WEST BANCORPORATION, INC. INTRODUCTION
The Company's financial highlights and key performance measures are presented in the table below.
As of and
for the Years Ended
2022 2021 2020
Performance Ratios
Return on average assets 1.32 % 1.52 % 1.19 %
Return on average equity 20.71 % 20.33 % 15.49 %
Efficiency ratio (1)(2) 43.70 % 40.91 % 41.96 %
Nonperforming assets/total assets (1)(3) 0.01 % 0.26 % 0.51 %
Net interest margin(2) 2.76 % 3.05 % 3.20 %
Dividends and Per Share Data
Basic earnings per common share $ 2.79 $ 3.00 $ 1.99
Diluted earnings per common share 2.76 2.95 1.98
Cash dividends per common share 1.00 0.94 0.84
Dividend payout ratio 35.82 % 31.33 % 42.23 %
Dividend yield 3.91 % 3.03 % 4.35 %
Operating Results and Year-End Balances
Net income $ 46,399 $ 49,607 $ 32,712
Total assets 3,613,218 3,500,201 3,185,744
Securities available for sale 664,115 758,822 420,571
Loans 2,742,836 2,456,196 2,280,575
Deposits 2,880,408 3,016,005 2,700,994
Borrowings 485,855 199,866 222,385
Stockholders' equity 211,112 260,328 223,695
Average equity to average assets ratio 6.39 % 7.46 % 7.71 %
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 better.
(2) As presented, this is a non-GAAP financial measure. For further information,
refer to the section "Non-GAAP Financial Measures" of this item.
(3) As of December 31 .
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(dollars in thousands, except per share amounts)
The Company's 2022 net income was $46,399 , compared to $49,607 in 2021. Basic
and diluted earnings per common share for 2022 were $2.79 and $2.76 ,
respectively, compared to $3.00 and $2.95 , respectively, in 2021. During 2022,
we paid our common stockholders $16,619 ($1.00 per common share) in dividends
compared to $15,543 ($0.94 per common share) in 2021. The dividend declared and
paid in the first quarter of 2023 was $0.25 per common share.
Total assets were $3,613,218 at December 31, 2022 , compared to $3,500,201 at
December 31, 2021 , a 3.2 percent increase. Our loan portfolio grew to $2,742,836
as of December 31, 2022 , from $2,456,196 as of December 31, 2021 . Loans included
$1,117 of PPP loans as of December 31, 2022 , compared to $22,206 as of
December 31, 2021 . Deposits decreased to $2,880,408 as of December 31, 2022 ,
from $3,016,005 as of December 31, 2021 . The decline in deposit balances was
primarily attributable to customers using their own liquidity to fund business
transactions, instead of incurring debt, and customers seeking higher yielding
investment options.
The U.S economy continues to be affected by the Federal Reserve's accommodative
monetary policies initiated during the COVID-19 pandemic. Current economic
concerns include the impact of sharp increases in interest rates as the Federal
Reserve responds to inflationary trends, labor shortages and wage pressures, and
the uncertainty of additional increases in the Federal Reserve target federal
funds rate. In response to increasing inflation rates, the Federal Reserve
increased the target federal funds rate by a total of 425 basis points in 2022.
Additional rate increases are expected to occur in 2023. The extent of rate
increases in 2023 will be largely dependent on inflation and employment data and
how this data is interpreted by the Federal Reserve .
The Company compares three key performance metrics to those of an identified
peer group for evaluating its results. The peer group for 2022 consists of 19
Midwestern, publicly traded financial institutions including Bank First
Corporation, Civista Bancshares, Inc., CrossFirst Bankshares, Inc., Equity
Bancshares, Inc., Farmers National Banc Corp., Farmers & Merchants Bancorp.,
First Business Financial Services, Inc., First Financial Corp., First Mid
Bancshares, Inc., German American Bancorp, Inc., Hills Bancorporation, Isabella
Bank Corporation, LCNB Corp., Macatawa Bank Corporation, Mercantile Bank
Corporation, MidWestOne Financial Group, Inc., Nicolet Bankshares, Inc., Peoples
Bancorp, Inc., and Southern Missouri Bancorp, Inc. The Company is in the middle
of the group in terms of asset size. The Company's goal is to perform at or near
the top of this peer group relative to what we consider to be three key metrics:
return on average equity, efficiency ratio and 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 As of and for the year ended
December 31, 2022 December 31, 2022
Return on average equity 20.71% 9.97%-17.24%
Efficiency ratio(1) 43.70% 43.15%-63.62%
Nonperforming assets to total assets 0.01% 0.02%-1.08%
(1) The efficiency ratio is a non-GAAP financial measure. For further information, refer to the Non-GAAP Financial Measures section of this report.
