What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-22 compared with 2023-02-23 · 198 added, 222 removed, 535 unchanged (44% of the section changed)

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• Average equity to average assets ratio - average equity divided by average assets.

(1) A lower ratio is better.

(1) A lower ratio is more desirable.

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

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

(3) As of December 31.

(dollars in thousands, except per share amounts)

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Our loan portfolio grew to $2,927,535 as of December 31, 2023, from $2,742,836 as of December 31, 2022.

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

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.

Deposits increased to $2,973,779 as of December 31, 2023, from $2,880,408 as of December 31, 2022.

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

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 peer group for 2023 consists of 22 Midwestern, publicly traded financial institutions including Bank First Corporation, Bridgewater Bancshares, Inc., ChoiceOne Financial Services, Inc., 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., HBT Financial, Inc., Hills Bancorporation, Isabella Bank Corporation, LCNB Corp., Macatawa Bank Corporation, Mercantile Bank Corporation, MidWest One 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.

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The Company’s significant accounting policies are described in the Notes to Consolidated Financial Statements.

Based on its consideration of accounting policies that involve the most complex and subjective estimates and judgments, management has identified its most critical accounting policies to be those related to the fair value of financial instruments and the allowance for loan losses.

The fair value of a financial instrument is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts business.

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

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

Loans are charged against the allowance for loan losses when management believes that collectability of the principal is unlikely.

The Company has policies and procedures for evaluating the overall credit quality of its loan portfolio, including timely identification of potential problem loans.

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

Quantitative factors include the Company’s historical loss experience.

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

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

To the extent that actual results differ from forecasts and management’s judgment, the allowance for loan losses may be greater or less than future charge-offs.

The measurement of the allowance for loan losses at December 31, 2022 included quantitative and qualitative factors.

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

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

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.

Expected credit losses are reflected in the allowance for credit losses (ACL) through a charge to credit loss expense.

When the Company deems all or a portion of a loan to be uncollectible, the appropriate amount is written off and the ACL is reduced by the same amount.

The Company applies judgment to determine when a loan is deemed uncollectible;

however, generally speaking, a loan will be considered uncollectible no later than when all efforts at collection have been exhausted.

Subsequent recoveries, if any, are credited to the ACL when received.

The Company measures expected credit losses of loans on a collective (pool) basis when the loans share similar risk characteristics and uses a cash flow based method to estimate expected credit losses for each of these pools.

The Company’s methodology for estimating the ACL considers available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts.

The methodologies apply historical loss information, adjusted for asset-specific characteristics, economic conditions at the measurement date, and forecasts about economic conditions expected to exist through the contractual lives of the financial assets that are reasonable and supportable, to the identified pools of financial assets with similar risk characteristics for which the historical experience was observed.

Loans that do not share risk characteristics are evaluated on an individual basis.

The Company uses a cash flow based model to estimate expected credit losses for all loan segments.

For each of the loan segments, the Company calculates a cash flow projection using contractual terms, estimated prepayment speeds, estimated curtailment rates, and other relevant data.

The Company uses regression analysis that links historical losses of the Company and a peer group to two economic metrics:

national unemployment rate and 10-year treasury rate over 2-year treasury rate spread to establish the loss rates applied to the projected cash flows.

For all loan segments, the Company uses a forecast period of four quarters and reverts to a historical rate after four quarters.

When estimating prepayment speed and curtailment rates, the modeling is based on historical internal data.

In addition to the historical loss information, the Company utilizes qualitative factors to adjust the ACL as appropriate.

Qualitative factors are based on management’s judgment of the changes in underlying loan composition of specific portfolios, trends relating to credit quality and collateral values, company-specific data, or effects of other factors such as market competition or legal and regulatory requirements.

The allowance for credit losses as of December 31, 2023 was $28,342, or 0.97 percent of outstanding loans, compared to $25,473, or 0.93 percent of outstanding loans as of December 31, 2022.

The allowance for credit losses for 2023 was measured under the current expected credit losses, or CECL, model, while the allowance for credit losses for 2022 was measured under the previous incurred loss model.

