What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2023-02-23 compared with 2022-02-24 · 193 added, 178 removed, 564 unchanged (40% of the section changed)

9 unchanged sentences

43.70 % 40.91 % 41.96 %

Texas ratio (1)(3)

Nonperforming assets/total assets (1)(3)

0.01 % 0.26 % 0.51 %

20 unchanged sentences

• 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.

• Nonperforming assets to total assets - total nonperforming assets divided by total assets.

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

8 unchanged sentences

The Company’s 2022 net income was $46,399, compared to $49,607 in 2021.

Net income for 2021 was a record for the Company.

Basic and diluted earnings per common share for 2022 were $2.79 and $2.76, respectively, compared to $3.00 and $2.95, respectively, in 2021.

During 2022, we paid our common stockholders $16,619 ($1.00 per common share) in dividends compared to $15,543 ($0.94 per common share) in 2021.

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.

The dividend declared and paid in the first quarter of 2023 was $0.25 per common share.

Total assets were $3,613,218 at December 31, 2022, compared to $3,500,201 at December 31, 2021, a 3.2 percent increase.

Our loan portfolio grew to $2,742,836 as of December 31, 2022, from $2,456,196 as of December 31, 2021.

Loans included $1,117 of PPP loans as of December 31, 2022, compared to $22,206 as of December 31, 2021.

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.

Deposits decreased to $2,880,408 as of December 31, 2022, from $3,016,005 as of December 31, 2021.

The decline in deposit balances was primarily attributable to customers using their own liquidity to fund business transactions, instead of incurring debt, and customers seeking higher yielding investment options.

The U.S economy continues to be affected by the Federal Reserve’s accommodative monetary policies initiated during the COVID-19 pandemic.

Current economic concerns include the impact of sharp increases in interest rates as the Federal Reserve responds to inflationary trends, labor shortages and wage pressures, and the uncertainty of additional increases in the Federal Reserve target federal funds rate.

In response to increasing inflation rates, the Federal Reserve increased the target federal funds rate by a total of 425 basis points in 2022.

Additional rate increases are expected to occur in 2023.

The extent of rate increases in 2023 will be largely dependent on inflation and employment data and how this data is interpreted by the Federal Reserve.

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 peer group for 2022 consists of 19 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., 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.

return on average equity, efficiency ratio and nonperforming assets to total assets.

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

2 unchanged sentences

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)

As of and for the year ended December 31, 2022 As of and for the year ended December 31, 2022

Return on average equity 20.71% 9.97%-17.24%

1 unchanged sentence

43.70% 43.15%-63.62%

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.

(dollars in thousands, except per share amounts)

Nonperforming assets to total assets 0.01% 0.02%-1.08%

(1) The efficiency ratio is a non-GAAP financial measure.

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

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, 2022 are compared to the results for the year ended December 31, 2021 and the consolidated financial condition of the Company as of December 31, 2022 is compared to December 31, 2021.

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.

Results of operations and financial condition for the year ended December 31, 2021 compared to the year ended December 31, 2020 can be found in Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company’s 2021 annual report on Form 10-K filed with the SEC on February 24, 2022.

(dollars in thousands, except per share amounts)

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

24 unchanged sentences

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.

Certain qualitative factors decreased in 2022 based upon the sustained performance of loans after the expiration of COVID-19 modifications, continued improvement in classified loans and no past due loans over 30 days for six consecutive quarters.

The portion of the allowance for loan losses related to loans collectively evaluated for impairment decreased $391 to a total of $25,473, or 0.93 percent of outstanding loans, as of December 31, 2022 compared to $25,864, or 1.05 percent of outstand ing loans, as of December 31, 2021.

As of December 31, 2022, there were no specific reserves related to loans individually evaluated for impairment compared to $2,500 as of December 31, 2021.

The specific reserve in 2021 was 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.

This impaired loan was settled in the second quarter of 2022, resulting in a charge-off of $451.

