Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollars in thousands, except per share amounts)
INTRODUCTION
The Company’s financial highlights and key performance measures are presented in the table below.
As of and for the Years Ended December 31,
2023 2022 2021
Performance Ratios
Return on average assets 0.66 % 1.32 % 1.52 %
Return on average equity 11.42 % 20.71 % 20.33 %
Efficiency ratio (1)(2)
60.73 % 43.70 % 40.91 %
Nonperforming assets/total assets (1)
0.01 % 0.01 % 0.26 %
Net interest margin (2)
2.01 % 2.76 % 3.05 %
Dividends and Per Share Data
Basic earnings per common share $ 1.44 $ 2.79 $ 3.00
Diluted earnings per common share 1.44 2.76 2.95
Cash dividends per common share 1.00 1.00 0.94
Dividend payout ratio 69.21 % 35.82 % 31.33 %
Dividend yield 4.72 % 3.91 % 3.03 %
Operating Results and Year-End Balances
Net income $ 24,137 $ 46,399 $ 49,607
Total assets 3,825,758 3,613,218 3,500,201
Securities available for sale 623,919 664,115 758,822
Loans 2,927,535 2,742,836 2,456,196
Deposits 2,973,779 2,880,408 3,016,005
Borrowings 592,637 485,855 199,866
Stockholders’ equity 225,043 211,112 260,328
Average equity to average assets ratio 5.77 % 6.39 % 7.46 %
Definition of ratios:
• Return on average assets - net income divided by average assets.
• Return on average equity - net income divided by average equity.
• Efficiency ratio - noninterest expense (excluding other real estate owned expense and write-down of premises) divided by noninterest income (excluding net securities gains/losses and gains/losses on disposition of premises and equipment) plus tax-equivalent net interest income.
• 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.
• Dividend payout ratio - dividends paid to common stockholders divided by net income.
• Dividend yield - dividends per share paid to common stockholders divided by closing year-end stock price.
• Average equity to average assets ratio - average equity divided by average assets.
(1) A lower ratio is 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.
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(dollars in thousands, except per share amounts)
The Company’s 2023 net income was $24,137, compared to $46,399 in 2022. Basic and diluted earnings per common share for 2023 were $1.44 and $1.44, respectively, compared to $2.79 and $2.76, respectively, in 2022. During 2023, we paid our common stockholders $16,704 ($1.00 per common share) in dividends compared to $16,619 ($1.00 per common share) in 2022. The dividend declared and paid in the first quarter of 2024 was $0.25 per common share.
Total assets were $3,825,758 at December 31, 2023, compared to $3,613,218 at December 31, 2022, a 5.9 percent increase. Our loan portfolio grew to $2,927,535 as of December 31, 2023, from $2,742,836 as of December 31, 2022. 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 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. 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 nonperforming assets to total assets. We believe these measures encompass the factors that define the performance of a community bank. Company and peer results for the key financial performance measures are summarized below.
West Bancorporation, Inc. Peer Group Range
As of and for the year ended December 31, 2023 As of and for the year ended December 31, 2023
Return on average equity 11.42% 1.85%-17.24%
Efficiency ratio (1)
60.73% 45.85%-70.02%
Nonperforming assets to total assets 0.01% 0.00%-0.73%
(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, 2023 are compared to the results for the year ended December 31, 2022 and the consolidated financial condition of the Company as of December 31, 2023 is compared to December 31, 2022. Results of operations and financial condition for the year ended December 31, 2022 compared to the year ended December 31, 2021 can be found in Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company’s 2022 annual report on Form 10-K filed with the SEC on February 23, 2023.
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(dollars in thousands, except per share amounts)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
This report is based on the Company’s audited consolidated financial statements that have been prepared in accordance with GAAP established by the FASB. The preparation of the Company’s financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, income and expenses. These estimates are based upon historical experience and on various other assumptions that management believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The Company’s significant accounting policies are described in the Notes to Consolidated Financial Statements. Based on its consideration of accounting policies that involve the most complex and subjective estimates and judgments, management has identified its most critical accounting policies to be those related to the fair value of financial instruments and the allowance for credit losses.
