# West Bancorporation Inc: Form 10-Q for the period ended Sep 30, 2021

- Company: [West Bancorporation Inc](/companies/wtba.md) (CIK 1166928)
- Form: 10-Q
- Filed: 2021-10-28
- Accepted by EDGAR: Oct 28, 2021, 07:22 ET
- Period: 2021-09-30
- Accession: 0001166928-21-000109
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1166928/000116692821000109/wtba-20210930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1166928/000116692821000109/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2021-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2021-07-01 to 2021-09-30 | $3.0m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2021-01-01 to 2021-09-30 | $9.2m | us-gaap:InterestExpense |
| Income tax | 3 months, 2021-07-01 to 2021-09-30 | $3.5m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2021-01-01 to 2021-09-30 | $10.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2021-07-01 to 2021-09-30 | $12.7m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2021-01-01 to 2021-09-30 | $37.7m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2021-07-01 to 2021-09-30 | $0.76 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2021-01-01 to 2021-09-30 | $2.25 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2021-07-01 to 2021-09-30 | $0.77 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2021-01-01 to 2021-09-30 | $2.28 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2021-07-01 to 2021-09-30 | 16,803,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2021-01-01 to 2021-09-30 | 16,772,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2021-01-01 to 2021-09-30 | $42.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2021-01-01 to 2021-09-30 | $6.4m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2021-01-01 to 2021-09-30 | $11.6m | us-gaap:PaymentsOfDividendsCommonStock |
| Total assets | at 2021-09-30 | $3.25bn | us-gaap:Assets |
| Total liabilities | at 2021-09-30 | $3.00bn | us-gaap:Liabilities |
| Shareholders' equity | at 2021-09-30 | $252.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 65,530 characters.

### "SAFE HARBOR" CONCERNING FORWARD-LOOKING STATEMENTS

Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to the Company’s business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meanings of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Forward-looking statements may appear throughout this report. These forward-looking statements are generally identified by the words “believes,” “expects,” “intends,” “anticipates,” “projects,” “future,” “may,” “should,” “will,” “strategy,” “plan,” “opportunity,” “will be,” “will likely result,” “will continue” or similar references, or references to estimates, predictions or future events. Such forward-looking statements are based upon certain underlying assumptions, risks and uncertainties. Because of the possibility that the underlying assumptions are incorrect or do not materialize as expected in the future, actual results could differ materially from these forward-looking statements. Risks and uncertainties that may affect future results include: the effects of the COVID-19 pandemic, including its potential effects on the economic environment, our customers and our operations, as well as any changes to federal, state or local government laws, regulations or orders in connection with the pandemic; interest rate risk; competitive pressures; pricing pressures on loans and deposits; changes in credit and other risks posed by the Company’s loan and investment portfolios, including declines in commercial or residential real estate values or changes in the allowance for loan losses dictated by new market conditions, accounting standards (including as a result of the future implementation of the current expected credit loss (CECL) accounting standard) or regulatory requirements; actions of bank and nonbank competitors; changes in local, national and international economic conditions; changes in legal and regulatory requirements, limitations and costs; changes in customers’ acceptance of the Company’s products and services; cyber-attacks; unexpected outcomes of existing or new litigation involving the Company; the monetary, trade and other regulatory policies of the U.S. government; acts of war or terrorism, widespread disease or pandemics, such as the COVID-19 pandemic, or other adverse external events; developments and uncertainty related to the future use and availability of some reference rates, such as the London Interbank Offered Rate, as well as other alternative reference rates; changes to U.S. tax laws, regulations and guidance; and any other risks described in the “Risk Factors” sections of this and other reports filed by the Company with the SEC. The Company undertakes no obligation to revise or update such forward-looking statements to reflect current or future events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

### CRITICAL ACCOUNTING POLICIES

The discussion and analysis of the Company's financial condition and results of operations are based upon the Company's consolidated financial statements that have been prepared in accordance with GAAP. 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 estimates and judgments that management believes involve the most complex and subjective estimates and judgments and have the most effect on the Company's reported financial position and results of operations are described as critical accounting policies in the Company's Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC on March 1, 2021. There have been no significant changes in the critical accounting policies or the assumptions and judgments utilized in applying these policies since December 31, 2020.

### 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 a 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.

| Three Months Ended September 30, 2021 Reconciliation of net interest income and net interest margin on a FTE basis to GAAP: | 2020 | Nine Months Ended September 30, 2021 | 2020 |
| --- | ---: | ---: | ---: |
| Net interest income (GAAP) **$24,486** | $21,132 | **$70,457** | $60,343 |
| Tax-equivalent adjustment(1) **306** | 144 | **805** | 516 |
| Net interest income on a FTE basis (non-GAAP) **24,792** | 21,276 | **71,262** | 60,859 |
| Average interest-earning assets **3,212,283** | 2,639,532 | **3,099,066** | 2,544,429 |
| Net interest margin on a FTE basis (non-GAAP) **3.06%** | 3.21% | **3.07%** | 3.19% |
| **Reconciliation of efficiency ratio on an adjusted and FTE basis to GAAP:** |  |  |  |
| Net interest income on a FTE basis (non-GAAP) **$24,792** | $21,276 | **$71,262** | $60,859 |
| Noninterest income **2,401** | 3,203 | **7,381** | 7,498 |
| Adjustment for realized securities gains, net **(11)** | (156) | **(51)** | (81) |
| Adjustment for losses on disposal of premises and equipment, net **—** | 1 | **29** | 3 |
| Adjusted income **27,182** | 24,324 | **78,621** | 68,279 |
| Noninterest expense **10,712** | 10,059 | **31,509** | 29,139 |
| Efficiency ratio on an adjusted and FTE basis (non-GAAP)(2) **39.41%** | 41.35% | **40.08%** | 42.68% |
| **Reconciliation of allowance for loan losses ratio, excluding PPP loans:** | **September 30, 2021** | December 31, 2020 | September 30, 2020 |
| Loans outstanding (GAAP) | **$2,359,567** | $2,280,575 | $2,247,425 |
| Less: PPP loans | **(47,416)** | (180,757) | (224,489) |
| Loans, net of PPP loans (non-GAAP) | **2,312,151** | 2,099,818 | 2,022,936 |
| Allowance for loan losses | **28,098** | 29,436 | 25,403 |
| Allowance for loan losses ratio, excluding PPP loans (non-GAAP)(3) | **1.22%** | 1.40% | 1.26% |

(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.

### OVERVIEW

The following discussion describes the consolidated operations and financial condition of the Company, West Bank and West Bank's special purpose subsidiaries (which are invested in new markets tax credit activities). Results of operations for the three and nine months ended September 30, 2021 are compared to the results for the same periods in 2020, and the consolidated financial condition of the Company as of September 30, 2021 is compared to that as of December 31, 2020. This discussion and analysis should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 1, 2021.

The Company conducts business from its main office in West Des Moines, Iowa and through its branch offices in central Iowa, which is generally the greater Des Moines metropolitan area; eastern Iowa, which is the area including and surrounding Iowa City and Coralville; and southern Minnesota, which includes the cities of Rochester, Owatonna, Mankato and St. Cloud.