The following discussion describes the consolidated operations and financial condition of the Company, including its subsidiaryWest Bank andWest Bank's special purpose subsidiaries. Results of operations for the year endedDecember 31, 2022 are compared to the results for the year endedDecember 31, 2021 and the consolidated financial condition of the Company as ofDecember 31, 2022 is compared toDecember 31, 2021 . Results of operations and financial condition for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 can be found in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company's 2021 annual report on Form 10-K filed with theSEC onFebruary 24, 2022 . 32 -------------------------------------------------------------------------------- Table of Contents (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 loan losses. The fair value of a financial instrument is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts business. A framework has been established for measuring the fair value of financial instruments that considers the attributes specific to particular assets or liabilities and includes a three-level hierarchy for determining fair value based on the transparency of inputs to each valuation as of the measurement date. The Company estimates the fair value of financial instruments using a variety of valuation methods. When financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value and are classified as Level 1. When financial instruments, such as securities and derivatives, are not actively traded, the Company determines fair value based on various sources and may apply matrix pricing with observable prices for similar instruments where a price for the identical instrument is not observable. The fair values of these financial instruments, which are classified as Level 2, are determined by pricing models that consider observable market data such as interest rate volatilities, yield curves, credit spreads, prices from external market data providers and/or nonbinding broker-dealer quotations. When observable inputs do not exist, the Company estimates fair value based on available market data, and these values are classified as Level 3. Imprecision in estimating fair values can impact the carrying value of assets and the amount of revenue or loss recorded. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that collectability of the principal is unlikely. The Company has policies and procedures for evaluating the overall credit quality of its loan portfolio, including timely identification of potential problem loans. On a quarterly basis, management reviews the appropriate level for the allowance for loan losses, incorporating a variety of risk considerations, both quantitative and qualitative. Quantitative factors include the Company's historical loss experience. Qualitative factors include the general economic environment in the Company's market areas and the expected trend of those economic conditions, delinquency and charge-off trends, collateral values, known information about individual loans and other factors. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions or the other factors considered. To the extent that actual results differ from forecasts and management's judgment, the allowance for loan losses may be greater or less than future charge-offs. The measurement of the allowance for loan losses atDecember 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 asWest 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 ofDecember 31, 2022 compared to$25,864 , or 1.05 percent of outstanding loans, as ofDecember 31, 2021 . As ofDecember 31, 2022 , there were no specific reserves related to loans individually evaluated for impairment compared to$2,500 as ofDecember 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 . 33 -------------------------------------------------------------------------------- Table of Contents (dollars in thousands, except per share amounts)
NON-GAAP FINANCIAL MEASURES
This report contains references to financial measures that are not defined in
GAAP. Such non-GAAP financial measures include the Company's presentation of net
interest income and net interest margin on a fully taxable equivalent (FTE)
basis, the presentation of the efficiency ratio on an adjusted and FTE basis,
excluding certain income and expenses, loans, net of PPP loans, and the
presentation of the allowance for loan losses ratio, excluding PPP loans.
Management believes these non-GAAP financial measures provide useful information
to both management and investors to analyze and evaluate the Company's financial
performance. These measures are considered standard measures of comparison
within the banking industry. Additionally, management believes providing
measures on an FTE basis enhances the comparability of income arising from
taxable and nontaxable sources. Limitations associated with non-GAAP financial
measures include the risks that persons might disagree as to the appropriateness
of items included in these measures and that different companies might calculate
these measures differently. These non-GAAP disclosures should not be considered
an alternative to the Company's GAAP results. The following table reconciles the
non-GAAP financial measures of net interest income and net interest margin on a
fully taxable equivalent basis, efficiency ratio on an adjusted and FTE basis,
loans, net of PPP loans and allowance for loan losses ratio, excluding PPP loans
to their most directly comparable measures under GAAP.
As and for the Years Ended
2022 2021 2020
Reconciliation of net interest income and net interest margin on an FTE basis to GAAP: Net interest income (GAAP)
$ 91,740 $ 95,059 $ 82,833
Tax-equivalent adjustment(1) 1,122 1,202 707
Net interest income on an FTE basis (non-GAAP) 92,862 96,261 83,540
Average interest-earning assets 3,361,091 3,152,138 2,614,342
Net interest margin on an FTE basis (non-GAAP) 2.76 % 3.05 % 3.20 %
Reconciliation of efficiency ratio on an FTE basis to GAAP: Net interest income on an FTE basis (non-GAAP)
$ 92,862 $ 96,261 $ 83,540 Noninterest income 10,208 9,729 9,602 Adjustment for realized securities gains, net - (51) (77)
Adjustment for losses on disposal of premises and
equipment, net 29 84 9 Adjusted income 103,099 106,023 93,074 Noninterest expense 45,051 43,380 39,054 Efficiency ratio on an adjusted and FTE basis (non-GAAP)(2) 43.70 % 40.91 % 41.96 %
Reconciliation of allowance for loan losses ratio, excluding PPP loans: Loans outstanding (GAAP)
$ 2,742,836 $ 2,456,196 $ 2,280,575 Less: 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. Management believes the
presentation of this non-GAAP measure provides supplemental useful information
for proper understanding of the financial results, as it enhances the
comparability of income arising from taxable and nontaxable sources.
(2) The efficiency ratio expresses noninterest expense as a percent of fully
taxable equivalent net interest income and noninterest income, excluding
specific noninterest income and expenses. Management believes the presentation
of this non-GAAP measure provides supplemental useful information for proper
understanding of the Company's financial performance. It is a standard measure
of comparison within the banking industry. A lower ratio is more desirable.
(3) Management believes that presenting the allowance for loan losses as a
percentage of total loans excluding PPP loans is useful in assessing the credit
quality of the Company's core portfolio.
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(dollars in thousands, except per share amounts)
RESULTS OF OPERATIONS - 2022 COMPARED TO 2021
OVERVIEW
Net income for the year endedDecember 31, 2022 was$46,399 , compared to$49,607 for the year endedDecember 31, 2021 . Basic and diluted earnings per common share for 2022 were$2.79 and$2.76 , respectively, and were$3.00 and$2.95 , respectively for 2021. The decrease in 2022 net income compared to 2021 was primarily due to a decrease in net interest income and an increase in noninterest expense, partially offset by a larger negative provision for loan losses and an increase in noninterest income. Net interest income declined$3,319 , or 3.5 percent, in 2022 compared to 2021. The decrease in net interest income was primarily due to an increase in interest expense on deposits and borrowings due to rising rates, partially offset by an increase in interest income on loans and securities. The Company recorded a negative provision for loan losses of$2,500 in 2022 compared to a negative provision for loan losses of$1,500 in 2021. The negative provision in 2022 was due to the reversal of a specific reserve on an impaired loan and the reduction of certain qualitative factors resulting from sustained performance of loans after the expiration of COVID-19 modifications and continued improvement in classified loans. The negative provision in 2021 was due to the reduction of certain qualitative factors resulting from improvement in economic conditions and lack of loan losses for the Company during the COVID-19 pandemic. Noninterest income increased$479 , or 4.9 percent, in 2022 compared to 2021, primarily due to an increase in loan swap fees. Noninterest expense grew$1,671 , or 3.9 percent, in 2022 compared to 2021, primarily due to an increase in salaries and employee benefits, partially offset by a decrease inFDIC insurance expense. The Company's ratio of nonperforming assets to total assets decreased to 0.01 percent as ofDecember 31, 2022 , compared to 0.26 percent as ofDecember 31, 2021 . This decrease was primarily due to the settlement of an impaired loan in 2022. For more discussion on loan quality, see the "Loan Portfolio" and "Summary of the Allowance for Loan Losses" sections in this Item of this Form 10-K.