The fair value of a financial instrument is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts business. A framework has been established for measuring the fair value of financial instruments that considers the attributes specific to particular assets or liabilities and includes a three-level hierarchy for determining fair value based on the transparency of inputs to each valuation as of the measurement date. The Company estimates the fair value of financial instruments using a variety of valuation methods. When financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value and are classified as Level 1. When financial instruments, such as securities and derivatives, are not actively traded, the Company determines fair value based on various sources and may apply matrix pricing with observable prices for similar instruments where a price for the identical instrument is not observable. The fair values of these financial instruments, which are classified as Level 2, are determined by pricing models that consider observable market data such as interest rate volatilities, yield curves, credit spreads, prices from external market data providers and/or nonbinding broker-dealer quotations. When observable inputs do not exist, the Company estimates fair value based on available market data, and these values are classified as Level 3. Imprecision in estimating fair values can impact the carrying value of assets and the amount of revenue or loss recorded.
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.
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(dollars in thousands, except per share amounts)
NON-GAAP FINANCIAL MEASURES
This report contains references to financial measures that are not defined in GAAP. Such non-GAAP financial measures include the Company’s presentation of net interest income and net interest margin on a fully taxable equivalent (FTE) basis, 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. These measures are considered standard measures of comparison within the banking industry. Additionally, management believes providing measures on an FTE basis enhances the comparability of income arising from taxable and nontaxable sources. Limitations associated with non-GAAP financial measures include the risks that persons might disagree as to the appropriateness of items included in these measures and that different companies might calculate these measures differently. These non-GAAP disclosures should not be considered an alternative to the Company’s GAAP results. The following table reconciles the non-GAAP financial measures of net interest income and net interest margin on a fully taxable equivalent basis 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
2023 2022 2021
Reconciliation of net interest income and net interest margin on an FTE basis to GAAP:
Net interest income (GAAP) $ 69,031 $ 91,740 $ 95,059
Tax-equivalent adjustment (1)
491 1,122 1,202
Net interest income on an FTE basis (non-GAAP)
69,522 92,862 96,261
Average interest-earning assets 3,465,964 3,361,091 3,152,138
Net interest margin on an FTE basis (non-GAAP) 2.01 % 2.76 % 3.05 %
Reconciliation of efficiency ratio on an FTE basis to GAAP:
Net interest income on an FTE basis (non-GAAP) $ 69,522 $ 92,862 $ 96,261
Noninterest income 10,066 10,208 9,729
Adjustment for realized securities (gains) losses, net 431 — (51)
Adjustment for losses on disposal of premises and
equipment, net
29 29 84
Adjusted income 80,048 103,099 106,023
Noninterest expense 48,611 45,051 43,380
Efficiency ratio on an adjusted and FTE basis (non-GAAP) (2)
60.73 % 43.70 % 40.91 %
(1) Computed on a tax-equivalent basis using a federal income tax rate of 21 percent, adjusted to reflect the effect of the nondeductible interest expense associated with owning tax-exempt securities and loans. Management believes the presentation of this non-GAAP measure provides supplemental useful information for proper understanding of the financial results, as it enhances the comparability of income arising from taxable and nontaxable sources.
(2) The efficiency ratio expresses noninterest expense as a percent of fully taxable equivalent net interest income and noninterest income, excluding specific noninterest income and expenses. Management believes the presentation of this non-GAAP measure provides supplemental useful information for proper understanding of the Company’s financial performance. It is a standard measure of comparison within the banking industry. A lower ratio is more desirable.
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(dollars in thousands, except per share amounts)
RESULTS OF OPERATIONS - 2023 COMPARED TO 2022
OVERVIEW
Net income for the year ended December 31, 2023 was $24,137, compared to $46,399 for the year ended December 31, 2022. 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 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 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 $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. The average yield on earning assets increased by 94 basis points, while the average rate paid on interest-bearing liabilities increased by 197 basis points. For additional analysis of net interest income, see the section captioned “Distribution of Assets, Liabilities and Stockholders’ Equity; Interest Rates; and Interest Differential” in this Item of this Form 10-K.
