CrossFirst Bankshares, Inc.

Form 10-Q

for the Quarter Ended September 30, ~~2019~~

2020

Index



Part I. Financial Information
			Item 1.		Financial Statements
					Forward-Looking Information	43
					Consolidated Balance Sheets - Unaudited	54
					Consolidated Statements of Income - Unaudited	65
					Consolidated Statements of ~~Other~~ Comprehensive Income ~~(Loss)~~ - Unaudited	76
					Consolidated Statements of Stockholders’ Equity - Unaudited	87
					Consolidated Statements of Cash Flows - Unaudited	109
					Notes to Consolidated Financial Statements ~~- Unaudited~~(unaudited)

Note 1: Nature of Operations and Summary of Significant Accounting Policies		1210
					Note 2: Earnings Per Share	1514
					Note 3: Securities	1615
					Note 4: Loans and Allowance for Loan Losses (“ALLL ”)	1918

Note 5: Derivatives and Hedging		2627
					Note 6: ~~Interest-Bearing~~Goodwill and Other Intangible Assets	28
Note 7: Time Deposits and Borrowings		2829
					Note 7:8: Change in Accumulated Other Comprehensive Income ~~(AOCI)~~(“AOCI”)	2829
					Note 8:9: Regulatory Matters	29

Note ~~9: Revenue from Contracts with Customers~~10: Stock-Based Compensation		30
					~~Note 10: Equity-Based Compensation~~	31
			Note 11: Income Tax	3132
					Note 12: Disclosures about Fair Value of Financial Instruments	3233
					Note 13: Commitments and Credit Risk	3736
					Note 14: Legal and Regulatory Proceedings	3736
Note 15: Subsequent Events		36
Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations	3837



~~Recent Developments~~Third Quarter 2020 Highlights		3837

~~Selected Financial Data (unaudited)~~Results of Operations		3940

~~GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures~~Net Interest Income		40

~~Results of Operations~~Non-Interest Income		4443
					~~Summary~~Non-Interest Expense	44
					~~Net Interest~~ Income Taxes	45
					~~Provision for Loan Losses~~	47
			~~Non-Interest Income~~	48
			~~Non-Interest Expense~~	49
			~~Income Taxes~~	50
			Analysis of Financial Condition	5045

~~Balance Sheet Summary~~Securities Portfolio		5045
					~~Security~~Loan Portfolio	5145
					~~Loans Portfolio~~	51
			Provision and Allowance for Loan Losses (‘‘ALLL’’)	5245
					Nonperforming Assets and Other Asset Quality Metrics	5348
					Deposits and Other Borrowings	5449
					Liquidity	5450
					Contractual Obligations	5550
					Capital Resources and Off-Balance Sheet Arrangements	5550
					Critical Accounting Policies	5650

Item 3.			Quantitative and Qualitative Disclosures about Market Risk	5651
			Item 4.		Controls and Procedures	5852

Part II. Other Information
			Item 1.		Legal Proceedings	5852
			Item 1A.		Risk Factors	5853




Item 2.			~~Unregistered Sales of Equity Securities and Use of Proceeds~~6. Exhibits	5854
					~~Item 3.~~		~~Defaults Upon Senior Securities~~	59
Signatures					~~Item 4.~~		~~Mine Safety Disclosures~~	59
	~~Item 5.~~		~~Other Information~~	59
	~~Item 6.~~		~~Exhibits~~	60

~~Signatures~~

Table of Contents

Forward-Looking Information

This report may contain forward-looking statements that reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as ‘‘may,’’ ‘‘might,’’ ‘‘should,’’ ‘‘could,’’ ‘‘predict,’’ ‘‘potential,’’ ‘‘believe,’’ ‘‘expect,’’ ‘‘continue,’’ ‘‘will,’’ ‘‘anticipate,’’ ‘‘seek,’’ ‘‘estimate,’’ ‘‘intend,’’ ‘‘plan,’’ ‘‘strive,’’ ‘‘projection,’’ ‘‘goal,’’ target,’’ ‘‘outlook,’’ ‘‘aim,’’ ‘‘would,’’ ‘‘annualized’’“may,” “might,” “should,” “could,” “predict,” “potential,” “believe,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “strive,” “projection,” “goal,” “target,” “outlook,” “aim,” “would,” “annualized” and ~~‘‘outlook,’’~~“outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature.

These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. Such possible events or factors include: risks associated with the current outbreak of the novel coronavirus, or the COVID-19 pandemic, changes in economic conditions in the Company’s market area, changes in policies by regulatory agencies, governmental legislation and regulation, fluctuations in interest rates, changes in liquidity requirements, demand for loans in the Company’s market area, changes in accounting and tax principles, estimates made on income taxes, competition with other entities that offer financial services, cybersecurity threats, and such other factors as discussed in our ~~prospectus (File No. 333-232704), dated August 14,~~Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the Securities and Exchange Commission ~~(‘‘SEC’’~~(“SEC”) ~~pursuant to Rule 424(b) of~~on March 10, 2020, any subsequent Form 10-Q as well as in our other filings with the ~~Securities Act of 1933, as amended (the ‘‘Securities Act’’), on August 15, 2019, related to our initial public offering.~~

SEC.

We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.



		4

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CROSSFIRST BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS


	September 30, 2020		December 31, 2019

	(Unaudited)
	(Dollars in thousands)
Assets



Cash and cash equivalents	$	223,636	$	187,320
Available-for-sale securities - taxable	214,735		298,208
Available-for-sale securities - tax-exempt	437,411		443,426



Loans, net of allowance for loan losses of $76,035 and $56,896 at September 30, 2020 and December 31, 2019, respectively	4,401,774		3,795,348
Premises and equipment, net	70,599		70,210
Restricted equity securities	20,923		17,278
Interest receivable	19,003		15,716
Foreclosed assets held for sale	2,349		3,619
Deferred tax asset	15,864		13,782
Goodwill and other intangible assets, net	227		7,694
Bank-owned life insurance	67,063		65,689
Other	32,112		12,943
Total assets	$	5,505,696	$	4,931,233
Liabilities and stockholders’ equity
Deposits
Noninterest-bearing	$	754,172	$	521,826
Savings, NOW and money market	2,597,691		2,162,187
Time	1,140,686		1,239,746
Total deposits	4,492,549		3,923,759
Federal funds purchased and repurchase agreements	13,531		14,921
Federal Home Loan Bank advances	336,100		358,743

Other borrowings	952		921
Interest payable and other liabilities	44,681		31,245
Total liabilities	4,887,813		4,329,589
Stockholders’ equity
Redeemable preferred stock, $0.01 par value, $25.00 liquidation value:


authorized - 5,000,000 shares, issued - 0 shares at September 30, 2020 and December 31, 2019, respectively	0		0
Common stock, $0.01 par value:


authorized - 200,000,000 shares, issued - 52,195,778 and 51,969,203 shares at September 30, 2020 and December 31, 2019, respectively	521		520
Additional paid-in capital	522,226		519,870
Retained earnings	69,355		64,803

Accumulated other comprehensive income	25,781		16,451
Total stockholders’ equity	617,883		601,644
Total liabilities and stockholders’ equity	$	5,505,696	$	4,931,233

September 30, 2019 December 31, 2018
(Unaudited)
(Dollars in thousands)
Assets
Cash and cash equivalents $ 128,126
$ 216,541
Available for sale securities - taxable 323,531
296,133
Available for sale securities - tax-exempt 409,562
367,545
Premises and equipment, held for sale —
3,444
Loans, net of allowance for loan losses of $42,995 and $37,826 at September 30, 2019 and December 31, 2018, respectively 3,586,797

3,022,921
Premises and equipment, net 71,314
74,945
Restricted equity securities 16,053
14,525
Interest receivable 15,909
14,092
Foreclosed assets held for sale 2,471
—
Deferred tax asset 7,429
16,316
Goodwill and other intangible assets, net 7,720
7,796
Bank-owned life insurance 65,228
63,811
Other 17,173
9,146
Total assets $ 4,651,313

$ 4,107,215
Liabilities and stockholders’ equity
Deposits
Non-interest bearing $ 513,832
$ 484,284
Savings, NOW and money market 1,922,522
1,714,136
Time 1,221,754
1,009,677
Total deposits 3,658,108

3,208,097
Federal funds purchased and repurchase agreements 49,810
75,406
Federal Home Loan Bank advances 307,804
312,985
Other borrowings 912
884
Interest payable and other liabilities 32,244
19,507
Total liabilities 4,048,878
3,616,879
Stockholders’ equity
Redeemable preferred stock, $0.01 par value, $25 liquidation value:
authorized - 5,000,000 shares, issued - 0 and 1,200,000 shares at September 30, 2019 and December 31, 2018, respectively —
12
Common stock, $0.01 par value:
authorized - 200,000,000 shares, issued - 51,969,203 and 45,074,322 shares at September 30, 2019 and December 31, 2018, respectively 520
451
Additional paid-in capital 518,816
454,512
Retained earnings 65,282
38,567
Other (84 ) (196 )
Accumulated other comprehensive income (loss) 17,901
(3,010 )
Total stockholders’ equity 602,435

490,336
Total liabilities and stockholders’ equity $ 4,651,313
$ 4,107,215

See Notes to Consolidated Financial Statements (unaudited)



~~See Notes to Consolidated Financial Statements (unaudited)~~		5

Table of Contents

CROSSFIRST BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
	(Dollars in thousands except per share data)
Interest Income
Loans, including fees	$	43,929	$	49,327	$	138,591	$	142,319

Available-for-sale securities - taxable	1,042		1,991		4,174		6,646
Available-for-sale securities - tax-exempt	3,186		2,969		9,758		8,820
Deposits with financial institutions	47		970		583		2,452
Dividends on bank stocks	248		272		808		801

Total interest income	48,452		55,529		153,914		161,038
Interest Expense
Deposits	7,298		18,003		29,975		51,421
Fed funds purchased and repurchase agreements	54		74		162		501
Federal Home Loan Bank Advances	1,749		1,629		4,980		4,739
Other borrowings	24		37		85		112
Total interest expense	9,125		19,743		35,202		56,773
Net Interest Income	39,327		35,786		118,712		104,265
Provision for Loan Losses	10,875		4,850		45,825		10,550
Net Interest Income after Provision for Loan Losses	28,452		30,936		72,887		93,715
Non-Interest Income
Service charges and fees on customer accounts	792		72		1,947		441
Gain on sale of available-for-sale debt securities	1,012		34		1,725		467

Impairment of premises and equipment held for sale	0		0		0		(424)
Gain on sale of loans	0		49		0		207
Income from bank-owned life insurance	464		476		1,373		1,416
Swap fee income, net	121		1,879		80		2,415
ATM and credit card interchange income	1,482		476		2,863		1,312
Other non-interest income	192		226		804		695
Total non-interest income	4,063		3,212		8,792		6,529
Non-Interest Expense
Salaries and employee benefits	14,628		14,256		43,022		43,296
Occupancy	2,144		2,080		6,274		6,301
Professional fees	1,132		427		3,098		1,923
Deposit insurance premiums	1,096		302		3,151		2,020
Data processing	652		649		2,065		1,868
Advertising	147		580		870		1,770
Software and communication	959		900		2,772		2,407

Foreclosed assets, net	20		8		1,174		33
Goodwill impairment	0		0		7,397		0
Other non-interest expense	2,233		1,970		6,421		6,145
Total non-interest expense	23,011		21,172		76,244		65,763
Net Income Before Taxes	9,504		12,976		5,435		34,481
Income tax expense	1,498		2,592		928		5,308
Net Income	$	8,006	$	10,384	$	4,507	$	29,173
Basic Earnings Per Share	$	0.15	$	0.22	$	0.09	$	0.63
Diluted Earnings Per Share	$	0.15	$	0.21	$	0.09	$	0.61

Three months ended Nine months ended
September 30, September 30,
2019 2018 2019 2018
(Dollars in thousands except per share data)
Interest Income
Loans, including fees $ 49,327
$ 34,012
$ 142,319
$ 89,262
Available for sale securities - Taxable 1,991
2,200
6,646
5,729
Available for sale securities - Tax-exempt 2,969
3,586
8,820
11,622
Deposits with financial institutions 970
723
2,452
2,481
Dividends on bank stocks 272
254
801
718
Total interest income 55,529
40,775
161,038
109,812
Interest Expense

Deposits 18,003
9,999
51,421
26,639
Fed funds purchased and repurchase agreements 74
287
501
628
Advances from Federal Home Loan Bank 1,629
1,468
4,739
4,308
Other borrowings 37
53
112
184
Total interest expense 19,743
11,807
56,773
31,759
Net Interest Income 35,786
28,968
104,265
78,053
Provision for Loan Losses 4,850
3,000
10,550
9,000
Net Interest Income after Provision for Loan Losses 30,936
25,968
93,715
69,053
Non-Interest Income

Service charges and fees (rebates) on customer accounts 72
(100 ) 441
506
Gain on sale of available for sale securities 34

195
467

608
Impairment of premises and equipment held for sale —

(171 ) (424 )
(171 )
Gain on sale of loans 49

25
207

618
Income from bank-owned life insurance 476
513
1,416
1,511
Swap fee income, net 1,879

253
2,415

299
ATM and credit card interchange income 476

301
1,312

827
Other non-interest income 226

169
695

690
Total non-interest income 3,212

1,185
6,529

4,888
Non-Interest Expense

Salaries and employee benefits 14,256
12,652
43,296
43,689
Occupancy 2,080
2,132
6,301
6,199
Professional fees 427
766
1,923
2,421
Deposit insurance premiums 302
823
2,020
2,411
Data processing 649
528
1,868
1,470
Advertising 580
527
1,770

1,982
Software and communication 900

630
2,407

1,958
Depreciation and amortization 413

516
1,320

1,306
Other non-interest expense 1,565

1,301
4,858

4,153
Total non-interest expense 21,172

19,875
65,763

65,589
Net Income Before Taxes 12,976
7,278
34,481
8,352
Income tax expense (benefit) 2,592
924
5,308
(904 )
Net Income $ 10,384
$ 6,354
$ 29,173
$ 9,256
Basic Earnings Per Share⁽¹⁾
$ 0.22
$ 0.15
$ 0.63
$ 0.23
Diluted Earnings Per Share⁽¹⁾
$ 0.21
$ 0.15
$ 0.61
$ 0.22
⁽¹⁾ Share data has been adjusted to reflect a 2-for-1 stock split effected in the form of a dividend on December 21, 2018.

