West Bancorporation(WTBA) - 2023 Q4 - Annual Report

Part I Business West Bancorporation, Inc. operates West Bank, a business-focused community bank in Iowa and Minnesota, emphasizing strong customer relationships and credit quality under extensive regulation - The Company is a financial holding company primarily owning West Bank, a business-focused community bank established in 1893[17] - The Company operates across central and eastern Iowa and southern Minnesota, including major cities like Des Moines, Iowa City, and Rochester[19] Key Business Metrics (2022 vs 2023) | Metric | 2022 | 2023 | Change | | :--- | :--- | :--- | :--- | | Loans Outstanding | $2.7 billion | $2.9 billion | +6.7% | | Total Deposits | - | - | +3.2% | | Dividends per Share | - | $1.00 | - | - The company's strategy focuses on developing strong relationships with small- to medium-sized businesses, providing personalized attention and financial expertise[24] - As an FDIC-insured financial holding company, the business is extensively regulated by federal and state agencies, impacting capital levels, investments, and dividend payments[38][39] Risk Factors The company faces inherent banking risks including credit concentration in commercial real estate, subjective allowance for credit losses, cybersecurity threats, interest rate sensitivity, intense competition, and extensive regulatory oversight impacting profitability and operations - The company's loan portfolio has a significant concentration in commercial real estate, posing risks from fluctuating property values and income dependency for repayment[94][97] - The allowance for credit losses (ACL) is subjective, requiring significant management estimates, and an insufficient ACL could decrease net income and capital[99][100] - The company is susceptible to cybersecurity threats, including fraud and data breaches, which could lead to financial losses, reputational damage, and litigation[107][108] - Earnings are highly dependent on net interest income, sensitive to interest rate changes, where rising rates have compressed the net interest margin by increasing funding costs faster than asset yields[130][131] - Operating in a highly regulated environment, changes in banking laws and regulations could adversely impact profitability, business practices, and compliance costs[136][138] Unresolved Staff Comments The company reports no unresolved comments from the Securities and Exchange Commission (SEC) staff - There are no unresolved comments from the SEC staff[153] Cybersecurity The company maintains a comprehensive Information Security Program, overseen by the Board and its committees, to manage cybersecurity risks through safeguards, assessments, and training, with no material impact from identified threats to date - The company maintains an Information Security Program with administrative, technical, and physical safeguards to protect customer information[156] - Oversight is managed by the Information Security Committee, with ultimate responsibility from the Board of Directors and its Risk and Information Technology Committee for cybersecurity risk management[158][159] - While cybersecurity threats are identified periodically, none have materially affected the company's business, operations, or financial condition to date[157] Properties The company's corporate office is in West Des Moines, Iowa, with West Bank operating 11 locations across Iowa and Minnesota (six leased, five owned), and a new corporate headquarters expected in Q2 2024 - West Bank operates 11 locations in total, comprising a main office and ten branches, with six facilities leased and five owned[160] - A new corporate headquarters is under construction in West Des Moines, Iowa, with an expected opening date of April 15, 2024[161] Legal Proceedings Neither the company nor West Bank is party to any material pending legal proceedings beyond ordinary litigation incidental to business - Neither the Company nor West Bank is party to any material pending legal proceedings, apart from ordinary litigation incidental to business[162] Mine Safety Disclosures This section is not applicable to the company - Not applicable[163] Part II Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under 'WTBA', with 149 holders as of February 16, 2024, and paid $1.00 per share in dividends for 2023 and 2022, intending to continue quarterly payments subject to approvals - The company's common stock is traded on the Nasdaq Global Select Market under the symbol "WTBA"[166] - Total cash dividends paid to common stockholders were $1.00 per share in both 2023 and 2022[167] Five-Year Stock Performance Comparison (Indexed) | Index | 12/31/2018 | 12/31/2019 | 12/31/2020 | 12/31/2021 | 12/31/2022 | 12/31/2023 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | West Bancorporation, Inc. | 100.00 | 139.47 | 109.93 | 183.00 | 156.60 | 137.21 | | Nasdaq Composite Index | 100.00 | 136.69 | 198.10 | 242.03 | 163.28 | 236.17 | | S&P U.S. BMI Banks - Midwest Region Index | 100.00 | 130.10 | 111.85 | 147.78 | 127.53 | 130.20 | Reserved This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations Net income for 2023 significantly decreased to $24.1 million from $46.4 million in 2022, primarily due to a 24.7% drop in net interest income and the adoption of CECL, while total assets grew 5.9% to $3.8 billion and credit quality remained strong Financial Highlights (2023 vs 2022) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net Income | $24,137 thousand | $46,399 thousand | | Diluted EPS | $1.44 | $2.76 | | Return on Average Assets | 0.66% | 1.32% | | Return on Average Equity | 11.42% | 20.71% | | Net Interest Margin | 2.01% | 2.76% | | Total Assets | $3,825,758 thousand | $3,613,218 thousand | | Total Loans | $2,927,535 thousand | $2,742,836 thousand | | Total Deposits | $2,973,779 thousand | $2,880,408 thousand | - The $22.7 million (24.7%) decrease in 2023 net income was primarily due to a decline in net interest income, as rising short-term interest rates caused interest expense to increase more than interest income[195] - The company adopted the CECL standard on January 1, 2023, resulting in a $700 thousand credit loss expense in 2023, contrasting with a $2.5 million credit loss benefit in 2022 under the prior model[196][250] Critical Accounting Policies and Estimates Management identifies fair value of financial instruments and the allowance for credit losses (ACL) as critical accounting policies, with ACL measured under the CECL model requiring significant judgment and estimates based on historical data, current conditions, and future forecasts - The company's most critical accounting policies are the fair value of financial instruments and the allowance for credit losses (ACL)[183] - The ACL is measured using a cash flow-based model under the CECL standard, requiring significant management judgment for economic forecasts and qualitative factors[186][187] - The allowance for credit losses was $28.3 million (0.97% of loans) at year-end 2023, up from $25.5 million (0.93% of loans) at year-end 2022[188] Results of Operations - 2023 Compared to 2022 Net income for 2023 was $24.1 million, down from $46.4 million in 2022, primarily due to a $22.7 million decrease in net interest income and a $0.7 million credit loss expense, while noninterest expense increased by 7.9% and the effective tax rate decreased to 18.9% - Net interest income decreased by $22.7 million (24.7%) as interest expense on deposits and borrowings increased more than interest income on assets[195] - Noninterest expense increased by $3.6 million (7.9%), driven by higher salaries and benefits (+4.7%), occupancy and equipment costs (+12.1%), and a 75.7% increase in FDIC insurance expense[197][205] - The effective income tax rate was 18.9% in 2023, down from 21.9% in 2022, with the 2022 rate including a one-time increase in state income tax expense[208] Securities Portfolio The securities available for sale portfolio decreased by $40.2 million to $623.9 million at year-end 2023, with 61% in government agency-guaranteed securities, and $121.8 million in gross unrealized losses attributed to interest rate changes, with no credit loss allowance deemed necessary - The balance of securities available for sale decreased by $40.2 million during 2023, primarily due to principal paydowns and a $11.3 million securities sale[226] - Approximately 61% of the portfolio consists of government agency-guaranteed collateralized mortgage obligations and mortgage-backed securities, considered to have little to no credit risk[227] - The portfolio had gross unrealized losses of $121.8 million at year-end 2023, attributed to market interest rate changes rather than credit quality decline, with no allowance for credit losses recorded[230] Loan Portfolio Total loans grew 6.7% to $2.93 billion in 2023, driven by commercial real estate, construction, and residential mortgages, with a 77.4% concentration in commercial real estate exceeding regulatory guidelines, yet credit quality remains strong with nonperforming loans at 0.01% - Total loans outstanding increased by 6.7% in 2023 compared to 2022[233] - Nonperforming loans remained stable at 0.01% of total loans at year-end 2023 and 2022[201] - Loans classified as 'watch' significantly decreased from $54.2 million at year-end 2022 to $0.14 million at year-end 2023, primarily due to a large borrowing relationship upgrade[237] - The company's loan portfolio