(dollars in thousands, except per share amounts)

21 unchanged sentences

Noninterest income 10,208 9,729 9,602

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

Adjustment for realized securities gains, net — (51) (77)

Adjustment for losses on disposal of premises and

equipment, net

Adjustment for gain on sale of premises — — (307)

Adjusted income 103,099 106,023 93,074

20 unchanged sentences

Basic and diluted earnings per common share for 2022 were $2.79 and $2.76, respectively, and were $3.00 and $2.95, respectively for 2021.

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.

The decrease in 2022 net income compared to 2021 was primarily due to a decrease in net interest income and an increase in noninterest expense, partially offset by a larger negative provision for loan losses and an increase in noninterest income.

Net interest income declined $3,319, or 3.5 percent, in 2022 compared to 2021.

The decrease in net interest income was primarily due to an increase in interest expense on deposits and borrowings due to rising rates, partially offset by an increase in interest income on loans and securities.

The Company recorded a negative provision for loan losses of $2,500 in 2022 compared to a negative provision for loan losses of $1,500 in 2021.

The negative provision in 2022 was due to the reversal of a specific reserve on an impaired loan and the reduction of certain qualitative factors resulting from sustained performance of loans after the expiration of COVID-19 modifications and continued improvement in classified loans.

The negative provision in 2021 was due to the reduction of certain qualitative factors resulting from improvement in economic conditions and lack of loan losses for the Company during the COVID-19 pandemic.

Noninterest income increased $479, or 4.9 percent, in 2022 compared to 2021, primarily due to an increase in loan swap fees.

Noninterest expense grew $1,671, or 3.9 percent, in 2022 compared to 2021, primarily due to an increase in salaries and employee benefits, partially offset by a decrease in FDIC insurance expense.

The Company’s ratio of nonperforming assets to total assets decreased to 0.01 percent as of December 31, 2022, compared to 0.26 percent as of December 31, 2021.

This decrease was primarily due to the settlement of an impaired loan in 2022.

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.

Net interest income decreased to $91,740 for 2022 from $95,059 for 2021, as the impact of the growth in average balances of interest-bearing liabilities and increase in average rate paid on interest-bearing liabilities exceeded the effects of the growth in average balances of interest-earning assets and increase in average yields on interest-earning assets.

The net interest margin for 2022 decreased 29 basis points to 2.76 percent compared to 3.05 percent for 2021.

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

The average yield on earning assets increased by 26 basis points, while the average rate paid on interest-bearing liabilities increased by 71 basis points.

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

3 unchanged sentences

The allowance for loan losses, which totaled $25,473 as of December 31, 2022, represented 0.93 percent of total loans and 7,910.87 percent of nonperforming loans at year end, compared to 1.15 percent and 316.99 percent, respectively, as of December 31, 2021.

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

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

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

These benefits were partially offset by loan growth.

(dollars in thousands, except per share amounts)

A negative provision for loan losses of $2,500 was recorded in 2022 compared to a negative provision of $1,500 in 2021.

The negative provision in 2022 was due to the reduction of certain qualitative factors resulting from sustained performance of loans after the expiration of the COVID-19 modifications, continued improvement in classified loans and the reversal of a specific reserve on an impaired loan.

The impaired loan, which had a specific reserve of $2,500, was settled in 2022, resulting in a charge-off of $451.

The negative provision in 2021 was due to the reduction of certain qualitative factors resulting from improvements in economic conditions and lack of loan losses for the Company during the COVID-19 pandemic.

Nonperforming loans at December 31, 2022 totaled $322, or 0.01 percent of total loans, a decrease from $8,948, or 0.36 percent of total loans, at December 31, 2021.

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

The decrease in nonperforming loans at December 31, 2022, compared to December 31, 2021, was due to the settlement of an impaired loan in 2022 that previously had a $2,500 specific reserve.

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, 2022 or 2021.

(dollars in thousands, except per share amounts)

Noninterest Income

14 unchanged sentences

Total noninterest income $ 10,208 $ 9,729 $ 479 4.9 %

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.

The increase in noninterest income in 2022 compared to 2021 was primarily due to loan swap fees of $835 earned in 2022 compared to $66 earned in 2021.

Additionally, revenue from trust services increased in 2022 compared to 2021 primarily due to one-time estate fees earned in 2022.