See Notes to Consolidated Financial Statements (unaudited)



~~See Notes to Consolidated Financial Statements (unaudited)~~		6

Table of Contents

CROSSFIRST BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF ~~OTHER~~ COMPREHENSIVE INCOME ~~(LOSS)~~ - UNAUDITED


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
	(Dollars in thousands)
Net Income	$	8,006	$	10,384	$	4,507	$	29,173
Other Comprehensive Income
Unrealized gain on available-for-sale debt securities	1,923		5,757		14,073		28,084
Less: income tax	472		1,410		3,440		6,890
Unrealized gain on available-for-sale debt securities, net of income tax	1,451		4,347		10,633		21,194
Reclassification adjustment for realized gains included in income	1,012		34		1,725		467
Less: income tax	248		9		422		115
Less: reclassification adjustment for realized gains included in income, net of income tax	764		25		1,303		352
Other comprehensive income	687		4,322		9,330		20,842
Comprehensive Income	$	8,693	$	14,706	$	13,837	$	50,015

Three months ended Nine months ended
September 30, September 30,
2019 2018 2019 2018
(Dollars in thousands)
Net Income $ 10,384
$ 6,354
$ 29,173
$ 9,256
Other Comprehensive Income (Loss)
Unrealized gain (loss) on available-for-sale securities 5,757
(6,592 ) 28,084
(22,062 )
Less: income tax (benefit) 1,410
(1,620 ) 6,890
(5,414 )
Unrealized gain (loss) on available-for-sale securities, net of income tax (benefit) 4,347
(4,972 ) 21,194
(16,648 )
Reclassification adjustment for realized gains included in income 34
195
467
608
Less: income tax 9
47
115
149
Less: reclassification adjustment for realized gains included in income, net of income tax 25
148
352
459
Other comprehensive income (loss) 4,322
(5,120 ) 20,842
(17,107 )
Comprehensive Income (Loss) $ 14,706
$ 1,234
$ 50,015
$ (7,851 )

See Notes to Consolidated Financial Statements (unaudited)



~~See Notes to Consolidated Financial Statements (unaudited)~~		7

Table of Contents

CROSSFIRST BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - UNAUDITED

Accumulated
Additional Other
Preferred Stock Common Stock Paid in Retained Comprehensive
Shares Amount
Shares⁽¹⁾

Amount⁽¹⁾
Capital
Earnings⁽¹⁾
Other Income (Loss) Total
(Dollars in thousands)
Balance at June 30, 2018 1,200,000
$ 12
35,496,278
$ 355
$ 321,544
$ 25,778
$ (191 ) $ (4,961 ) $ 342,537
Net income —
—
—
—
—
6,354
—
—
6,354
Change in unrealized depreciation on available-for-sale securities —
—
—
—
—
—
—
(5,120 ) (5,120 )
Issuance of shares —
—
5,031,110
50
69,733
(25 ) —
—
69,758
Issuance of shares from equity-based awards —
—
—
—
—
—
—
—
—
Retired shares —
—
(265,908 ) (3 ) (2,534 ) (1,253 ) —
—
(3,790 )
Preferred dividends declared —
—
—
—
—
(525 ) —
—
(525 )
Employee receivables from sale of stock —
—
—
—
2
—
(1 ) —
1
Share-based compensation —
—
—
—
527
—
—
—
527
Employee stock purchase plan additions —
—
—
—
38
—
—
—
38
Balance at September 30, 2018 1,200,000
$ 12
40,261,480
$ 402
$ 389,310
$ 30,329
$ (192 ) $ (10,081 ) $ 409,780


																																Accumulated
																												Additional				Other
																						Preferred Stock			Common Stock			Paid in		Retained		Comprehensive
																						Shares	Amount		Shares	Amount		Capital		Earnings		Income		Total
																						(Dollars in thousands)
Balance at June 30, 2019	—	$	—	45,367,641	$	453	$	430,347		$	54,899		$	(83	)	$	13,579	$	499,195		Balance at June 30, 2019	0	$	0	45,367,641	$	453	$	430,347	$	54,816	$	13,579	$	499,195
Net income	—	—		—	—		—			10,384			—			—		10,384			Net income	—	—		—	—		—		10,384		—		10,384
Change in unrealized appreciation on available-for-sale securities	—	—		—	—					—			—			4,322		4,322			Change in unrealized appreciation on available-for-sale securities	—	—		—	—		—		—		4,322		4,322
Issuance of shares	—	—		6,600,245	67		87,154			(1		)	—			—		87,220			Issuance of shares	—	—		6,600,245	67		87,154		(1)		—		87,220
Issuance of shares from equity-based awards	—	—		1,317	—		(10		)	—			—			—		(10		)	Issuance of shares from equity-based awards	—	—		1,317	—		(10)		—		—		(10)

Employee receivables from sale of stock	—	—		—	—		1			—			(1		)	—		—			Employee receivables from sale of stock	—	—		—	—		1		(1)		—		0
Share-based compensation	—	—		—	—		1,324			—			—			—		1,324
Employee stock purchase plan additions	—	—		—	—		—			—			—			—		—
Stock-based compensation																					Stock-based compensation	—	—		—	—		1,324		—		—		1,324

Balance at September 30, 2019	—	$	—	51,969,203	$	520	$	518,816		$	65,282		$	(84	)	$	17,901	$	602,435		Balance at September 30, 2019	0	$	0	51,969,203	$	520	$	518,816	$	65,198	$	17,901	$	602,435

⁽¹⁾ ~~Share data has been adjusted to reflect a 2-for-1 stock split effected in the form of a dividend on December 21, 2018.~~


											Accumulated
							Additional				Other
	Preferred Stock			Common Stock			Paid in		Retained		Comprehensive
	Shares	Amount		Shares	Amount		Capital		Earnings		Income		Total
	(Dollars in thousands)
Balance at June 30, 2020	0	$	0	52,167,573	$	521	$	521,133	$	61,344	$	25,094	$	608,092
Net income	—	—		—	—		—		8,006		—		8,006

Change in unrealized appreciation on available-for-sale securities	—	—		—	—		—		—		687		687

Issuance of shares from equity-based awards	—	—		28,205	—		(115)		—		—		(115)


Employee receivables from sale of stock	—	—		—	—		1		5		—		6
Stock-based compensation	—	—		—	—		1,186		—		—		1,186
Employee stock purchase additions	—	—		—	—		21		—		—		21


Balance at September 30, 2020	0	$	0	52,195,778	$	521	$	522,226	$	69,355	$	25,781	$	617,883

See Notes to Consolidated Financial Statements (unaudited)



~~See Notes to Consolidated Financial Statements (unaudited)~~		8

Table of Contents

~~CROSSFIRST BANKSHARES, INC.~~

~~CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - UNAUDITED - CONTINUED~~

Accumulated
Additional Other
Preferred Stock Common Stock Paid in Retained Comprehensive
Shares Amount
Shares⁽¹⁾

Amount⁽¹⁾
Capital
Earnings⁽¹⁾
Other Income (Loss) Total
(Dollars in thousands)
Balance at December 31, 2017 1,200,000
$ 12
30,686,256
$ 307
$ 256,108
$ 23,950
$ (256 ) $ 7,026
$ 287,147
Net income —
—
—
—
—
9,256
—
—
9,256
Change in unrealized depreciation on available-for-sale securities —
—
—
—

—
—
(17,107 ) (17,107 )
Issuance of shares —
—
9,557,054
95
132,868
(48 ) —
—
132,915
Issuance of shares from equity-based awards —
—
284,078
3
(1,653 ) (1 ) —
—
(1,651 )
Retired shares —
—
(265,908 ) (3 ) (2,534 ) (1,253 ) —
—
(3,790 )
Preferred dividends declared —
—
—
—
—
(1,575 ) —
—
(1,575 )
Employee receivables from sale of stock —
—
—
—
8
—
64
—
72
Share-based compensation —
—
—
—
4,386
—
—
—
4,386
Employee stock purchase plan additions —
—
—
—
127
—
—
—
127
Balance at September 30, 2018 1,200,000
$ 12
40,261,480
$ 402
$ 389,310
$ 30,329
$ (192 ) $ (10,081 ) $ 409,780


																																				Accumulated
																																Additional				Other
																										Preferred Stock			Common Stock			Paid in		Retained		Comprehensive
																										Shares	Amount		Shares	Amount		Capital		Earnings		Income (Loss)		Total
																										(Dollars in thousands)
Balance at December 31, 2018	1,200,000		$	12		45,074,322		$	451	$	454,512		$	38,567		$	(196	)	$	(3,010	)	$	490,336		Balance at December 31, 2018	1,200,000	$	12	45,074,322	$	451	$	454,512	$	38,371	$	(3,010)	$	490,336
Net income			—			—		—		—			29,173			—			—			29,173			Net income	—	—		—	—		—		29,173		—		29,173
Change in unrealized appreciation on available-for-sale securities	—		—			—		—					—			—			20,842			20,842			Change in unrealized appreciation on available-for-sale securities	—	—		—	—		—		—		20,842		20,842
Issuance of shares	—		—			6,851,213		68		88,869			—			—			—			88,937			Issuance of shares	—	—		6,851,213	68		88,869		—		—		88,937
Issuance of shares from equity-based awards	—		—			53,668		1		(246		)	—			—			—			(245		)	Issuance of shares from equity-based awards	—	—		53,668	1		(246)		—		—		(245)
Retired shares	(1,200,000	)	(12		)	(10,000	)	—		(30,088		)	(55		)	—						(30,155		)	Retired shares	(1,200,000)	(12)		(10,000)	—		(30,088)		(55)		—		(30,155)
Preferred dividends declared	—		—			—		—		—			(175		)	—			—			(175		)	Preferred dividends declared	—	—		—	—		—		(175)		—		(175)
Employee receivables from sale of stock	—		—			—		—		5			—			112			—			117			Employee receivables from sale of stock	—	—		—	—		5		112		—		117
Share-based compensation	—		—			—		—		3,569			—			—			—			3,569
Employee receivables from sale of stock	—		—			—		—		36			—			—			—			36
Stock-based compensation																									Stock-based compensation	—	—		—	—		3,569		—		—		3,569
Employee stock purchase plan additions																									Employee stock purchase plan additions	—	—		—	—		36		—		—		36
Adoption of ASU 2016-01	—		—			—		—		—			(69		)	—			69			—			Adoption of ASU 2016-01	—	—		—	—		—		(69)		69		0
Adoption of ASU 2018-07	—		—			—		—		2,159			(2,159		)	—			—			—			Adoption of ASU 2018-07	—	—		—	—		2,159		(2,159)		—		0
Balance at September 30, 2019	—		$	—		51,969,203		$	520	$	518,816		$	65,282		$	(84	)	$	17,901		$	602,435		Balance at September 30, 2019	0	$	0	51,969,203	$	520	$	518,816	$	65,198	$	17,901	$	602,435

⁽¹⁾ ~~Share data has been adjusted to reflect a 2-for-1 stock split effected in the form of a dividend on December 21, 2018.~~


											Accumulated
							Additional				Other
	Preferred Stock			Common Stock			Paid in		Retained		Comprehensive
	Shares	Amount		Shares	Amount		Capital		Earnings		Income		Total
	(Dollars in thousands)
Balance at December 31, 2019	0	$	0	51,969,203	$	520	$	519,870	$	64,803	$	16,451	$	601,644
Net income	—	—		—	—		—		4,507		—		4,507

Change in unrealized appreciation on available-for-sale securities	—	—		—	—		—		—		9,330		9,330

Issuance of shares from equity-based awards	—	—		226,575	1		(869)		—		—		(868)


Employee receivables from sale of stock	—	—		—	—		2		45		—		47
Stock-based compensation	—	—		—	—		3,202		—		—		3,202
Employee stock purchase plan additions	—	—		—	—		21		—		—		21
Balance at September 30, 2020	0	$	0	52,195,778	$	521	$	522,226	$	69,355	$	25,781	$	617,883

See Notes to Consolidated Financial Statements (unaudited)



~~See Notes to Consolidated Financial Statements (unaudited)~~		9

Table of Contents

CROSSFIRST BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED


	Nine Months Ended
	September 30,
	2020		2019
	(Dollars in thousands)
Operating Activities
Net income	$	4,507	$	29,173
Items not requiring (providing) cash
Depreciation and amortization	3,888		4,015
Provision for loan losses	45,825		10,550

Accretion of discounts and amortization of premiums on securities	4,632		4,098
Equity based compensation	3,223		3,606

Foreclosed asset impairment	1,270		0

Deferred income taxes	(5,098)		2,088


Net realized gains on available-for-sale debt securities	(1,725)		(467)
Goodwill impairment	7,397		0




Changes in


Interest receivable	(3,287)		(1,817)
Other assets	(2,845)		(9,837)
Other liabilities	(4,599)		13,261
Net cash provided by operating activities	53,188		54,670
Investing Activities
Net change in loans	(652,251)		(576,897)
Purchases of available-for-sale securities	(35,326)		(157,492)
Proceeds from maturities of available-for-sale securities	102,529		48,658
Proceeds from sale of available-for-sale securities	31,810		63,515

Purchase of premises and equipment	(4,849)		(649)
Proceeds from the sale of fixed assets	121		3,324
Purchase of restricted equity securities, net	(2,839)		(732)



Net cash used in investing activities	(560,805)		(620,273)




Financing Activities

Net increase in demand deposits, savings, NOW and money market accounts	667,849		237,934
Net increase (decrease) in time deposits	(99,060)		212,077

Net decrease in repurchase agreements and federal funds purchased	(1,390)		(50,596)


Net increase in federal funds sold	0		25,000


Proceeds from Federal Home Loan Bank advances	138,000		45,000
Repayment of Federal Home Loan Bank advances	(160,643)		(50,181)



Retirement of preferred stock	0		(30,000)
Issuance of common shares, net of issuance cost	0		88,782


Acquisition of common stock for tax withholding obligations	(869)		(245)
Net decrease in employee receivables	46		117
Dividends paid on preferred stock	0		(700)
Net cash provided by financing activities	543,933		477,188
Increase (Decrease) in Cash and Cash Equivalents	36,316		(88,415)
Cash and Cash Equivalents, Beginning of Period	187,320		216,541
Cash and Cash Equivalents, End of Period	$	223,636	$	128,126

Supplemental Cash Flows Information
Interest paid	$	37,238	$	54,998
Income taxes paid	7,335		1,030
Foreclosed assets in settlement of loans	$	0	$	2,471