(dollars in thousands, except per share amounts)

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

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

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

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

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These non-GAAP disclosures should not be considered an alternative to the Company’s GAAP results.

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

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

As and for the Years Ended December 31

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Noninterest income 10,066 10,208 9,729

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

Adjustment for realized securities (gains) losses, net 431 — (51)

Adjustment for losses on disposal of premises and

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60.73 % 43.70 % 40.91 %

Reconciliation of allowance for loan losses ratio, excluding PPP loans:

Loans outstanding (GAAP) $ 2,742,836 $ 2,456,196 $ 2,280,575

PPP loans (1,117) (22,206) (180,757)

Loans, net of PPP loans (non-GAAP) 2,741,719 2,433,990 2,099,818

Allowance for loan losses 25,473 28,364 29,436

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

0.93 % 1.17 % 1.40 %

(1) Computed on a tax-equivalent basis using a federal income tax rate of 21 percent, adjusted to reflect the effect of the nondeductible interest expense associated with owning tax-exempt securities and loans.

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A lower ratio is more desirable.

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

(dollars in thousands, except per share amounts)

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Basic and diluted earnings per common share for 2023 were $1.44 and $1.44, respectively, and were $2.79 and $2.76, respectively for 2022.

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.

The decrease in net income in 2023 compared to 2022 was primarily due to the decrease in net interest income.

Net interest income declined $22,709, or 24.7 percent, in 2023 compared to 2022.

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.

The decrease in net interest income was due to an increase in interest expense on deposits and borrowings that exceeded an increase in interest income on loans and securities, primarily due to rapidly rising short-term interest rates, an inverted yield curve and changes in funding mix.

The Company recorded a credit loss expense of $700 in 2023 compared to a credit loss expense of negative $2,500 in 2022.

The credit loss expense recorded in 2023 was primarily due to loan growth.

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

The credit loss expense recorded in 2023 was made under the current expected credit losses, or CECL, model, while the negative credit loss expense recorded in 2022 was made under the previous incurred loss model.

Noninterest income decreased $142, or 1.4 percent, in 2023 compared to 2022, primarily due to realized losses on the sales of securities and a decrease in loan swap fees, partially offset by a gain from bank-owned life insurance.

Noninterest expense increased $3,560, or 7.9 percent, in 2023 compared to 2022, primarily due to increases in salaries and employee benefits, occupancy and equipment expense and FDIC insurance expense.

The Company’s ratio of nonperforming assets to total assets was 0.01 percent as of both December 31, 2023 and December 31, 2022.

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

Net Interest Income

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.

Net interest income decreased to $69,031 for 2023 from $91,740 for 2022, as the impact of the increase in average rates paid on and growth in average balances of interest-bearing liabilities exceeded the benefits of the growth in average balances and increase in average yields on interest-earning assets.

The net interest margin for 2023 decreased 75 basis points to 2.01 percent, compared to 2.76 percent for 2022.

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and Interest Differential” in this Item of this Form 10-K.

Provision for Loan Losses and Loan Quality

The allowance for loan losses, which totaled $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 $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, 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.

Credit Loss Expense, Allowance for Credit Losses, and Loan Quality

The allowance for credit losses, which totaled $28,342 as of December 31, 2023, represented 0.97 percent of total loans, compared to 0.93 percent as of December 31, 2022.

A credit loss expense of $700 was recorded in 2023, compared to a credit loss expense of negative $2,500 in 2022.

The credit loss expense recorded in 2023 included an allocation of $500 to the allowance for credit losses related to loans and $200 to the allowance for credit losses related to unfunded commitments.

This credit loss expense was primarily due to growth in loans and unfunded loan commitments.

Management believed the allowance for credit losses at December 31, 2023 was adequate to absorb expected losses in the loan portfolio as of that date.

Nonperforming loans at December 31, 2023 totaled $296, or 0.01 percent of total loans, a slight decrease from $322, or 0.01 percent of total loans, at December 31, 2022.

The decrease in nonperforming loans at December 31, 2023, compared to December 31, 2022, was due to scheduled payments made on the single loan included in the nonaccrual balance in both periods.