Net Interest Income
Net interest income decreased to$91,740 for 2022 from$95,059 for 2021, as the impact of the growth in average balances of interest-bearing liabilities and increase in average rate paid on interest-bearing liabilities exceeded the effects of the growth in average balances of interest-earning assets and increase in average yields on interest-earning assets. The net interest margin for 2022 decreased 29 basis points to 2.76 percent compared to 3.05 percent for 2021. The average yield on earning assets increased by 26 basis points, while the average rate paid on interest-bearing liabilities increased by 71 basis points. For additional analysis of net interest income, see the section captioned "Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates; and Interest Differential" in this Item of this Form 10-K.
Provision for Loan Losses and Loan Quality
The allowance for loan losses, which totaled$25,473 as ofDecember 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 ofDecember 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 atDecember 31, 2022 totaled$322 , or 0.01 percent of total loans, a decrease from$8,948 , or 0.36 percent of total loans, atDecember 31, 2021 . The decrease in nonperforming loans atDecember 31, 2022 , compared toDecember 31, 2021 , was due to the settlement of an impaired loan in 2022 that previously had a$2,500 specific reserve. Nonperforming loans include loans on nonaccrual status, loans past due 90 days or more and still accruing interest, and loans that have been considered to be troubled debt restructured (TDR) due to the borrowers' financial difficulties. The Company held no other real estate owned properties as ofDecember 31, 2022 or 2021. 35 -------------------------------------------------------------------------------- Table of Contents (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. In addition,
accounts within the "Other income" category that represent a significant portion
of the total or a significant variance are shown.
Years ended December 31
Noninterest income: 2022 2021 Change Change %
Service charges on deposit accounts $ 2,194 $ 2,352 $ (158) (6.7) %
Debit card usage fees 1,969 1,948 21 1.1 %
Trust services 2,709 2,671 38 1.4 %
Increase in cash value of bank-owned life
insurance 964 923 41 4.4 %
Loan swap fees 835 66 769 1,165.2 %
Realized securities gains, net - 51 (51) (100.0) %
Other income:
All other 1,537 1,718 (181) (10.5) %
Total other income 1,537 1,718 (181) (10.5) %
Total noninterest income $ 10,208 $ 9,729 $ 479 4.9 %
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.
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: 2022 2021 Change Change %
Salaries and employee benefits $ 25,838 $ 23,226 $ 2,612 11.2 %
Occupancy 4,913 5,162 (249) (4.8) %
Data processing 2,597 2,465 132 5.4 %
Subscriptions and service contracts 2,137 1,777 360 20.3 %
FDIC insurance 996 1,818 (822) (45.2) %
Professional fees 874 946 (72) (7.6) %
Director fees 814 765 49 6.4 %
Other expenses:
Business development 1,147 999 148 14.8 %
Insurance expense 717 502 215 42.8 %
Trust 539 593 (54) (9.1) %
Consulting fees 339 302 37 12.3 %
Marketing 246 224 22 9.8 %
Charitable contributions - 890 (890) (100.0) %
Low income housing projects amortization 540 701 (161) (23.0) %
New markets tax credit project amortization and
management fees 919 919 - - %
All other 2,435 2,091 344 16.5 %
Total other 6,882 7,221 (339) (4.7) %
Total noninterest expense $ 45,051 $ 43,380 $ 1,671 3.9 %
36-------------------------------------------------------------------------------- Table of Contents (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 intoWest Bank inDecember 2021 andJune 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.
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 2022 and 2021 was$9,165 and$9,833 , respectively, while state income tax expense was approximately$3,833 and$3,468 , respectively. The effective rate of income tax expense as a percent of income before income taxes was 21.9 percent and 21.2 percent, respectively, for 2022 and 2021. In 2022, income tax expense included a one-time increase in state income tax expense related to theJune 2022 enactment of changes in theIowa bank franchise tax rates. This legislation reduces theIowa 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 tax rate for both 2022 and 2021 was also impacted by federal income tax credits, including low income housing tax credits and a new markets tax credit fromWest Bank's investment in a qualified community development entity, of approximately$1,468 and$1,368 , 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. 37 -------------------------------------------------------------------------------- Table of Contents (dollars in thousands, except per share amounts)
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES; AND INTEREST DIFFERENTIAL
Average Balances and an Analysis of Average Rates Earned and Paid
The following table shows average balances and interest income or interest
expense, with the resulting average yield or rate by category of average
interest-earning assets or interest-bearing liabilities for the years
indicated. Interest income and the resulting net interest income are shown on a
fully taxable basis. Interest expense includes the effect of interest rate
swaps, if applicable.
