What changed in this filing

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Item 1A. Risk Factors

2023-02-23 compared with 2022-02-24 · 80 added, 51 removed, 301 unchanged (30% of the section changed)

25 unchanged sentences

Also, when credit markets tighten due to adverse developments in specific markets or the general economy, opportunities for refinancing may become more expensive or unavailable, resulting in loan defaults.

West Bancorporation, Inc.

and Subsidiary

Our loan portfolio includes commercial real estate loans, which involve risks specific to real estate values.

4 unchanged sentences

Economic events or governmental regulations outside of the control of the borrower or lender could negatively impact the future cash flows and market values of the affected properties.

West Bancorporation, Inc.

and Subsidiary

If the loans that are collateralized by real estate become troubled and the value of the real estate has been significantly impaired, then we may not be able to recover the full contractual amount of principal and interest that we anticipated at the time of originating the loans, which could cause us to charge off all or a portion of the loans.

28 unchanged sentences

and unidentified losses inherent in the current loan portfolio.

West Bancorporation, Inc.

and Subsidiary

Determination of the allowance is inherently subjective as it requires significant estimates and management’s judgment of credit risks and future trends, all of which may undergo material changes.

3 unchanged sentences

Any increases in provisions will result in a decrease in net income and capital and may have a material adverse effect on our financial condition and results of operations.

West Bancorporation, Inc.

and Subsidiary

The Current Expected Credit Loss accounting standard could require us to increase our allowance for loan losses and may have a material adverse effect on our financial condition and results of operations.

The FASB issued a new accounting standard that will be effective for the Company for the fiscal year beginning January 1, 2023.

This standard, referred to as Current Expected Credit Loss (CECL), will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans and recognize the expected credit losses as allowances for loan losses.

This will change the current method of providing for loan losses that are probable, and may require us to increase our allowance for loan losses and to greatly increase the types of data we will need to collect and analyze to determine the appropriate level of the allowance for loan losses.

An increase in our allowance for loan losses at the adoption of CECL would decrease capital.

Any subsequent increase in our allowance for loan losses or expenses incurred to determine the appropriate level of the allowance for loan losses will result in a decrease in net income and capital and may have a material adverse impact on our financial condition and results of operations.

Moreover, the CECL model may create more volatility in our level of allowance for loan losses and could result in the need for additional capital.

The FASB issued a new accounting standard that became effective for the Company beginning on January 1, 2023.

This standard, referred to as Current Expected Credit Loss (CECL), requires the Company to determine periodic estimates of lifetime expected credit losses on loans and recognize the expected credit losses as allowances for loan losses.

This changed the Company’s previous methodology of providing for loan losses that are probable.

Utilizing objective and subjective factors, the Company now maintains, as of January 1, 2023, an allowance for credit losses, established through a provision for credit losses charged to expense, to cover its estimate of the current expected credit losses in its loan and securities portfolios.

In determining the size of this allowance, the Company utilizes estimates based on analyses of volume and types of loans, internal loan classifications, trends in classifications, volume and trends in delinquencies, nonaccruals and charge-offs, loss experience of various loan categories, national and local economic conditions, including unemployment statistics, industry and peer bank loan quality indications, and other pertinent factors and information.

Expected losses are difficult to forecast, especially if those losses stem from factors beyond the Company’s historical experience or are otherwise inconsistent with its credit quality assessments.

If the Company’s assumptions are inaccurate, its current allowance may not be sufficient to cover potential credit losses, and additional provisions may be necessary which would negatively impact its results of operations and financial condition.

Any subsequent increase in our allowance for credit losses or expenses incurred to determine the appropriate level of the allowance for credit losses will result in a decrease in net income and capital and may have a material adverse impact on our financial condition and results of operations.

Moreover, the CECL model may create more volatility in our level of allowance for credit losses and could result in the need for additional capital.

Our accounting policies and methods are the basis for how we report our financial condition and results of operations, and they may require management to make estimates about matters that are inherently uncertain.

7 unchanged sentences

These changes are beyond our control, can be difficult to predict and could have a material adverse impact on our financial condition and results of operations.

If a significant portion of any unrealized losses in our portfolio of investment securities were to become other than temporarily impaired with credit losses, we would recognize a material charge to our earnings, and our capital ratios would be adversely impacted.

If a significant portion of any unrealized losses in our portfolio of investment securities were to incur credit losses, we would recognize a material charge to our earnings, and our capital ratios would be adversely impacted.

Factors beyond our control can significantly influence the fair value of investment securities in our portfolio and can cause potential adverse changes to the fair value of those securities.