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 loan restructurings made to borrowers experiencing financial difficulty.

The Company held no other real estate owned properties as of December 31, 2023 or 2022.

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The following table shows the variance from the prior year in the noninterest income categories shown in the Consolidated Statements of Income.

In addition, accounts within the “Other income” category that represent a significant portion of the total or a significant variance are shown.

Years ended December 31

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Increase in cash value of bank-owned life insurance 1,044 964 80 8.3 %

Gain from bank-owned life insurance 691 — 691 N/A

Loan swap fees 431 835 (404) (48.4) %

Realized securities gains, net — 51 (51) (100.0) %

Realized securities losses, net (431) — (431) N/A

Other income 1,424 1,537 (113) (7.4) %

All other 1,537 1,718 (181) (10.5) %

Total other income 1,537 1,718 (181) (10.5) %

Total noninterest income $ 10,066 $ 10,208 $ (142) (1.4) %

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.

The decline in service charges on deposit accounts was primarily attributable to a higher earnings credit rate on commercial accounts.

Revenue from trust services was higher in 2023 compared to 2022 primarily due to increases in one-time estate fees.

An increase in trust assets and accounts since December 31, 2022 also contributed to the increase in trust service fees.

The gain from bank-owned life insurance in 2023 was the result of a death benefit claim.

Loan swap fees in 2023 and 2022 consist of fees earned in the back-to-back swap program.

In 2023, the Company sold $11,285 of securities from the available for sale securities portfolio and realized a net loss of $431.

The proceeds from this sale were reinvested in the loan portfolio.

Noninterest Expense

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Salaries and employee benefits $ 27,060 $ 25,838 $ 1,222 4.7 %

Occupancy 4,913 5,162 (249) (4.8) %

Occupancy and equipment 5,507 4,913 594 12.1 %

Data processing 2,790 2,597 193 7.4 %

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

Technology and software 2,341 2,137 204 9.5 %

FDIC insurance 1,750 996 754 75.7 %

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Consulting fees 257 339 (82) (24.2) %

Charitable contributions 180 — 180 N/A

Marketing 163 246 (83) (33.7) %

Charitable contributions — 890 (890) (100.0) %

Low income housing projects amortization 589 540 49 9.1 %

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(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.

Salaries and employee benefits increased in 2023 compared to 2022 primarily due to wage increases in response to market conditions and competition in retaining and recruiting talent.

Additionally, the number of full-time equivalent employees has increased with growth in our commercial banking team and information technology department.

Occupancy and equipment expense increased in 2023 compared to 2022 primarily due to an increase in depreciation expense related to the new bank buildings in St.

Cloud and Mankato, Minnesota, along with scheduled increases in rent expense on existing leases.

FDIC insurance expense increased in 2023 when compared to 2022 primarily due to the FDIC’s increase in the minimum assessment rate, which was announced in 2022 and effective as of the first quarter of 2023.

Business development expenses increased in 2023 due to an increase in the size of our commercial banking team and a general increase in sponsorships and business development activity.

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

Federal income tax expense for 2023 and 2022 was $3,711 and $9,165, respectively, while state income tax expense was $1,938 and $3,833, respectively.

The effective rate of income tax expense as a percent of income before income taxes was 18.9 percent and 21.9 percent, respectively, for 2023 and 2022.

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.

This legislation reduced 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.

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, tax-exempt gain from bank-owned life insurance, disallowed interest expense, stock compensation and state income taxes.

The effective tax rate for both 2023 and 2022 was also impacted by federal income tax credits, including low income housing tax credits and a new markets tax credit from West Bank’s investment in a qualified community development entity, of approximately $1,498 and $1,468, respectively.

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Other, less allowance for

loan losses 80,553 46,612 42,610

credit losses 106,194 80,553 46,612

Total noninterest-earning assets 196,614 147,694 119,044

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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 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.

The Federal Reserve increased the target federal funds interest rate by a total of 425 basis points in 2022 and an additional 100 basis points in 2023.

The potential for additional target federal funds interest rate changes in 2024 is unknown at this time.