2022 2021 2020
Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
Assets
Interest-earning assets:
Loans: (1) (2)
Commercial $ 487,151 $ 22,742 4.67 % $ 525,228 $ 23,365 4.45 % $ 566,593 $ 22,328 3.94 %
Real estate (3) 2,061,777 84,523 4.10 % 1,796,118 72,579 4.04 % 1,574,339 68,444 4.35 %
Consumer and other 5,748 282 4.91 % 4,193 182 4.34 % 6,222 272 4.36 %
Total loans 2,554,676 107,547 4.21 % 2,325,539 96,126 4.13 % 2,147,154 91,044 4.24 %
Securities:
Taxable 592,186 12,524 2.11 % 450,910 8,542 1.89 % 322,695 7,818 2.42 %
Tax-exempt (3) 155,803 4,197 2.69 % 141,816 3,522 2.48 % 55,589 1,774 3.19 %
Total securities 747,989 16,721 2.24 % 592,726 12,064 2.04 % 378,284 9,592 2.54 %
Interest-bearing deposits 58,426 203 0.35 % 233,873 292 0.12 % 88,904 304 0.34 %
Total interest-earning assets (3) 3,361,091 124,471 3.70 % 3,152,138 108,482 3.44 % 2,614,342 100,940 3.86 %
Noninterest-earning assets:
Cash and due from banks 23,842 41,141 53,874
Premises and equipment, net 43,299 31,291
28,957
Other, less allowance for loan losses 80,553 46,612
42,610
Total noninterest-earning assets 147,694 119,044 125,441 Total assets$ 3,508,785 $ 3,271,182 $ 2,739,783 Liabilities and Stockholders' Equity Interest-bearing liabilities: Deposits: Interest-bearing demand$ 505,889 2,458 0.49 %$ 477,988 769 0.16 %$ 371,153 747 0.20 % Savings and money market 1,452,034 15,814
1.09 % 1,413,878 5,641 0.40 % 1,128,631 7,008 0.62 %
Time 291,732 4,357 1.49 % 208,164 1,538 0.74 % 215,224 3,501 1.63 %
Total deposits 2,249,655 22,629 1.01 % 2,100,030 7,948 0.38 % 1,715,008 11,256 0.66 %
Borrowed funds:
Federal funds purchased and
other short-term borrowings 62,901 1,764 2.80 % 4,620 5 0.11 % 4,397 23 0.52 %
Subordinated notes, net 52,873 2,867 5.42 % 20,458 1,008 4.93 % 20,445 1,016 4.97 %
Federal Home Loan Bank
advances 128,863 2,669 2.07 % 140,274 2,944 2.10 % 178,191 4,705 2.64 %
Long-term debt 51,489 1,680 3.26 % 20,995 316 1.51 % 24,912 400 1.61 %
Total borrowed funds 296,126 8,980 3.03 % 186,347 4,273 2.29 % 227,945 6,144 2.70 %
Total interest-bearing liabilities 2,545,781 31,609 1.24 % 2,286,377 12,221 0.53 % 1,942,953 17,400 0.90 %
Noninterest-bearing liabilities:
Demand deposits 708,667 709,009 544,211
Other liabilities 30,284 31,783 41,399
Stockholders' equity 224,053 244,013 211,220
Total liabilities and
stockholders' equity $ 3,508,785 $ 3,271,182 Net interest income (4)/net interest spread (3)$ 92,862 2.46 %$ 96,261 2.91 %$ 83,540 2.96 % Net interest margin (3) (4) 2.76 % 3.05 % 3.20 % (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. 38 -------------------------------------------------------------------------------- Table of Contents (dollars in thousands, except per share amounts)
Net Interest Income
The Company's largest component of net income is net interest income, which is the difference between interest earned on interest-earning assets, consisting primarily of loans and securities, and interest paid on interest-bearing liabilities, consisting of deposits and borrowings. Fluctuations in net interest income can result from the combination of changes in the balances of asset and liability categories and changes in interest rates. Interest rates earned and paid are also affected by general economic conditions, particularly changes in market interest rates, and by competitive factors, government policies and the actions of regulatory authorities. TheFederal Reserve increased the target federal funds interest rate by a total of 425 basis points in 2022 and is expected to continue to raise the target federal funds rate in 2023. The magnitude and pace of increases in 2023 is unknown at this time. The increases in 2022 have had an impact on the Company's net interest income and net interest margin and will impact the comparability of net interest income between 2022 and 2021. Net interest margin is a measure of the net return on interest-earning assets and is computed by dividing annualized tax-equivalent net interest income by total average interest-earning assets for the period. For the years endedDecember 31, 2022 , 2021 and 2020, the Company's net interest margin on a tax-equivalent basis was 2.76, 3.05 and 3.20 percent, respectively. There was a decrease of$3,399 in tax-equivalent net interest income in 2022 compared to 2021. 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. 2022 Compared to 2021
2021 Compared to 2020
Volume Rate Total Volume Rate Total
Interest Income
Loans: (1)
Commercial $ (1,744) $ 1,121 $ (623) $ (1,706) $ 2,743 $ 1,037
Real estate (2) 10,877 1,067 11,944 9,189 (5,054) 4,135
Consumer and other 74 26 100 (88) (2) (90)
Total loans (including fees) 9,207 2,214 11,421 7,395 (2,313) 5,082
Securities:
Taxable 2,903 1,079 3,982 2,669 (1,945) 724
Tax-exempt (2) 363 312 675 2,218 (470) 1,748
Total securities 3,266 1,391 4,657 4,887 (2,415) 2,472
Interest-bearing deposits (335) 246 (89) 269 (281) (12)
Total interest income (2) 12,138 3,851 15,989 12,551 (5,009) 7,542
Interest Expense
Deposits:
Interest-bearing demand 47 1,642 1,689 190 (168) 22
Savings and money market 156 10,017 10,173 1,509 (2,876) (1,367)
Time 795 2,024 2,819 (111) (1,852) (1,963)
Total deposits 998 13,683 14,681 1,588 (4,896) (3,308)
Borrowed funds:
Federal funds purchased and
other short-term borrowings 591 1,168 1,759 1 (19) (18)
Subordinated debt, net 1,748 111 1,859 1 (9) (8)
Federal Home Loan Bank advances (237) (38) (275) (897) (864) (1,761)
Long-term debt 756 608 1,364 (60) (24) (84)
Total borrowed funds 2,858 1,849 4,707 (955) (916) (1,871)
Total interest expense 3,856 15,532 19,388 633 (5,812) (5,179)
Net interest income (2) (3) $ 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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(dollars in thousands, except per share amounts)
Tax-equivalent interest income and fees on loans increased $11,421 for the year
ended December 31, 2022 , compared to 2021. The improvement was primarily due to
an increase of $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 Company continues to focus on expanding existing and entering into new
customer relationships while maintaining strong credit quality. The yield on the
Company's loan portfolio is affected by the portfolio's loan mix, the interest
rate environment, the effects of competition, the level of nonaccrual loans and
reversals of previously accrued interest on charged-off loans. The yield on the
loan portfolio is expected to increase in a rising rate environment as
variable-rate loans and loan renewals reprice at higher rates. The political and
economic environments can also influence the volume of new loan originations and
the mix of variable-rate versus fixed-rate loans.