### IMPACT OF COVID-19

We continue to monitor the impact COVID-19 is having on the local economies we operate in and the uncertainty of the long-term ramifications to our customers and operations. Within our markets, vaccinations have become readily available, infection positivity rates are at moderate levels, and the restrictions on businesses have generally been fully lifted. However, the lasting effects of government aid programs are uncertain as stimulus packages taper, and the ultimate long-term impact of the business shutdowns that occurred as a result of COVID-19 remains uncertain in many sectors of the economy. In the third quarter of 2021, COVID-19 positivity rates and hospitalizations in our markets rose due to the impact of the Delta variant.

The Federal Reserve, in response to the economic risks resulting from the COVID-19 pandemic, returned to a zero-interest rate policy in March 2020. This was after most broader market rates decreased significantly in response to evolving news about the COVID-19 pandemic. Many areas of consumer and business spending have rebounded in recent months, but there remains uncertainty about the longer lasting impact on local businesses as well as the travel, hospitality and entertainment industries resulting from the COVID-19 pandemic. This could cause a longer recovery time for all sectors of the economy and could make it challenging for sectors that have had better recoveries to maintain those recoveries in the long run. Inflation and supply shortages also pose risks to the economic recovery.

At the onset of the COVID-19 pandemic, the Bank lowered its offered rates on all deposit products and experienced an immediate positive impact on our cost of deposits. We responded to lower market rates for lending by lowering rates offered on our loan products. Given current rates offered by the Bank on new loans and prepayments on existing loans, the yield on the total loan portfolio is likely to continue to decrease. With significant cash inflows realized from growth in deposit balances and forgiveness of PPP loans, the current yields on reinvested funds into new securities are lower than existing portfolio yields. Considering the low market interest rates and the ongoing economic uncertainty, our net interest margin could decrease in future periods.

### SUMMARY

Net income for the three months ended September 30, 2021 was $12,706, or $0.76 per diluted common share, compared to $8,100, or $0.49 per diluted common share, for the three months ended September 30, 2020. The Company's annualized return on average assets and return on average equity for the three months ended September 30, 2021 were 1.52 percent and 20.02 percent, respectively, compared to 1.16 percent and 15.20 percent, respectively, for the three months ended September 30, 2020.

The increase in net income for the three months ended September 30, 2021 compared to the same period in 2020 was primarily due to a decrease in the provision for loan losses and an increase in net interest income, partially offset by a decrease in noninterest income and an increase in noninterest expense.

Net interest income for the three months ended September 30, 2021 grew $3,354, or 15.9 percent, compared to the three months ended September 30, 2020. The increase in net interest income was primarily due to the increase in interest income on loans and securities and the decrease in interest expense on borrowed funds. The Company recorded no provision for loan losses during the three months ended September 30, 2021, compared to a provision of $4,000 for the three months ended September 30, 2020. The provision in 2020 was due to uncertainty surrounding economic conditions as a result of the COVID-19 pandemic.

Noninterest income decreased $802 during the three months ended September 30, 2021 compared to the three months ended September 30, 2020, primarily due to a decrease in loan swap fees. Noninterest expense increased $653 during the three months ended September 30, 2021 compared to the three months ended September 30, 2020, primarily due to increases in salaries and employee benefits and FDIC insurance expense.

Net income for the nine months ended September 30, 2021 was $37,697, or $2.25 per diluted common share, compared to $24,158, or $1.46 per diluted common share, for the nine months ended September 30, 2020. The Company's annualized return on average assets and return on average equity for the nine months ended September 30, 2021 were 1.56 percent and 20.98 percent, respectively, compared to 1.21 percent and 15.47 percent, respectively, for the first nine months of 2020.

The increase in net income for the nine months ended September 30, 2021 compared to the same period in 2020 was primarily due to a decrease in the provision for loan losses and an increase in net interest income, partially offset by an increase in noninterest expense.

Net interest income for the nine months ended September 30, 2021 grew $10,114, or 16.8 percent, compared to the nine months ended September 30, 2020. The increase in net interest income was primarily due to the increase in interest income on loans and securities and the decrease in interest expense on deposits and borrowed funds. The Company recorded a negative provision for loan losses of $1,500 during the nine months ended September 30, 2021, compared to a provision of $8,000 for the nine months ended September 30, 2020. The provision in 2020 was due primarily to uncertainty surrounding economic conditions as a result of the COVID-19 pandemic. The negative provision in 2021 was due primarily to the improvement in economic conditions and removal of pandemic-related restrictions on businesses in our market areas.

Noninterest income decreased $117 during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, primarily due to a decrease in loan swap fees, partially offset by increases in trust revenue and increase in cash value of bank-owned life insurance. Noninterest expense increased $2,370 for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, primarily due to increases in salaries and employee benefits and FDIC insurance expense.

Total loans outstanding increased $78,992, or 3.5 percent, during the first nine months of 2021. Excluding the impact of PPP loan activity, total loans outstanding increased $212,333, or 10.1 percent, during the first nine months of 2021. As of September 30, 2021, the allowance for loan losses was 1.19 percent of outstanding loans, compared to 1.29 percent as of December 31, 2020. At September 30, 2021, the allowance for loan losses was 1.22 percent of outstanding loans, excluding $47,416 of PPP loans (a non-GAAP financial measure), which are 100 percent guaranteed by the SBA, compared to 1.40 percent of outstanding loans, excluding $180,757 of PPP loans, as of December 31, 2020. Management believed the allowance for loan losses at September 30, 2021 was adequate to absorb any losses inherent in the loan portfolio as of that date.

On a quarterly basis, the Company compares three key performance metrics to those of our identified peer group. The peer group for 2021 consists of 21 Midwestern, publicly traded financial institutions including Bank First Corporation, Civista Bancshares, Inc., CrossFirst Bankshares, Inc., Equity Bancshares, Inc., Farmers National Banc Corp., Farmers & Merchants Bancorp., First Business Financial Services, Inc., First Financial Corp., First Mid Bancshares, Inc., German American Bancorp, Inc., Hills Bancorporation, Isabella Bank Corporation, LCNB Corp., Level One Bancorp, Inc., Macatawa Bank Corporation, Mackinac Financial 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 Texas ratio. 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. As of and for the nine months ended September 30, 2021 | As of and for the six months ended June 30, 2021 | Peer Group Range(3) As of and for the six months ended June 30, 2021 |
| --- | ---: | ---: | --- |
| Return on average equity | **20.98%** | 21.50% | 5.44% - 17.01% |
| Efficiency ratio(1) (2) | **40.08%** | 40.43% | 42.19% - 71.57% |
| Texas ratio(2) | **3.24%** | 5.31% | 1.92% - 16.74% |

(1) The efficiency ratio is a non-GAAP financial measure. For further information, refer to the Non-GAAP Financial Measures section of this report.

(2) A lower ratio is more desirable.

(3) Latest data available.