is concentrated in commercial real estate, exceeding regulatory guidelines, necessitating heightened risk management practices like stress testing and trend analysis[241][243] Summary of the Allowance for Credit Losses Effective January 1, 2023, the company adopted CECL, increasing the ACL by $2.5 million upon adoption, with the ACL ending the year at $28.3 million (0.97% of loans), and management believes it is adequate for expected lifetime losses - The company adopted the CECL standard on January 1, 2023, requiring a one-time adjustment that increased the ACL by $2.458 million[250][260] Allowance for Credit Losses Ratios | Ratio | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | ACL to Total Loans | 0.97% | 0.93% | | Nonaccrual Loans to Total Loans | 0.01% | 0.01% | | ACL to Nonaccrual Loans | 9,575.00% | 7,910.87% | Deposits Total deposits increased 3.2% to $2.97 billion at year-end 2023, facing significant competition and increasing funding costs, with brokered deposits totaling $305.4 million and estimated uninsured deposits at approximately $1.44 billion - Total deposits increased 3.2% to $2.97 billion as of December 31, 2023[261] - The company utilizes brokered deposits, which increased to $305.4 million at year-end 2023 from $272.7 million at year-end 2022[262] - Total estimated uninsured deposits were $1.44 billion as of December 31, 2023[267] Liquidity and Capital Resources The company maintains sufficient liquidity with $528 million additional FHLB borrowing capacity and Federal Reserve access, while total stockholders' equity increased to $225.0 million, and both the company and West Bank met all well-capitalized regulatory requirements - As of December 31, 2023, West Bank had additional borrowing capacity of approximately $528 million from the FHLB and $2.282 billion from the Federal Reserve discount window[280] - Total stockholders' equity increased to $225.0 million at year-end 2023 from $211.1 million at year-end 2022, primarily due to net income less dividends and a decrease in accumulated other comprehensive loss[282] - The Company and West Bank met all capital adequacy requirements and were considered well-capitalized as of December 31, 2023[283] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, managed by an Asset Liability Committee using an earnings simulation model, which estimates a 100 basis point rate increase would decrease net interest income by 4.58% over one year, while a 100 basis point decrease would increase it by 3.16% - The company's main market risk is interest rate risk, managed by an Asset Liability Committee using an earnings simulation approach to measure exposure[285][286][287] Estimated Change in Net Interest Income (One Year) | Change in Interest Rates | $ Change (thousands) | % Change | | :--- | :--- | :--- | | 300 bps rising | $(11,456) | (14.73)% | | 200 bps rising | $(7,187) | (9.24)% | | 100 bps rising | $(3,559) | (4.58)% | | 100 bps falling | $2,461 | 3.16% | | 200 bps falling | $4,786 | 6.16% | Financial Statements and Supplementary Data This section presents the company's consolidated financial statements and RSM US LLP's unqualified audit opinion on financial statements and internal controls, highlighting the Allowance for Credit Losses for Loans as a critical audit matter due to significant judgment and CECL adoption - The independent auditor, RSM US LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2023[292][305] - The auditor identified the Allowance for Credit Losses for Loans as a critical audit matter due to significant judgments and complex estimations required by management, particularly under the new CECL model[297][300] Consolidated Balance Sheets As of December 31, 2023, total assets were $3.83 billion, up from $3.61 billion in 2022, driven by increased net loans, while total liabilities rose to $3.60 billion, and total stockholders' equity increased to $225.0 million Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $65,357 | $26,539 | | Securities available for sale | $623,919 | $664,115 | | Loans, net | $2,899,193 | $2,717,363 | | Total Assets | $3,825,758 | $3,613,218 | | Liabilities & Equity | | | | Total deposits | $2,973,779 | $2,880,408 | | Borrowings (FHLB, etc.) | $465,270 | $355,000 | | Subordinated notes, net | $79,631 | $79,369 | | Total Liabilities | $3,600,715 | $3,402,106 | | Total Stockholders' Equity | $225,043 | $211,112 | Consolidated Statements of Income For 2023, net income sharply declined to $24.1 million from $46.4 million in 2022, primarily due to net interest income falling to $69.0 million as interest expense more than doubled, alongside a $0.7 million credit loss expense and increased noninterest expenses Consolidated Income Statement