The increases that occurred throughout 2022 and 2023 have had a significant impact on the comparability of net interest income between 2023, 2022 and 2021.

Net interest margin on an FTE basis, a non-GAAP financial measure, 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, 2023, 2022 and 2021, the Company’s net interest margin on a tax-equivalent basis was 2.01, 2.76 and 3.05 percent, respectively.

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

Tax-equivalent net interest income decreased $23,340 in 2023 compared to 2022.

Rate and Volume Analysis

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Tax-equivalent interest income and fees on loans increased $35,616 for the year ended December 31, 2023, compared to 2022.

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 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.

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 improvement was primarily due to an increase in the average yield on loans of 90 basis points in 2023 compared to 2022.

Rising market interest rates have resulted in increasing rates on variable-rate loans and higher interest rates on loan renewals and new originations compared to existing portfolio rates.

Additionally, the average balance of loans increased $245,580 in 2023 compared to 2022.

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 yield on the loan portfolio is expected to increase in a rising rate environment as variable-rate loans reprice at higher rates and fixed rate loan renewals and new originations are priced at prevailing market rates, which exceed the average rate on existing fixed rate loans.

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

Tax-equivalent interest income on securities increased $743 for the year ended December 31, 2023, compared to 2022.

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 average balance of securities available for sale in 2023 was $85,137 lower than in 2022, primarily due to principal paydowns on securities, sales of securities, and the decline in fair value of available for sale securities during 2023 resulting from the increase in market interest rates during 2023.

The yield on available for sale securities increased by 39 basis points in 2023 compared to 2022.

Interest expense on deposits increased $44,167 for the year ended December 31, 2023, compared to 2022.

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 average balance of interest bearing deposits decreased $486 in 2023 compared to 2022.

The rates paid on deposits increased 196 basis points in 2023 compared to 2022.

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.

The increase in the cost of deposits was primarily due to increases in deposit rates in response to increases in the target federal funds rate and market interest rates, increased competition for deposit balances, and changes in deposit mix.

The Federal Reserve increased the target federal funds rate by a total of 425 basis points in 2022 and an additional 100 basis points in 2023.

These increases have had an adverse impact on the cost of deposits and have increased market competition.

Interest expense on borrowed funds increased $15,498 for the year ended December 31, 2023, compared to 2022.

The average balance of borrowed funds increased $293,759 in 2023 compared to 2022.

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.

The Company issued $60,000 of subordinated debt in June 2022.

Additionally, average balances of federal funds purchased and other short-term borrowings increased $131,901 in 2023 compared to 2022.

The average rate paid on federal funds purchased and other short-term borrowings increased 209 basis points in 2023 compared to 2022.

This increase in average rates paid on federal funds purchased and other short-term borrowings was driven by the increases in the target federal funds rate by the Federal Reserve.

The average balances of FHLB advances increased by $136,781 in 2023 compared to 2022.

This increase in average balances was primarily due to increases in our rolling funding program whereby rolling one-month FHLB advances are hedged with long-term interest rate swap agreements to provide long-term fixed cost wholesale funding.

The average rate paid on FHLB advances increased 83 basis points in 2023 compared to 2022.

SECURITIES PORTFOLIO

The balance of securities available for sale decreased by $40,196 as of December 31, 2023, compared to December 31, 2022.

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)

This decrease was primarily due to principal paydowns on securities and a sale of $11,285 of securities in the fourth quarter of 2023.

The proceeds from this sale were reinvested into the loan portfolio.

The Company expects the securities portfolio as a percentage of total assets to decrease over time as the proceeds from paydowns and maturities may be used for loan growth or repayment of borrowed funds.

As of December 31, 2023, approximately 61 percent of the available for sale securities portfolio consisted of government agency guaranteed collateralized mortgage obligations and mortgage-backed securities.

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.

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

The securities issued by state and political subdivisions are diversified among municipalities in 26 states.

2 unchanged sentences

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

(dollars in thousands, except per share amounts)

year After one year

12 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, 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, or to manage interest rate risk.