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. 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. 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. 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. 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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(dollars in thousands, except per share amounts)
Noninterest Income
The following table shows the variance from the prior year in the noninterest income categories shown in the Consolidated Statements of Income.
Years ended December 31
Noninterest income: 2023 2022 Change Change %
Service charges on deposit accounts $ 1,859 $ 2,194 $ (335) (15.3) %
Debit card usage fees 1,980 1,969 11 0.6 %
Trust services 3,068 2,709 359 13.3 %
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 losses, net (431) — (431) N/A
Other income 1,424 1,537 (113) (7.4) %
Total noninterest income $ 10,066 $ 10,208 $ (142) (1.4) %
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
The following table shows the variance from the prior year in the noninterest expense categories shown in the Consolidated Statements of Income. In addition, accounts within the “Other expenses” category that represent a significant portion of the total or a significant variance are shown.
Years ended December 31
Noninterest expense: 2023 2022 Change Change %
Salaries and employee benefits $ 27,060 $ 25,838 $ 1,222 4.7 %
Occupancy and equipment 5,507 4,913 594 12.1 %
Data processing 2,790 2,597 193 7.4 %
Technology and software 2,341 2,137 204 9.5 %
FDIC insurance 1,750 996 754 75.7 %
Professional fees 1,026 874 152 17.4 %
Director fees 892 814 78 9.6 %
Other expenses:
Business development 1,263 1,147 116 10.1 %
Insurance expense 793 717 76 10.6 %
Trust 622 539 83 15.4 %
Consulting fees 257 339 (82) (24.2) %
Charitable contributions 180 — 180 N/A
Marketing 163 246 (83) (33.7) %
Low income housing projects amortization 589 540 49 9.1 %
New markets tax credit project amortization and management fees 919 919 — — %
All other 2,459 2,435 24 1.0 %
Total other 7,245 6,882 363 5.3 %
Total noninterest expense $ 48,611 $ 45,051 $ 3,560 7.9 %
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(dollars in thousands, except per share amounts)
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.
Income Taxes
The Company records a provision for income tax expense currently payable, along with a provision for those taxes payable or refundable in the future (deferred taxes). Deferred taxes arise from differences in the timing of certain items for financial statement reporting compared to income tax reporting and are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Federal income tax expense for 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 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, 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. The Company continues to maintain a valuation allowance against the tax effect of state net operating losses carryforwards as management believes it is likely that such carryforwards will expire without being utilized.
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(dollars in thousands, except per share amounts)
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS’ EQUITY; INTEREST RATES; AND INTEREST DIFFERENTIAL
Average Balances and an Analysis of Average Rates Earned and Paid
The following table shows average balances and interest income or interest expense, with the resulting average yield or rate by category of average interest-earning assets or interest-bearing liabilities for the years indicated. Interest income and the resulting net interest income are shown on a fully taxable basis. Interest expense includes the effect of interest rate swaps, if applicable.