The decrease in other income for 2022 compared to 2021 was primarily 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 noninterest income.

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

(dollars in thousands, except per share amounts)

Noninterest Expense

7 unchanged sentences

Data processing 2,597 2,465 132 5.4 %

Subscriptions and service contracts 2,137 1,777 360 20.3 %

FDIC insurance 996 1,818 (822) (45.2) %

2 unchanged sentences

Other expenses:

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

Business development 1,147 999 148 14.8 %

Charitable contributions 890 180 710 394.4 %

Trust 593 462 131 28.4 %

Insurance expense 717 502 215 42.8 %

Trust 539 593 (54) (9.1) %

Consulting fees 339 302 37 12.3 %

Marketing 246 224 22 9.8 %

Charitable contributions — 890 (890) (100.0) %

Low income housing projects amortization 540 701 (161) (23.0) %

3 unchanged sentences

Total noninterest expense $ 45,051 $ 43,380 $ 1,671 3.9 %

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.

(dollars in thousands, except per share amounts)

Salaries and employee benefits increased in 2022 compared to 2021 primarily due to an increase in expense related to restricted stock units, the addition of five commercial bankers since the third quarter of 2021, and normal operating increases.

Subscriptions and service contracts increased in 2022 compared to 2021, primarily due to increases in information technology and information security solutions.

FDIC insurance expense decreased in 2022 compared to 2021 primarily due to a reduction in the assessment rate resulting from capital injections into West Bank in December 2021 and June 2022.

Business development expenses increased in 2022 as business development efforts have normalized following the initial period of the pandemic with increased in-person activities, and the addition of five commercial bankers.

Insurance expense increased in 2022 compared to 2021 primarily due to expenses incurred in 2022 related to bank buildings that are under construction.

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.

Federal income tax expense for 2022 and 2021 was $9,165 and $9,833, respectively, while state income tax expense was approximately $3,833 and $3,468, respectively.

The effective rate of income tax expense as a percent of income before income taxes was 21.9 percent and 21.2 percent, respectively, for 2022 and 2021.

In 2022, income tax expense included a one-time increase in state income tax expense related to the June 2022 enactment of changes in the Iowa bank franchise tax rates.

This legislation reduces the Iowa bank franchise tax rate applied to apportioned income for 2023 and future years.

The future reduction in the state tax rate required the Company to reduce net deferred tax assets by $671 and in turn caused the one-time increase in 2022 tax expense.

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.

26 unchanged sentences

Total securities 747,989 16,721 2.24 % 592,726 12,064 2.04 % 378,284 9,592 2.54 %

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

Interest-bearing deposits 58,426 203 0.35 % 233,873 292 0.12 % 88,904 304 0.34 %

Total interest-earning assets (3)

14 unchanged sentences

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 funds purchased and

other short-term borrowings 62,901 1,764 2.80 % 4,620 5 0.11 % 4,397 23 0.52 %

Subordinated notes, net 52,873 2,867 5.42 % 20,458 1,008 4.93 % 20,445 1,016 4.97 %

Federal Home Loan Bank

24 unchanged sentences

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.

The Federal Reserve increased the target federal funds interest rate by a total of 425 basis points in 2022 and is expected to continue to raise the target federal funds rate in 2023.

The magnitude and pace of increases in 2023 is unknown at this time.

The increases in 2022 have had an impact on the Company’s net interest income and net interest margin and will impact the comparability of net interest income between 2022 and 2021.

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, 2022, 2021 and 2020, the Company’s net interest margin on a tax-equivalent basis was 2.76, 3.05 and 3.20 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.

There was a decrease of $3,399 in tax-equivalent net interest income in 2022 compared to 2021.

Rate and Volume Analysis

13 unchanged sentences

Total securities 3,266 1,391 4,657 4,887 (2,415) 2,472

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

Interest-bearing deposits (335) 246 (89) 269 (281) (12)

Total interest income (2)

6 unchanged sentences

Borrowed funds:

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

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

Federal funds purchased and

other short-term borrowings 591 1,168 1,759 1 (19) (18)

Subordinated debt, net 1,748 111 1,859 1 (9) (8)

Federal Home Loan Bank advances (237) (38) (275) (897) (864) (1,761)

10 unchanged sentences

Tax-equivalent interest income and fees on loans increased $11,421 for the year ended December 31, 2022, compared to 2021.