These factors include, but are not limited to, changes in interest rates, rating agency downgrades of the securities, defaults by the issuer or individual mortgagors with respect to the underlying securities, and instability in the credit markets.

Any of the foregoing factors could cause an other than temporary impairment (OTTI) in future periods and result in realized losses.

We analyze our investment securities quarterly to determine whether, in the opinion of management, any of the securities have OTTI.

To the extent that any portion of the unrealized losses in our portfolio of investment securities is determined to have OTTI and is credit-loss related, we will recognize a charge to our earnings in the quarter during which such determination is made, and our capital ratios will be adversely impacted.

Generally, a fixed income security is determined to have OTTI when it appears unlikely that we will receive all the principal and interest due in accordance with the original terms of the investment.

Any of the foregoing factors could result in realized losses in future periods.

We analyze our investment securities quarterly to determine whether, in the opinion of management, any of the securities have credit losses.

To the extent that any portion of the unrealized losses in our portfolio of investment securities is determined to have credit losses, we will recognize a charge to our earnings in the quarter during which such determination is made, and our capital ratios will be adversely impacted.

Generally, a fixed income security is determined to have credit losses when it appears unlikely that we will receive all the principal and interest due in accordance with the original terms of the investment.

In addition to credit losses, losses are recognized for a security with an unrealized loss if the Company has the intent to sell the security or if it is more likely than not that the Company will be required to sell the security before collection of the principal amount.

At December 31, 2022, we had $138,732 of net unrealized losses in our securities portfolio.

If we are forced to liquidate any of those investments prior to maturity, including because of a lack of liquidity, we would recognize as a charge to earnings the losses attributable to those securities.

Our securities portfolio has an average duration of 6.7 years, so we expect an increase in unrealized losses if interest rates continue to increase in 2023.

West Bancorporation, Inc.

40 unchanged sentences

West Bank maintains liquidity primarily through customer deposits and other short-term funding sources, including advances from the Federal Home Loan Bank (FHLB), brokered CDs and purchased federal funds.

We are currently experiencing higher than normal levels of liquidity and are facing challenges on how to invest or deploy the excess funds.

This increased liquidity and an uptick in the competition for loans have created additional downward pressure on our net interest margin in recent periods.

If economic influences change so that we do not have access to short-term credit, or our depositors withdraw a substantial amount of their funds for other uses, West Bank might experience liquidity issues.

Our efforts to monitor and manage liquidity risk may not be successful or sufficient to deal with dramatic or unanticipated reductions in our liquidity.

If this were to occur and additional debt is needed for liquidity purposes in the future, there can be no assurance that such debt would be available or, if available, would be on favorable terms.

In such events, our cost of funds may increase, thereby reducing our net interest income, or we may need to sell a portion of our investment portfolio, which, depending upon market conditions, could result in the Company or West Bank realizing losses.

If this were to occur and additional short-term borrowings or debt is needed for liquidity purposes in the future, there can be no assurance that such borrowings or debt would be available or, if available, would be on favorable terms.

If we increase our short-term borrowings or debt, our cost of funds will increase, thereby reducing our net interest income, or we may need to sell a portion of our investment portfolio, which, depending upon market conditions, could result in the Company or West Bank realizing losses.

At December 31, 2022, our borrowed funds increased to $485.9 million, compared to $199.9 million at December 31, 2021.

The increase included $58.9 million in subordinated notes that were issued in June 2022, $30.0 million in FHLB advances associated with a long-term interest rate swap and $197.1 million in federal funds purchased and other short-term borrowings.

As a result, our cost of funds has increased and caused a decline in our net interest income and net interest margin in 2022, as compared to 2021.

Although we believe West Bank’s current sources of funds are adequate for its liquidity needs, there can be no assurance in this regard for the future.

12 unchanged sentences

We rely on customer deposits to be a low cost and stable source of funding.

We compete with banks and other financial services companies for deposits.

We compete with banks and other financial services companies, including digital asset service providers, for deposits.

If our competitors raise the rates they pay on deposits, our funding costs may increase, either because we raise our rates to avoid losing deposits or because we lose deposits and must rely on more expensive sources of funding.

41 unchanged sentences

Labor shortages and a failure to attract and retain qualified employees could negatively impact our business, results of operations and financial condition.

A number of factors may adversely affect the labor force available to us or increase labor costs, including high employment levels, decreased labor force size and participation rates as a result of the COVID-19 pandemic, expanded unemployment benefits offered in response to the ongoing COVID-19 pandemic, and other government actions.

A number of factors may adversely affect the labor force available to us or increase labor costs, including high employment levels and decreased labor force size and participation rates.