2023 2022 2021
Average
Balance Revenue/
Expense Yield/
Rate Average
Balance Revenue/
Expense Yield/
Rate Average
Balance Revenue/
Expense Yield/
Rate
Assets
Interest-earning assets:
Loans: (1) (2)
Commercial $ 520,116 $ 32,067 6.17 % $ 487,151 $ 22,742 4.67 % $ 525,228 $ 23,365 4.45 %
Real estate (3)
2,270,662 110,431 4.86 % 2,061,777 84,523 4.10 % 1,796,118 72,579 4.04 %
Consumer and other 9,478 665 7.02 % 5,748 282 4.91 % 4,193 182 4.34 %
Total loans 2,800,256 143,163 5.11 % 2,554,676 107,547 4.21 % 2,325,539 96,126 4.13 %
Securities:
Taxable 516,118 13,696 2.65 % 592,186 12,524 2.11 % 450,910 8,542 1.89 %
Tax-exempt (3)
146,734 3,768 2.57 % 155,803 4,197 2.69 % 141,816 3,522 2.48 %
Total securities 662,852 17,464 2.63 % 747,989 16,721 2.24 % 592,726 12,064 2.04 %
Interest-bearing deposits 2,856 169 5.94 % 58,426 203 0.35 % 233,873 292 0.12 %
Total interest-earning assets (3)
3,465,964 160,796 4.64 % 3,361,091 124,471 3.70 % 3,152,138 108,482 3.44 %
Noninterest-earning assets:
Cash and due from banks 23,139 23,842 41,141
Premises and equipment, net 67,281 43,299 31,291
Other, less allowance for
credit losses 106,194 80,553 46,612
Total noninterest-earning assets 196,614 147,694 119,044
Total assets $ 3,662,578 $ 3,508,785 $ 3,271,182
Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Deposits:
Interest-bearing demand $ 467,174 6,984 1.49 % $ 505,889 2,458 0.49 % $ 477,988 769 0.16 %
Savings and money market 1,357,675 43,569 3.21 % 1,452,034 15,814 1.09 % 1,413,878 5,641 0.40 %
Time 424,320 16,243 3.83 % 291,732 4,357 1.49 % 208,164 1,538 0.74 %
Total deposits 2,249,169 66,796 2.97 % 2,249,655 22,629 1.01 % 2,100,030 7,948 0.38 %
Borrowed funds:
Federal funds purchased and
other short-term borrowings 194,802 9,532 4.89 % 62,901 1,764 2.80 % 4,620 5 0.11 %
Subordinated notes, net 79,501 4,442 5.59 % 52,873 2,867 5.42 % 20,458 1,008 4.93 %
Federal Home Loan Bank
advances 265,644 7,694 2.90 % 128,863 2,669 2.07 % 140,274 2,944 2.10 %
Long-term debt 49,938 2,810 5.63 % 51,489 1,680 3.26 % 20,995 316 1.51 %
Total borrowed funds 589,885 24,478 4.15 % 296,126 8,980 3.03 % 186,347 4,273 2.29 %
Total interest-bearing liabilities 2,839,054 91,274 3.21 % 2,545,781 31,609 1.24 % 2,286,377 12,221 0.53 %
Noninterest-bearing liabilities:
Demand deposits 586,903 708,667 709,009
Other liabilities 25,218 30,284 31,783
Stockholders’ equity 211,403 224,053 244,013
Total liabilities and
stockholders’ equity $ 3,662,578 $ 3,508,785 $ 3,271,182
Net interest income (4) /net interest spread (3)
$ 69,522 1.43 % $ 92,862 2.46 % $ 96,261 2.91 %
Net interest margin (3) (4)
2.01 % 2.76 % 3.05 %
(1) Average loan balances include nonaccrual loans. Interest income recognized on nonaccrual loans has been included.
(2) Interest income on loans includes amortization of loan fees and costs and prepayment penalties collected, which are not material.
(3) Tax-exempt income has been adjusted to a tax-equivalent basis using a federal income tax rate of 21 percent and is adjusted to reflect the effect of the nondeductible interest expense associated with owning tax-exempt securities and loans.
(4) Net interest income (FTE) and net interest margin (FTE) are non-GAAP financial measures. For further information, refer to the section “Non-GAAP Financial Measures” of this Item.
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(dollars in thousands, except per share amounts)
Net Interest Income
The Company’s largest component of net income is net interest income, which is the difference between interest earned on interest-earning assets, consisting primarily of loans and securities, and interest paid on interest-bearing liabilities, consisting of deposits and borrowings. Fluctuations in net interest income can result from the combination of changes in the balances of asset and liability categories and changes in interest rates. Interest rates earned and paid are also affected by general economic conditions, particularly changes in market interest rates, and by competitive factors, government policies and the actions of regulatory authorities. The Federal Reserve 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. Tax-equivalent net interest income decreased $23,340 in 2023 compared to 2022.