Tax-equivalent interest income on securities increased $4,657 for the year ended
December 31, 2022 , compared to 2021. The average balance of securities available
for sale in 2022 was $155,263 higher than in 2021, primarily as a result of
securities purchased during 2021 and 2022 to improve the yield on excess
liquidity. The yield on available for sale securities increased by 20 basis
points in 2022 compared to 2021.
Interest expense on deposits increased $14,681 for the year ended December 31,
2022 , compared to 2021. The average balance of interest bearing deposits
increased $149,625 in 2022 compared to 2021, which included an increase of
average brokered deposits of $64,161 . The rates paid on deposits increased 63
basis points in 2022 compared to 2021. The increase in the cost of deposits was
primarily due to increases in short-term brokered deposit balances and other
changes in deposit mix, increases in certain deposit rates in response to
increases in the target federal funds rate and market interest rate competition.
The Federal Reserve increased the targeted federal funds rate by a total of 425
basis points in 2022, which has had a direct impact on the cost of deposits and
market competition. The cost of deposits will likely increase further in a
rising rate environment.
Interest expense on borrowed funds increased $4,707 for the year ended
December 31, 2022 , compared to 2021. The average balance of borrowed funds
increased $109,779 in 2022 compared to 2021. The rate paid on borrowed funds
increased 74 basis points in 2022 compared to 2021. The Company increased
variable-rate long-term debt by $34,500 in December 2021 and issued subordinated
debt of $60,000 in June 2022 . Average balances of federal funds purchased and
other short-term borrowings increased $58,281 in 2022 compared to 2021 to
support loan growth. The average rate of these federal funds purchased and other
short-term borrowings increased by 269 basis points in 2022 compared to 2021.
The cost of borrowed funds will likely increase further in a rising rate
environment.
The Federal Reserve increased the target federal funds rate by a total of 425
basis points in 2022. The Federal Reserve may continue to make additional rate
increases in 2023. These rate increases could improve reinvestment rates on
loans and securities, but also increase the Company's cost of deposits and
borrowed funds and increase the unrealized losses in the Company's securities
portfolio.
SECURITIES PORTFOLIO
The balance of securities available for sale decreased by $94,707 as of
December 31, 2022 , compared to December 31, 2021 . In the first quarter of 2022,
the Company purchased securities to improve the yield on excess liquidity while
monitoring duration and interest rate risk. The purchases were offset by
principal paydowns and the change in the fair value of the portfolio, which
declined $132,008 in 2022. The decline in fair value was the result of increases
in market interest rates and is not an indication of declining credit quality.
These unrealized losses are recorded in accumulated other comprehensive loss,
net of tax. Future increases in market interest rates could result in a further
increase of the unrealized losses in the securities portfolio.
Securities available for sale as a percentage of total assets is elevated over
historical levels which resulted from the deployment of excess liquidity during
2021 and 2022 to the securities portfolio as an earning asset alternative for
excess liquidity from increased levels of core deposits. The Company expects the
securities portfolio as a percentage of total assets to decrease over time as
the proceeds from paydowns and maturities are used to fund loan growth.
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(dollars in thousands, except per share amounts)
As of December 31, 2022 , approximately 63 percent of the available for sale
securities portfolio consisted of government agency guaranteed collateralized
mortgage obligations and mortgage-backed securities. Those securities have
little to no credit risk and provide cash flows for liquidity and repricing
opportunities. All collateralized mortgage obligations and mortgage-backed
securities consist of residential and commercial mortgage pass-through
securities and collateralized mortgage obligations guaranteed by the Federal
Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Association
(FNMA), Government National Mortgage Association (GNMA), or the SBA. The
securities issued by state and political subdivisions 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, 2022 . 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.
After one year After five years
Within one but within five but within ten After ten
year years years years Total
Securities available for sale:
State and political subdivisions (1) - % - % 1.85 % 2.39 % 2.35 %
Collateralized mortgage obligations - - 2.48 1.67 1.68
Mortgage-backed securities - - 1.61 1.72 1.69
Collateralized loan obligations - - 5.89 - 5.89
Corporate notes - - 3.26 - 3.26
- % - % 3.35 % 1.91 % 2.11 %
(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.
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 ofDecember 31, 2022 , the majority of all loans were originated directly byWest Bank to borrowers withinWest Bank's market areas. As ofDecember 31, 2022 , total loans were approximately 95.2 percent of total deposits and 75.9 percent of total assets. Loans outstanding at the end of 2022 increased 11.7 percent compared to the end of 2021. Changes in the loan portfolio during 2022 included increases of$241,722 in commercial real estate loans and$26,381 in commercial loans. Exclusive of PPP loans, loan growth in 2022 was$307,729 , or 12.6 percent. The Company continues to focus on business development efforts in all of its markets. We believe that loan growth could slow down in 2023 as a result of uncertainty and diversity in economic outlooks, labor and wage challenges and the impact of higher interest rates on overall cash flows and debt service capabilities. For a description of the loan segments, see Note 4 to the consolidated financial statements included in Item 8 of this Form 10-K. 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. 41
-------------------------------------------------------------------------------- Table of Contents (dollars in thousands, except per share amounts) The Company follows a loan policy approved byWest Bank's Board of Directors. The loan policy is reviewed at least annually and is updated as considered necessary. The policy establishes lending limits, review criteria and other guidelines for loan administration and the allowance for loan losses, among other things. Loans are approved 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