At its meeting on October 27, 2021, the Company's Board of Directors declared a quarterly cash dividend of $0.24 per common share. The dividend is payable on November 24, 2021, to stockholders of record on November 10, 2021.

### RESULTS OF OPERATIONS

The following table shows selected financial results and measures for the three and nine months ended September 30, 2021 compared with the same periods in 2020.

| Three Months Ended September 30, 2021 | 2020 | Change | Change % | Nine Months Ended September 30, 2021 | 2020 | Change | Change % |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net income **$12,706** | $8,100 | $4,606 | 56.86% | **$37,697** | $24,158 | $13,539 | 56.04% |
| Average assets **3,325,522** | 2,766,151 | 559,371 | 20.22% | **3,220,687** | 2,666,532 | 554,155 | 20.78% |
| Average stockholders' equity **251,770** | 212,054 | 39,716 | 18.73% | **240,235** | 208,628 | 31,607 | 15.15% |
| Return on average assets **1.52%** | 1.16% | 0.36% |  | **1.56%** | 1.21% | 0.35% |  |
| Return on average equity **20.02%** | 15.20% | 4.82% |  | **20.98%** | 15.47% | 5.51% |  |
| Net interest margin (1) **3.06%** | 3.21% | (0.15)% |  | **3.07%** | 3.19% | (0.12)% |  |
| Efficiency ratio (1) (2) **39.41%** | 41.35% | (1.94)% |  | **40.08%** | 42.68% | (2.60)% |  |
| Dividend payout ratio **31.27%** | 42.70% | (11.43)% |  | **30.69%** | 42.87% | (12.18)% |  |
| Average equity to average assets ratio **7.57%** | 7.67% | (0.10)% |  | **7.46%** | 7.82% | (0.36)% |  |
|  |  |  |  | As of September 30, |  |  |  |
|  |  |  |  | **2021** | 2020 | Change |  |
| Texas ratio (2) |  |  |  | **3.24%** | 7.38% | (4.14)% |  |
| Equity to assets ratio |  |  |  | **7.77%** | 7.76% | 0.01% |  |
| Tangible common equity ratio |  |  |  | **7.77%** | 7.76% | 0.01% |  |

(1) Amounts are presented on a FTE basis. These are non-GAAP financial measures. For further information, refer to the Non-GAAP Financial Measures section of this report.

(2) A lower ratio is more desirable.

Definitions of ratios:

- Return on average assets - annualized net income divided by average assets.
- Return on average equity - annualized net income divided by average stockholders' equity.
- Net interest margin - annualized tax-equivalent net interest income divided by average interest-earning assets.
- 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.
- Dividend payout ratio - dividends paid to common stockholders divided by net income.
- Average equity to average assets ratio - average equity divided by average assets.
- Texas ratio - total nonperforming assets divided by tangible common equity plus the allowance for loan losses.
- Equity to assets ratio - equity divided by assets.
- Tangible common equity ratio - common equity less intangible assets (none held) divided by tangible assets.

#### Net Interest Income

The following tables present average balances and related interest income or interest expense, with the resulting annualized average yield or rate by category of interest-earning assets or interest-bearing liabilities. Interest income and the resulting net interest income are shown on a FTE basis.

| Three Months Ended September 30, Average Balance 2021 2020 Interest-earning assets: Loans: (1) (2) | Change | Change- % | Interest Income/Expense 2021 | 2020 | Change | Change- % | Yield/Rate 2021 | 2020 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial **$496,485** $635,577 | $(139,092) | (21.88)% | **$5,687** | $5,549 | $138 | 2.49% | **4.54%** | 3.47% | 1.07% |
| Real estate (3) **1,837,251** 1,589,000 | 248,251 | 15.62% | **18,632** | 16,934 | 1,698 | 10.03% | **4.02%** | 4.24% | (0.22)% |
| Consumer and other **3,619** 6,031 | (2,412) | (39.99)% | **39** | 64 | (25) | (39.06)% | **4.30%** | 4.19% | 0.11% |
| Total loans **2,337,355** 2,230,608 | 106,747 | 4.79% | **24,358** | 22,547 | 1,811 | 8.03% | **4.13%** | 4.02% | 0.11% |
| Securities: |  |  |  |  |  |  |  |  |  |
| Taxable **506,746** 294,545 | 212,201 | 72.04% | **2,412** | 1,728 | 684 | 39.58% | **1.90%** | 2.35% | (0.45)% |
| Tax-exempt (3) **155,806** 57,839 | 97,967 | 169.38% | **940** | 465 | 475 | 102.15% | **2.41%** | 3.22% | (0.81)% |
| Total securities **662,552** 352,384 | 310,168 | 88.02% | **3,352** | 2,193 | 1,159 | 52.85% | **2.02%** | 2.49% | (0.47)% |
| Federal funds sold **212,376** 56,540 | 155,836 | 275.62% | **82** | 15 | 67 | 446.67% | **0.15%** | 0.10% | 0.05% |
| Total interest-earning assets (3) **$3,212,283** $2,639,532 | $572,751 | 21.70% | **27,792** | 24,755 | 3,037 | 12.27% | **3.43%** | 3.73% | (0.30)% |
| Interest-bearing liabilities: |  |  |  |  |  |  |  |  |  |
| Deposits: |  |  |  |  |  |  |  |  |  |
| Interest-bearing demand, |  |  |  |  |  |  |  |  |  |
| savings and money |  |  |  |  |  |  |  |  |  |
| market **$1,935,286** $1,482,705 | $452,581 | 30.52% | **1,660** | 1,355 | 305 | 22.51% | **0.34%** | 0.36% | (0.02)% |
| Time deposits **210,465** 188,828 | 21,637 | 11.46% | **361** | 591 | (230) | (38.92)% | **0.68%** | 1.25% | (0.57)% |
| Total deposits **2,145,751** 1,671,533 | 474,218 | 28.37% | **2,021** | 1,946 | 75 | 3.85% | **0.37%** | 0.46% | (0.09)% |
| Other borrowed funds **169,183** 225,995 | (56,812) | (25.14)% | **978** | 1,532 | (554) | (36.16)% | **2.29%** | 2.70% | (0.41)% |
| Total interest-bearing |  |  |  |  |  |  |  |  |  |
| liabilities **$2,314,934** $1,897,528 | $417,406 | 22.00% | **2,999** | 3,478 | (479) | (13.77)% | **0.51%** | 0.73% | (0.22)% |
| Net interest income (FTE) (4) |  |  | **$24,793** | $21,277 | $3,516 | 16.52% |  |  |  |
| Net interest spread (FTE) |  |  |  |  |  |  | **2.92%** | 3.00% | (0.08)% |
| Net interest margin (FTE) (4) |  |  |  |  |  |  | **3.06%** | 3.21% | (0.15)% |