Nine months ended
September 30,
2019 2018
(Dollars in thousands)
Operating Activities
Net income $ 29,173
$ 9,256
Items not requiring (providing) cash
Depreciation and amortization 4,015
3,299
Provision for loan losses 10,550
9,000
Accretion of discounts and amortization of premiums on securities 4,098
4,134
Equity based compensation 3,606
4,513
(Gain) loss on disposal of fixed assets 64
(4 )
Gain on sale of loans (207 ) (618 )
Deferred income taxes 2,088
(1,105 )
Net increase in bank owned life insurance (1,416 ) (1,511 )
Net realized gains on available-for-sale securities (539 ) (608 )
Impairment of assets held for sale 424
171
Dividends on FHLB stock (797 ) (713 )
Stock dividends on CRA mutual fund (38 ) (34 )
Changes in
Interest receivable (1,817 ) (2,105 )
Other assets (7,795 ) (170 )
Other liabilities 13,261
4,237
Net cash provided by operating activities 54,670
27,742
Investing Activities
Net change in loans (576,897 ) (741,784 )
Purchases of available-for-sale securities (157,492 ) (198,214 )
Proceeds from maturities of available-for-sale securities 48,658
35,755
Proceeds from sale of available-for-sale securities 63,515
149,271
Purchase of premises and equipment (649 ) (41,268 )
Purchase of restricted equity securities (1,673 ) (1,300 )
Proceeds from the sale of fixed assets 3,324
1,862
Proceeds from sale of restricted equity securities 941
942
Net cash used in investing activities (620,273 ) (794,736 )
Financing Activities
Net increase in demand deposits, savings, NOW and money market accounts 237,934
456,487
Net increase in time deposits 212,077
46,729
Net increase (decrease) in repurchase agreements and fed funds purchased (50,596 ) 77,479
Net increase in federal funds sold 25,000
55,000
Proceeds from line of credit —
30,000
Repayment of line of credit —
(30,000 )
Proceeds from Federal Home Loan Bank advances 45,000
28,000
Repayment of Federal Home Loan Bank advances (50,181 ) (10,171 )
Net repayments of Federal Home Loan Bank line of credit —
(25,000 )

See Notes to Consolidated Financial Statements (unaudited)



~~See~~ Table of Contents	Notes to Consolidated Financial Statements (unaudited)	10

~~Table of Contents~~

~~CROSSFIRST BANKSHARES, INC.~~

~~CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED~~

Nine months ended
September 30,
2019 2018
(Dollars in thousands)
Retirement of preferred stock $ (30,000 ) $ —
Issuance of common shares, net of issuance cost 88,390
132,550
Proceeds from employee stock purchase plan 547
367
Common stock purchased and retired (155 ) (3,790 )
Acquisition of common stock for tax withholding obligations (245 ) (1,651 )
Net decrease in employee receivables 117
72
Dividends paid on preferred stock (700 ) (1,575 )
Net cash provided by financing activities 477,188
754,497
Decrease in Cash and Cash Equivalents (88,415 ) (12,497 )
Cash and Cash Equivalents, Beginning of Period 216,541
130,820
Cash and Cash Equivalents, End of Period $ 128,126
$ 118,323
Supplemental Cash Flows Information
Interest paid $ 54,998
$ 31,437
Income taxes paid 1,030
19
Foreclosed assets in settlement of loans 2,471
—
Dividends declared and unpaid on preferred stock —
525



~~See Notes to Consolidated Financial Statements (unaudited)~~		11



~~Table of Contents~~	~~Notes to Unaudited Consolidated Financial Statements~~


~~Note 1:~~	~~Nature of Operations and Summary of Significant Accounting Policies~~

Note 1:Nature of Operations and Summary of Significant Accounting Policies

Organization and Nature of Operations

CrossFirst Bankshares, Inc. (the ~~‘‘Company’’~~“Company”)~~, a Kansas corporation, was incorporated in~~ ~~December 2017. Prior to incorporation, the Company was registered as a limited liability company under the name CrossFirst Holdings, LLC. The Company~~ is a bank holding company whose principal activities are the ownership and management of its wholly-owned subsidiaries, CrossFirst Bank (the ~~‘‘Bank’’~~“Bank”) and CFSA, LLC, ~~(“CFSA”),~~ which holds ~~title to certain assets.~~cash. In addition, CrossFirst Investments, Inc. ~~(‘‘CFI’’~~(“CFI”) is a wholly-owned subsidiary of the Bank, which holds investments in marketable securities.

Basis of Presentation

The Company’s accounting and reporting policies conform to accounting principles generally accepted in the United States ~~(‘‘GAAP’’~~(“GAAP”). The consolidated financial statements include the accounts of the ~~Company;~~Company, the Bank, CFI and ~~CFSA.~~CFSA, LLC. All significant intercompany accounts and transactions have been eliminated in consolidation.

The consolidated interim financial statements are unaudited and certain information and footnote disclosures presented in accordance with GAAP have been condensed or omitted and should be read in conjunction with the Company’s consolidated financial statements, and ~~notes thereto,~~footnotes included in the Company’s Annual Report on Form 10-K for the ~~six-months ended June 30, 2019 and~~ year ended December 31, ~~2018 included in the Company’s prospectus, dated August 14,~~ 2019 (the “2019 Form 10-K”), filed with the Securities and Exchange Commission ~~(‘‘SEC’’~~(the “SEC”) ~~pursuant to Rule 424(b) of the Securities Act of 1933, as amended,~~ on ~~August 15, 2019, related to the Company’s initial public offering (the ‘‘IPO Prospectus’’).~~March 10, 2020.

In the opinion of management, the interim financial statements include all adjustments ~~all of~~ which are of a normal, recurring nature necessary for the fair presentation of the financial position, results of operations, and cash flows of the Company and the disclosures made are adequate to make the interim financial information not misleading. The consolidated financial statements have been prepared in accordance with GAAP for interim financial information and the instructions to Form 10-Q adopted by the SEC.

~~There have been~~Except for the accounting changes mentioned under “Coronavirus Aid, Relief, and Economic Security Act” and “Change in Accounting Principle” section below, no other significant changes in the accounting policies of the Company occurred since ~~June 30,~~December 31, 2019, the most recent date financial statements were provided within the ~~IPO Prospectus.~~Company’s 2019 Form 10-K. The information contained in the financial statements and footnotes for the period ended ~~June 30,~~December 31, 2019 included in the Company’s ~~IPO Prospectus~~2019 Form 10-K should be referred to in connection with these unaudited interim consolidated financial statements.

Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

Use of Estimates

The Company ~~has~~ identified accounting policies and estimates that, due to the difficult, subjective or complex judgments and assumptions inherent in those policies and estimates and the potential sensitivity of the Company’s financial statements to those judgments and assumptions, are critical to an understanding of the Company’s financial condition and results of operations. Actual results could differ from those estimates. In particular, the novel coronavirus (“COVID-19”) pandemic and resulting impacts to economic conditions, as well as, adverse impacts to the Company’s operations may impact future estimates. The Allowance for Loan and Lease Losses, ~~Investment Securities Impairment,~~ Deferred Tax Asset, and Fair Value of Financial Instruments are particularly susceptible to significant change.

~~Change in Presentation Due to Stock Split~~

On December 18, 2018, the Company announced a 2-for-1 stock split, effected in the form of a dividend, effective December 21, 2018. Share data and per share data were retroactively adjusted for the periods presented to reflect the change in capital structure.

Cash Equivalents

The Company had ~~$85.0~~$176 million of cash and cash equivalents at the Federal Reserve Bank of Kansas City as of September 30, ~~2019.~~2020. The reserve required at September 30, ~~2019~~2020 was ~~approximately $63.3 million. In addition,~~$0.

Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)

The CARES Act allows financial institutions to elect not to consider whether loan modifications relating to the COVID-19 pandemic that they make between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the national emergency related to the COVID-19 pandemic ends are troubled debt restructurings (“TDRs”), which require additional disclosures. The relief can be applied to modifications of loans to borrowers that were not more than 30 days past due as of December 31, 2019. The Company elected to apply the guidance during the first quarter of 2020. The review of loans that meet the criteria is overseen by the Office of the Chief Credit Officer and his team.

Loans Individually Evaluated for Impairment

Prior to the quarter ended June 30, 2020, loans risk rated substandard or lower were considered impaired and evaluated on an individual basis. As of June 30, 2020 and periods going forward, loans risk rated substandard and on accrual were evaluated collectively. The new approach provided a better estimate of potential losses inherent in the substandard portfolio.



		12



Table of Contents			Notes to ~~Unaudited~~ Consolidated Financial Statements (unaudited)

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. The Company’s definition of a substandard credit was unchanged. Substandard loans exhibit a well-defined weakness or weaknesses that jeopardize repayment. A distinct possibility exists that the Company will sustain some loss if deficiencies are not corrected.

Loss potential, while existing in the aggregate amount of substandard loans, does not have to exist in individual loans classified substandard. As a result, the Company revised its allowance methodology to evaluate substandard, performing loans collectively for impairment as opposed to evaluating these loans individually for impairment. At June 30, 2020, the change in methodology impacted $200 million of performing, substandard loans that were reviewed on a collective basis.

Change in Accounting Principle

On January 1, 2020, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standard Update (“ASU”) 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which was applied on a prospective basis. A description of the nature and reason for the change in accounting principle is provided below in the recent accounting pronouncements section.

On January 1, 2020, the Company adopted FASB ASU 2019-12, Simplifying the Accounting for Income Taxes, which was applied as of the adoption date. A description of the nature and reason for the change in accounting principle is provided below in the recent accounting pronouncements section.

Changes Affecting Comparability

Beginning with the quarter ended June 30, 2020, the Company separated the “Foreclosed assets, net” from the “other non-interest expense” category within the Consolidated Statements of Income. The separation was due to an increase in foreclosed asset expenses during 2020. The change had no impact on net income or total stockholders’ equity.

Beginning with the quarter ended June 30, 2020, the Company changed loans individually evaluated for impairment. A discussion regarding this change is provided above under “Loans Individually Evaluated for Impairment” and in “Note 4: Loans and Allowance for Loan Losses (“ALLL”)” within the Notes to the Unaudited Consolidated Financial Statements. The Company separated substandard loans into performing and nonperforming categories that were previously consolidated within the loan footnote disclosures. The change in disclosure did not impact the Company's impaired loan information at ~~times required to place cash collateral with a third party as part of its back-to-back swap agreements. At~~December 31, 2019 or ALLL information for the three and nine months ended September 30, 2019 ~~approximately $18.2 million was required~~ as ~~cash collateral.~~presented in “Note 4: Loans and Allowance for Loan Losses (“ALLL”)” within the Notes to the Unaudited Consolidated Financial Statements.

~~Initial Public Offering~~

~~On August 19, 2019,~~Beginning with the quarter ended March 31, 2020, the Company ~~completed its initial public offering~~consolidated the “Other” line item previously included in stockholders’ equity into retained earnings within the Consolidated Balance Sheets and the Consolidated Statements of ~~common shares.~~ Stockholders’ Equity. The consolidation was made due to the immateriality of the “Other” line item. The change had no impact on net income or total stockholders’ equity.

Emerging Growth Company (“EGC”)

The Company issued and sold 5,750,000 common shares at a public offering price of $14.50 per share. After deducting the underwriting discounts and offering expenses, the Company received total net proceeds of $75.6 million from the initial public offering. In addition, certain selling stockholders participated in the offering and soldis currently an ~~aggregate of 1,261,589 common shares at a public offering price of $14.50 per share. The Company did not receive any proceeds from the sales of shares by the selling stockholders.~~

On September 17, 2019, the underwriters partially exercised their option to purchase additional shares. The Company issued and sold 844,362 common shares at a public offering price of $14.50 per share. After deducting the underwriting discounts and offering expenses, the Company received total net proceeds of $11.4 million.

~~As of September 30, 2019, the Company qualified as an emerging growth company (‘‘EGC’’) under the Jumpstart Our Business Startups Act of 2012 (the ‘‘JOBS Act’’).~~EGC. An EGC may take advantage of reduced reporting requirements and is relieved of certain other significant requirements that are otherwise generally applicable to public companies. ~~Amongst~~Among the reductions and reliefs, the Company elected to extend the transition period for complying with new or revised accounting standards affecting public companies. This means that the financial statements the Company files or furnishes, will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period for so long as the Company remains an EGC or until the Company affirmatively and irrevocably ~~opt~~opts out of the extended transition period under the JOBS Act.


Table of Contents			Notes to Consolidated Financial Statements (unaudited)

Recent Accounting Pronouncements

The Company has implemented the following ~~Accounting Standards Updates (‘‘ASU’’)~~ASUs during ~~2019:~~2020:

Standard

Date of Adoption

Description

Effect on Financial Statements or Other Significant Matters

ASU 2020-04:

Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting

June 30, 2020

The ASU provides optional expedients and exceptions to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.

The ASU only applies to transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The amendments include:

(1) Optional expedients to contract modifications that allow the Company to adjust the effective interest rate of receivables and debt, account for lease modifications as a continuation of the existing lease, and remove the requirement to reassess its original conclusions for contract modifications about whether that contract contains an embedded derivative that is clearly and closely related to the economic characteristics and risks of the host contract under Subtopic 815-15, Derivatives and Hedging—Embedded Derivatives;

(2) Exceptions to the guidance in Topic 815 related to changes in the critical terms of a hedging relationship due to reference rate reform; and

(3) Optional expedients for cash flow and fair value hedges.

The Company had more than $1 billion in loans tied to LIBOR as of September 30, 2020.

The Company does not believe the adoption will have a material accounting impact on the Company’s consolidated financial position or results of operations. Additionally, LIBOR fallback language has been included in key loan provisions of new and renewed loans in preparation for transition from LIBOR to the new benchmark rate when such transition occurs. This standard is expected to ease the administrative burden in accounting for the future effects of reference rate reform.

The ASU allows the Company to recognize the modification related to LIBOR as a continuation of the old contract, rather than a cancellation of the old contract resulting in a write off of unamortized fees and creation of a new contract.

ASU 2019-12:

Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes

January 1, 2020

(Early Adoption)

The ASU simplifies the accounting for income taxes. Among other changes, the ASU:

(1) Removes the exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items;

(2) Removes the exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year;

(3) Requires an entity to recognize a franchise tax that is partially based on income as an income-based tax and account for any incremental amount incurred as a nonincome based tax; and

(4) Requires an entity to reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date.

The amendments in the ASU did not have a material impact on the Company’s tax methodology, processes, or the Company’s financial statements.


Table of Contents			Notes to Consolidated Financial Statements (unaudited)

Standard

Date of Adoption

Description

Effect on Financial Statements or Other Significant Matters

ASU 2018-13:

Fair Value Measurement (Topic 820): Disclosure Framework

January 1, 2020

Improves the effectiveness of disclosures in the notes to financial statements by facilitating clear communication of the information. The amendments modify certain disclosure requirements of fair value measurements in Topic 820, Fair Value Measurement.

Entities are no longer required to disclose transfers between Level 1 and Level 2 of the fair value hierarchy or qualitatively disclose the valuation process for Level 3 fair value measurements. The updated guidance requires disclosure of the changes in unrealized gains and losses for the period included in Other Comprehensive Income for recurring Level 3 fair value measurements. Entities are required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The additional provisions of the guidance should be adopted prospectively. The eliminated requirements should be adopted retrospectively.

The adoption did not have a material impact to the Company’s financial statements.

No transfers between Level 1 and Level 2 occurred in 2019 or 2020 and the Company did not have any recurring Level 3 fair value measurements that created an unrealized gain or loss in Other Comprehensive Income. In addition, the Company previously disclosed the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements.