Although we have not experienced any material labor shortage to date, we have recently observed an overall tightening and increasingly competitive local labor market.

1 unchanged sentence

In addition, if we are unable to hire and retain employees capable of performing at a high-level, or if mitigation measures we take to respond to a decrease in labor availability have unintended negative effects, our business could be adversely affected.

An overall labor shortage, lack of skilled labor, increased turnover or labor inflation, caused by COVID-19 or as a result of general macroeconomic factors, could have a material adverse impact on our business, results of operations and financial condition.

An overall labor shortage, lack of skilled labor, increased turnover or labor inflation, caused by general macroeconomic factors, could have a material adverse impact on our business, results of operations and financial condition.

West Bancorporation, Inc.

1 unchanged sentence

Changes in interest rates could negatively impact our financial condition and results of operations.

Earnings in the banking industry, particularly the community bank segment, are substantially dependent on net interest income, which is the difference between interest earned on interest-earning assets (investments and loans) and interest paid on interest-bearing liabilities (deposits and borrowings).

Interest rates are sensitive to many factors, including government monetary and fiscal policies and domestic and international economic and political conditions.

If interest rates increase, which is expected to occur in 2022, banks will experience competitive pressures to increase rates paid on deposits.

Depending on competitive pressures, such deposit rate increases may occur faster than increases in rates received on loans, which may reduce net interest income during the transition periods.

Changes in interest rates could also influence our ability to originate loans and obtain deposits, the fair value of our financial assets and liabilities, and the average duration of our securities portfolio.

Earnings in the banking industry, particularly the community bank segment, are substantially dependent on net interest income, which is the difference between interest earned on interest-earning assets (securities and loans) and interest paid on interest-bearing liabilities (deposits and borrowings).

Interest rates are sensitive to many factors, including government monetary and fiscal policies, domestic and international economic and political conditions and competition.

If interest rates continue to increase, which is expected in 2023, banks will experience competitive pressures to further increase rates paid on deposits.

It is currently expected that during 2023, and perhaps beyond, the Federal Open Market Committee of the Federal Reserve, or FOMC, will continue to increase interest rates to reduce the rate of inflation.

In 2022, the FOMC increased, at various dates throughout the year, the target range for the federal funds rate from 0.00 percent to 0.25 percent to a range of 4.25 percent to 4.50 percent.

All of these increases were expressly made in response to inflationary pressures, which are currently expected to continue in 2023.

If the FOMC further increases the targeted federal funds rates, overall interest rates likely will rise, which may negatively impact the entire national economy.

In addition, our net interest income could be adversely affected if the rates we pay on deposits and borrowings increase more rapidly than the rates we earn on loans and other assets.

Rising interest rates also may reduce the demand for loans and the value of fixed-rate securities.

These effects from interest rate changes or from other sustained economic stress or a recession, among other matters, could have a material adverse effect on our business, financial condition, liquidity, and results of operations.

A large percentage of our securities have fixed interest rates and are classified as available for sale.

As is the case with many financial institutions, our emphasis on increasing the development of core deposits, those with no stated maturity date, has resulted in our interest-bearing liabilities having a shorter duration than our interest-earning assets.

This imbalance can create significant earnings volatility because interest rates change over time.

As interest rates have increased, our cost of funds has increased more rapidly than the yields on a substantial portion of our interest-earning assets.

In addition, the market value of our securities portfolio has declined in recent periods.

At December 31, 2022, we had $138,732 of net unrealized losses in the securities portfolio.

In line with the foregoing, we have experienced and may continue to experience an increase in the cost of interest-bearing liabilities, primarily due to raising the rates we pay on some of our deposit products to stay competitive within our market, and an increase in borrowing costs from increases in the federal funds rate.

Community banks, such as West Bank, rely more heavily than larger institutions on net interest income as a revenue source.

14 unchanged sentences

Such unfavorable conditions could materially and adversely affect us.

The financial markets and the global economy may also be adversely affected by the current or anticipated impact of military conflict, including the current conflict between Russia and Ukraine, which is increasing volatility in commodity and energy prices, creating supply chain issues and causing instability in financial markets.

Sanctions imposed by the United States and other countries in response to such conflict could further adversely impact the financial markets and the global economy, and any economic countermeasures by the affected countries or others could exacerbate market and economic instability.

The specific consequences of the conflict in Ukraine on our business is difficult to predict at this time, but in addition to inflationary pressures affecting our operations and those of our customers and borrowers, we may also experience an increase in cyberattacks against us, our customers and borrowers, service providers and other third parties.