Total gross unrealized losses in the securities available for sale portfolio were $121,806 at December 31, 2023 compared to $138,736 at December 31, 2022.

As of December 31, 2023, the Company did not have the intent to sell, nor was it more likely than not that we would be required to sell any of the securities in an unrealized loss position prior to recovery.

As of December 31, 2023, the Company also determined that no individual securities in an unrealized loss position represented credit losses that would require an allowance for credit losses.

Management concluded that the unrealized losses in the portfolio are the result of increases in risk-free market interest rates since the securities were purchased and are not an indication of declining credit quality.

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

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.

2 unchanged sentences

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

As of December 31, 2023, total loans were approximately 98.4 percent of total deposits and 76.5 percent of total assets.

Loans outstanding at the end of 2023 increased 6.7 percent compared to the end of 2022.

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.

Changes in the loan portfolio during 2023 included increases of $82,570 in commercial real estate loans, $50,463 in construction, land and land development loans and $31,477 in 1-4 family residential first mortgage loans.

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

3 unchanged sentences

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.

The loan policy is reviewed at least annually and is updated as considered necessary.

The policy establishes lending limits, review criteria and other guidelines for loan administration and the allowance for loan losses, among other things.

The policy establishes lending limits, review criteria and other guidelines for loan administration and the allowance for credit losses, among other things.

Loans are approved in accordance with the applicable guidelines and underwriting policies.

2 unchanged sentences

As of December 31, 2023 and 2022, 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 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.

Nonperforming loans declined slightly to $296 at December 31, 2023, compared to $322 at December 31, 2022.

The decrease was due to scheduled payments made on the one loan that was included in nonaccrual loans in both periods.

(dollars in thousands, except per share amounts)

The watch classification of loans decreased to $144 as of December 31, 2023 from $54,231 as of December 31, 2022.

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.

Commercial real estate loans of approximately $52,600 were upgraded and removed from the watch list during the second quarter of 2023.

These loans related to one borrowing relationship that had been downgraded during the COVID-19 pandemic.

The upgrade resulted from the borrowers’ ability to return to normal operations and financial performance for an extended period of time.

Loans Secured by Real Estate

1 unchanged sentence

Management places a strong emphasis on monitoring the composition of the Company’s commercial real estate loan portfolio.

The Company has an established lending policy which includes a number of underwriting factors to be considered in making a commercial real estate loan, including, but not limited to, location, loan-to-value ratio (LTV), cash flow, collateral and the credit history of the borrower.

The Company has an established lending policy which includes a number of underwriting factors to be considered in making a commercial real estate loan, including, but not limited to, location, loan-to-value ratio (LTV), cash flow and debt service coverage, collateral and the credit history and expertise of the borrower.

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

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

The Bank’s Executive Loan Committee (ELC), which is made up of the Chief Executive Officer, Bank President, Chief Risk Officer, Minnesota Group President, Chief Credit Officer and Credit Department Manager, approves all commercial loan relationships in excess of $500 in total credit exposure and annually reviews all commercial loan relationships of $1,000 and greater.

Credit approval authorities for individual officers are reviewed, at least annually, by the ELC and approved by the Board of Directors.

Executive management regularly reviews available market data.

Commercial real estate portfolio monitoring practices include quarterly stress testing and quarterly trend analysis of underwriting exceptions, average loan-to-value and average debt service coverage for significant real estate segments.

The Company maintains an annual independent loan review program.

The Company engages a third party to evaluate credit quality, assigned risk ratings, underwriting standards and collateral documentation.

The review covers a significant portion of the loan portfolio and is carried out on a semi-annual basis.

Findings are reported to the ELC and the Board of Directors.

The Company also maintains an internal loan audit department that performs certain pre- and post-closing procedural and documentation reviews.

The internal findings are reported quarterly to the ELC.

(dollars in thousands, except per share amounts)

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As of December 31

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

Balance % of Non-owner Occupied CRE Weighted Average LTV Balance % of Non-owner Occupied CRE Weighted Average LTV

Non-owner occupied:

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$ 1,698,529 $ 698,683 $ 36,440

SUMMARY OF THE ALLOWANCE FOR LOAN LOSSES

The provision for loan losses represents charges made to earnings to maintain an adequate allowance for loan losses.