36

(in thousands, except share and per share data)

| Nine Months Ended September 30, Average Balance 2021 2020 Interest-earning assets: Loans: (1) (2) | Change | Change- % | Interest Income/Expense 2021 | 2020 | Change | Change- % | Yield/Rate 2021 | 2020 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial **$538,579** $551,476 | $(12,897) | (2.34)% | **$17,880** | $15,927 | $1,953 | 12.26% | **4.44%** | 3.86% | 0.58% |
| Real estate (3) **1,764,285** 1,557,211 | 207,074 | 13.30% | **53,712** | 51,284 | 2,428 | 4.73% | **4.07%** | 4.40% | (0.33)% |
| Consumer and other **4,365** 6,374 | (2,009) | (31.52)% | **146** | 210 | (64) | (30.48)% | **4.48%** | 4.40% | 0.08% |
| Total loans **2,307,229** 2,115,061 | 192,168 | 9.09% | **71,738** | 67,421 | 4,317 | 6.40% | **4.16%** | 4.26% | (0.10)% |
| Securities: |  |  |  |  |  |  |  |  |  |
| Taxable **403,873** 325,853 | 78,020 | 23.94% | **5,952** | 6,105 | (153) | (2.51)% | **1.96%** | 2.50% | (0.54)% |
| Tax-exempt (3) **133,074** 48,381 | 84,693 | 175.05% | **2,506** | 1,221 | 1,285 | 105.24% | **2.51%** | 3.37% | (0.86)% |
| Total securities **536,947** 374,234 | 162,713 | 43.48% | **8,458** | 7,326 | 1,132 | 15.45% | **2.10%** | 2.61% | (0.51)% |
| Federal funds sold **254,890** 55,134 | 199,756 | 362.31% | **226** | 256 | (30) | (11.72)% | **0.12%** | 0.62% | (0.50)% |
| Total interest-earning assets (3) **$3,099,066** $2,544,429 | $554,637 | 21.80% | **80,422** | 75,003 | 5,419 | 7.23% | **3.47%** | 3.94% | (0.47)% |
| Interest-bearing liabilities: |  |  |  |  |  |  |  |  |  |
| Deposits: |  |  |  |  |  |  |  |  |  |
| Interest-bearing demand, |  |  |  |  |  |  |  |  |  |
| savings and money |  |  |  |  |  |  |  |  |  |
| market **$1,841,642** $1,450,279 | $391,363 | 26.99% | **4,680** | 6,308 | (1,628) | (25.81)% | **0.34%** | 0.58% | (0.24)% |
| Time deposits **212,967** 229,205 | (16,238) | (7.08)% | **1,213** | 3,035 | (1,822) | (60.03)% | **0.76%** | 1.77% | (1.01)% |
| Total deposits **2,054,609** 1,679,484 | 375,125 | 22.34% | **5,893** | 9,343 | (3,450) | (36.93)% | **0.38%** | 0.74% | (0.36)% |
| Other borrowed funds **190,832** 229,431 | (38,599) | (16.82)% | **3,266** | 4,801 | (1,535) | (31.97)% | **2.29%** | 2.80% | (0.51)% |
| Total interest-bearing |  |  |  |  |  |  |  |  |  |
| liabilities **$2,245,441** $1,908,915 | $336,526 | 17.63% | **9,159** | 14,144 | (4,985) | (35.24)% | **0.55%** | 0.99% | (0.44)% |
| Net interest income (FTE) (4) |  |  | **$71,263** | $60,859 | $10,404 | 17.10% |  |  |  |
| Net interest spread (FTE) |  |  |  |  |  |  | **2.92%** | 2.95% | (0.03)% |
| Net interest margin (FTE) (4) |  |  |  |  |  |  | **3.07%** | 3.19% | (0.12)% |

(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 Non-GAAP Financial Measures section of this report.

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 average balances of asset and liability categories and changes in interest rates. Interest rates earned and paid are affected by general economic conditions, particularly changes in market interest rates, and by competitive factors, government policies and actions of regulatory authorities. The Federal Reserve decreased the targeted federal funds interest rate by a total of 150 basis points in March 2020, reaching its current range of 0.0 - 0.25 percent.

Net interest margin on a 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. The net interest margin for the three and nine months ended September 30, 2021 decreased by 15 and 12 basis points, respectively, compared to the three and nine months ended September 30, 2020. The primary driver of the decrease in the net interest margin was a decrease in yield on securities, partially offset by a decrease in the interest rates paid on deposits and other borrowed funds. The higher average balances of federal funds sold also contributed to a lower net interest margin. Tax-equivalent net interest income for the three and nine months ended September 30, 2021 increased $3,516 and $10,404, respectively, compared to the same time periods in 2020. The increase in net interest income for the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020 was primarily due to increases in average loans and securities balances and decreases in deposit interest rates, partially offset by increases in average deposit balances and decreases in yields on securities.

Tax-equivalent interest income on loans increased $1,811 for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. Included in commercial loans were PPP loans with interest income of $1,590 and $1,365 and yields of 9.28 percent and 2.42 percent for the three months ended September 30, 2021 and September 30, 2020, respectively. For the nine months ended September 30, 2021, tax-equivalent interest income on loans increased $4,317 compared to the same period in 2020. Included in commercial loans were PPP loans with interest income of $5,819 and $2,438 and yields of 6.46 percent and 2.44 percent for the nine months ended September 30, 2021 and September 30, 2020, respectively. The PPP loan interest income in 2021 included accelerated origination fees recognized at the time of loan forgiveness. Exclusive of the PPP loans, the yield on loans was 3.98 percent and 4.20 percent for the three months ended September 30, 2021 and September 30, 2020, respectively, and 4.03 percent and 4.38 percent for the nine months ended September 30, 2021 and September 30, 2020, respectively. Management believes interest income on loans and the yield on loans could decline in future periods if the low interest rate environment and strong competition persist. Average loan balances, exclusive of PPP loans, increased $263,086 and $205,062, or 13.1 percent and 10.3 percent for the three and nine months ended September 30, 2021, respectively, compared to the same time periods in 2020.

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 political and economic environments can also influence the volume of new loan originations and the mix of variable-rate versus fixed-rate loans. We anticipate that our interest income could be adversely affected in future periods as a result of the long-term impact of the COVID-19 pandemic, including the possibility of decreases in the size of our loan portfolio and declining credit quality, the effect of lower interest rates, and the potential for an increase in nonaccrual loans.

The average balance of interest-bearing demand, savings and money market deposits increased for the three and nine months ended September 30, 2021, compared to the three and nine months ended September 30, 2020, primarily due to an increase in average balances of money market and interest-bearing demand accounts. The increase in average balances was primarily due to changes in customer behavior as a result of the COVID-19 pandemic and our customers' desire to retain liquidity, as well as a result of additional funds provided to individuals and businesses by government relief programs. The average rate paid on interest-bearing demand, savings and money market deposits for the three and nine months ended September 30, 2021 decreased 2 and 24 basis points, respectively, compared to the three and nine months ended September 30, 2020. The average rate paid on time deposits decreased 57 and 101 basis points, respectively, for the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020. The decreases were primarily due to decreasing interest rates on all deposit products in response to the unprecedented decrease in the targeted federal funds rate that occurred in March 2020.

