANCE SHEET ARRANGEMENTS In the normal course of business, West Bank commits to extend credit in the form of loan commitments and standby letters of credit in order to meet the financing needs of its customers. These commitments expose West Bank to varying degrees of credit and market risks in excess of the amounts recognized in the consolidated balance sheets and are subject to the same credit policies as are the loans recorded on the balance sheets. West Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. West Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Commitments to lend are subject to borrowers’ continuing compliance with existing credit agreements. Management of the Company does not expect any significant losses as a result of these commitments. 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. 48 Table of Contents (dollars in thousands, except per share amounts) LIQUIDITY AND CAPITAL RESOURCES The objective of liquidity management is to ensure the availability of sufficient cash flows to meet all financial commitments and to capitalize on opportunities for profitable business expansion. The Company’s principal source of funds is deposits. Other sources include loan principal repayments, proceeds from the maturity and sale of investment securities, principal payments on amortizing securities, federal funds purchased, advances from the FHLB, and funds provided by operations. Liquidity management is conducted on both a daily and a long-term basis. Investments in liquid assets are adjusted based on expected loan demand, projected loan and investment securities maturities and payments, expected deposit flows and the objectives set by West Bank’s asset-liability management policy. 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. West Bank had no amounts outstanding at the Federal Reserve discount window or under the unsecured federal funds lines as of December 31, 2021. Net cash from continuing operating activities contributed $57,878, $42,285 and $36,967 to liquidity for the years ended December 31, 2021, 2020 and 2019, respectively. 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. 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. 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 Company and West Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Capital requirements are more fully discussed under the heading “Supervision and Regulation” included in Item 1 and in Note 16 to the consolidated financial statements included in Item 8 of this Form 10-K. As of December 31, 2021, the Company and West Bank met all capital adequacy requirements to which they were subject, and the Company’s and West Bank’s capital ratios were in excess of the requirements to be well-capitalized under capital regulations. 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. 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.