~~Standard~~

~~Date of Adoption~~

~~Description~~

~~Effect on Financial Statements or Other Significant Matters~~

ASU ~~2018-07 -~~2017-04:

~~Stock Compensation~~Intangibles—Goodwill and Other (Topic ~~718)~~350): ~~Improvements to Nonemployee Share-Based Payment Accounting~~Simplifying the Test for Goodwill Impairment

January ~~2019~~

1, 2020

(Early ~~adoption~~

Adoption)

~~Expanded~~Eliminates Step 2 from the ~~scope of Topic 718~~goodwill impairment test which required entities to ~~include share-based payment transactions for acquiring goods and services from nonemployees, excluding share-based payments used to effectively provide (1) financing to~~compute the ~~issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606,~~ ~~Revenue from Contracts with Customers~~.

~~The amendments include (1) grants are measured at grant-date~~implied fair value of ~~the equity instruments, (2) equity-classified nonemployee share-based payment awards are measured at the grant date,~~

(3) performance based awards are measured based on the probability of satisfying the performance conditions, and (4) in general, non-employee share-based payment awards will continue to be subject to the requirements of ASC 718 unless modified after the good has been delivered, the service has been rendered, any other conditions necessary to earn the right to benefit from the instrument have been satisfied, and the nonemployee is no longer providing goodsgoodwill. An entity should perform an annual, or ~~services.~~

The Company had 216,960 stock-based awards to non-employees as of the implementation date, including 116,960 performance-based restricted stock units. The adoption of the ASU allowed the Company to (i) set the fair market value of the non-employee awards as of the adoption date and (ii) start to expense the performance-based restricted stock units based on the probability of satisfying the performance conditions.

Adoption of ASU 2018-07 required the Company to make a one-time transfer of $2.2 million from retained earnings to additional paid in capital. The Company will record forfeitures as they occur and base fair market values on the expected term, like the Company’s accounting for employee-based awards.



		13



~~Table of Contents~~	~~Notes to Unaudited Consolidated Financial Statements~~



~~Standard~~	~~Date of Adoption~~	~~Description~~	~~Effect on Financial Statements or Other Significant Matters~~
~~ASU 2016-01 -~~ ~~Financial Instruments-Overall (Subtopic 825-10)~~	~~January 2019~~	Required equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. ~~Emphasized the existing requirement to use exit prices to measure fair value for disclosure purposes and clarifies that entities should not make use of practicability exceptions in determining~~interim, goodwill impairment test by comparing the fair value of ~~loans.~~ a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.		~~The Company transferred $68.7 thousand from accumulated other comprehensive loss to retained earnings in January 2019.~~ ~~There~~On the date of adoption there was no impact to the ~~income statement on the adoption date.~~
~~ASU 2014-09 -~~ ~~Revenue from Contracts with Customers~~	~~January 2019~~	~~Amended guidance related to revenue from contracts with customers.~~ The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Replaced nearly all existing revenue recognition guidance, including industry-specific guidance, established a new control-based revenue recognition model, changed the basis for deciding when revenue is recognized over time or at a point in time, provided new and more detailed guidance on specific topics and expands and improves disclosures about revenue.	~~The accounting update did not materially impact the~~Company’s financial ~~statements or recognition of revenues.~~statements. The ~~update did not apply~~Company’s process for evaluating goodwill impairment was modified to ~~revenue associated~~align with ~~financial instruments, including loans~~the elimination of Step 2. In the second quarter of 2020, the Company performed a Step 0 analysis then a Step 1 analysis and ~~securities~~determined that are accounted for under other GAAP, which comprises a significant portion of the Company’s revenue stream. In addition, the Company’s non-interest income is generated by customer transactions or through the passage of time and as a result the pattern or timing of income recognitiongoodwill was ~~not impacted.~~ fully impaired.

The Company ~~has~~provided updates to the following ASUs that have not ~~yet~~ been adopted. A complete list of recent, applicable accounting pronouncements was provided in the ~~IPO Prospectus:~~Company’s 2019 Form 10-K:

Standard

Anticipated Date of Adoption

Description

Effect on Financial Statements or Other Significant Matters

ASU 2016-13

Financial Instruments-Credit Losses

~~The~~If the Company ~~expects to implement this standard in 2020; however,~~maintains its EGC status, the Company is not required to implement this standard until January ~~2023 if it maintains~~2023. The Company will continue to monitor its ~~EGC status.~~progress and the requirements related to adoption.

Requires an entity to utilize a new impairment model known as the current expected credit loss ~~(’’CECL’’~~(“CECL”) model to estimate its lifetime expected credit loss and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset.

The Company ~~has~~ established a committee of individuals from applicable departments to oversee the implementation process.

The Company ~~implemented a third-party software solution and~~ completed the third party software implementation phase ~~of the transition. The software implementation phase~~that included data capture and portfolio segmentation amongst other items.

The Company ~~has~~ completed ~~an initial~~ parallel ~~run~~runs in 2019. During the first nine months of 2020, the Company continued to perform parallel runs using ~~2019~~2020 data and ~~expects~~continued to ~~complete a second parallel run using third quarter data during~~recalibrate inputs as necessary. The Company is evaluating the ~~fourth quarter.~~

internal control changes that will be necessary to transition to the third-party platform.

At this time, an estimate of the impact cannot be established as the Company continues to evaluate the inputs into the model. The ~~fourth quarter parallel run may provide a better estimate of the impact to the Company’s financial statements, but the~~ actual impact could be significantly affected by the composition, characteristics, and quality of the underlying loan portfolio at the time of adoption.



		14



~~Table of Contents~~	~~Notes to Unaudited Consolidated Financial Statements~~



~~Standard~~ Table of Contents			Notes to Consolidated Financial Statements (unaudited)

Standard

Anticipated Date of Adoption

Description

Effect on Financial Statements or Other Significant Matters

ASU 2016-02

Leases (Topic 842)

The Company expects to implement this standard ~~in 2020; however,~~on January 1, 2022, unless the Company ~~is not~~loses its EGC status during 2021. If EGC status changes, the Company would therefore be required to implement ~~this standard until January 2021 if it maintains its EGC status.~~the ASU as of the beginning of 2021.

Requires lessees and lessors to recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements.

The update requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach with the option to elect certain practical expedients.

The update will also increase disclosures around leases, including qualitative and specific quantitative measures.

The Company ~~is electing~~expects to apply the update as of the beginning of the period of adoption and the Company ~~will~~does not plan to restate comparative periods. The Company ~~also~~ expects to elect certain optional practical expedients.

The Company gathered all potential lease and embedded lease agreements during 2019 and 2020 and is evaluating the applicability and impact to the financial statements.

The Company’s current operating leases relate primarily to ~~three~~four branch locations. Based on ~~these~~the current leases, the Company anticipates recognizing a lease liability and related right-to-use asset on its balance sheet, with an immaterial impact to its income statement compared to the current lease accounting model. However, the ultimate impact of the standard will depend on the ~~Company~~Company's lease portfolio as of the adoption date.


~~Note 2:~~	~~Earnings Per Share~~

Note 2:Earnings Per Share

The following table presents the computation of basic and diluted earnings per share:


	Three Months Ended				Nine Months Ended					Three Months Ended				Nine Months Ended
	September 30,				September 30,					September 30,				September 30,
	2019		2018		2019		2018			2020		2019		2020		2019
	(Dollars in thousands)									(Dollars in thousands except per share data)
Earnings per Share									Earnings per Share
Net income	$	10,384	$	6,354	$	29,173	$	9,256	Net income	$	8,006	$	10,384	$	4,507	$	29,173
Less: preferred stock dividends	—		525		175		1,575		Less: preferred stock dividends	0		0		0		175
Net income available to common stockholders	$	10,384	$	5,829	$	28,998	$	7,681	Net income available to common stockholders	$	8,006	$	10,384	$	4,507	$	28,998
Weighted average common shares⁽¹⁾	48,351,553		37,790,614		46,239,021		33,918,540
Weighted average common shares									Weighted average common shares	52,136,286		48,351,553		52,104,372		46,239,021
Earnings per share	$	0.22	$	0.15	$	0.63	$	0.23	Earnings per share	$	0.15	$	0.22	$	0.09	$	0.63
Dilutive Earnings Per Share									Dilutive Earnings Per Share

Net income available to common stockholders	$	10,384	$	5,829	$	28,998	$	7,681	Net income available to common stockholders	$	8,006	$	10,384	$	4,507	$	28,998
Weighted average common shares⁽¹⁾	48,351,553		37,790,614		46,239,021		33,918,540
Effect of dilutive shares⁽¹⁾	812,996		988,010		842,706		1,133,888
Weighted average dilutive common shares⁽¹⁾	49,164,549		38,778,624		47,081,727		35,052,428
Weighted average common shares									Weighted average common shares	52,136,286		48,351,553		52,104,372		46,239,021
Effect of dilutive shares									Effect of dilutive shares	423,840		812,996		463,219		842,706
Weighted average dilutive common shares									Weighted average dilutive common shares	52,560,126		49,164,549		52,567,591		47,081,727
Diluted earnings per share	$	0.21	$	0.15	$	0.61	$	0.22	Diluted earnings per share	$	0.15	$	0.21	$	0.09	$	0.61

SARs, RSUs, RSAs, PRSUs, PSSs not included because to do so would be antidilutive⁽¹⁾	541,556		442,452		507,167		273,180

¹ Share data has been adjusted to reflect a 2-for-1 stock split effected in the form of a dividend on December 21, 2018.
Stock-based awards not included because to do so would be antidilutive									Stock-based awards not included because to do so would be antidilutive	1,214,433		541,556		1,053,393		507,167



		15



Table of Contents			Notes to ~~Unaudited~~ Consolidated Financial Statements (unaudited)


~~Note 3:~~	~~Securities~~

~~Available-for-Sale Debt and Equity~~ Note 3:Securities

The amortized cost and approximate fair values, together with gross unrealized gains and losses, of period end available-for-sale debt and equity securities consisted of the following:


	September 30, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Approximate Fair Value
	(Dollars in thousands)
Available-for-sale debt securities
Mortgage-backed - GSE residential	$	122,093	$	4,690	$	0	$	126,783
Collateralized mortgage obligations - GSE residential	71,735		1,271		7		72,999
State and political subdivisions	421,075		28,339		220		449,194
Corporate bonds	860		67		2		925
Total available-for-sale debt securities	615,763		34,367		229		649,901
Equity securities
Mutual funds	2,222		23		0		2,245
Total equity securities	2,222		23		0		2,245
Total available-for-sale securities	$	617,985	$	34,390	$	229	$	652,146

September 30, 2019
Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Approximate Fair Value
(Dollars in thousands)
Available-for-sale debt securities
Mortgage-backed - GSE residential $ 158,897
$ 2,009
$ 192
$ 160,714
Collateralized mortgage obligations - GSE residential 147,917
1,002
244
148,675
State and political subdivisions 398,963
21,051
5
420,009
Corporate bonds 1,444
92
—
1,536
Total available-for-sale debt securities 707,221
24,154
441
730,934
Equity securities
Mutual funds 2,179
—
20
2,159
Total equity securities 2,179
—
20
2,159
Total available-for-sale securities $ 709,400
$ 24,154
$ 461
$ 733,093

December 31, 2018
Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Approximate Fair Value
(Dollars in thousands)
Available-for-sale debt securities
Mortgage-backed - GSE residential $ 131,215
$ 162
$ 2,090
$ 129,287
Collateralized mortgage obligations - GSE residential 154,110
287
1,771
152,626
State and political subdivisions 378,595
3,908
4,445
378,058
Corporate bonds 1,613
70
26
1,657
Total available-for-sale debt securities 665,533
4,427
8,332
661,628
Equity securities
Mutual funds 2,141
—
91
2,050
Total equity securities 2,141
—
91
2,050
Total available-for-sale securities $ 667,674
$ 4,427
$ 8,423
$ 663,678

~~The carrying value of securities pledged as collateral was $36.6 million and $108.6 million at September 30, 2019 and December 31, 2018, respectively.~~


	December 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Approximate Fair Value
	(Dollars in thousands)
Available-for-sale debt securities
Mortgage-backed - GSE residential	$	151,037	$	1,668	$	193	$	152,512
Collateralized mortgage obligations - GSE residential	128,876		625		289		129,212
State and political subdivisions	436,448		19,996		104		456,340
Corporate bonds	1,321		88		0		1,409
Total available-for-sale debt securities	717,682		22,377		586		739,473
Equity securities
Mutual funds	2,190		0		29		2,161
Total equity securities	2,190		0		29		2,161
Total available-for-sale securities	$	719,872	$	22,377	$	615	$	741,634



		16



Table of Contents			Notes to ~~Unaudited~~ Consolidated Financial Statements (unaudited)

The amortized cost and fair value of available-for-sale debt securities at September 30, ~~2019,~~2020, by contractual maturity, are shown below:


	September 30, 2020
	Within			After One to			After Five to			After
	One Year			Five Years			Ten Years			Ten Years			Total
	(Dollars in thousands)
Available-for-sale debt securities
Mortgage-backed - GSE residential(1)
Amortized cost	$	0		$	55		$	199		$	121,839		$	122,093
Estimated fair value	$	0		$	58		$	213		$	126,512		$	126,783
Weighted average yield(2)	0		%	4.57		%	3.91		%	2.03		%	2.06		%
Collateralized mortgage obligations - GSE residential(1)
Amortized cost	$	0		$	0		$	2,496		$	69,239		$	71,735
Estimated fair value	$	0		$	0		$	2,735		$	70,264		$	72,999
Weighted average yield(2)	0		%	0		%	2.77		%	1.10		%	1.16		%
State and political subdivisions
Amortized cost	$	653		$	7,407		$	59,992		$	353,023		$	421,075
Estimated fair value	$	654		$	7,573		$	65,059		$	375,908		$	449,194
Weighted average yield(2)	8.02		%	5.44		%	3.52		%	3.08		%	3.19		%
Corporate bonds
Amortized cost	$	0		$	0		$	860		$	0		$	860
Estimated fair value	$	0		$	0		$	925		$	0		$	925
Weighted average yield(2)	0		%	0		%	5.57		%	0		%	5.57		%
Total available-for-sale debt securities
Amortized cost	$	653		$	7,462		$	63,547		$	544,101		$	615,763
Estimated fair value	$	654		$	7,631		$	68,932		$	572,684		$	649,901
Weighted average yield(2)	8.02		%	5.44		%	3.52		%	2.59		%	2.73		%
(1) Actual maturities may differ from contractual maturities because issuers may have the rights to call or prepay obligations with or without prepayment penalties.
(2) Yields are calculated based on amortized cost.

September 30, 2019
Within After One to After Five to After
One Year Five Years Ten Years Ten Years Total
(Dollars in thousands)
Available-for-sale debt securities
Mortgage-backed - GSE residential⁽¹⁾

Amortized cost $ —
$ —
$ 1,411
$ 157,486
$ 158,897
Estimated fair value —
—
1,471
159,243
160,714
Collateralized mortgage obligations - GSE residential⁽¹⁾

Amortized cost —
—
2,876
145,041
147,917
Estimated fair value —
—
3,011
145,664
148,675
State and political subdivisions
Amortized cost —
3,580
40,410
354,973
398,963
Estimated fair value —
3,674
43,071
373,264
420,009
Corporate bonds
Amortized cost —
—
1,444
—
1,444
Estimated fair value —
—
1,536
—
1,536
Total available-for-sale debt securities
Amortized cost —

3,580

46,141

657,500

707,221
Estimated fair value $ —

$ 3,674

$ 49,089

$ 678,171

$ 730,934
⁽¹⁾ Actual maturities may differ from contractual maturities because issuers may have the rights to call or prepay obligations with or without prepayment penalties.