The average balance of other borrowed funds decreased $56,812 and $38,599, respectively, for the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020. The rate paid on borrowed funds declined by 41 and 51 basis points, respectively, for the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020. These declines were primarily due to the repayment of $50,000 of FHLB advances in the second quarter of 2021 and the maturity of long-term, high rate FHLB advances in the second and third quarters of 2020.

As a result of the historically low interest rate environment, we expect that our net interest income and net interest margin could decrease in future periods.

#### Provision for Loan Losses and the Related Allowance for Loan Losses

The provision for loan losses represents a charge 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. The provisions for loan losses were zero and negative $1,500 for the three and nine months ended September 30, 2021, compared to a provision of $4,000 and $8,000 for the three and nine months ended September 30, 2020. The provisions in 2020 were due primarily to uncertainty surrounding economic conditions as a result of the COVID-19 pandemic, while the negative provision recorded in 2021 was primarily due to the improvement in economic conditions. In 2021, reductions in certain qualitative factors used in the allowance for loan losses calculation related to economic improvement were partially offset by loan growth.

Factors management considers 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. In response to COVID-19, the Company increased its monitoring efforts of certain segments of the loan portfolio that management believed were under increased stress, including hotel exposures. Ongoing communication with customers regarding revenue and cash flow expectations continue to be used to monitor risks and stress in the loan portfolio. For example, customers in the hotel industry provide monthly updates on occupancy rates.

The quarterly evaluation of the allowance focuses on factors such as specific loan reviews, changes in the components of the loan portfolio given the current and forecasted 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 concentrations in central and eastern Iowa and southern Minnesota. The local economies in those markets are composed primarily of major financial service 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 generally are not fully repaid over the loan period and may require refinancing or a large payoff at maturity. When the 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 charge-offs or provision for loan losses based on such agencies' review of information available to them at the time of their examinations.

West Bank's policy is to charge off loans when, in management's opinion, a loan or a portion of a loan is deemed uncollectible. Commercially reasonable efforts are made to maximize subsequent recoveries. The following table summarizes the activity in the Company's allowance for loan losses for the three and nine months ended September 30, 2021 and 2020 and related ratios.

|  | Three Months Ended September 30, 2021 | 2020 | Change | Nine Months Ended September 30, 2021 | 2020 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Balance at beginning of period | **$28,042** | $21,363 | $6,679 | **$29,436** | $17,235 | $12,201 |
| Charge-offs | **—** | — | — | **—** | (1) | 1 |
| Recoveries | **56** | 40 | 16 | **162** | 169 | (7) |
| Net recoveries | **56** | 40 | 16 | **162** | 168 | (6) |
| Provision for loan losses charged to operations | **—** | 4,000 | (4,000) | **(1,500)** | 8,000 | (9,500) |
| Balance at end of period | **$28,098** | $25,403 | $2,695 | **$28,098** | $25,403 | $2,695 |
| Average loans outstanding | **$2,337,355** | $2,230,608 |  | **$2,307,229** | $2,115,061 |  |
| Ratio of annualized net (charge-offs) recoveries during the period to average loans outstanding | **0.01%** | 0.01% |  | **0.01%** | 0.01% |  |
| Ratio of allowance for loan losses to average loans outstanding | **1.20%** | 1.14% |  | **1.22%** | 1.20% |  |
| Ratio of allowance for loan losses to total loans at end of period | **1.19%** | 1.13% |  | **1.19%** | 1.13% |  |
| Ratio of allowance for loan losses to total loans at end of period, excluding PPP loans(1) | **1.22%** | 1.26% |  | **1.22%** | 1.26% |  |

(1) A non-GAAP financial measure. For further information, refer to the Non-GAAP Financial Measures section of this report.

In 2020, the U.S. economy deteriorated rapidly and significantly as a result of the COVID-19 pandemic and the impact of economic uncertainties. The national unemployment rate jumped from 4.4 percent in March 2020 to 14.8 percent in April 2020 amid nationwide shutdowns and other restrictions in the interest of public health and safety. In 2021, the economy has begun to recover; however some economic measures still lag pre-pandemic levels. Additionally, certain industries, including travel, hospitality and entertainment, have been particularly impacted by shutdowns, capacity restrictions, and social distancing requirements that occurred in response to COVID-19. There remains uncertainty about recovery times and the long term impact on local businesses as well as the travel, hospitality and entertainment industries. The Company increased certain qualitative factors used in the allowance for loan losses evaluation in 2020 in response to the COVID-19 pandemic. Based on the continued improvement in national and local economic performances measures, the relative success of vaccination efforts and the lifting of pandemic-related restrictions in the Company's market areas, the Company decreased certain qualitative factors used in the allowance for loan losses evaluation in the second and third quarters of 2021. However, the qualitative factors overall remain higher at September 30, 2021 than they were prior to the 2020 COVID-19 pandemic related adjustments.

#### Noninterest Income

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

| Noninterest income: | Three Months Ended September 30, 2021 | 2020 | Change | Change % |
| --- | ---: | ---: | ---: | ---: |
| Service charges on deposit accounts | **$589** | $609 | $(20) | (3.28)% |
| Debit card usage fees | **490** | 432 | 58 | 13.43% |
| Trust services | **695** | 553 | 142 | 25.68% |
| Increase in cash value of bank-owned life insurance | **230** | 133 | 97 | 72.93% |
| Loan swap fees | **—** | 983 | (983) | (100.00)% |
| Realized securities gains, net | **11** | 156 | (145) | (92.95)% |
| Other income: |  |  |  |  |
| All other income | **386** | 337 | 49 | 14.54% |
| Total other income | **386** | 337 | 49 | 14.54% |
| Total noninterest income | **$2,401** | $3,203 | $(802) | (25.04)% |
|  | Nine Months Ended September 30, |  |  |  |
| Noninterest income: | **2021** | 2020 | Change | Change % |
| Service charges on deposit accounts | **$1,749** | $1,743 | $6 | 0.34% |
| Debit card usage fees | **1,443** | 1,205 | 238 | 19.75% |
| Trust services | **2,038** | 1,477 | 561 | 37.98% |
| Increase in cash value of bank-owned life insurance | **690** | 427 | 263 | 61.59% |
| Loan swap fees | **42** | 1,572 | (1,530) | (97.33)% |
| Realized securities gains, net | **51** | 81 | (30) | (37.04)% |
| Other income: |  |  |  |  |
| All other income | **1,368** | 993 | 375 | 37.76% |
| Total other income | **1,368** | 993 | 375 | 37.76% |
| Total noninterest income | **$7,381** | $7,498 | $(117) | (1.56)% |

Debit card usage fees increased for the three and nine months months ended September 30, 2021 when compared to the same periods ended September 30, 2020, due to an increase in transaction volume as consumers responded to the reopening of the economy. Revenue from trust services increased for the three and nine months ended September 30, 2021 when compared to the same periods ended September 30, 2020, primarily as a result of an increase in the value of trust assets in 2021 compared to 2020. The increase in cash value of bank-owned life insurance was driven by the purchase of additional life insurance in the third quarter of 2020, increasing total life insurance investments for the three and nine months ended September 30, 2021 in comparison to the three and nine months ended September 30, 2020. The Company offers loan level interest rate swaps to its customers and offsets its exposure from such contracts by entering into mirror image swaps with a swap counterparty (back-to-back swap program). Loan swap fees consist of fees earned in the back-to-back swap program at contract origination and are dependent on the timing and volume of customer activity.