The adequacy of the allowance for loan losses is evaluated quarterly by management and reviewed by the Board of Directors.

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

SUMMARY OF THE ALLOWANCE FOR CREDIT LOSSES

The Company adopted FASB Accounting Standards Update (ASU) No.

2016-13 effective January 1, 2023 using the modified retrospective method for financial assets measured at amortized cost and off-balance sheet credit exposures.

See Notes 1 and 4 to the Financial Statements included in Item 8 of this Form 10-K for additional information.

The credit loss expense recorded on the income statement includes charges made to earnings to maintain an adequate allowance for credit losses.

The adequacy of the allowance for credit losses is evaluated quarterly by management and reviewed by the Board.

The allowance for credit losses is management’s estimate of expected lifetime losses 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:

Factors considered by management in establishing an appropriate allowance include:

the borrower’s financial condition;

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Any one of the following conditions may result in the review of a specific loan:

concern about whether the customer’s cash flow or net worth is sufficient to repay the loan;

concern about whether the borrower’s cash flow or net worth is sufficient to repay the loan;

delinquency status;

3 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, financial service and health care industries, and state and county governments.

The local economies are composed primarily of major financial services companies, healthcare providers, educational institutions, technology and agribusiness companies, and state and local 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.

3 unchanged sentences

When the general economy turns downward, commercial borrowers may not be able to repay their loans, and the value of their assets, which are usually pledged as collateral, may decrease rapidly and significantly.

While management uses available information to recognize losses on loans, further reduction in the carrying amounts of loans may be necessary based on changes in circumstances, changes in the overall economy in the markets we currently serve, or later acquired information.

While management uses available information to recognize credit losses, further reduction in the carrying amounts of loans may be necessary based on changes in circumstances, changes in the overall economy in the markets we currently serve, or later acquired information.

Identifiable sectors within the general economy are subject to additional volatility, which at any time may have a substantial impact on the loan portfolio.

In addition, regulatory agencies, as integral parts of their examination processes, periodically review the credit quality of the loan portfolio and the level of the allowance for loan losses.

Such agencies may require West Bank to recognize additional losses based on such agencies’ review of information available to them at the time of their examinations.

In addition, regulatory agencies, as integral parts of their examination processes, periodically review the credit quality of the loan portfolio and the level of the allowance for credit losses.

Such agencies may require West Bank to recognize additional charge-offs or provisions for credit losses based on such agencies’ review of information available to them at the time of their examinations.

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

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

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

2023 2022 2021

8 unchanged sentences

Total 0.00 % (0.02) % 0.02 %

Ratio of allowance for loan losses to total

Ratio of allowance for credit losses to total

loans at the end of period 0.97 % 0.93 % 1.15 %

Ratio of allowance for loan losses to total

loans at the end of period, excluding PPP

0.93 % 1.17 % 1.40 %

Ratio of nonaccrual loans to total loans at

end of period 0.01 % 0.01 % 0.36 %

Ratio of allowance for loan losses to total

Ratio of allowance for credit losses to total

nonaccrual loans at the end of period 9,575.00 % 7,910.87 % 316.99 %

4 unchanged sentences

(dollars in thousands, except per share amounts)

Breakdown of Allowance for Loan Losses by Category

The following table sets forth information concerning the Company’s allocation of the allowance for loan losses by loan segment as of the dates indicated.

The following table sets forth information concerning the Company’s allocation of the allowance for credit losses by loan segment as of the dates indicated.

As of December 31

13 unchanged sentences

* Percent of loans in each category to total loans.

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

the historical net loss experience by category, which can vary over time;

specific reserves for loans considered impaired;

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

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.

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 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.

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)

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.

As of December 31, 2023 there was no allowance for credit losses related to loans individually evaluated for credit losses.

As of December 31, 2022, there were no specific reserves related to loans individually evaluated for impairment.