Rate and Volume Analysis
The rate and volume analysis shown below, on a tax-equivalent basis, is used to determine how much of the change in interest income or expense is the result of a change in volume or a change in interest yield or rate. The change in interest that is due to both volume and rate has been allocated to the change due to volume and the change due to rate in proportion to the absolute value of the change in each.
2023 Compared to 2022 2022 Compared to 2021
Volume Rate Total Volume Rate Total
Interest Income
Loans: (1)
Commercial $ 1,625 $ 7,700 $ 9,325 $ (1,744) $ 1,121 $ (623)
Real estate (2)
9,125 16,783 25,908 10,877 1,067 11,944
Consumer and other 230 153 383 74 26 100
Total loans (including fees) 10,980 24,636 35,616 9,207 2,214 11,421
Securities:
Taxable (1,746) 2,918 1,172 2,903 1,079 3,982
Tax-exempt (2)
(238) (191) (429) 363 312 675
Total securities (1,984) 2,727 743 3,266 1,391 4,657
Interest-bearing deposits (366) 332 (34) (335) 246 (89)
Total interest income (2)
8,630 27,695 36,325 12,138 3,851 15,989
Interest Expense
Deposits:
Interest-bearing demand (202) 4,728 4,526 47 1,642 1,689
Savings and money market (1,092) 28,847 27,755 156 10,017 10,173
Time 2,677 9,209 11,886 795 2,024 2,819
Total deposits 1,383 42,784 44,167 998 13,683 14,681
Borrowed funds:
Federal funds purchased and
other short-term borrowings 5,732 2,036 7,768 591 1,168 1,759
Subordinated debt, net 1,485 90 1,575 1,748 111 1,859
Federal Home Loan Bank advances 3,654 1,371 5,025 (237) (38) (275)
Long-term debt (52) 1,182 1,130 756 608 1,364
Total borrowed funds 10,819 4,679 15,498 2,858 1,849 4,707
Total interest expense 12,202 47,463 59,665 3,856 15,532 19,388
Net interest income (2) (3)
$ (3,572) $ (19,768) $ (23,340) $ 8,282 $ (11,681) $ (3,399)
(1) Average balances of nonaccrual loans were included for computational purposes.
(2) Tax-exempt income has been converted to a tax-equivalent basis using a federal income tax rate of 21 percent and is adjusted for the effect of the nondeductible interest expense associated with owning tax-exempt securities and loans.
(3) Net interest income (FTE) is a non-GAAP financial measure. For further information, refer to the section “Non-GAAP Financial Measures” of this Item.
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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 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 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 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 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 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 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. 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. We believe 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 Small Business Administration (SBA). The securities issued by state and political subdivisions are diversified among municipalities in 26 states.
The following table sets forth the weighted average yield by contractual maturity by security type as of December 31, 2023. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. The collateralized mortgage obligations and mortgage-backed securities have monthly paydowns that are not reflected in the table.
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Within one
year After one year
but within five
years After five years
but within ten
years After ten years Total
Securities available for sale:
State and political subdivisions (1)
— % — % 1.93 % 2.15 % 2.13 %
Collateralized mortgage obligations — — 2.38 1.56 1.56
Mortgage-backed securities — 1.45 1.61 1.65 1.63
Collateralized loan obligations — — 7.35 — 7.35
Corporate notes — — 3.26 — 3.26
— % 1.45 % 4.07 % 1.77 % 2.07 %
(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.
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.
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 areas. 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, 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 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. We believe that loan growth could slow down in 2024 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. The interest rates charged on loans vary with the degree of risk and the amount and terms of the loan. Competitive pressures, the creditworthiness of the borrower, market interest rates, the availability of funds, and government regulations further influence the rate charged on a loan.
The Company follows a loan policy approved by West Bank’s Board of Directors. The loan policy is reviewed at least annually and is updated as considered necessary. The policy establishes lending limits, review criteria and other guidelines for loan administration and the allowance for credit losses, among other things. 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.