The increase in other income for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily due to the recognition of net swap termination gains totaling $181 in March 2021. Interest rate swaps with a total notional amount of $150,000 were terminated and the pre-tax gains and losses were recorded in other noninterest income. Refer to Note 5 to the financial statements for additional information.

#### Noninterest Expense

The following tables show 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 below.

| Noninterest expense: | Three Months Ended September 30, 2021 | 2020 | Change | Change % |
| --- | ---: | ---: | ---: | ---: |
| Salaries and employee benefits | **$6,018** | $5,412 | $606 | 11.20% |
| Occupancy | **1,203** | 1,221 | (18) | (1.47)% |
| Data processing | **616** | 572 | 44 | 7.69% |
| FDIC insurance | **528** | 351 | 177 | 50.43% |
| Professional fees | **212** | 230 | (18) | (7.83)% |
| Director fees | **176** | 236 | (60) | (25.42)% |
| Other expenses: |  |  |  |  |
| Marketing | **54** | 57 | (3) | (5.26)% |
| Business development | **229** | 158 | 71 | 44.94% |
| Insurance expense | **127** | 110 | 17 | 15.45% |
| Charitable contributions | **60** | 45 | 15 | 33.33% |
| Subscriptions and service contracts | **424** | 351 | 73 | 20.80% |
| Trust | **181** | 117 | 64 | 54.70% |
| Consulting fees | **70** | 67 | 3 | 4.48% |
| Low income housing projects amortization | **203** | 110 | 93 | 84.55% |
| New markets tax credit project amortization and management fees | **230** | 230 | — | —% |
| All other | **381** | 792 | (411) | (51.89)% |
| Total other expenses | **1,959** | 2,037 | (78) | (3.83)% |
| Total noninterest expense | **$10,712** | $10,059 | $653 | 6.49% |
|  | Nine Months Ended September 30, |  |  |  |
| Noninterest expense: | **2021** | 2020 | Change | Change % |
| Salaries and employee benefits | **$17,298** | $16,014 | $1,284 | 8.02% |
| Occupancy | **3,630** | 3,651 | (21) | (0.58)% |
| Data processing | **1,835** | 1,756 | 79 | 4.50% |
| FDIC insurance | **1,358** | 880 | 478 | 54.32% |
| Professional fees | **763** | 669 | 94 | 14.05% |
| Director fees | **581** | 664 | (83) | (12.50)% |
| Other expenses: |  |  |  |  |
| Marketing | **156** | 145 | 11 | 7.59% |
| Business development | **676** | 562 | 114 | 20.28% |
| Insurance expense | **371** | 324 | 47 | 14.51% |
| Charitable contributions | **180** | 135 | 45 | 33.33% |
| Subscriptions and service contracts | **1,269** | 982 | 287 | 29.23% |
| Trust | **459** | 337 | 122 | 36.20% |
| Consulting fees | **223** | 233 | (10) | (4.29)% |
| Low income housing projects amortization | **529** | 315 | 214 | 67.94% |
| New markets tax credit project amortization and management fees | **689** | 689 | — | —% |
| All other | **1,492** | 1,783 | (291) | (16.32)% |
| Total other expenses | **6,044** | 5,505 | 539 | 9.79% |
| Total noninterest expense | **$31,509** | $29,139 | $2,370 | 8.13% |

42

Salaries and employee benefits increased for the three and nine months ended September 30, 2021 when compared to the three and nine months ended September 30, 2020, primarily due to an increase in expense related to restricted stock units and the addition of three commercial bankers in the Des Moines market in the third quarter of 2021. FDIC insurance expense increased during the three and nine months ended September 30, 2021 when compared to the same time periods in 2020 due to increases in both the Company's average assets and assessment rate.

Business development expense increased for the three and nine months ended September 30, 2021 in comparison to the three and nine months ended September 30, 2020. Business development activities were significantly limited as a result of COVID-19 shutdowns and social distancing guidelines that began in the second quarter of 2020. Business development activities have increased in the second and third quarters of 2021 as local economies return to normal activities. Subscriptions and service contracts increased primarily due to increases in information technology and information security solutions. All other expenses were lower for the three and nine months ended September 30, 2021 when compared to the three and nine months ended September 30, 2020, due primarily to losses in 2020 from a check fraud incident.

#### Income Tax Expense

The Company recorded income tax expense of $3,469 (21.4 percent of pre-tax income) and $10,132 (21.2 percent of pre-tax income) for the three and nine months ended September 30, 2021, compared with $2,176 (21.2 percent of pre-tax income) and $6,544 (21.3 percent of pre-tax income) for the three and nine months ended September 30, 2020. The Company's consolidated income tax rate differs from the federal statutory income tax rate in each period, primarily due to tax-exempt interest income, the tax-exempt increase in cash value of bank-owned life insurance, disallowed interest expense, and state income taxes. In addition, for the nine months ended September 30, 2021, a tax benefit of $233 was recorded as a result of the increase in fair value of restricted stock over the vesting period. Comparatively, for the nine months ended September 30, 2020, a tax expense of $116 was recorded as a result of the decrease in fair value of restricted stock over the vesting period. The tax rates for the first nine months of 2021 and 2020 were also impacted by year-to-date federal low income housing tax credits and a new markets tax credit of approximately $1,026 and $930, respectively.

### FINANCIAL CONDITION

The Company had total assets of $3,249,700 as of September 30, 2021, compared to total assets of $3,185,744 as of December 31, 2020. Fluctuations in the balance sheet included increases in securities, loans, deposits, federal funds purchased and other liabilities and decreases in Federal Home Loan Bank advances, federal funds sold and long-term debt.

#### Securities

The balance of securities available for sale increased by $342,826 during the nine months ended September 30, 2021. In the first nine months of 2021, securities were purchased to improve the yield on excess liquidity. As of September 30, 2021, approximately 62 percent of the available for sale securities portfolio consisted of government agency guaranteed collateralized mortgage obligations and mortgage-backed securities. Management currently believes these securities provide relatively good yields, have little to no credit risk and provide fairly consistent cash flows.

#### Loans and Nonperforming Assets

Loans outstanding increased $78,992 from $2,280,575 as of December 31, 2020 to $2,359,567 as of September 30, 2021. Changes in the loan portfolio during the first nine months of 2021 included increases of $98,163 in commercial real estate loans and $89,562 in construction, land and land development loans. Commercial loans declined $112,255, which included a $133,341 decline in PPP loans. As of September 30, 2021, PPP loans outstanding totaled $47,416, which was made up of $6,812 from round one of the program in 2020 and $40,604 from round two in 2021. The Company continues to focus on business development efforts in all of its markets. Exclusive of PPP loans, loan growth in the first nine months of 2021 was 10.1 percent.