Nonperforming loans declined to$322 atDecember 31, 2022 , compared to$8,948 atDecember 31, 2021 . The decrease was due to the settlement of an impaired loan in 2022. The nonperforming loans atDecember 31, 2022 and 2021 consisted of one and two borrowing relationships, respectively. The watch classification of loans decreased to$54,231 as ofDecember 31, 2022 from$64,025 as ofDecember 31, 2021 . The decrease was primarily due to the improvement in risk rating for a previously classified commercial real estate loan. This relationship was upgraded primarily due to the sustained improvement in financial performance. Loans Secured by Real Estate The commercial real estate market continues to be a significant source of business forWest Bank . Management places a strong emphasis on monitoring the composition of the Company's commercial real estate loan portfolio. The Company has an established lending policy which includes a number of underwriting factors to be considered in making a commercial real estate loan, including, but not limited to, location, loan-to-value ratio (LTV), cash flow, collateral and the credit history of the borrower. The lending policy also includes guidelines for real estate appraisals and evaluations, including minimum appraisal and evaluation standards. Although repayment risk exists on all loans, different factors influence repayment risk for each type of loan. The primary risks associated with commercial real estate loans are the quality of the borrower's management and the health of the national and regional economies. Underwriting on commercial properties is primarily based on the economic viability of the project with heavy consideration given to the creditworthiness and experience of the borrower. Recognizing that debt is paid via cash flow, the projected cash flows of the project are critical in underwriting because these determine the ultimate value of the property and the ability to service debt. Therefore, in most commercial real estate projects, we generally require a minimum stabilized debt service coverage ratio of 1.20 to 1.35, depending on the real estate type. Exceptions to this policy can be made for certain borrowers that exhibit other credit quality strengths. Exceptions to the policy are monitored by management. Our strategy with respect to the management of these types of risks is to consistently follow prudent loan policies and underwriting practices. The Company recognizes that a diversified loan portfolio contributes to reducing risk. The specific loan portfolio mix is subject to change based on loan demand, the business environment and various economic factors. The Company actively monitors concentrations within the loan portfolio to ensure appropriate diversification is maintained. In addition, management tracks the level of owner occupied commercial real estate loans versus non-owner occupied commercial real estate loans. Owner occupied commercial real estate loans are generally considered to have less risk than non-owner occupied commercial real estate loans. In accordance with regulatory guidelines, the Company exercises heightened risk management practices when non-owner occupied commercial real estate lending exceeds 300 percent of total risk-based capital or construction, land development, and other land loans exceed 100 percent of total risk-based capital. Although the Company's loan portfolio is heavily concentrated in real estate and its real estate portfolio levels exceed these regulatory guidelines, it has established risk management policies and procedures to regularly monitor the commercial real estate portfolio. 42 -------------------------------------------------------------------------------- Table of Contents (dollars in thousands, except per share amounts) Commercial loans secured by real estate, including construction, land and land development, totaled$2,134,954 , or 77.7 percent of total loans, atDecember 31, 2022 . Non-owner occupied commercial real estate loan concentrations and the weighted average LTV by property type as ofDecember 31, 2022 and 2021 are shown in the following table. LTV is determined using the maximum credit exposure of the loan compared to the most recent appraisal data on the property obtained in accordance with the Company's lending policies. As of December 31 2022 2021 % of CRE % of CRE non-owner non-owner occupied Weighted Average occupied Weighted Average Balance Portfolio LTV Balance Portfolio LTV Non-owner occupied: Multifamily$ 371,224 21.0 % 69 %$ 435,097 27.8 % 71 % Medical & senior care facilities 249,127 14.1 65 220,726 14.1 59 Warehouse & trucking 169,462 9.6 67 153,022 9.8 69 Hotels 216,539 12.3 68 203,967 13.0 68 Mixed use 100,985 5.7 67 72,039 4.6 63 Offices 139,163 7.9 71 134,106 8.6 70 Land for development 114,428 6.5 62 96,687 6.2 63 All other 405,261 22.9 not available 249,265 15.9 not available$ 1,766,189 100.0 %$ 1,564,909 100.0 % The following table summarizes non-owner occupied commercial real estate loans by property type by risk rating as ofDecember 31, 2022 . 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, 2022 Risk Rating Total 1-3 4 5 6 7 8 Non-owner occupied: Multifamily$ 371,224 $ 25,451 $ 263,872 $ 81,901 $ - $ - $ - Medical & senior care facilities 249,127 93,983 127,337 27,807 - - - Warehouse & trucking 169,462 57,157 96,866 15,439 - - - Hotel 216,539 - 92,227 78,856 45,456 - - Mixed use 100,985 12,723 57,079 23,513 7,670 - - Offices 139,163 16,549 103,684 18,930 - - - Land for development 114,428 2,621 107,996 3,764 47 - - All other 405,261 71,374 330,067 3,820 - - -$ 1,766,189 $ 279,858 $ 1,179,128 $ 254,030 $ 53,173 $ - $ -
As of
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(dollars in thousands, except per share amounts)
Maturities of Loans
The contractual maturities of the Company's loan portfolio are shown in the following tables. Actual repayments may differ from contractual maturities because individual borrowers may have the right to prepay loans with or without prepayment penalties.
As of December 31, 2022
After five
After one but but
Within one within five within 15 After 15
year years years years Total
Commercial $ 179,987 $ 229,801 $ 96,118 $ 13,290 $ 519,196
Real estate:
Construction, land and land
development 190,273 158,333 14,408 - 363,014
1-4 family residential first
mortgages 6,764 64,921 3,526 - 75,211
Home equity 3,480 6,842 - - 10,322
Commercial 62,817 1,005,599 665,677 37,847 1,771,940
Consumer and other 5,096 2,196 - - 7,292
$ 448,417 $ 1,467,692 $ 779,729 $ 51,137 $ 2,746,975
After five
After one but but
within five within 15 After 15
years years years
Loan maturities after one year with:
Fixed rates
Commercial $ 148,531 $ 56,042 $ -
Real estate:
Construction, land and land
development 112,192 9,078 -
1-4 family residential first
mortgages 62,425 1,681 -
Home equity 1,035 - -
Commercial 964,167 444,025 12,326
Consumer and other 1,805 - -
Total fixed-rate loans 1,290,155 510,826 12,326
Variable rates
Commercial 81,270 40,076 13,290
Real estate:
Construction, land and land
development 46,141 5,330 -
1-4 family residential first
mortgages 2,496 1,845 -
Home equity 5,807 - -
Commercial 41,432 221,652 25,521
Consumer and other 391 - -
Total variable-rate loans 177,537 268,903 38,811
$ 1,467,692 $ 779,729 $ 51,137 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.
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(dollars in thousands, except per share amounts)
Factors considered in establishing an appropriate allowance include: the
borrower's financial condition; the value and adequacy of loan collateral; the
condition of the local economy and the borrower's specific industry; the levels
and trends of loans by segment; and a review of delinquent and classified loans.