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.

The improvement was primarily due to an increase of $229,137 in the average balance of loans in 2022 compared to 2021.

Additionally, the average yield on loans increased 8 basis points in 2022 compared to 2021.

Average loan balances for the year ended December 31, 2022 included $5,656 of PPP loans, compared to average PPP loan balances of $98,593 for the year ended December 31, 2021.

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, which includes the amortization of origination fees paid by the Small Business Administration (SBA), was $759 for the year ended December 31, 2022, resulting in a yield of 13.41 percent.

Interest income recognized on PPP loans in 2021 was $6,731, resulting in a yield of 6.83 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.

Exclusive of PPP loans, the yield on loans was 4.19 percent and 4.01 percent for the years ended December 31, 2022 and 2021, respectively.

The increase in the yield on loans was primarily due to the repricing of variable rate loans and loan growth and renewals in a rising rate environment.

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 yield on the loan portfolio is expected to increase in a rising rate environment as variable-rate loans and loan renewals reprice at higher rates.

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.

Tax-equivalent interest income on securities increased $4,657 for the year ended December 31, 2022, compared to 2021.

The average balance of securities available for sale in 2022 was $155,263 higher than in 2021, primarily as a result of securities purchased during 2021 and 2022 to improve the yield on excess liquidity.

The yield on available for sale securities increased by 20 basis points in 2022 compared to 2021.

Interest expense on deposits increased $14,681 for the year ended December 31, 2022, compared to 2021.

The average balance of interest bearing deposits increased $149,625 in 2022 compared to 2021, which included an increase of average brokered deposits of $64,161.

The rates paid on deposits increased 63 basis points in 2022 compared to 2021.

The increase in the cost of deposits was primarily due to increases in short-term brokered deposit balances and other changes in deposit mix, increases in certain deposit rates in response to increases in the target federal funds rate and market interest rate competition.

The Federal Reserve increased the targeted federal funds rate by a total of 425 basis points in 2022, which has had a direct impact on the cost of deposits and market competition.

The cost of deposits will likely increase further in a rising rate environment.

Interest expense on borrowed funds increased $4,707 for the year ended December 31, 2022, compared to 2021.

The average balance of borrowed funds increased $109,779 in 2022 compared to 2021.

The rate paid on borrowed funds increased 74 basis points in 2022 compared to 2021.

The Company increased variable-rate long-term debt by $34,500 in December 2021 and issued subordinated debt of $60,000 in June 2022.

Average balances of federal funds purchased and other short-term borrowings increased $58,281 in 2022 compared to 2021 to support loan growth.

The average rate of these federal funds purchased and other short-term borrowings increased by 269 basis points in 2022 compared to 2021.

The cost of borrowed funds will likely increase further in a rising rate environment.

The Federal Reserve increased the target federal funds rate by a total of 425 basis points in 2022.

The Federal Reserve may continue to make additional rate increases in 2023.

These rate increases could improve reinvestment rates on loans and securities, but also increase the Company’s cost of deposits and borrowed funds and increase the unrealized losses in the Company’s securities portfolio.

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.

The balance of securities available for sale decreased by $94,707 as of December 31, 2022, compared to December 31, 2021.

In the first quarter of 2022, the Company purchased securities to improve the yield on excess liquidity while monitoring duration and interest rate risk.

The purchases were offset by principal paydowns and the change in the fair value of the portfolio, which declined $132,008 in 2022.

The decline in fair value was the result of increases in market interest rates and is not an indication of declining credit quality.

These unrealized losses are recorded in accumulated other comprehensive loss, net of tax.

Future increases in market interest rates could result in a further increase of the unrealized losses in the securities portfolio.

Securities available for sale as a percentage of total assets is elevated over historical levels which resulted from the deployment of excess liquidity during 2021 and 2022 to the securities portfolio as an earning asset alternative for excess liquidity from increased levels of core deposits.