Table of Contents			Notes to Consolidated Financial Statements (unaudited)

The following tables show ~~gross unrealized losses,~~ the number of securities, ~~that are in an~~ unrealized loss, ~~position,~~ and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired (“OTTI”), aggregated by investment class and length of time that individual securities have been in a continuous unrealized loss position at September 30, ~~2019~~2020 and December 31, ~~2018:~~2019:


	September 30, 2020
	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses		Number of Securities
	(Dollars in thousands)
Available-for-sale debt securities
Mortgage-backed - GSE residential	$	0	$	0	0	$	0	$	0	0	$	0	$	0	0
Collateralized mortgage obligations - GSE residential	3,178		7		1	0		0		0	3,178		7		1
State and political subdivisions	14,998		220		19	26		0		1	15,024		220		20
Corporate bonds	457		2		1	0		0		0	457		2		1
Total temporarily impaired debt securities	$	18,633	$	229	21	$	26	$	0	1	$	18,659	$	229	22

September 30, 2019
Less than 12 Months 12 Months or More Total
Fair Value Unrealized Losses Number of Securities Fair Value Unrealized Losses Number of Securities Fair Value Unrealized Losses Number of Securities
(Dollars in thousands)
Available-for-Sale Debt Securities
Mortgage-backed - GSE residential $ 3,988
$ 4
1
$ 27,889
$ 188
5
$ 31,877
$ 192
6
Collateralized mortgage obligations - GSE residential 48,851
149
6
9,792
95
10
58,643
244
16
State and political subdivisions 2,952
4
3
146
1
1
3,098
5
4
Corporate bonds —
—
0
—
—
0
—
—
0
Total temporarily impaired debt securities $ 55,791
$ 157
10
$ 37,827
$ 284
16
$ 93,618
$ 441
26



		17



~~Table of Contents~~	~~Notes to Unaudited Consolidated Financial Statements~~

December 31, 2018
Less than 12 Months 12 Months or More Total
Fair Value Unrealized Losses Number of Securities Fair Value Unrealized Losses Number of Securities Fair Value Unrealized Losses Number of Securities
(Dollars in thousands)
Available-for-Sale Debt Securities
Mortgage-backed - GSE residential $ 66,232
$ 369
10
$ 44,280
$ 1,721
11
$ 110,512
$ 2,090
21
Collateralized mortgage obligations - GSE residential 4,639
42
1 68,362
1,729
20 73,001
1,771
21
State and political subdivisions 85,181
1,210
68 97,721
3,235
74 182,902
4,445
142
Corporate bonds 723
26
1
—
—
0
723
26
1
Total temporarily impaired debt securities $ 156,775
$ 1,647
80
$ 210,363
$ 6,685
105
$ 367,138
$ 8,332
185


	December 31, 2019
	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses		Number of Securities
	(Dollars in thousands)
Available-for-sale debt securities
Mortgage-backed - GSE residential	$	7,959	$	38	2	$	20,396	$	155	4	$	28,355	$	193	6
Collateralized mortgage obligations - GSE residential	48,980		199		7	8,622		90		9	57,602		289		16
State and political subdivisions	21,412		102		11	167		2		2	21,579		104		13
Corporate bonds	530		0		1	0		0		0	530		0		1
Total temporarily impaired debt securities	$	78,881	$	339	21	$	29,185	$	247	15	$	108,066	$	586	36

The unrealized losses on the Company’s investments in state and political subdivisions were caused by interest rate changes and adjustments in credit ratings. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. The unrealized losses on the Company’s investments in collateralized mortgage-backed securities and corporate bonds were caused by interest rate changes and market assumptions about prepayment speeds.

The Company expects to recover the amortized cost basis over the term of the ~~securities, excluding a previously disclosed impaired security. Because the~~securities. The Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost basis, which may be ~~maturity,~~maturity.

Gains and losses on the ~~Company does not consider those investments to be other-than-temporarily impaired (‘‘OTTI’’) at September 30, 2019.~~

sale of debt securities are recorded on the trade date and are determined using the specific identification method. Gross gains of ~~$506.2~~$2 million and $506 thousand ~~and $2.0 million~~ and gross losses of ~~$39.4~~$60 thousand and ~~$1.4 million~~$39 thousand resulting from sales of available-for-sale securities were realized for the nine-months ended September 30, 2020 and 2019, ~~and 2018,~~ respectively.

~~Equity Securities~~

~~Equity securities consist of Community Reinvestment Act mutual funds.~~ The ~~fair value~~gross gains as of ~~the equity securities was $2.2 million and $2.1 million at~~ September 30, ~~2019 and December 31, 2018, respectively. Prior~~2020, included $75 thousand related to ~~January 1, 2019, equity securities were stated at fair value with unrealized gains and losses reported as~~ a ~~separate component of accumulated other comprehensive income, net of tax. A net unrealized loss of $68.7 thousand had been recognized~~previously disclosed OTTI municipal security that was settled in accumulated other comprehensive income as of December 31, 2018. On January 1, 2019, the unrealized loss was reclassified out of accumulated other comprehensive income and into retained earnings with subsequent changes in fair value being recognized in other non-interest income. The following is a summary of the recorded fair value and the unrealized and realized gains and losses recognized in net income on available-for-sale equity securities:2020.

September 30, 2019
Three months ended Nine months ended
(Dollars in thousands)
Net gains recognized during the period on equity securities $ 16
$ 72
Less: net gains recognized during the period on equity securities sold during the period —
—
Unrealized gain recognized during the reporting period on equity securities still held at the reporting date $ 16
$ 72



		18



Table of Contents			Notes to ~~Unaudited~~ Consolidated Financial Statements (unaudited)

Note 4:Loans and Allowance for Loan Losses (“ALLL”)


~~Note 4:~~	~~Loans and Allowance for Loan Losses~~

Categories of loans at September 30, ~~2019~~2020 and December 31, ~~2018~~2019 include:

September 30, 2019 December 31, 2018
(Dollars in thousands)
Commercial $ 1,312,647
$ 1,134,414
Energy 396,132
358,283
Commercial real estate 993,153
846,561
Construction and land development 527,582
440,032
Residential real estate 365,435
246,275
Equity lines of credit 22,192
20,286
Consumer installment 21,552
23,528
Gross loans 3,638,693

3,069,379
Less: Allowance for loan losses 42,995
37,826
Less: Net deferred loan fees and costs 8,901

8,632
Net loans $ 3,586,797
$ 3,022,921


	September 30, 2020		December 31, 2019

	(Dollars in thousands)
Commercial	$	1,291,572	$	1,356,817
Energy	384,181		408,573
Commercial real estate	1,195,631		1,024,041
Construction and land development	587,617		628,418
Residential real estate	618,082		398,695
Paycheck Protection Program (“PPP”)	369,260		0


Consumer	46,771		45,163
Gross loans	4,493,114		3,861,707
Less: Allowance for loan losses	76,035		56,896
Less: Net deferred loan fees and costs	15,305		9,463
Net loans	$	4,401,774	$	3,795,348

Allowance for Loan Losses

The ~~allowance for loan losses~~ALLL is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the loan balance is not collectible. Subsequent recoveries, if any, are credited to the allowance.

The ~~allowance for loan losses~~ALLL is evaluated on a regular basis by management and is based upon management’s periodic review of its ability to collect the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The ~~allowance~~ALLL consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers ~~unclassified~~all loans on accrual and is based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process and loan categories. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

The Company evaluates the loan risk grading system definitions, portfolio segment definitions, and ALLL methodology on an ongoing basis. Starting with the quarter ended June 30, 2020, the Company distinguished between performing and nonperforming substandard loans, as previously discussed in “Note 1: Nature of Operations and Summary of Significant Accounting Policies”. In addition, the Company separated PPP loans that are 100% guaranteed by the Small Business Administration (“SBA”). No additional changes to loan definitions, segmentation, and ALLL methodology occurred during the third quarter of 2020.

The following tables summarize the activity in the ~~allowance for loan losses~~ALLL by portfolio segment and disaggregated based on the Company’s impairment methodology. The allocation in one portfolio segment does not preclude its availability to absorb losses in other segments:


	Commercial		Energy		Commercial Real Estate		Construction and Land Development		Residential Real Estate		PPP		Consumer		Total
	(Dollars in thousands)
Three months ended September 30, 2020
Allowance for loan losses
Beginning balance	$	26,543	$	17,372	$	16,899	$	5,019	$	4,868	$	0	$	484	$	71,185
Provision charged to expense	7,439		2,168		908		(530)		882		0		8		10,875
Charge-offs	(5,781)		0		0		0		(256)		0		0		(6,037)
Recoveries	2		0		0		0		0		0		10		12
Ending balance	$	28,203	$	19,540	$	17,807	$	4,489	$	5,494	$	0	$	502	$	76,035

Commercial Energy Commercial Real Estate Construction and Land Development Residential Real Estate Equity Lines of Credit Consumer Installment Total
(Dollars in thousands)
Three months ended September 30, 2019
Allowance for loan losses
Beginning balance $ 22,975
$ 7,300
$ 7,533
$ 2,602
$ 2,138
$ 155
$ 149
$ 42,852
Provision charged to expense 3,535
1,077
(249 ) 414
82
5
(14 ) 4,850
Charge-offs (1,700 ) (3,000 ) —
—
—
—
(8 ) (4,708 )
Recoveries 1
—
—
—
—
—
—
1
Ending balance $ 24,811
$ 5,377
$ 7,284
$ 3,016
$ 2,220
$ 160
$ 127
$ 42,995



		19



Table of Contents			Notes to ~~Unaudited~~ Consolidated Financial Statements (unaudited)


	Commercial		Energy		Commercial Real Estate		Construction and Land Development		Residential Real Estate		PPP		Consumer		Total
	(Dollars in thousands)
Three months ended September 30, 2019
Allowance for loan losses
Beginning balance	$	22,975	$	7,300	$	7,533	$	2,602	$	2,138	$	0	$	304	$	42,852
Provision charged to expense	3,535		1,077		(249)		414		82		0		(9)		4,850
Charge-offs	(1,700)		(3,000)		0		0		0		0		(8)		(4,708)
Recoveries	1		0		0		0		0		0		0		1
Ending balance	$	24,811	$	5,377	$	7,284	$	3,016	$	2,220	$	0	$	287	$	42,995


	Commercial		Energy		Commercial Real Estate		Construction and Land Development		Residential Real Estate		PPP		Consumer		Total
	(Dollars in thousands)
Nine months ended September 30, 2020
Allowance for loan losses
Beginning balance	$	35,864	$	6,565	$	8,085	$	3,516	$	2,546	$	0	$	320	$	56,896
Provision charged to expense	16,210		15,253		9,722		973		3,393		0		274		45,825
Charge-offs	(23,946)		(2,278)		0		0		(445)		0		(104)		(26,773)
Recoveries	75		0		0		0		0		0		12		87
Ending balance	$	28,203	$	19,540	$	17,807	$	4,489	$	5,494	$	0	$	502	$	76,035


																					Commercial		Energy		Commercial Real Estate		Construction and Land Development		Residential Real Estate		PPP		Consumer		Total
	Commercial			Energy		Commercial Real Estate		Construction and Land Development		Residential Real Estate		Equity Lines of Credit		Consumer Installment			Total				(Dollars in thousands)
	(Dollars in thousands)
Three months ended September 30, 2018
Nine months ended September 30, 2019																				Nine months ended September 30, 2019
Allowance for loan losses	Allowance for loan losses																			Allowance for loan losses
Beginning balance	$	11,739		$	7,957	$	6,584	$	2,530	$	1,103	$	170	$	114		$	30,197		Beginning balance	$	16,584	$	10,262	$	6,755	$	2,475	$	1,464	$	0	$	286	$	37,826
Provision charged to expense	1,102			1,184		315		137		261		4		(3		)	3,000			Provision charged to expense	11,166		(2,461)		529		541		756		0		$	19��	10,550
Charge-offs	(97		)	—		—		—		—		—		—			(97		)	Charge-offs	(2,954)		(3,000)		0		0		0		0		(19)		(5,973)
Recoveries	439			—		—		—		—		—		1			440			Recoveries	15		576		0		0		0		0		1		592
Ending balance	$	13,183		$	9,141	$	6,899	$	2,667	$	1,364	$	174	$	112		$	33,540		Ending balance	$	24,811	$	5,377	$	7,284	$	3,016	$	2,220	$	0	$	287	$	42,995

Commercial Energy Commercial Real Estate Construction and Land Development Residential Real Estate Equity Lines of Credit Consumer Installment Total
(Dollars in thousands)
Nine months ended September 30, 2019
Allowance for loan losses
Beginning balance $ 16,584
$ 10,262
$ 6,755
$ 2,475
$ 1,464
$ 159
$ 127
$ 37,826
Provision charged to expense 11,166
(2,461 ) 529
541
756
1
18
10,550
Charge-offs (2,954 ) (3,000 ) —
—
—
—
(19 ) (5,973 )
Recoveries 15
576
—
—
—
—
1
592
Ending balance $ 24,811
$ 5,377
$ 7,284
$ 3,016
$ 2,220
$ 160
$ 127
$ 42,995

Commercial Energy Commercial Real Estate Construction and Land Development Residential Real Estate Equity Lines of Credit Consumer Installment Total
(Dollars in thousands)
Nine months ended September 30, 2018
Allowance for loan losses
Beginning balance $ 11,378
$ 7,726
$ 4,668
$ 1,200
$ 905
$ 122
$ 92
$ 26,091
Provision charged to expense 2,031
2,671
2,231
1,467
459
77
64
9,000
Charge-offs (681 ) (1,256 ) —
—
—
(25 ) (45 ) (2,007 )
Recoveries 455
—
—
—
—
—
1
456
Ending balance $ 13,183
$ 9,141
$ 6,899
$ 2,667
$ 1,364
$ 174
$ 112
$ 33,540



		20



Table of Contents			Notes to ~~Unaudited~~ Consolidated Financial Statements (unaudited)


	Commercial		Energy		Commercial Real Estate		Construction and Land Development		Residential Real Estate		PPP		Consumer		Total
	(Dollars in thousands)
September 30, 2020
Period end allowance for loan losses allocated to:
Individually evaluated for impairment	$	2,432	$	2,540	$	1,525	$	0	$	0	$	0	$	0	$	6,497
Collectively evaluated for impairment	$	25,771	$	17,000	$	16,282	$	4,489	$	5,494	$	0	$	502	$	69,538
Ending balance	$	28,203	$	19,540	$	17,807	$	4,489	$	5,494	$	0	$	502	$	76,035