The portion of the allowance for credit losses related to loans collectively evaluated for credit losses increased to $28,342, or 0.97 percent of outstanding loans as of December 31, 2023, compared to $25,473, or 0.93 percent of outstanding loans as of December 31, 2022.

The increase was primarily due to the $2,458 adjustment to the allowance on January 1, 2023 related to the adoption of ASU No.

2016-13, also known as the current expected credit loss, or CECL, standard.

Additionally, there was a credit loss expense of $500 related to loans for the year ended December 31, 2023, which was due primarily to loan growth.

The provision for loan losses recorded in 2022 was negative $2,500.

This 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 the sustained performance of loans after the expiration of COVID-19 modifications and continued improvement in classified loans.

Management believed the allowance for credit losses as of December 31, 2023 was adequate to absorb the expected losses in the portfolio as of that date.

Deposits totaled $2,973,779 as of December 31, 2023, which was an increase of 3.2 percent compared to December 31, 2022.

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

In particular, significant competition for deposits driven by high interest rate alternatives for depositors is currently impacting deposit fluctuations and increasing our cost of deposits.

At December 31, 2023, the Company had $305,411 in brokered deposits, compared to $272,691 at December 31, 2022.

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

Brokered deposits included fixed-rate time deposits with maturities through December 2025 and variable-rate deposits with terms through February 2025.

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

(dollars in thousands, except per share amounts)

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.

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Interest-bearing demand:

Reward Me checking 54,641 0.12 52,960 0.08 47,435 0.15

Insured cash sweep 137,027 2.48 139,807 0.80 125,402 0.34

6 unchanged sentences

$ 2,836,072 $ 2,958,322 $ 2,809,039

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.

Management believes interest rates on deposits could continue to increase in 2024 in response to ongoing competition for deposit balances and high short-term market rates.

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.

Approximately 93 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 the core time deposits will be renewed.

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

The following table shows the amounts and remaining maturities of time deposits with balances of $100 or more as of December 31, 2023.

3 months or less $ 231,110

2 unchanged sentences

Over 12 months 28,283

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 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.

West Bank participates in the IntraFi ® ICS and CDARS reciprocal deposit network, which enables depositors to receive FDIC insurance coverage on 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.

1 unchanged sentence

Included in total deposits as of December 31, 2023 and 2022, were $165,858 and $155,888, respectively, of reciprocal interest-bearing checking and $254,504 and $186,160, respectively, of reciprocal money market deposits.

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

Total estimated uninsured deposits were $1,435,406, $1,412,955 and $1,312,933 as of December 31, 2023, 2022 and 2021, respectively.

The uninsured deposit amounts are estimated based on the methodologies and assumptions used for regulatory reporting requirements and include brokered funds and collateralized public unit deposits.

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

3 months or less $ 148,585

2 unchanged sentences

Over 12 months 24,538

Total uninsured deposits were $1,412,955, $1,312,933 and $1,297,848 as of December 31, 2022, 2021 and 2020, respectively.

(dollars in thousands, except per share amounts)

BORROWED FUNDS

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.

These interest rate swaps have maturity dates ranging from September 2023 through June 2029 and fixed rates ranging from 1.63 percent to 3.64 percent.

Federal funds purchased and other short-term borrowings decreased from $200,000 as of December 31, 2022 to $150,270 as of December 31, 2023.

The Company had $315,000 of FHLB advances outstanding at December 31, 2023, compared to $155,000 at December 31, 2022.

During 2023, the Company increased its rolling funding program by entering into seven long-term interest rate swap agreements hedging interest payments of one-month rolling funding with a total notional amount of $140,000.

As of December 31, 2023, the Company’s rolling funding program, funded with short-term FHLB advances and hedged with long-term interest rate swaps, totaled $295,000.

These interest rate swaps have maturity dates ranging from August 2024 through June 2029 and fixed rates ranging from 1.69 percent to 4.65 percent.

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

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

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

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

1 unchanged sentence

Interest is payable quarterly.

Required quarterly principal payments begin in May 2023.

Required quarterly principal payments began 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, which was 7.50 percent as of December 31, 2023.