The Company expects the securities portfolio as a percentage of total assets to decrease over time as the proceeds from paydowns and maturities are used to fund loan growth.

(dollars in thousands, except per share amounts)

As of December 31, 2022, 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.

Those securities have little to no credit risk and provide cash flows for liquidity and repricing opportunities.

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 26 states.

16 unchanged sentences

(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.

As of December 31, 2022, the gross unrealized losses of $138,736 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.

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

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, 2022, the majority of all loans were originated directly by West Bank to borrowers within West Bank’s market areas.

As of December 31, 2022, total loans were approximately 95.2 percent of total deposits and 75.9 percent of total assets.

Loans outstanding at the end of 2022 increased 11.7 percent compared to the end of 2021.

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.

Changes in the loan portfolio during 2022 included increases of $241,722 in commercial real estate loans and $26,381 in commercial loans.

Exclusive of PPP loans, loan growth in 2022 was $307,729, or 12.6 percent.

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

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

(dollars in thousands, except per share amounts)

We believe that loan growth could slow down in 2023 as a result of uncertainty and diversity in economic outlooks, labor and wage challenges and the impact of higher interest rates on overall cash flows and debt service capabilities.

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

1 unchanged sentence

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.

(dollars in thousands, except per share amounts)

The Company follows a loan policy approved by West Bank’s Board of Directors.

1 unchanged sentence

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 are approved 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.

As of December 31, 2022 and 2021, there were no loans that were past due 30 days or more.

Nonperforming loans declined to $322 at December 31, 2022, compared to $8,948 at December 31, 2021.

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.

The decrease was due to the settlement of an impaired loan in 2022.

The nonperforming loans at December 31, 2022 and 2021 consisted of one and two borrowing relationships, respectively.

The watch classification of loans decreased to $54,231 as of December 31, 2022 from $64,025 as of December 31, 2021.

The decrease was primarily due to the improvement in risk rating for a previously classified commercial real estate loan.

This relationship was upgraded primarily due to the sustained improvement in financial performance.

Loans Secured by Real Estate

84 unchanged sentences

$ 1,467,692 $ 779,729 $ 51,137

(dollars in thousands, except per share amounts)

SUMMARY OF THE ALLOWANCE FOR LOAN LOSSES

2 unchanged sentences

The allowance for loan losses is management’s best estimate of probable losses inherent in the loan portfolio as of the balance sheet date.

(dollars in thousands, except per share amounts)

Factors considered in establishing an appropriate allowance include:

12 unchanged sentences

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.

The local economies are composed primarily of agriculture, financial service and health care 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.

7 unchanged sentences

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.

(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.

23 unchanged sentences

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

(dollars in thousands, except per share amounts)

Breakdown of Allowance for Loan Losses by Category

15 unchanged sentences

* Percent of loans in each category to total loans.

(dollars in thousands, except per share amounts)

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

2 unchanged sentences

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.

economy continues to be affected by the Federal Reserve’s accommodative monetary policies initiated during the COVID-19 pandemic.

In response to increasing inflation rates, the Federal Reserve increased the target federal funds rate by a total of 425 basis points in 2022.

Additional rate increases are expected to occur in 2023.

The Company decreased certain qualitative factors used in the allowance for loan losses evaluation in 2022 based upon the sustained performance of loans after the expiration of COVID-19 modifications and continued improvement in classified loans, no past due loans over 30 days, and the settlement of an impaired loan in 2022 that previously had a $2,500 specific reserve.

This resulted in a negative provision for 2022.

As of December 31, 2022 and December 31, 2021, there were $0 and $2,500 in specific reserves related to loans individually evaluated for impairment, respectively.

The specific reserve in 2021 resulted from the downgrade in credit quality of one borrower due to the severe economic impact of COVID-19 on its business.

This impaired loan was settled in 2022, resulting in a net charge-off of $451.

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 $2,500 was appropriate for the year ended December 31, 2022.

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.