Allocated to loans:
Individually evaluated for impairment	$	38,589	$	21,318	$	17,035	$	0	$	6,406	$	0	$	246	$	83,594
Collectively evaluated for impairment	$	1,252,983	$	362,863	$	1,178,596	$	587,617	$	611,676	$	369,260	$	46,525	$	4,409,520
Ending balance	$	1,291,572	$	384,181	$	1,195,631	$	587,617	$	618,082	$	369,260	$	46,771	$	4,493,114


	Commercial		Energy		Commercial Real Estate		Construction and Land Development		Residential Real Estate		PPP		Consumer		Total
	(Dollars in thousands)
December 31, 2019
Period end allowance for loan losses allocated to:
Individually evaluated for impairment	$	19,942	$	1,949	$	210	$	0	$	197	$	0	$	0	$	22,298
Collectively evaluated for impairment	$	15,922	$	4,616	$	7,875	$	3,516	$	2,349	$	0	$	320	$	34,598
Ending balance	$	35,864	$	6,565	$	8,085	$	3,516	$	2,546	$	0	$	320	$	56,896
Allocated to loans:
Individually evaluated for impairment	$	70,876	9,744		$	10,492	$	0	$	2,388	$	0	$	0	$	93,500
Collectively evaluated for impairment	$	1,285,941	$	398,829	$	1,013,549	$	628,418	$	396,307	$	0	$	45,163	$	3,768,207
Ending balance	$	1,356,817	$	408,573	$	1,024,041	$	628,418	$	398,695	$	0	$	45,163	$	3,861,707

Commercial Energy Commercial Real Estate Construction and Land Development Residential Real Estate Equity Lines of Credit Consumer Installment Total
(Dollars in thousands)
September 30, 2019
Ending balance
Individually evaluated for impairment $ 10,398
$ 854
$ 343
$ —
$ 219
$ —
$ —
$ 11,814
Collectively evaluated for impairment $ 14,413
$ 4,523
$ 6,941
$ 3,016
$ 2,001
$ 160
$ 127
$ 31,181
Allocated to loans:
Individually evaluated for impairment $ 66,162
$ 10,226
$ 16,544
$ —
$ 2,537
$ —
$ —
$ 95,469
Collectively evaluated for impairment $ 1,246,485
$ 385,906
$ 976,609
$ 527,582
$ 362,898
$ 22,192
$ 21,552
$ 3,543,224
Ending balance $ 1,312,647
$ 396,132
$ 993,153
$ 527,582
$ 365,435
$ 22,192
$ 21,552
$ 3,638,693

Commercial Energy Commercial Real Estate Construction and Land Development Residential Real Estate Equity Lines of Credit Consumer Installment Total
(Dollars in thousands)
December 31, 2018
Ending balance
Individually evaluated for impairment $ 5,814
$ 3,108
$ 473
$ —
$ 5
$ —
$ —
$ 9,400
Collectively evaluated for impairment $ 10,770
$ 7,154
$ 6,282
$ 2,475
$ 1,459
$ 159
$ 127
$ 28,426
Allocated to loans:
Individually evaluated for impairment $ 78,147
16,250
$ 15,227
$ —
$ 2,027
$ —
$ —
$ 111,651
Collectively evaluated for impairment $ 1,056,267
$ 342,033
$ 831,334
$ 440,032
$ 244,248
$ 20,286
$ 23,528
$ 2,957,728
Ending balance $ 1,134,414
$ 358,283
$ 846,561
$ 440,032
$ 246,275
$ 20,286
$ 23,528
$ 3,069,379

Table of Contents

Notes to Consolidated Financial Statements (unaudited)

Credit Risk Profile

The Company analyzes its loan portfolio based on an internal rating ~~category~~categories (grades 1 - 8), portfolio ~~segment~~segmentation and payment activity. These categories are utilized to develop the associated ~~allowance for loan losses.~~ALLL. A description of the loan grades and segments follows:

Loan Grades

•Pass (risk rating 1-4) - Considered satisfactory. Includes borrowers that generally maintain good liquidity and financial condition or the credit is currently protected with sales trends remaining flat or declining. Most ratios compare favorably with industry norms and Company policies. Debt is programmed and timely repayment is expected.

•Special Mention (risk rating 5) - Borrowers generally exhibit adverse trends in operations or an imbalanced position in their balance sheet that has not reached a point where repayment is jeopardized. Credits are currently protected but, if left uncorrected, the potential weaknesses may result in deterioration of the repayment prospects for the credit or in the Company’s credit or lien position at a future date. These credits are not adversely classified and do not expose the Company to enough risk to warrant adverse classification.

•Substandard (risk rating 6) - Credits generally exhibit well-defined weakness(es) that jeopardize repayment. Credits are inadequately protected by the current worth and paying capacity of the obligor or of the collateral pledged. A distinct possibility exists that the Company will sustain some loss if deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard. Substandard loans include both performing and nonperforming loans and are broken out in the table below.

•Doubtful (risk rating 7) - Credits which exhibit weaknesses inherent in a substandard credit with the added characteristic that these weaknesses make collection or liquidation in full highly questionable or improbable based on existing facts, conditions and values. Because of reasonably specific pending factors, which may work to the advantage and strengthening of the assets, classification as a loss is deferred until its more exact status may be determined.

•Loss (risk rating 8) - Credits which are considered uncollectible or of such little value that their continuance as a bankable asset is not warranted.

Loan Portfolio Segments

•Commercial - Includes loans to commercial customers for use in financing working capital, equipment purchases and expansions. Repayment is primarily from the cash flow of a borrower’s principal business operation. Credit risk is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations.

•Energy - Includes loans to oil and natural gas customers for use in financing working capital needs, exploration and production activities, and acquisitions. The loans are repaid primarily from the conversion of crude oil and natural gas to cash. Credit risk is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations. Energy loans are typically collateralized with the underlying oil and gas reserves.

•Commercial Real Estate - Loans typically involve larger principal amounts, and repayment of these loans is generally dependent on the successful operations of the property securing the loan or the business conducted on the property securing the loan. These are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Credit risk may be impacted by the creditworthiness of a borrower, property values and the local economies in the borrower’s market areas.

•Construction and Land Development - Loans are usually based upon estimates of costs and estimated value of the completed project and include independent appraisal reviews and a financial analysis of the developers and property owners. Sources of repayment include permanent loans, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are higher risk than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of long-term financing. Credit risk may be impacted by the creditworthiness of a borrower, property values and the local economies in the borrower’s market areas.

•Residential Real Estate - The loans are generally secured by owner-occupied 1-4 family residences or multifamily properties. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers or underlying tenants. Credit risk in these loans can be impacted by economic conditions within or outside the borrower’s market areas that might impact either property values, a borrower’s personal income, or residents’ income.

•PPP - The loans were established by the CARES Act which authorized forgivable loans to small businesses to pay their employees during the COVID-19 pandemic. The program requires all loan terms to be the same for everyone. The loans


•			~~Pass & Watch~~ (risk rating 1 - 4) - Considered satisfactory. Includes borrowers that generally maintain good liquidity and financial condition or the credit is currently protected with sales trends remaining flat or declining. Most ratios compare favorably with industry norms and Company policies. Debt is programmed and timely repayment is expected.Table of Contents

Notes to Consolidated Financial Statements (unaudited)
•	~~Special Mention~~ (risk rating 5) - Borrowers generally exhibit adverse trends in operations or an imbalanced position in their balance sheet that has not reached a point where repayment is jeopardized. Credits are currently protected but, if left uncorrected, the potential weaknesses may result in deterioration of the repayment prospects for the credit or in the Company’s credit or lien position at a future date. These credits are not adversely classified and do not expose the Company to enough risk to warrant adverse classification.

•

~~Substandard~~ (risk rating 6) - Credits generally exhibit a well-defined weakness(es) that jeopardize repayment. Credits are inadequately protected by the current worth and paying capacity of the obligor or of the collateral pledged. A distinct possibility exists that the Company will sustain some loss if deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard.

•

~~Doubtful~~ (risk rating 7) - Credits which exhibit weaknesses inherent in a substandard credit with the added characteristic that these weaknesses make collection or liquidation in full highly questionable and improbable based on existing facts, conditions and values. Because of reasonably specific pending factors, which may work to the advantage and strengthening of the assets, classification as a loss is deferred until its more exact status may be determined.


•	~~Loss~~ ~~(risk rating 8) - Credits which are considered uncollectible or of such little value that their continuance as a bankable asset is not warranted.~~

~~Loan Portfolio Segments~~are 100 percent guaranteed by the SBA and repayment is primarily dependent on the borrower’s cash flow or SBA repayment approval.

•

~~Commercial~~ ~~- Includes loans to commercial customers for use~~

•Consumer - The loan portfolio consists of revolving lines of credit and various term loans such as automobile loans and loans for other personal purposes. Repayment is primarily dependent on the personal income and credit rating of the borrowers. Credit risk is driven by consumer economic factors (such as unemployment and general economic conditions in ~~financing working capital needs, equipment purchases and expansions. Repayment is primarily from~~ the ~~cash flow of a~~ borrower’s ~~principal business operation. Credit risk is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations.~~

•

~~Energy~~ - Includes loans to oil and natural gas customers for use in financing working capital needs, exploration and production activities, and acquisitions. The loans in this category are repaid primarily from the conversion of crude oil and natural gas to cash. Credit risk is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations.

•

~~Commercial Real Estate~~ - Loans typically involve larger principal amounts, and repayment of these loans is generally dependent on the successful operations of the property securing the loan or the business conducted on the property securing the loan. These are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Credit risk may be impacted by the creditworthiness of a borrower, property values and the local economies in the company’s market areas.

•

~~Construction and Land Development~~ - Loans are usually based upon estimates of costs and estimated value of the completed project and include independent appraisal reviews and a financial analysis of the developers and property owners. Sources of repayment include permanent loans, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are higher risk than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of long-term financing. Credit risk may be impacted by the creditworthiness of a borrower, property values and the local economies in the company’s market areas.

•

~~Residential Real Estate~~ - The loans are generally secured by owner-occupied 1-4 family residences. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers. Credit risk in these loans can be impacted by economic conditions within or outside the company’s market areas that might impact either property values or a borrower’s personal income. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over many borrowers.

•

~~Equity Lines of Credit~~ - The loans are revolving lines of credit extended to consumers secured through a first or second mortgage on their personal residence. Repayment is primarily dependent on the personal income and credit rating of the borrowers. Credit risk in these loans may be impacted by economic conditions within the company’s market areas that may impact either property values or a borrower’s personal income.

•

~~Consumer Installment~~ - The loan portfolio consists of various term and line of credit loans such as automobile loans and loans for other personal purposes. Repayment comes from a borrower’s income sources that are typically independent of the loan purpose. Credit risk is driven by consumer economic factors (such as unemployment and general economic conditions in the Company’s market area) and the creditworthiness of a borrower.

The following tables present the credit risk profile of the Company’s loan portfolio based on an internal rating ~~category~~categories (grades 1 - 8), portfolio ~~segment~~segmentation, and payment activity:



	Pass		Special Mention		Substandard Performing		Substandard Nonperforming		Doubtful		Loss		Total
	(Dollars in thousands)
September 30, 2020
Commercial	$	1,106,338	$	71,746	$	75,714	$	34,528	$	3,246	$	0	$	1,291,572
Energy	186,881		58,726		117,389		17,435		3,750		0		384,181
Commercial real estate	1,114,802		41,030		26,624		12,377		798		0		1,195,631
Construction and land development	581,160		5,299		1,158		0		0		0		587,617
Residential real estate	610,909		527		3,467		3,179		0		0		618,082
PPP	369,260		0		0		0		0		0		369,260


Consumer	46,525		0		0		246		0		0		46,771
	$	4,015,875	$	177,328	$	224,352	$	67,765	$	7,794	$	0	$	4,493,114

Pass & Watch Special Mention Substandard Doubtful Loss Total
(Dollars in thousands)
September 30, 2019
Commercial $ 1,217,280
$ 29,350
$ 66,017
$ —
$ —
$ 1,312,647
Energy 378,533
10,342
2,580
4,677
—
396,132
Commercial real estate 976,262
7,529
8,402
960
—
993,153
Construction and land development 527,582
—
—
—
—
527,582
Residential real estate 362,625
273
2,537
—
—
365,435
Equity lines of credit 22,192
—
—
—
—
22,192
Consumer installment 21,552
—
—
—
—
21,552
$ 3,506,026
$ 47,494
$ 79,536
$ 5,637
$ —
$ 3,638,693

Pass & Watch Special Mention Substandard Doubtful Loss Total
(Dollars in thousands)
December 31, 2018
Commercial $ 1,056,505
$ —
$ 73,824
$ 4,085
$ —
$ 1,134,414
Energy 339,720
5,376
13,187
—
—
358,283
Commercial real estate 831,290
6,950
7,209
1,112
—
846,561
Construction and land development 440,032
—
—
—
—
440,032
Residential real estate 244,178
70
2,027
—
—
246,275
Equity lines of credit 20,286
—
—
—
—
20,286
Consumer installment 23,528
—
—
—
—
23,528
$ 2,955,539
$ 12,396
$ 96,247
$ 5,197
$ —
$ 3,069,379



	Pass		Special Mention		Substandard Performing		Substandard Nonperforming		Doubtful		Loss		Total
	(Dollars in thousands)
December 31, 2019
Commercial	$	1,258,952	$	27,069	$	38,666	$	32,130	$	0	$	0	$	1,356,817
Energy	392,233		9,460		2,340		0		4,540		0		408,573
Commercial real estate	1,007,921		9,311		5,746		120		943		0		1,024,041
Construction and land development	628,418		0		0		0		0		0		628,418
Residential real estate	394,495		1,789		469		1,942		0		0		398,695
PPP	0		0		0		0		0		0		0


Consumer	45,163		0		0		0		0		0		45,163
	$	3,727,182	$	47,629	$	47,221	$	34,192	$	5,483	$	0	$	3,861,707

The Company evaluates the loan risk grading system definitions, portfolio segment definitions and allowance for loan loss methodology on an ongoing basis. No significant changes were made to either during the past year.