(dollars in thousands, except per share amounts)

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

During 2023, the Company entered into an interest rate swap contract that effectively converts $20,000 of this borrowing to a fixed rate of 6.40 percent through its maturity date.

As of December 31, 2023, this borrowing had a balance of $36,250.

In June 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.

4 unchanged sentences

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.

The interest rate is a variable rate based on the 3-month term SOFR plus 0.26161 percent tenor spread adjustment plus 3.05 percent.

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

8 unchanged sentences

Commitments to lend are subject to borrowers’ continuing compliance with existing credit agreements.

Management of the Company does not expect any significant losses as a result of these commitments.

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

(dollars in thousands, except per share amounts)

As of December 31, 2023, the allowance for credit losses related to off-balance sheet unfunded commitments was $2,544.

Upon the adoption of ASU No.

2016-13, the Company recorded an allowance for credit losses associated with unfunded commitments of $2,344.

In 2023, the Company recorded a credit loss expense of $200 for unfunded commitments.

The allowance for credit losses for off-balance-sheet credit exposures is presented in the “Accrued expenses and other liabilities” line of the Consolidated Balance Sheets.

LIQUIDITY AND CAPITAL RESOURCES

1 unchanged sentence

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, other wholesale funding and funds provided by operations.

Other sources include loan principal repayments, proceeds from the maturity and sale of securities, principal payments on amortizing securities, federal funds purchased, advances from the FHLB, other wholesale funding 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 securities maturities and payments, expected deposit flows and the objectives set by West Bank’s asset-liability management policy.

The Company had liquid assets (cash and cash equivalents) of $65,357 as of December 31, 2023 compared with $26,539 as of December 31, 2022.

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.

West Bank had no amounts outstanding at the Federal Reserve discount window or under the unsecured federal funds lines as of December 31, 2022.

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

The Company utilizes brokered deposits and other wholesale funding to supplement core deposit fluctuations and loan growth.

Brokered deposits are obtained through various programs administered by IntraFi® and through other third party brokers.

At December 31, 2023, the Company had $305,411 in brokered deposits, which included fixed-rate time deposits with maturities through December 2025 and variable-rate deposits with terms through February 2025.

As of December 31, 2023, West Bank had additional borrowing capacity available from the FHLB of approximately $528,000, as well as approximately $2,282 through the Federal Reserve discount window, $35,000 through unsecured federal funds lines of credit with correspondent banks and $89,000 through the BTFP.

The BTFP was established by the Federal Reserve in March 2023 to provide an additional source of liquidity against high-quality securities.

As of December 31, 2023, West Bank had pledged approximately $89,000 in eligible securities to facilitate participation in the program.

No funds were borrowed from the Federal Reserve discount window or BTFP as of December 31, 2023.

The Federal Reserve has announced that it is ending the BTFP and will cease making new loans under this program on March 11, 2024.

Net cash from continuing operating activities contributed $25,249, $59,439 and $57,878 to liquidity for the years ended December 31, 2023, 2022 and 2021, respectively.

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

(dollars in thousands, except per share amounts)

Management believed that the combination of high levels of potentially liquid assets, unencumbered securities, cash flows from operations and additional borrowing capacity provided the Company with sufficient liquidity as of December 31, 2023.

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.

West Bank will pay the contractor a contract price consisting of the cost of work plus a fee, with anticipated construction completed in 2024.

As of December 31, 2023, the Company had a remaining commitment of $13,019 under this contract.

The Company’s total stockholders’ equity increased to $225,043 as of December 31, 2023 from $211,112 as of December 31, 2022.

The increase was primarily due to net income less dividends paid and the decrease in accumulated other comprehensive loss.

At December 31, 2023, tangible common equity as a percent of tangible assets was 5.88 percent compared to 5.84 percent as of December 31, 2022.

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.

The decrease in accumulated other comprehensive loss was driven by the decrease in the net unrealized losses on available for sale securities between December 31, 2022 and December 31, 2023.

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

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Also, as of December 31, 2023, the ratios for the Company and West Bank were sufficient to meet the capital conservation buffer.

(dollars in thousands, except per share amounts)

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