Highlights (in thousands) | Account | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Total Interest Income | $160,305 | $123,349 | $107,280 | | Total Interest Expense | $91,274 | $31,609 | $12,221 | | Net Interest Income | $69,031 | $91,740 | $95,059 | | Credit Loss Expense (Benefit) | $700 | $(2,500) | $(1,500) | | Total Noninterest Income | $10,066 | $10,208 | $9,729 | | Total Noninterest Expense | $48,611 | $45,051 | $43,380 | | Net Income | $24,137 | $46,399 | $49,607 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting principles, financial disclosure, or auditing scope within the last two years - There have been no changes in or disagreements with the Company's accountants in the two years prior to the most recent financial statements[501] Controls and Procedures As of December 31, 2023, the CEO and CFO concluded disclosure controls and procedures were effective, management asserted effective internal control over financial reporting, and no material changes occurred during Q4 2023 - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of the end of the period[502] - Management asserts that the Company maintained effective internal control over financial reporting as of December 31, 2023[506] - No material changes in internal control over financial reporting occurred during the fourth quarter of 2023[508] Other Information During Q4 2023, no directors or executive officers adopted or terminated any Rule 10b5-1 trading plans or other non-Rule 10b5-1 trading arrangements - During the fourth quarter of 2023, no directors or executive officers adopted or terminated any Rule 10b5-1 trading arrangement[509] Disclosure Regarding Foreign Jurisdictions That Prevent Inspection This section is not applicable to the company - Not applicable[510] Part III Directors, Executive Officers, and Corporate Governance Information on directors, executive officers, code of ethics, and the audit committee is incorporated by reference from the definitive Proxy Statement, with the company maintaining a Code of Conduct applicable to all personnel - Information required for this item is incorporated by reference from the Company's definitive Proxy Statement on Form DEF 14A[512] - The Company has a Code of Conduct applicable to all directors, officers, and employees, available on its website[513] Executive Compensation Information regarding executive and director compensation is incorporated by reference from the company's definitive Proxy Statement on Form DEF 14A - Information regarding executive compensation is incorporated by reference from the Company's definitive Proxy Statement[516] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details the company's equity compensation plans, with 479,480 shares to be issued upon exercise of outstanding rights and 266,963 shares available for future issuance as of December 31, 2023, with further information incorporated by reference from the Proxy Statement Equity Compensation Plan Information (as of Dec 31, 2023) | Plan Category | Number of shares to be issued upon exercise (a) | Weighted-average exercise price (b) | Number of shares remaining available for future issuance (c) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by stockholders | 479,480 | — | 266,963 | | Total | 479,480 | — | 266,963 | - Additional information regarding security ownership of beneficial owners and management is incorporated by reference from the Company's definitive Proxy Statement[520] Certain Relationships and Related Transactions, and Director Independence Information concerning related party transactions and director independence is incorporated by reference from the company's definitive Proxy Statement on Form DEF 14A - Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the Company's definitive Proxy Statement[521] Principal Accountant Fees and Services Information concerning principal accountant fees and services is incorporated by reference from the company's definitive Proxy Statement on Form DEF 14A - Information regarding principal accountant fees and services is incorporated by reference from the Company's definitive Proxy Statement[523] Part IV Exhibits and Financial Statement Schedules This section lists financial statements, schedules, and exhibits filed as part of the Form 10-K, with consolidated financial statements in Item 8 and all schedules omitted as not applicable or included elsewhere, alongside a comprehensive exhibit list - The consolidated financial statements from Item 8 are incorporated by reference[525] - All financial statement schedules are omitted as not applicable or included in the financial statements or notes[526] Form 10-K Summary The company has not provided a summary for its Form 10-K - None[533]