Nonaccrual loans decreased $7,114 from December 31, 2020 to September 30, 2021 due to payments received on outstanding balances. The Company's Texas ratio, which is computed by dividing total nonperforming assets by tangible common equity plus the allowance for loan losses, was 3.24 percent as of September 30, 2021, compared to 6.40 percent as of December 31, 2020.

The watch classification of loans increased to $91,325 as of September 30, 2021 from $26,715 as of December 31, 2020. The increase was primarily due to the addition of $69,078 of hotel, restaurant and other commercial real estate loans related to one borrowing group. This relationship was downgraded to watch classification in the first quarter of 2021 primarily due to a slower rebound in its hotel occupancy rates compared to other market data. The loans in this downgraded borrowing group are considered well collateralized with a weighted average loan to value ratio of 70 percent.

Even though we have seen improvement in economic conditions, we believe the COVID-19 pandemic could have further adverse affects on the credit quality of our loan portfolio. The duration of business disruptions to our customers in the hotel, restaurant and movie theater industries could result in increased loan delinquencies and defaults. Management believes impaired loans could increase in the future as a result of the long-term economic effects of the COVID-19 pandemic, including the risk of future shutdowns in response to new COVID-19 variants. No credit issues are anticipated with PPP loans at this time, as they are 100 percent guaranteed by the SBA.

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. An analysis of the Company's non-owner occupied commercial real estate portfolio as of December 31, 2020 was presented in the Company's Form 10-K filed with the SEC on March 1, 2021, and the Company has not experienced any material changes to that analysis since December 31, 2020.

The following table sets forth the amount of nonperforming assets held by the Company and common ratio measurements of those assets as of the dates shown.

|  | September 30, 2021 | December 31, 2020 | Change |
| --- | ---: | ---: | ---: |
| Nonaccrual loans | **$9,080** | $16,194 | $(7,114) |
| Loans past due 90 days and still accruing interest | **—** | — | — |
| Troubled debt restructured loans (1) | **—** | — | — |
| Total nonperforming loans | **9,080** | 16,194 | (7,114) |
| Other real estate owned | **—** | — | — |
| Total nonperforming assets | **$9,080** | $16,194 | $(7,114) |
| Nonperforming loans to total loans | **0.38%** | 0.71% | (0.33)% |
| Nonperforming assets to total assets | **0.28%** | 0.51% | (0.23)% |

(1) While TDR loans are commonly reported by the industry as nonperforming, those not classified in the nonaccrual category are accruing interest due to payment performance. TDR loans on nonaccrual status are categorized as nonaccrual. There were six TDR loans related to one borrower as of September 30, 2021 categorized as nonaccrual. There were no TDR loans as of December 31, 2020 categorized as nonaccrual.

#### Deposits

Deposits increased $35,929 during the first nine months of 2021. Savings accounts, which include money market accounts, increased by a total of $105,067 from December 31, 2020 to September 30, 2021. Interest-bearing demand accounts decreased a total of $95,716 from December 31, 2020 to September 30, 2021. Balance fluctuations were primarily due to normal customer activity, as corporate customers' liquidity needs vary at any given time. We believe that deposit levels could decrease in future periods as a result of the end of broad government stimulus programs relating to the COVID-19 pandemic and low interest rates.

#### Borrowed Funds

The Company had $125,000 of short-term FHLB advances outstanding at September 30, 2021, compared to $175,000 as of December 31, 2020. The Company repaid $50,000 of FHLB advances at maturity in the second quarter of 2021 to reduce unneeded funding as a result of high deposit balances and excess liquidity. Federal funds balances fluctuate based on customer loan and deposit activity and the Company's balance sheet management objectives.

#### Derivatives

At September 30, 2021 and December 31, 2020, the Company had interest rate swap contracts associated with borrowed funds and deposits with a total notional amount of $255,000 and $305,000, respectively. The fair value of these derivative contracts, which is reported in other liabilities on the balance sheet, increased $12,974 from December 31, 2020 to September 30, 2021 due to the increases in projected long-term market interest rates.

In March 2021, the Company terminated interest rate swaps with a total notional amount of $150,000. Of the total notional amount of $150,000, $100,000 were forward-starting interest rate swaps originated in January 2021 and $50,000 were interest rate swaps hedging the interest cash flows of FHLB advances. The net termination gains were recorded in other noninterest income.

#### Other Liabilities

Other liabilities at September 30, 2021 included $30,151 of pending security settlements.

#### 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 collateralized mortgage obligations and mortgage-backed securities, federal funds purchased, advances from the FHLB, and funds provided by operations. Liquidity management is conducted on both a daily and a long-term basis. Investments in liquid assets are adjusted based on expected loan demand, projected loan and securities maturities and payments, expected deposit flows and the objectives set by the Company's asset-liability management policy. The Company had liquid assets (cash and cash equivalents) of $32,469 as of September 30, 2021 compared with $396,435 as of December 31, 2020.

As of September 30, 2021, West Bank had additional borrowing capacity available from the FHLB of approximately $553,000, as well as approximately $18,000 through the Federal Reserve discount window and $67,000 through unsecured federal funds lines of credit with correspondent banks. Net cash from operating activities contributed $72,585 to liquidity for the nine months ended September 30, 2021. Management believed that the combination of high levels of potentially liquid assets, cash flows from operations, and additional borrowing capacity provided the Company with strong liquidity as of September 30, 2021.

The Company's total stockholders' equity increased to $252,376 at September 30, 2021 from $223,695 at December 31, 2020. The increase was primarily the result of net income less dividends paid and an increase in fair value of derivatives, partially offset by a decrease in the fair value of securities. At September 30, 2021, the Company's tangible common equity as a percent of tangible assets was 7.77 percent compared to 7.02 percent as of December 31, 2020.

The Company had remaining commitments to invest in qualified affordable housing projects totaling $3,992 and $3,505 as of September 30, 2021 and December 31, 2020, respectively. During 2020, the Company began construction on a new office in Sartell, Minnesota, which had a remaining construction commitment of $3,477 and $8,324 as of September 30, 2021 and December 31, 2020, respectively.

The Company and West Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements (as shown in the following table) can result in certain mandatory and possibly additional discretionary actions by regulators, which, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and West Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's and West Bank's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Management believed the Company and West Bank met all capital adequacy requirements to which they were subject as of September 30, 2021.