The quarterly evaluation focuses on factors such as specific loan reviews,
changes in the components of the loan portfolio given economic conditions, and
historical loss experience. Any one of the following conditions may result in
the review of a specific loan: concern about whether the customer's cash flow or
net worth is sufficient to repay the loan; delinquency status; criticism of the
loan in a regulatory examination; the suspension of interest accrual; or other
factors, including whether the loan has other special or unusual characteristics
that suggest special monitoring is warranted. The Company's concentration risks
include geographic concentration in central and eastern Iowa and southern
Minnesota . The local economies are composed primarily of agriculture, financial
service and health care industries, and state and county governments.
West Bank has a significant portion of its loan portfolio in commercial real
estate loans, commercial lines of credit, commercial term loans, and
construction and land development loans. West Bank's typical commercial borrower
is a small- or medium-sized, privately owned business entity. Compared to
residential mortgages or consumer loans, commercial loans typically have larger
balances and repayment usually depends on the borrowers' successful business
operations. Commercial loans also generally are not fully repaid over the loan
period and, thus, may require refinancing or a large payoff at maturity. When
the general economy turns downward, commercial borrowers may not be able to
repay their loans, and the value of their assets, which are usually pledged as
collateral, may decrease rapidly and significantly.
While management uses available information to recognize losses on loans,
further reduction in the carrying amounts of loans may be necessary based on
changes in circumstances, changes in the overall economy in the markets we
currently serve, or later acquired information. Identifiable sectors within the
general economy are subject to additional volatility, which at any time may have
a substantial impact on the loan portfolio. In addition, regulatory agencies, as
integral parts of their examination processes, periodically review the credit
quality of the loan portfolio and the level of the allowance for loan
losses. Such agencies may require West Bank to recognize additional losses based
on such agencies' review of information available to them at the time of their
examinations.
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
2022 2021 2020
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 (0.02) % 0.02 % 0.01 %
Ratio of allowance for loan losses to total
loans at the end of period 0.93 % 1.15 % 1.29 %
Ratio of allowance for loan losses to total
loans at the end of period, excluding PPP
loans(1) 0.93 % 1.17 % 1.40 %
Ratio of nonaccrual loans to total loans at
end of period 0.01 % 0.36 % 0.71 %
Ratio of allowance for loan losses to total
nonaccrual loans at the end of period 7,910.87 % 316.99 % 181.77 %
Ratio of net (charge-offs) recoveries to total
loans at end of period (0.01) % 0.02 % 0.01 %
(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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(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.
As of December 31
2022 2021 2020
Amount %* Amount %* Amount %*
Balance at end of
period applicable to:
Commercial $ 4,804 18.90 % $ 4,776 20.03 % $ 4,718 26.40 %
Real estate:
Construction, land
and land development 3,548 13.21 3,646 14.60 2,634 10.32
1-4 family residential
first mortgages 357 2.74 339 2.69 360 2.58
Home equity 101 0.38 91 0.34 114 0.41
Commercial 16,575 64.50 19,466 62.19 21,535 60.04
Consumer and other 88 0.27 46 0.15 75 0.25
$ 25,473 100.00 % $ 28,364 100.00 % $ 29,436 100.00 %
* 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. TheU.S. economy continues to be affected by theFederal Reserve's accommodative monetary policies initiated during the COVID-19 pandemic. Current economic concerns include the impact of sharp increases in interest rates as theFederal Reserve responds to inflationary trends, labor shortages and wage pressures, and the uncertainty of additional increases in theFederal Reserve target federal funds rate. In response to increasing inflation rates, theFederal 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 ofDecember 31, 2022 andDecember 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 . 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 ofDecember 31, 2022 compared to$25,864 , or 1.05 percent of outstanding loans, as ofDecember 31, 2021 . Based upon the quarterly evaluations, management determined a provision for loan losses of negative$2,500 was appropriate for the year endedDecember 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 ofDecember 31, 2022 was adequate to absorb the losses inherent in the loan portfolio. InJune 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. 46 -------------------------------------------------------------------------------- Table of Contents (dollars in thousands, except per share amounts) The Company adopted the CECL standard effectiveJanuary 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
Deposits totaled$2,880,408 as ofDecember 31, 2022 , which was 4.5 percent lower than the total as ofDecember 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 inTreasury securities and other investment options primarily as a result of the sharp increase in shorter term interest rates. AtDecember 31, 2022 , the Company had$272,691 in brokered deposits, compared to$176,008 atDecember 31, 2021 . Brokered deposits included fixed-rate time deposits with maturities throughSeptember 2024 and variable-rate deposits with terms throughFebruary 2024 . Brokered deposits are utilized, along with other wholesale funding sources, to fund loan growth and offset core deposit outflows. The following table sets forth the average balances for each major category of deposits and the weighted average interest rate paid for those deposits during the years indicated. Years ended December 31 2022 2021 2020 Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate Noninterest-bearing demand$ 708,667 - %$ 709,009 - %$ 544,211 - % Interest-bearing demand: Reward Me checking 54,641 0.12 52,960 0.08 47,435 0.15 Insured cash sweep 139,807 0.80 125,402 0.34 94,042 0.46 Other interest-bearing demand 311,441 0.41 299,626 0.10 229,677 0.11 Money market: Insured cash sweep 323,970 1.01 308,136 0.36 266,837 0.60 Other money market 967,953 1.26 959,314 0.45 737,801 0.70 Savings 160,111 0.24 146,428 0.14 123,993 0.18 Time 291,732 1.49 208,164 0.74 215,224 1.63$ 2,958,322 $ 2,809,039 $ 2,259,220 Management expects the average interest rates on deposits will increase in 2023 as theFederal Reserve increased the target federal funds rate throughout 2022 by a total of 425 basis points and is expected to continue to increase the target federal funds rate in 2023. To limit the Company's exposure to market interest rate changes, interest rate swaps are in place on$110,000 of deposit balances that effectively convert certain customer deposits with variable rates to fixed-rate instruments. 47
-------------------------------------------------------------------------------- Table of Contents (dollars in thousands, except per share amounts) The following table shows the amounts and remaining maturities of time certificates of deposit with balances of$100 or more as ofDecember 31, 2022 . 3 months or less$ 146,167 Over 3 through 6 months 110,865 Over 6 through 12 months 116,934 Over 12 months 8,885$ 382,851 Approximately 91 percent of the total time deposits issued byWest 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 receiveFDIC insurance coverage for deposits otherwise exceeding the maximum insurable amount. We consider these reciprocal deposits to be in-market deposits as distinguished from traditional out-of-market brokered deposits. Time deposits as ofDecember 31, 2022 and 2021, included$122,915 and$92,210 , respectively, of reciprocal deposits. Included in total deposits as ofDecember 31, 2022 and 2021, were$155,888 and$178,366 , respectively, of reciprocal interest-bearing checking and$186,160 and$412,027 , respectively, of reciprocal money market deposits.