		21



Table of Contents			Notes to ~~Unaudited~~ Consolidated Financial Statements (unaudited)

Loan Portfolio Aging Analysis

The following tables present the Company’s loan portfolio aging analysis ~~of the recorded investment in loans~~ as of September 30, ~~2019~~2020 and December 31, ~~2018:~~2019:


	30-59 Days Past Due		60-89 Days Past Due		90 Days or More		Total Past Due		Current		Total Loans Receivable		Loans >= 90 Days and Accruing
	(Dollars in thousands)
September 30, 2020
Commercial	$	12,274	$	28,487	$	6,641	$	47,402	$	1,244,170	$	1,291,572	$	1,141
Energy	0		1,540		3,055		4,595		379,586		384,181		0
Commercial real estate	1,459		0		4,475		5,934		1,189,697		1,195,631		0
Construction and land development	0		0		0		0		587,617		587,617		0
Residential real estate	1,591		0		6,124		7,715		610,367		618,082		3,183
PPP	0		0		0		0		369,260		369,260		0


Consumer	0		0		0		0		46,771		46,771		0
	$	15,324	$	30,027	$	20,295	$	65,646	$	4,427,468	$	4,493,114	$	4,324


	30-59 Days Past Due		60-89 Days Past Due		90 Days or More		Total Past Due		Current		Total Loans Receivable		Loans >= 90 Days and Accruing
	(Dollars in thousands)
December 31, 2019
Commercial	$	1,091	$	276	$	30,911	$	32,278	$	1,324,539	$	1,356,817	$	37
Energy	2,340		0		4,593		6,933		401,640		408,573		53
Commercial real estate	316		0		4,589		4,905		1,019,136		1,024,041		4,501
Construction and land development	196		0		0		196		628,222		628,418		0
Residential real estate	2,347		0		1,919		4,266		394,429		398,695		0
PPP	0		0		0		0		0		0		0
Consumer	2		254		0		256		44,907		45,163		0
	$	6,292	$	530	$	42,012	$	48,834	$	3,812,873	$	3,861,707	$	4,591

30-59 Days Past Due 60-89 Days Past Due 90 Days or More Total Past Due Current Total Loans Receivable Loans >= 90 Days and Accruing
(Dollars in thousands)
September 30, 2019
Commercial $ 42,039
$ 2,785
$ 1,101
$ 45,925
$ 1,266,722
$ 1,312,647
$ —
Energy 7,122
—
5,319
12,441
383,691
396,132
642
Commercial real estate 317
—
93
410
992,743
993,153
—
Construction and land development 12,345
—
—
12,345
515,237
527,582
—
Residential real estate 68
—
2,012
2,080
363,355
365,435
—
Equity lines of credit —
—
—
—
22,192
22,192
—
Consumer installment 50
—
—
50
21,502
21,552
—
$ 61,941
$ 2,785
$ 8,525
$ 73,251
$ 3,565,442
$ 3,638,693
$ 642

30-59 Days Past Due 60-89 Days Past Due 90 Days or More Total Past Due Current Total Loans Receivable Loans >= 90 Days and Accruing
(Dollars in thousands)
December 31, 2018
Commercial $ 1,040
$ —
$ 4,137
$ 5,177
$ 1,129,237
$ 1,134,414
$ —
Energy 1,994
—
9,218
11,212
347,071
358,283
—
Commercial real estate —
425
2,253
2,678
843,883
846,561
—
Construction and land development —
—
—
—
440,032
440,032
—
Residential real estate 28
194
—
222
246,053
246,275
—
Equity lines of credit —
—
—
—
20,286
20,286
—
Consumer installment —
—
—
—
23,528
23,528
—
$ 3,062
$ 619
$ 15,608
$ 19,289
$ 3,050,090
$ 3,069,379
$ —

Table of Contents

Notes to Consolidated Financial Statements (unaudited)

Impaired Loans

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. The intent of concessions is to maximize collection.

Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans.



		22



~~Table of Contents~~	~~Notes to Unaudited Consolidated Financial Statements~~

The following tables present ~~impaired~~loans individually evaluated for impairment, including all restructured and formerly restructured loans, for the periods ended September 30, ~~2019~~2020 and December 31, ~~2018:~~

2019:


										Unpaid
			Unpaid					Recorded Balance		Principal Balance		Specific Allowance
	Recorded Balance		Principal Balance		Specific Allowance			(Dollars in thousands)
	(Dollars in thousands)
September 30, 2019
September 30, 2020							September 30, 2020
Loans without a specific valuation							Loans without a specific valuation
Commercial	$	25,770	$	25,770	$	—	Commercial	$	29,439	$	35,220	$	—
Energy	2,969		2,969		—		Energy	0		0		—
Commercial real estate	12,501		12,501		—		Commercial real estate	4,628		4,628		—
Construction and land development	—		—		—		Construction and land development	0		0		—
Residential real estate	2,195		2,195		—		Residential real estate	6,406		6,662		—
Equity lines of credit	—		—		—
Consumer installment	—		—		—
PPP							PPP	0		0		—

Consumer							Consumer	246		246		—
Loans with a specific valuation							Loans with a specific valuation
Commercial	40,392		40,392		10,398		Commercial	9,150		20,538		2,432
Energy	7,257		7,257		854		Energy	21,318		26,597		2,540
Commercial real estate	4,043		4,043		343		Commercial real estate	12,407		13,206		1,525
Construction and land development	—		—		—		Construction and land development	0		0		0
Residential real estate	342		342		219		Residential real estate	0		0		0
Equity lines of credit	—		—		—
Consumer installment	—		—		—
PPP							PPP	0		0		0

Consumer							Consumer	0		0		0

Total							Total
Commercial	66,162		66,162		10,398		Commercial	38,589		55,758		2,432
Energy	10,226		10,226		854		Energy	21,318		26,597		2,540
Commercial real estate	16,544		16,544		343		Commercial real estate	17,035		17,834		1,525
Construction and land development	—		—		—		Construction and land development	0		0		0
Residential real estate	2,537		2,537		219		Residential real estate	6,406		6,662		0
Equity lines of credit	—		—		—
Consumer installment	—		—		—
PPP							PPP	0		0		0
	$	95,469	$	95,469	$	11,814

Consumer							Consumer	246		246		0
								$	83,594	$	107,097	$	6,497



		23



Table of Contents			Notes to ~~Unaudited~~ Consolidated Financial Statements (unaudited)


			Unpaid
	Recorded Balance		Principal Balance		Specific Allowance
	(Dollars in thousands)
December 31, 2019
Loans without a specific valuation
Commercial	$	35,846	$	35,846	$	—
Energy	2,864		2,864		—
Commercial real estate	9,464		9,464		—
Construction and land development	0		0		—
Residential real estate	2,139		2,139		—
PPP	0		0		—
Consumer	0		0		—
Loans with a specific valuation
Commercial	35,030		40,030		19,942
Energy	6,880		9,880		1,949
Commercial real estate	1,028		1,028		210
Construction and land development	0		0		0
Residential real estate	249		249		197
PPP	0		0		0
Consumer	0		0		0

Total
Commercial	70,876		75,876		19,942
Energy	9,744		12,744		1,949
Commercial real estate	10,492		10,492		210
Construction and land development	0		0		0
Residential real estate	2,388		2,388		197
PPP	0		0		0
Consumer	0		0		0
	$	93,500	$	101,500	$	22,298

Unpaid
Recorded Balance Principal Balance Specific Allowance
(Dollars in thousands)
December 31, 2018
Loans without a specific valuation
Commercial $ 40,151
$ 40,151
$ —
Energy 2,789
2,789
—
Commercial real estate 7,059
7,059
—
Construction and land development —
—
—
Residential real estate 1,964
1,964
—
Equity lines of credit —
—
—
Consumer installment —
—
—
Loans with a specific valuation
Commercial 37,996
37,996
5,814
Energy 13,461
13,461
3,108
Commercial real estate 8,168
8,168
473
Construction and land development —
—
—
Residential real estate 63
63
5
Equity lines of credit —
—
—
Consumer installment —
—
—
Total
Commercial 78,147
78,147
5,814
Energy 16,250
16,250
3,108
Commercial real estate 15,227
15,227
473
Construction and land development —
—
—
Residential real estate 2,027
2,027
5
Equity lines of credit —
—
—
Consumer installment —
—
—
$ 111,651
$ 111,651
$ 9,400

The table below shows interest income recognized during the ~~three-~~three and ~~nine-month~~nine month periods ended September 30, ~~2019~~2020 and ~~September 30, 2018~~2019 for impaired loans, including all restructured and formerly restructured loans, held at the end of each period:

Three months ended Nine months ended
September 30, September 30,
2019 2018 2019 2018
(Dollars in thousands)
Commercial $ 386
$ 402
$ 862
$ 1,110
Energy 98
93
324
369
Commercial real estate 200
88
613
291
Construction and land development —
—
—
—
Residential real estate 8
17
17
52
Equity lines of credit —
—
—
—
Consumer installment —
—
—
—
Total interest income recognized $ 692
$ 600
$ 1,816
$ 1,822


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
	(Dollars in thousands)
Commercial	$	12	$	386	$	841	$	862
Energy	2		98		257		324
Commercial real estate	58		200		346		613
Construction and land development	0		0		0		0
Residential real estate	36		8		108		17
PPP	0		0		0		0


Consumer	0		0		0		0
Total interest income recognized	$	108	$	692	$	1,552	$	1,816



		24



Table of Contents			Notes to ~~Unaudited~~ Consolidated Financial Statements (unaudited)

The table below shows the three and nine month average balance of impaired loans ~~during~~for the ~~three- and nine-month~~ periods ended September 30, ~~2019~~2020 and ~~September 30, 2018~~2019 by loan category for impaired loans, including all restructured and formerly restructured loans, held at the end of each period:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
	(Dollars in thousands)
Commercial	$	45,482	$	54,410	$	49,538	$	49,265
Energy	21,396		13,623		23,220		15,091
Commercial real estate	17,937		16,690		18,132		16,528
Construction and land development	0		0		0		0
Residential real estate	6,419		2,538		6,304		2,354
PPP	0		0		0		0
Consumer	248		0		253		0
Total average impaired loans	$	91,482	$	87,261	$	97,447	$	83,238

Three months ended Nine months ended
September 30, September 30,
2019 2018 2019
(Dollars in thousands)
Commercial $ 54,410
$ 27,671
$ 49,265
$ 26,849
Energy 13,623
17,683
15,091
18,992
Commercial real estate 16,690
8,055
16,528
8,101
Construction and land development —
—
—
—
Residential real estate 2,538
2,046
2,354
2,059
Equity lines of credit —
—
—
—
Consumer installment —
—
—
—
Total average impaired loans $ 87,261
$ 55,455
$ 83,238
$ 56,001

Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes and with the statistical information and financial data appearing in this report as well as in ~~The~~the Company’s ~~prospectus (File No. 333-232704)~~Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the Securities &and Exchange Commission ~~(‘‘SEC’’~~(“SEC”) ~~pursuant to Rule 424(b) of the Securities Act of 1933, as amended,~~ on ~~August 15, 2019, related to The Company’s initial public offering~~March 10, 2020 (the ~~‘‘IPO Prospectus’’~~“2019 Form 10-K”). Results of operations for the ~~three-~~three and ~~nine-month~~nine month periods ended September 30, ~~2019~~2020 are not necessarily indicative of results to be attained for any other period. Certain statements in this report contain forward-looking statements regarding our future plans, objectives, beliefs, expectations, representations and projections. See "Forward-Looking Information" which is incorporated herein by reference. Actual results could differ materially from the anticipated results and other expectations expressed in our forward-looking statements as a result of a number of factors, including but not limited to those discussed in Item 1A – "Risk Factors" in the 2019 Form 10-K, as supplemented by Item 1A – "Risk Factors" in this report.

Unless we state otherwise or the context otherwise requires, references in the below section to ~~‘‘we,’’ ‘‘our,’’ ‘‘us,’’ ‘‘ourselves,’’ ‘‘our~~“we,” “our,” “us,” “ourselves,” “our company,’’” and the ~~‘‘Company’’~~“Company” refer to CrossFirst Bankshares, Inc., ~~a Kansas corporation, its predecessors~~ and its consolidated subsidiaries. References to ~~‘‘CrossFirst Bank’’~~“CrossFirst Bank” and the ~~‘‘Bank’’~~“Bank” refer to CrossFirst Bank, ~~a Kansas chartered bank and~~ our wholly-owned consolidated bank subsidiary.

On December 21, 2018, we effected a two-for-one split of our common stock in the form of a stock dividend, whereby each holder of our common stock received one additional share of common stock for each share owned as of the record date of December 19, 2018. The effect of the stock dividend on outstanding shares and per share figures has been retroactively applied to all periods presented in this Form 10-Q.

~~Recent Developments~~

We completed our initial public offering on August 19, 2019 in which we issued and sold 6,594,362 common shares including 844,362 shares pursuant to the underwriters’ partial exercise of their overallotment option. The common shares were sold at an initial public offering price of $14.50 per share. After deducting the underwriting discounts and offering expenses, the Company received total net proceeds of $87.0 million. The shares began trading on the Nasdaq Global Select Market under the symbol ‘‘CFB.’’Third Quarter 2020 Highlights

During the third quarter ended September 30, ~~2019,~~2020, we accomplished the following:

~~Increased total~~•$5.5 billion of assets, ~~$178.1 million or 4.0% during the quarter to $4.7 billion, driven by a $162.4 million or 4.7% increase in our loan portfolio.~~

~~Increased quarterly net income $945.0 thousand or 10.0% on a linked quarter basis, resulting in a quarterly return on average assets of 0.89% and return on average equity of 7.58%.~~

~~Achieved an efficiency ratio of 54.3% during the quarter.~~

~~Increased diluted earnings per share (‘‘EPS’’) 40% to $0.21 for the quarter from the same period in 2018.~~

~~Increased year-to-date 2019 diluted EPS to $0.61,~~ an increase of ~~177%~~12% from December 31, 2019;

•Efficiency ratio of 53% for the third quarter of 2020 as we optimized staffing levels, invested in technology and controlled discretionary spending;

•$64 million of loan growth from the ~~same period~~previous quarter and $854 million or 23% over the last twelve months;

•$188 million of deposit growth from the previous quarter and $834 million or 23% over the last twelve months;

•Opened our second full-service bank in ~~2018.~~the Dallas metropolitan area and moved the Kansas City team into its new location on the Country Club Plaza, in the heart of Kansas City;

•Book value per share of $11.84 at September 30, 2020 compared to $11.59 at September 30, 2019;

•Announced a $20 million common stock buyback program.

Update on the COVID-19 Global Pandemic (“COVID-19”) Impact

The COVID-19 pandemic has caused, and is expected to continue to cause, economic uncertainty and a disruption to the financial markets, the duration and extent of which is not currently known. A discussion of the impact of the COVID-19 pandemic on the Company and its operations and measures undertaken by the Company in response thereto is provided below.

Bank Operations

The Company implemented its business continuity procedures in March 2020 as a result of the COVID-19 pandemic. As of September 30, 2020, team members continued to work in the office as needed to limit exposure risk to our employees and customers. No material interruptions to our business operations have occurred to date.