West Bancorporation, Inc.

and Subsidiary

Continued elevated levels of inflation could adversely impact our business, results of operations and financial condition.

The United States has recently experienced elevated levels of inflation, with the consumer price index climbing approximately 7.1 percent in 2022.

Inflationary pressures are currently expected to continue into 2023.

Continued levels of inflation could have complex effects on our business, results of operations and financial condition, some of which could be materially adverse.

8 unchanged sentences

Failure to meet these capital and other regulatory requirements could affect customer confidence, our ability to grow, the costs of funds, FDIC insurance costs, the ability to pay dividends on common stock and to make distributions on the junior subordinated debentures, the ability to make acquisitions, the ability to make certain discretionary bonus payments to executive officers, and the results of operations and financial condition.

West Bancorporation, Inc.

and Subsidiary

Risks Related to the COVID-19 Pandemic

The outbreak of COVID-19 led to an economic recession and had other severe effects on the U.S.

The ultimate impact of the COVID-19 pandemic may have an adverse effect on our financial condition and growth prospects in the future.

The COVID-19 pandemic negatively impacted the United States and world economy.

The outbreak of COVID-19 resulted in a decline in the businesses of certain of our clients, a decrease in consumer confidence, and initial increases in unemployment.

Recent supply chain disruptions caused primarily by the pandemic have negatively affected certain of our commercial customers.

Even as efforts to contain the pandemic, including vaccinations, have made progress and some restrictions have relaxed, new variants of the virus have and may continue to have significant economic effects.

The impact of these variants cannot be predicted.

As a result, we expect the impact of COVID-19 could continue to be volatile, and last for a significant and indeterminate period.

In addition, the lasting effects of government aid programs are uncertain, and the ultimate long-term impact of the business shutdowns that occurred as a result of COVID-19 remains uncertain in many sectors of the economy.

Risks Related to the Supervision and Regulation of the Banking Industry and Government Policies

9 unchanged sentences

These changes also may require us to invest significant management attention and resources to make any necessary changes to operations in order to comply and could therefore also materially and adversely affect our business, financial condition and results of operations.

West Bancorporation, Inc.

and Subsidiary

Monetary policies and regulations of the Federal Reserve could adversely affect our business, financial condition and results of operations.

7 unchanged sentences

The specific effects of such policies upon our business, financial condition and results of operations cannot be predicted.

West Bancorporation, Inc.

and Subsidiary

Other Risks Related to the Banking Industry in General

3 unchanged sentences

Our future success depends, in part, on our ability to effectively implement new technology.

The widespread adoption of new technologies, including mobile banking services, cryptocurrencies and payment systems, could require us in the future to make substantial expenditures to modify or adapt our existing products and services as we grow and develop new products to satisfy our customers’ expectations and comply with regulatory guidance.

Many of our larger competitors have substantially greater resources than we do to invest in technological improvements.

4 unchanged sentences

Consumers can also complete transactions such as paying bills and transferring funds directly without the assistance of banks.

The process of eliminating banks as intermediaries could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from deposits.

While we do not offer products relating to digital assets, including cryptocurrencies, stablecoins and other similar assets, there has been a significant increase in digital asset adoption globally over the past several years.

Certain characteristics of digital asset transactions, such as the speed with which such transactions can be conducted, the ability to transact without the involvement of regulated intermediaries, the ability to engage in transactions across multiple jurisdictions, and the anonymous nature of the transactions, are appealing to certain consumers notwithstanding the various risks posed by such transactions.

Accordingly, digital asset service providers which, at present are not subject to the same degree of scrutiny and oversight as banking organizations and other financial institutions, are becoming active competitors to more traditional financial institutions.

The process of eliminating banks as intermediaries, known as “disintermediation”, could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from deposits.

The loss of these revenue streams and the lower cost deposits as a source of funds could have a material adverse effect on our business, financial condition and results of operations.

Potential partnerships with digital asset companies, moreover, could also entail significant investment.

A transition away from LIBOR as a reference rate for financial contracts could negatively affect our income and expenses and the value of various financial contracts.

LIBOR is used extensively in the United States and globally as a benchmark for various financial contracts, including adjustable-rate mortgages, corporate debt and interest rate swaps.

LIBOR is set based on interest information reported by certain banks, which may stop reporting such information after 2021.

LIBOR is set based on interest rate information reported by certain banks, which will stop reporting such information starting after December 31, 2021 through June 30, 2023.

Other benchmarks may perform differently than LIBOR or alternative benchmarks have performed in the past or have other consequences that cannot currently be anticipated.