The following table shows the portion of time deposits in excess of the insurance limit by maturity.
3 months or less$ 99,763 Over 3 through 6 months 66,873 Over 6 through 12 months 53,735 Over 12 months 2,002$ 222,373
Total uninsured deposits were
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 ofDecember 31, 2021 to$200,000 as ofDecember 31, 2022 . The$200,000 as ofDecember 31, 2022 was comprised of overnight and short-term FHLB advances. The Company had$155,000 of short-term FHLB advances outstanding atDecember 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 fromSeptember 2023 throughJune 2029 and fixed rates ranging from 1.63 percent to 3.64 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. OnDecember 15, 2021 , the Company entered into a credit agreement with an unaffiliated commercial bank and borrowed$40,000 . This credit agreement replaced a prior credit agreement with the same commercial bank that had a remaining balance of$5,500 . The additional borrowing was used to make a capital injection into the Company's subsidiary,West Bank . Interest is payable quarterly. Required quarterly principal payments begin inMay 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 6.50 percent as ofDecember 31, 2022 . 48 -------------------------------------------------------------------------------- Table of Contents (dollars in thousands, except per share amounts) OnJune 14, 2022 , the Company issued$60,000 of subordinated notes (Notes). The Notes initially bear interest at 5.25 percent per annum, with interest payable semi-annually for the first five years of the Notes. BeginningJune 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 afterJune 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 onJune 15, 2032 if they are not earlier redeemed. Proceeds from this debt issuance were used to make a$58,650 capital injection intoWest Bank , the Company's subsidiary. The Company has an interest rate swap with a notional amount of$20,000 which converts variable-rate subordinated debentures to fixed-rate debt. The interest rate is a variable rate based on the 3-month LIBOR plus 3.05 percent. This interest rate swap has a fixed rate of 4.81 percent and matures inSeptember 2026 .
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 exposeWest Bank to varying degrees of credit and market risks in excess of the amounts recognized in the consolidated balance sheets and are subject to the same credit policies as are the loans recorded on the balance sheets.West Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments.West Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Commitments to lend are subject to borrowers' continuing compliance with existing credit agreements. Management of the Company does not expect any significant losses as a result of these commitments. Off-balance sheet commitments are more fully discussed in Note 17 to the consolidated financial statements included in Item 8 of this Form 10-K.
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 investment 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 byWest Bank's asset-liability management policy. Our deposit growth strategy emphasizes core deposit growth. Deposit inflows and outflows can vary widely and are influenced by prevailing market interest rates, competition, local and national economic conditions and fluctuations in our corporate customers' and municipal customers' own liquidity needs. The Company may utilize brokered deposits to supplement core deposit fluctuations and loan growth. Brokered deposits are obtained through various programs administered by IntraFi, including IntraFi Network Deposits and IntraFi Funding, and through other third parties. AtDecember 31, 2022 , the Company had$272,691 in brokered deposits, which included fixed-rate time deposits with maturities throughSeptember 2024 and variable-rate deposits with terms throughFebruary 2024 . As ofDecember 31, 2022 ,West Bank had additional borrowing capacity available from the FHLB of approximately$372,000 , as well as approximately$3,830 at theFederal Reserve discount window and$67,000 through unsecured federal funds lines of credit with correspondent banks.West Bank had no amounts outstanding at theFederal Reserve discount window or under the unsecured federal funds lines as ofDecember 31, 2022 . Net cash from continuing operating activities contributed$59,439 ,$57,878 and$42,285 to liquidity for the years endedDecember 31, 2022 , 2021 and 2020, 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 ofDecember 31, 2022 . 49 -------------------------------------------------------------------------------- Table of Contents (dollars in thousands, except per share amounts)West Bank has entered into a construction contract for the construction of a new headquarters building inWest 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 ofDecember 31, 2022 ,$7,371 had been paid under this construction contract. Additionally,West Bank began construction of a new office inMankato, Minnesota in 2022, which had a remaining construction commitment of$6,520 as ofDecember 31, 2022 . The Company's total stockholders' equity decreased to$211,112 as ofDecember 31, 2022 from$260,328 as ofDecember 31, 2021 . The decrease was primarily the result of the increased accumulated other comprehensive loss, partially offset by net income less dividends paid. AtDecember 31, 2022 , tangible common equity as a percent of tangible assets was 5.84 percent compared to 7.44 percent as ofDecember 31, 2021 . The increase in accumulated other comprehensive loss was the result of the negative effect that rising interest rates have had on the market value adjustment of our available for sale securities portfolio. While accumulated other comprehensive losses reduce tangible common equity, they have no impact on regulatory capital. As ofDecember 31, 2022 and 2021, the Company had no intangible assets. The Company andWest 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 ofDecember 31, 2022 , the Company andWest Bank met all capital adequacy requirements to which they were subject, and the Company's andWest Bank's capital ratios were in excess of the requirements to be well-capitalized under capital regulations. Also, as ofDecember 31, 2022 , the ratios for the Company andWest Bank were sufficient to meet the capital conservation buffer.
EFFECTS OF NEW STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
A discussion of the effects of new financial accounting standards and developments as they relate to the Company is located in Note 1 to the consolidated financial statements included in Item 8 of this Form 10-K.
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