As of December 31, 2023 and 2022, there were no loans that were past due 30 days or more.
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.
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The watch classification of loans decreased to $144 as of December 31, 2023 from $54,231 as of December 31, 2022. 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
The commercial real estate market continues to be a significant source of business for West Bank. Management places a strong emphasis on monitoring the composition of the Company’s commercial real estate loan portfolio. The Company has an established lending policy which includes a number of underwriting factors to be considered in making a commercial real estate loan, including, but not limited to, location, loan-to-value ratio (LTV), cash flow 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.
Although repayment risk exists on all loans, different factors influence repayment risk for each type of loan. The primary risks associated with commercial real estate loans are the quality of the borrower’s management and the health of the national and regional economies. Underwriting on commercial properties is primarily based on the economic viability of the project with heavy consideration given to the creditworthiness and experience of the borrower. Recognizing that debt is paid via cash flow, the projected cash flows of the project are critical in underwriting because these determine the ultimate value of the property and the ability to service debt. Therefore, in most commercial real estate projects, we generally require a minimum stabilized debt service coverage ratio of 1.20 to 1.35, depending on the real estate type. Exceptions to this policy can be made for certain borrowers that exhibit other credit quality strengths. Exceptions to the policy are monitored by management. Our strategy with respect to the management of these types of risks is to consistently follow prudent loan policies and underwriting practices.
The Company recognizes that a diversified loan portfolio contributes to reducing risk. The specific loan portfolio mix is subject to change based on loan demand, the business environment and various economic factors. The Company actively monitors concentrations within the loan portfolio to ensure appropriate diversification is maintained. In addition, management tracks the level of owner occupied commercial real estate loans versus non-owner occupied commercial real estate loans. Owner occupied commercial real estate loans are generally considered to have less risk than non-owner occupied commercial real estate loans.
In accordance with regulatory guidelines, the Company exercises heightened risk management practices when non-owner occupied commercial real estate lending exceeds 300 percent of total risk-based capital or construction, land development, and other land loans exceed 100 percent of total risk-based capital. Although the Company’s loan portfolio is heavily concentrated in real estate and its real estate portfolio levels exceed these regulatory guidelines, it has established risk management policies and procedures to regularly monitor the commercial real estate portfolio.
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.
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Commercial loans secured by real estate, including construction, land and land development, totaled $2,267,987, or 77.4 percent of total loans, at December 31, 2023. Non-owner occupied commercial real estate loan concentrations and the weighted average LTV by property type as of December 31, 2023 and 2022 are shown in the following table. LTV is determined using the maximum credit exposure of the loan compared to the most recent appraisal data on the property obtained in accordance with the Company’s lending policies.
As of December 31
2023 2022
Balance % of Non-owner Occupied CRE Weighted Average LTV Balance % of Non-owner Occupied CRE Weighted Average LTV
Non-owner occupied:
Multifamily $ 453,958 24.2 % 69 % $ 371,224 21.0 % 69 %
Medical & senior care facilities 225,314 12.0 63 249,127 14.1 65
Warehouse & trucking 167,030 8.9 63 169,462 9.6 67
Hotels 251,497 13.4 66 216,539 12.3 68
Mixed use 96,488 5.2 67 100,985 5.7 67
Offices 137,468 7.4 70 139,163 7.9 71
Land for development 110,874 5.9 64 114,428 6.5 62
All other 430,515 23.0 not available 405,261 22.9 not available
$ 1,873,144 100.0 % $ 1,766,189 100.0 %
The following table summarizes non-owner occupied commercial real estate loans by property type by risk rating as of December 31, 2023. Risk ratings are defined in Note 4 to the consolidated financial statements included in Item 8 of this Form 10-K.