The Company's and West Bank's capital amounts and ratios are presented in the following table.

| As of September 30, 2021: Total Capital (to Risk-Weighted Assets) | Actual Amount | Ratio | For Capital Adequacy Purposes Amount | Ratio | For Capital Adequacy Purposes With Capital Conservation Buffer Amount | Ratio | To Be Well-Capitalized Amount | Ratio |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Consolidated | **$310,479** | **11.12%** | **$223,376** | **8.00%** | **$293,181** | **10.50%** | **$279,220** | **10.00%** |
| West Bank | **312,109** | **11.18%** | **223,315** | **8.00%** | **293,101** | **10.50%** | **279,144** | **10.00%** |
| Tier 1 Capital (to Risk-Weighted Assets) |  |  |  |  |  |  |  |  |
| Consolidated | **282,381** | **10.11%** | **167,532** | **6.00%** | **237,337** | **8.50%** | **223,376** | **8.00%** |
| West Bank | **284,011** | **10.17%** | **167,486** | **6.00%** | **237,272** | **8.50%** | **223,315** | **8.00%** |
| Common Equity Tier 1 Capital (to Risk-Weighted Assets) |  |  |  |  |  |  |  |  |
| Consolidated | **262,381** | **9.40%** | **125,649** | **4.50%** | **195,454** | **7.00%** | **181,493** | **6.50%** |
| West Bank | **284,011** | **10.17%** | **125,615** | **4.50%** | **195,401** | **7.00%** | **181,444** | **6.50%** |
| Tier 1 Capital (to Average Assets) |  |  |  |  |  |  |  |  |
| Consolidated | **282,381** | **8.51%** | **132,785** | **4.00%** | **132,785** | **4.00%** | **165,981** | **5.00%** |
| West Bank | **284,011** | **8.56%** | **132,685** | **4.00%** | **132,685** | **4.00%** | **165,856** | **5.00%** |
| As of December 31, 2020: |  |  |  |  |  |  |  |  |
| Total Capital (to Risk-Weighted Assets) |  |  |  |  |  |  |  |  |
| Consolidated | $284,977 | 11.45% | $199,092 | 8.00% | $261,308 | 10.50% | $248,865 | 10.00% |
| West Bank | 290,677 | 11.69% | 198,995 | 8.00% | 261,181 | 10.50% | 248,744 | 10.00% |
| Tier 1 Capital (to Risk-Weighted Assets) |  |  |  |  |  |  |  |  |
| Consolidated | 255,541 | 10.27% | 149,319 | 6.00% | 211,535 | 8.50% | 199,092 | 8.00% |
| West Bank | 261,241 | 10.50% | 149,246 | 6.00% | 211,431 | 8.50% | 198,995 | 8.00% |
| Common Equity Tier 1 Capital (to Risk-Weighted Assets) |  |  |  |  |  |  |  |  |
| Consolidated | 235,541 | 9.46% | 111,989 | 4.50% | 174,205 | 7.00% | 161,762 | 6.50% |
| West Bank | 261,241 | 10.50% | 111,935 | 4.50% | 174,120 | 7.00% | 161,683 | 6.50% |
| Tier 1 Capital (to Average Assets) |  |  |  |  |  |  |  |  |
| Consolidated | 255,541 | 8.66% | 118,053 | 4.00% | 118,053 | 4.00% | 147,567 | 5.00% |
| West Bank | 261,241 | 8.86% | 117,946 | 4.00% | 117,946 | 4.00% | 147,433 | 5.00% |

The Company and West Bank are subject to the rules of the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act. The rules include the implementation of a 2.5 percent capital conservation buffer that is added to the minimum requirements for capital adequacy purposes. A banking organization with a capital conservation buffer of less than the required amount will be subject to limitations on capital distributions, including dividend payments, and certain discretionary bonus payments to executive officers. At September 30, 2021, the capital ratios for the Company and West Bank were sufficient to meet the conservation buffer.

## Market risk

As filed, 4,074 characters.

The Company's market risk is composed primarily of interest rate risk arising from its core banking activities of lending and deposit taking. Interest rate risk refers to the exposure arising from changes in interest rates. Fluctuations in interest rates have a significant impact not only upon net income, but also upon the cash flows and market values of assets and liabilities. Our results of operations, like those of other financial institutions, are impacted by changes in interest rates and the interest rate sensitivity of our interest-earning assets and interest-bearing liabilities. Management continually develops and applies strategies to mitigate this risk. Management does not believe that the Company's primary market risk exposure and management of that exposure in the first nine months of 2021 have materially changed compared to those in the year 2020.

The Company's objectives are to manage interest rate risk to foster consistent growth of earnings and capital. It is our policy to maintain an acceptable level of interest rate risk over a range of possible changes in interest rates while remaining responsive to market demand for loan and deposit products. To measure that risk, the Company uses an earnings simulation approach.

The Company maintains an Asset Liability Committee which meets quarterly to review the interest rate sensitivity position and to review and develop various strategies for managing interest rate risk. Measuring and managing interest rate risk is a dynamic process that management performs with the objective of maximizing net interest margin while maintaining interest rate risk within acceptable tolerances. This process relies primarily on the simulation of net interest income over multiple interest rate scenarios. The Company engages a third party that utilizes a modeling program to measure the Company’s exposure to potential interest rate changes. For various assumed hypothetical changes in market interest rates, this analysis measures the estimated change in net interest income. The simulations allow for ongoing assessment of interest rate sensitivity and can include the impact of potential new business strategies. The modeled scenarios begin with a base case in which rates are unchanged and include parallel and nonparallel rate shocks. The results of these shocks are measured in two forms: first, the impact on the net interest margin and earnings over one and two year time frames; and second, the impact on the market value of equity. The results of the simulation are compared against approved policy limits.

The following table presents the estimated change in net interest income for one year under several scenarios of assumed interest rate changes for the rate shock levels shown. The net interest income in each scenario is based on parallel and permanent changes in the interest rates.

| Scenario | % Change |
| --- | ---: |
| 300 basis points rising | 1.24% |
| 200 basis points rising | 1.03% |
| 100 basis points rising | 0.76% |
| Base | — |

As of September 30, 2021, the estimated effect of a 300 basis point increase in interest rates would be an increase of the Company's net interest income by approximately 1.24 percent, or $1,144 over the twelve months ending September 30, 2022. The estimated effect of a decrease in rates is not reasonably calculable due to the current low interest rate environment.

Computations of the prospective effects of hypothetical interest rate changes are based on numerous assumptions. The assumptions used in our interest rate sensitivity simulation discussed above are inherently uncertain and, as a result, the simulations cannot precisely measure net interest income or precisely predict the impact of changes in interest rates on net interest income. Actual values may differ from those projections set forth above due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions. Further, the computations do not contemplate any actions the Company may undertake in response to changes in interest rates.

## Controls and procedures

As filed, 1,171 characters.

a. Evaluation of disclosure controls and procedures. As of the end of the period covered by this report, an evaluation of the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) was performed under the supervision, and with the participation, of the Company's Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.

b. Changes in internal control over financial reporting. There were no changes in the Company's internal control over financial reporting that occurred during the quarter ended September 30, 2021, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

## Risk factors

As filed, 199 characters.

Management does not believe there have been any material changes in the risk factors that were disclosed in the Company's Form 10-K filed with the Securities and Exchange Commission on March 1, 2021.

Filed Oct 28, 2021.
Source: SEC EDGAR, the filing index for accession 0001166928-21-000109. Last ingested by Listed: Nov 14, 2026, 21:19 ET. No prices; not investment advice.