This negative provision was due to the reversal of a specific reserve on an impaired loan and the sustained performance of loans after the expiration of COVID-19 modifications and continued improvement in classified loans.

Management believed the allowance for loan losses as of December 31, 2022 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.

In June 2016, the FASB issued ASU No.

2016-13, Financial Instruments-Credit Losses (Topic 326).

The amendments in this update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected.

Under the update, the income statement will reflect the measurement of credit losses for newly recognized financial assets, as well as the estimated increases or decreases of expected credit losses that have taken place during the period.

The amendment requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, in addition to the credit quality of the Company’s portfolio.

(dollars in thousands, except per share amounts)

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

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 Company adopted the CECL standard effective January 1, 2023.

During the first quarter of 2023, the Company will finalize all internal processes related to the adoption of CECL.

The Company will also recognize a one-time cumulative effect adjustment to the allowance for credit losses in the first quarter of 2023 with the offset to retained earnings, net of tax.

Based on preliminary projections, the Company is estimating an increase to the allowance for credit losses, including the allowance for unfunded commitments, of between $4,500 and $5,500 upon adoption.

The Company does not expect a material allowance for credit losses to be recorded on the available for sale securities portfolio under the newly codified CECL model.

See Note 1 to the consolidated financial statements for additional information regarding the Company’s adoption of CECL.

Additional details on the allowance for loan losses are included in Note 4 to the consolidated financial statements included in Item 8 of this Form 10-K.

Deposits totaled $2,880,408 as of December 31, 2022, which was 4.5 percent lower than the total as of December 31, 2021.

Deposit inflows and outflows are influenced by prevailing market interest rates, competition, local and national economic conditions, and fluctuations in our business customers’ own liquidity needs.

The decline in deposit balances was primarily due to customers using their own liquidity to fund business transactions, instead of incurring debt, and customers seeking higher yielding investment options.

A large corporate customer completed significant business transactions during 2022 that were funded by accumulated cash balances, accounting for a significant portion of the decrease in deposits.

Also, large core depositors who had accumulated excess discretionary balances sought higher yields in Treasury securities and other investment options primarily as a result of the sharp increase in shorter term interest rates.

At December 31, 2022, the Company had $272,691 in brokered deposits, compared to $176,008 at December 31, 2021.

Brokered deposits included fixed-rate time deposits with maturities through September 2024 and variable-rate deposits with terms through February 2024.

Brokered deposits are utilized, along with other wholesale funding sources, to fund loan growth and offset core deposit outflows.

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

14 unchanged sentences

$ 2,958,322 $ 2,809,039 $ 2,259,220

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.

Management expects the average interest rates on deposits will increase in 2023 as the Federal Reserve increased the target federal funds rate throughout 2022 by a total of 425 basis points and is expected to continue to increase the target federal funds rate in 2023.

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.

(dollars in thousands, except per share amounts)

The following table shows the amounts and remaining maturities of time certificates of deposit with balances of $100 or more as of December 31, 2022.

3 unchanged sentences

Over 12 months 8,885

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

Approximately 91 percent of the total time deposits issued by West Bank mature in the next year, including brokered time deposits.

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.

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

We participate in a reciprocal deposit network which enables depositors to receive FDIC insurance coverage for deposits otherwise exceeding the maximum insurable amount.

We consider these reciprocal deposits to be in-market deposits as distinguished from traditional out-of-market brokered deposits.

Time deposits as of December 31, 2022 and 2021, included $122,915 and $92,210, respectively, of reciprocal deposits.

Included in total deposits as of December 31, 2022 and 2021, were $155,888 and $178,366, respectively, of reciprocal interest-bearing checking and $186,160 and $412,027, respectively, of reciprocal money market deposits.

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

3 unchanged sentences

Over 12 months 2,002

(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 $1,412,955, $1,312,933 and $1,297,848 as of December 31, 2022, 2021 and 2020, 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 fluctuation in the balances of federal funds purchased and other short-term borrowings 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 FHLB advances.

Federal funds purchased and other short-term borrowings increased from $2,880 as of December 31, 2021 to $200,000 as of December 31, 2022.