As of December 31, 2023
Risk Rating
Total 1-3 4 5 6 7 8
Non-owner occupied:
Multifamily $ 453,958 $ 30,893 $ 339,817 $ 83,248 $ — $ — $ —
Medical & senior care facilities 225,314 70,896 123,680 30,738 — — —
Warehouse & trucking 167,030 55,593 95,616 15,821 — — —
Hotel 251,497 — 151,957 99,540 — — —
Mixed use 96,488 13,280 55,965 27,243 — — —
Offices 137,468 16,566 100,891 20,011 — — —
Land for development 110,874 2,025 105,746 3,103 — — —
All other 430,515 67,516 358,307 4,692 — — —
$ 1,873,144 $ 256,769 $ 1,331,979 $ 284,396 $ — $ — $ —
As of December 31, 2023, there were no non-owner occupied commercial real estate loans that were past due 30 days or more.
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Maturities of Loans
The contractual maturities of the Company’s loan portfolio are shown in the following tables. Actual repayments may differ from contractual maturities because individual borrowers may have the right to prepay loans with or without prepayment penalties.
As of December 31, 2023
Within one
year After one but
within five years After five but
within 15 years After 15 years Total
Commercial $ 166,171 $ 270,955 $ 94,468 $ — $ 531,594
Real estate:
Construction, land and land development 195,018 187,346 31,113 — 413,477
1-4 family residential first mortgages 7,309 98,127 1,252 — 106,688
Home equity 5,310 9,308 — — 14,618
Commercial 118,043 1,128,177 571,850 36,440 1,854,510
Consumer and other 6,314 4,616 — — 10,930
$ 498,165 $ 1,698,529 $ 698,683 $ 36,440 $ 2,931,817
After one but
within five years After five but
within 15 years After 15 years
Loan maturities after one year with:
Fixed rates
Commercial $ 185,004 $ 39,956 $ —
Real estate:
Construction, land and land development 110,911 11,964 —
1-4 family residential first mortgages 80,432 1,198 —
Home equity 3,365 — —
Commercial 1,095,562 342,677 11,803
Consumer and other 1,537 — —
Total fixed-rate loans 1,476,811 395,795 11,803
Variable rates
Commercial 85,951 54,512 —
Real estate:
Construction, land and land development 76,435 19,149 —
1-4 family residential first mortgages 17,695 54 —
Home equity 5,943 — —
Commercial 32,615 229,173 24,637
Consumer and other 3,079 — —
Total variable-rate loans 221,718 302,888 24,637
$ 1,698,529 $ 698,683 $ 36,440
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.
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Factors considered by management in establishing an appropriate allowance include: the borrower’s financial condition; the value and adequacy of loan collateral; the condition of the local economy and the borrower’s specific industry; the levels and trends of loans by segment; and a review of delinquent and classified loans. The quarterly evaluation focuses on factors such as specific loan reviews, changes in the components of the loan portfolio given economic conditions, and historical loss experience. Any one of the following conditions may result in the review of a specific loan: concern about whether the borrower’s cash flow or net worth is sufficient to repay the loan; delinquency status; criticism of the loan in a regulatory examination; the suspension of interest accrual; or other factors, including whether the loan has other special or unusual characteristics that suggest special monitoring is warranted. The Company’s concentration risks include geographic concentration in central and eastern Iowa and southern Minnesota. The local economies are composed primarily of 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. West Bank’s typical commercial borrower is a small- or medium-sized, privately owned business entity. Compared to residential mortgages or consumer loans, commercial loans typically have larger balances and repayment usually depends on the borrowers’ successful business operations. Commercial loans also generally are not fully repaid over the loan period and, thus, may require refinancing or a large payoff at maturity. When the general economy turns downward, commercial borrowers may not be able to repay their loans, and the value of their assets, which are usually pledged as collateral, may decrease rapidly and significantly.