It is also uncertain what will happen with instruments that rely on LIBOR for future interest rate adjustments and which remain outstanding if LIBOR ceases to exist.

West Bancorporation, Inc.

and Subsidiary

While there is no consensus on what rate or rates may become accepted alternatives to LIBOR, the Alternative Reference Rates Committee, a steering committee comprised of U.S.

13 unchanged sentences

Although we are currently unable to assess what the ultimate impact of the transition from LIBOR will be, failure to adequately manage the transition could have a material adverse effect on our business, financial condition and results of operations.

West Bancorporation, Inc.

and Subsidiary

Climate change could adversely affect our business, affect client activity levels and damage our reputation.

Concerns over the long-term impacts of climate change have led and will continue to lead to governmental efforts around the world to mitigate those impacts.

Consumers and businesses also may change their behavior on their own as a result of these concerns.

New governmental regulations or guidance relating to climate change, as well as changes in consumers’ and businesses’ behaviors and business preferences, may affect whether and on what terms and conditions we will engage in certain activities or offer certain products or services.

The governmental and supervisory focus on climate change could also result in our becoming subject to new or heightened regulatory requirements, such as requirements relating to operational resiliency or stress testing for various climate stress scenarios.

Any such new or heightened requirements could result in increased regulatory, compliance or other costs or higher capital requirements.

In connection with the transition to a low carbon economy, legislative or public policy changes and changes in consumer sentiment could negatively impact the businesses and financial condition of our clients, which may decrease revenues from those clients and increase the credit risk associated with loans and other credit exposures to those clients.

Our business, reputation and ability to attract and retain employees may also be harmed if our response to climate change is perceived to be ineffective or insufficient.

Furthermore, the long-term impacts of climate change could have a negative impact on our customers and their businesses.

Physical risks include extreme storms that damage or destroy property and inventory securing loans we make, or may interrupt our customers’ business operations, putting them in financial difficulty, and increasing the risk of default.

Our customers are also facing changes in energy and commodity prices driven by climate change, as well as new regulatory requirements resulting in increased operational costs.

Risks Related to West Bancorporation’s Common Stock

5 unchanged sentences

Conversely, attempts to purchase a significant amount of our stock could cause the market price to rise above the reasonable inherent worth of the Company.

West Bancorporation, Inc.

and Subsidiary

The stock market can be volatile, and fluctuations in our operating results and other factors could cause our stock price to decline.

14 unchanged sentences

If we cannot raise additional capital when needed, our ability to further expand our operations could be materially impaired and our financial condition and liquidity could be materially and adversely affected.

The holders of our junior subordinated debentures have rights that are senior to those of our common stockholders.

As of December 31, 2021, the Company had $20.6 million in junior subordinated debentures outstanding that were issued to the Company’s subsidiary trust, West Bancorporation Capital Trust I.

The junior subordinated debentures are senior to the Company’s shares of common stock.

As a result, the Company must make payments on the junior subordinated debentures (and the related trust preferred securities (TPS)) before any dividends can be paid on its common stock, and in the event of the Company’s bankruptcy, dissolution or liquidation, the holders of the debentures must be satisfied before any distributions can be made to the holders of the common stock.

The holders of our 5.25% Fixed-to-Floating Rate Subordinated Notes due in 2032 and the holders of our junior subordinated debentures have rights that are senior to those of our common stockholders.

As of December 31, 2022, the Company had $20.6 million in junior subordinated debentures outstanding that were issued to the Company’s subsidiary trust, West Bancorporation Capital Trust I, and $60.0 million aggregate principal amount outstanding of the Company’s 5.25% Fixed-to-Floating Rate Subordinated Notes due 2032 (the “Notes”).

The junior subordinated debentures and the Notes are senior to the Company’s shares of common stock.

As a result, the Company must make payments on the junior subordinated debentures (and the related trust preferred securities (TPS)) and the Notes before any dividends can be paid on its common stock, and in the event of the Company’s bankruptcy, dissolution or liquidation, the holders of the debentures and the Notes must be satisfied before any distributions can be made to the holders of the common stock.

The Company has the right to defer distributions on the junior subordinated debentures (and the related TPS) for up to five years during which time no dividends may be paid to holders of the Company’s common stock.

1 unchanged sentence

Interest payments on the junior subordinated debentures underlying the TPS are classified as a “dividend” by the Federal Reserve supervisory policies and therefore are subject to applicable restrictions and approvals imposed by the Federal Reserve Board.

West Bancorporation, Inc.

and Subsidiary

There can be no assurances concerning continuing dividend payments.

8 unchanged sentences

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 1A. Risk Factors