The $200,000 as of December 31, 2022 was comprised of overnight and short-term FHLB advances.

The Company had $155,000 of short-term FHLB advances outstanding at December 31, 2022 associated with long-term interest rate swaps.

The Company has entered into long-term interest rate swap agreements with a total notional amount of $155,000 to hedge the interest payments of one-month rolling funding consisting of FHLB advances or brokered deposits.

4 unchanged sentences

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.

Interest is payable quarterly.

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 variable at the Wall Street Journal Prime Rate minus 1.00 percent, which was 6.50 percent as of December 31, 2022.

(dollars in thousands, except per share amounts)

On June 14, 2022, the Company issued $60,000 of subordinated notes (Notes).

The Notes initially bear interest at 5.25 percent per annum, with interest payable semi-annually for the first five years of the Notes.

Beginning June 15, 2027, the interest rate will reset quarterly to a floating rate per annum that is expected to be three-month term Secured Overnight Financing Rate (SOFR) plus 2.41 percent, with payments due quarterly.

The Company may redeem the Notes, in whole or in part, on and after June 15, 2027 at a price equal to 100 percent of the principal amount of the Notes being redeemed plus accrued and unpaid interest.

The Notes will mature on June 15, 2032 if they are not earlier redeemed.

Proceeds from this debt issuance were used to make a $58,650 capital injection into West Bank, the Company’s subsidiary.

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

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

11 unchanged sentences

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

(dollars in thousands, except per share amounts)

LIQUIDITY AND CAPITAL RESOURCES

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 objectives of liquidity management are 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.

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

Our deposit growth strategy emphasizes core deposit growth.

Deposit inflows and outflows can vary widely and are influenced by prevailing market interest rates, competition, local and national economic conditions and fluctuations in our corporate customers’ and municipal customers’ own liquidity needs.

The Company may utilize brokered deposits to supplement core deposit fluctuations and loan growth.

Brokered deposits are obtained through various programs administered by IntraFi, including IntraFi Network Deposits and IntraFi Funding, and through other third parties.

At December 31, 2022, the Company had $272,691 in brokered deposits, which included fixed-rate time deposits with maturities through September 2024 and variable-rate deposits with terms through February 2024.

As of December 31, 2022, West Bank had additional borrowing capacity available from the FHLB of approximately $372,000, as well as approximately $3,830 at the Federal Reserve discount window and $67,000 through unsecured federal funds lines of credit with correspondent banks.

2 unchanged sentences

Management believed that the combination of high levels of potentially liquid assets, cash flows from operations and additional borrowing capacity provided the Company with sufficient liquidity as of December 31, 2022.

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.

(dollars in thousands, except per share amounts)

West Bank has entered into a construction contract for the construction of a new headquarters building in West Des Moines, Iowa.

West Bank will pay the contractor a contract price consisting of the cost of work plus a fee, subject to a guaranteed maximum price of $42,309, with anticipated construction completed in 2024.

As of December 31, 2022, $7,371 had been paid under this construction contract.

Additionally, West Bank began construction of a new office in Mankato, Minnesota in 2022, which had a remaining construction commitment of $6,520 as of December 31, 2022.

The Company’s total stockholders’ equity decreased to $211,112 as of December 31, 2022 from $260,328 as of December 31, 2021.

The decrease was primarily the result of the increased accumulated other comprehensive loss, partially offset by net income less dividends paid.

At December 31, 2022, tangible common equity as a percent of tangible assets was 5.84 percent compared to 7.44 percent as of December 31, 2021.

The increase in accumulated other comprehensive loss was the result of the negative effect that rising interest rates have had on the market value adjustment of our available for sale securities portfolio.

While accumulated other comprehensive losses reduce tangible common equity, they have no impact on regulatory capital.

As of December 31, 2022 and 2021, the Company had no intangible assets.

2 unchanged sentences

As of December 31, 2022, 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.

Also, as of December 31, 2022, the ratios for the Company and West Bank were sufficient to meet the capital conservation buffer.

EFFECTS OF NEW STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS

1 unchanged sentence

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

What changed 10-K

Item 7. Management’s Discussion and Analysis