While management uses available information to recognize 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 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 Credit Losses for the Years Ended December 31
2023 2022 2021
Ratio of net (charge-offs) recoveries during the
period to average loans outstanding by segment:
Commercial — % — % 0.02 %
Real estate:
Construction, land and land development — — —
1-4 family residential first mortgages — — —
Home equity — — —
Commercial — (0.02) % —
Consumer and other — — —
Total 0.00 % (0.02) % 0.02 %
Ratio of allowance for credit losses to total
loans at the end of period 0.97 % 0.93 % 1.15 %
Ratio of nonaccrual loans to total loans at
end of period 0.01 % 0.01 % 0.36 %
Ratio of allowance for credit losses to total
nonaccrual loans at the end of period 9,575.00 % 7,910.87 % 316.99 %
Ratio of net (charge-offs) recoveries to total
loans at end of period 0.00 % (0.01) % 0.02 %
(1) As presented, this is a non-GAAP financial measure. For further information, refer to the section “Non-GAAP Financial Measures” of this item.
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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
2023 2022 2021
Amount %* Amount %* Amount %*
Balance at end of
period applicable to:
Commercial $ 5,291 18.13 % $ 4,804 18.90 % $ 4,776 20.03 %
Real estate:
Construction, land
and land development 3,668 14.11 3,548 13.21 3,646 14.60
1-4 family residential
first mortgages 704 3.64 357 2.74 339 2.69
Home equity 142 0.50 101 0.38 91 0.34
Commercial 18,420 63.25 16,575 64.50 19,466 62.19
Consumer and other 117 0.37 88 0.27 46 0.15
$ 28,342 100.00 % $ 25,473 100.00 % $ 28,364 100.00 %
* Percent of loans in each category to total loans.
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
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 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.
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The following table sets forth the average balances for each major category of deposits and the weighted average interest rate paid for those deposits during the years indicated.
Years ended December 31
2023 2022 2021
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
Noninterest-bearing demand $ 586,903 — % $ 708,667 — % $ 709,009 — %
Interest-bearing demand:
Insured cash sweep 137,027 2.48 139,807 0.80 125,402 0.34
Other interest-bearing demand 330,147 1.09 366,082 0.37 352,586 0.10
Money market:
Insured cash sweep 249,574 3.58 323,970 1.01 308,136 0.36
Other money market 973,853 3.47 967,953 1.26 959,314 0.45
Savings 134,248 0.61 160,111 0.24 146,428 0.14
Time 424,320 3.83 291,732 1.49 208,164 0.74
$ 2,836,072 $ 2,958,322 $ 2,809,039
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.
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
Over 3 through 6 months 123,674
Over 6 through 12 months 91,151
Over 12 months 28,283
$ 474,218
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. Time deposits as of December 31, 2023 and 2022, included $152,160 and $122,915, respectively, of reciprocal deposits. 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.
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
Over 3 through 6 months 65,890
Over 6 through 12 months 27,038
Over 12 months 24,538
$ 266,051
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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 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.
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. The additional borrowing was used to make a capital injection into the Company’s subsidiary, West Bank. Interest is payable quarterly. 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. 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. 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 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.
West Bank’s new markets tax credit special purpose subsidiary has a credit agreement for $11,486. Interest is payable monthly over the term of the agreement with an interest rate of 1.00 percent. Monthly principal payments begin in January 2026, and the agreement matures in December 2048.
OFF-BALANCE SHEET ARRANGEMENTS
In the normal course of business, West Bank commits to extend credit in the form of loan commitments and standby letters of credit in order to meet the financing needs of its customers. These commitments expose West Bank to varying degrees of credit and market risks in excess of the amounts recognized in the consolidated balance sheets and are subject to the same credit policies as are the loans recorded on the balance sheets.
West Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. West Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Commitments to lend are subject to borrowers’ continuing compliance with existing credit agreements. 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.
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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
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 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, 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, 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, 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 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. As of December 31, 2023 and 2022, the Company had no intangible assets.
The Company and West Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Capital requirements are more fully discussed under the heading “Supervision and Regulation” included in Item 1 and in Note 16 to the consolidated financial statements included in Item 8 of this Form 10-K. As of December 31, 2023, 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, 2023, the ratios for the Company and West Bank were sufficient to meet the capital conservation buffer.
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EFFECTS OF NEW STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
A discussion of the effects of new financial accounting standards and developments as they relate to the Company is located in Note 1 to the consolidated financial statements included in Item 8 of this Form 10-K.