Paycheck Protection Program (“PPP”) Lending Facility and Loans

The PPP was established by the CARES Act and authorized forgivable loans to small businesses. The Bank provided PPP loans to support current customers and foster relationships with new customers. The loans earn interest at 1%, include fees between 1% and 5% and typically mature in two years. The loans originated under the PPP received a 0% risk weight under the regulatory capital rules which resulted in increased Common Equity Tier 1, Tier 1, and Tier 2 capital ratios, but the PPP loans are included in the calculation of our Leverage ratio. The following table summarizes the impact of the PPP loans on our financials:


	As of or For the Period Ended September 30, 2020
	Outstanding Balance		Total Origination Fees		Earned Fees		Unearned Fees
	(Dollars in thousands)
PPP Loans	$	369,260	$	9,946	$	3,172	$	6,774



		38

Table of Contents

Loan Modifications

~~Selected Financial Data (unaudited)~~

~~Selected~~The CARES Act allows financial ~~data~~institutions to elect to suspend GAAP principles and regulatory determinations for ~~and~~loan modifications relating to COVID-19 that would otherwise be categorized as TDRs from March 1, 2020 to the earlier of ~~our previous five quarters and for and as of~~December 31, 2020 or 60 days after the ~~nine-months ended September 30, 2019 and 2018 is presented below:~~

Third Second First Fourth Third Nine Months Ended
Quarter Quarter Quarter Quarter Quarter September 30,
2019 2019 2019 2018 2018 2019 2018
Per Common Share Data
Basic earnings per share $ 0.22
$ 0.21
$ 0.20
$ 0.22
$ 0.15
$ 0.63
$ 0.23
Diluted earnings per share 0.21
0.20
0.20
0.22
0.15
0.61
0.22
Book value per share 11.59
11.00
10.63
10.21
9.43
11.59
9.43
Tangible book value per share⁽¹⁾
$ 11.44
$ 10.83
$ 10.46
$ 10.04
$ 9.24
$ 11.44
$ 9.24
Selected Operating Ratios
Yield on securities - tax equivalent⁽²⁾
3.19 % 3.42 % 3.59 % 3.61 % 3.58 % 3.40 % 3.62 %
Yield on loans 5.53
5.66
5.75
5.56
5.35
5.64
5.25
Yield on interest-earning assets⁽²⁾
5.00
5.18
5.25
5.08
4.81
5.14
4.65
Cost of interest-bearing deposits 2.26
2.33
2.30
2.04
1.72
2.30
1.59
Cost of total deposits 1.94
1.99
1.96
1.70
1.42
1.96
1.35
Cost of funds 1.94
1.99
1.96
1.72
1.46
1.96
1.40
Net interest margin⁽²⁾
3.24
3.35
3.46
3.51
3.44
3.35
3.34
Return on average assets 0.89
0.86
0.91
1.06
0.70
0.89
0.37
Non-GAAP core operating return on average assets⁽³⁾
0.89
0.89
0.78
0.67
0.72
0.86
0.53
Return on average equity 7.58
7.78
7.98
9.03
6.68
7.76
3.51
Non-GAAP core operating return on average equity⁽⁴⁾
7.58
8.04
6.79
5.59
6.83
7.48
5.38
Non-interest expense to average assets 1.82
2.00
2.20
2.06
2.20
2.00
2.61
Efficiency ratio⁽⁵⁾
54.29
60.09
64.20
60.18
65.91
59.36
79.08
Non-GAAP core operating efficiency ratio⁽⁶⁾
54.29
59.40
64.20
62.61
65.54
59.13
72.24
Non-GAAP tax equivalent efficiency ratio⁽⁷⁾
53.43
59.10
63.10
59.02
64.31
58.38
76.82
Non-interest-bearing deposits to total deposits 14.05
14.28
14.36
15.10
17.99
14.05
17.99
Loans to deposits 99.23 % 96.74 % 96.40 % 95.41 % 97.49 % 99.23 % 97.49 %
Credit Quality Ratios
Allowance for loan losses to total loans 1.18 % 1.24 % 1.22 % 1.23 % 1.22 % 1.18 % 1.22 %
Nonperforming assets to total assets 1.00
1.18
0.36
0.43
0.35
1.00
0.35
Nonperforming loans to total loans 1.22
1.45
0.40
0.58
0.48
1.22
0.48
Allowance for loan losses to nonperforming loans 97.12
85.20
307.27
212.30
256.65
97.12
256.65
Net charge-offs (recoveries) to average loans⁽⁸⁾
0.53 % — % 0.09 % 0.03 % (0.05 )% 0.21 % 0.09 %



		39

~~Table of Contents~~

Third Second First Fourth Third Nine Months Ended
Quarter Quarter Quarter Quarter Quarter September 30,
2019 2019 2019 2018 2018 2019 2018
Capital Ratios
Total stockholders’ equity to total assets 12.95 % 11.16 % 11.26 % 11.94 % 11.03 % 12.95 % 11.03 %
Tier 1 leverage ratio 12.57
10.87
11.15
12.43
11.39
12.57
11.39
Common equity tier 1 capital ratio 12.91
11.02
11.23
11.75
10.55
12.91
10.55
Tier 1 risk-based capital ratio 12.93
11.04
11.23
12.53
11.38
12.93
11.38
Total risk-based capital ratio 13.90 % 12.04 % 12.20 % 13.51 % 12.32 % 13.90 % 12.32 %
⁽¹⁾Tangible common stockholders’ equity and tangible book value per share are non-GAAP financial measures. The most directly comparable GAAP measure is stockholders’ equity and book value per share. See ’’GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures’’ for a reconciliation of this measure.
⁽²⁾ Tax exempt income (tax-free municipal securities) is calculated on a tax equivalent basis. The incremental tax rate used is 21.0%.
⁽³⁾ Non-GAAP core operating income and non-GAAP core operating return on average assets are non-GAAP financial measures. The most directly comparable measure under GAAP is net income and return on average assets, respectively. See ‘‘GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures’’ for a reconciliation of this measure.
⁽⁴⁾ Non-GAAP core operating return on average equity is a non-GAAP financial measure. The most directly comparable GAAP financial measure is return on average equity. See ‘‘GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures’’ for a reconciliation of this measure.
⁽⁵⁾We calculate efficiency ratio as non-interest expense divided by the sum of net interest income and non-interest income.
⁽⁶⁾ Non-GAAP core operating efficiency ratio is a non-GAAP financial measure. The most directly comparable GAAP financial measure is the efficiency ratio. See ‘‘GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures’’ for a reconciliation of this measure.
⁽⁷⁾ Non-GAAP tax equivalent efficiency ratio is a non-GAAP financial measure. The most directly comparable measure is the efficiency ratio. See ‘‘GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures’’ for a reconciliation of this measure.
⁽⁸⁾Interim periods are annualized

~~GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures~~

Non-GAAP financial measures are used by management to evaluate our performance. The non-GAAP financial measures that we discuss should not be considered in isolation or as a substitute for the most directly comparable financial measures calculated in accordance with GAAP. Moreover, the way we calculate these non-GAAP financial measures may differ from that of other companies reporting measures with similar names.

~~We calculate ‘‘non-GAAP core operating income’’ as net income adjusted to remove non-recurring or non-core income and expense items related to:~~

~~Restructuring charges associated with the transition of our former CEO - In connection with the departure of our former CEO in the second quarter of 2018, we incurred restructuring charges~~national emergency related to the ~~acceleration~~COVID-19 pandemic ends as long as the loan was not more than 30 days past due as of ~~certain stock-based compensation~~December 31, 2019. The Company elected to use this guidance.

Deferred loan interest accrues on loans modified as a result of the COVID-19 pandemic until determined that it is more likely than not that we will be unable to collect the accrued interest balance. After the deferral period, the modified loan terms require all accrued interest to be paid or capitalized and ~~employee costs, some of which were adjusted in~~amortized over the ~~fourth~~original loan term. The Company may provide an additional deferral period to customers on an as needed basis. Information regarding all loan modifications outstanding at September 30, 2020 is provided below:


Total Loan Modifications by Category Impacted by the COVID-19 Pandemic as of September 30, 2020
	Number of Loans	Value of Loans		Percent of Gross Loans in Category
	(Dollars in thousands)
Commercial	51	$	73,894	6	%
Energy	4	34,683		9
Commercial real estate	31	176,096		15
Construction and land development	2	14,899		3
Residential real estate	5	18,128		3


Total Loan Modifications	93	$	317,700	7	%


Total Loan Modifications by Type of Modification Impacted by the COVID-19 Pandemic as of September 30, 2020
	Number of Loans	Value of Loans
	(Dollars in thousands)
Payment deferral	17	$	97,692
Interest-only payments	45	135,765
Other (multiple modifications, change in rate and/or payment)	31	84,243
Total Loan Modifications	93	$	317,700

During the third quarter of ~~2018.~~

~~Impairment charges associated with two buildings that~~2020, the Company assessed and approved a second round of modifications. These modifications were ~~held-for-sale - We acquired~~based on a ~~larger corporate headquarters~~customer’s business condition, evaluation of near and long term recovery potential and level of support from the owners and guarantors. The Company expects modified loans to ~~accommodate our business needs that eliminated~~recover from the ~~need for two smaller support buildings. The two smaller support buildings had been acquired recently~~pandemic, but uncertainty regarding the short-term and ~~were extensively remodeled, which resulted in a difference between book and market value for those assets. We sold one~~long-term effects of the ~~buildings~~COVID-19 pandemic remain that may require the Company to (i) downgrade modified loans that may increase our ALLL, (ii) reverse interest income previously recognized but not received, and (iii) charge-off modified loans. Information regarding loans that received a second modification as of September 30, 2020 is provided below:


Second Loan Modifications by Category Impacted by the COVID-19 Pandemic as of September 30, 2020
	Number of Loans	Value of Loans		Percent of Gross Loans in Category
	(Dollars in thousands)
Recreation (subcategory)	4	13,940
Restaurants (subcategory)	5	9,233
Other (subcategory)	7	5,875
Total Commercial	16	$	29,048	2	%
Hotel and Lodging (subcategory)	5	53,928
Medical and Senior Living (subcategory)	1	18,612
Owner Occupied (subcategory)	4	11,862
Total Commercial Real Estate	10	$	84,402	7	%
Total Energy	2	$	1,859	—	%
Total Residential Real Estate	1	$	17,220	3	%
Total Second Loan Modifications	29	$	132,529	3	%

Table of Contents

Loan Portfolio and Credit Quality

The COVID-19 pandemic impacted our borrowers resulting in ~~2018~~credit migration and ~~the other in the second quarter of 2019.~~

~~State tax credits -~~increased provisions. As a result of the ~~purchase~~COVID-19 pandemic, the Company plans to moderate loan growth to focus on current customers, implement floors on loans and ~~improvement~~monitor unfunded credit lines. Listed below are categories in our loan portfolio that have been or may be significantly impacted by the COVID-19 pandemic, resulting in increased monitoring.

Energy Loans

Energy loans were comprised of 64% predominately oil backed loans and 36% predominately natural gas backed loans. Our customer base has significant experience in the energy sector and the Company has an experienced group of energy lenders and credit officers that are proactively monitoring the portfolio. 70% of the energy portfolio has been downgraded since December 31, 2019, resulting in a $14 million or 263% increase in the energy ALLL balance at September 30, 2020. We plan to support our ~~new corporate headquarters~~current customers and decrease our overall energy exposure.

Real Estate Loans

Our real estate loans are comprised of construction and development loans, 1-4 family loans and commercial real estate loans. There is significant uncertainty regarding the impact of the COVID-19 pandemic on our real estate loan portfolio, but we ~~received state tax credits.~~continue to monitor the following industries:


Real Estate Industries with Increased Monitoring as of September 30, 2020
Industry	Outstanding Balance		Percent of Gross Loans
	(Dollars in thousands)
Retail	$	187,140	4.2	%
Hotel and Lodging	170,953		3.8
Medical and Senior Living	183,890		4.1

These industries were identified due to travel restrictions, cancellation of events and large gatherings, reduction in demand for senior living housing and furlough of workers and an increase in unemployment numbers. The Bank has worked with business owners in these industries by deferring loan payments and funding the PPP loans.

Commercial Loans

The ~~most directly comparable GAAP financial measure for non-GAAP core operating income~~Company provides a mix of variable-rate and fixed-rate commercial loans across various industries. We extend commercial loans on an unsecured and secured basis. There is ~~net income.~~significant uncertainty regarding the impact the COVID-19 pandemic will have on our commercial loan portfolio as well, but we identified the following industries that received an increase in monitoring:

~~We calculate ‘‘non-GAAP core operating return~~


Commercial Industries with Increased Monitoring as of September 30, 2020
Industry	Outstanding Balance		Percent of Gross Loans
	(Dollars in thousands)
Recreation	$	86,086	1.9	%
Restaurants	63,270		1.4
Aircraft and Aviation	$	64,248	1.4	%

These industries were identified based on average assets’’ as non-GAAP core operating income (as defined above) divided by average assets. The most directly comparable GAAP financial measure is return on average assets, which is calculated as net income divided by average assets.travel, entertainment, and restaurant restrictions. Cancellation of events and large gatherings, business closures and furlough of workers and an increase in unemployment numbers have also impacted these industries.



		40

Table of Contents

We calculate ‘‘non-GAAP core operating return on average equity’’ as non-GAAP core operating income (defined above) less preferred dividends divided by average common equity. The most directly comparable GAAP financial measure is return on average equity, which is calculated as net income less preferred dividends divided by average common equity.

We calculate ‘‘non-GAAP core operating efficiency ratio’’ as non-interest expense adjusted to remove non-recurring non-interest expenses as defined under non-GAAP core operating income divided by the sum of net interest income and non-interest income adjusted to remove non-recurring non-interest income as defined under non-GAAP core operating income. The most directly comparable GAAP financial measure is the efficiency ratio.

Management believes that non-GAAP core operating income, non-GAAP core operating return on average assets, non-GAAP core operating return on average equity and non-GAAP core operating efficiency ratio remove events that are not recurring and not part of core business activities and are useful analytical tools for investors to compare periods excluding these non-recurring or non-core income and charges.

The following table reconciles, as of the dates set forth below, net income to non-GAAP core operating income, non-GAAP core operating return on average assets, non-GAAP core operating return on average equity and non-GAAP core operating efficiency ratio:

Three Months Ended Nine Months Ended
September June March December September
30, 30, 31, 31, 30, September 30,
2019 2019 2019 2018 2018 2019 2018
(Dollars in thousands)
Non-GAAP core operating income:
Net Income $ 10,384
$ 9,439
$ 9,350
$ 10,334
$ 6,354
$ 29,173
$ 9,256
Add: restructuring charges —
—
—
(815 ) —
—
5,548
Less: tax effect⁽¹⁾
—
—
—
(210 ) —
—
1,591
Restructuring charges, net of tax —
—
—
(605 ) —
—
3,957
Add: fixed asset impairments —
424
—
—
171
424
171
Less: tax effect⁽²⁾
—
109
—
—
44
109
44
Fixed asset impairments, net of tax —
315
—
—
127
315
127
Add: state tax credit⁽³⁾
—
—
(1,361 ) (3,129 ) —
(1,361 ) —
Non-GAAP core operating income $ 10,384
$ 9,754
$ 7,989
$ 6,600
$ 6,481
$ 28,127
$ 13,340
⁽¹⁾Represents the tax impact of the adjustments above at a tax rate of 25.73%, plus a permanent tax benefit associated with stock-based grants that were exercised prior to our former CEO’s departure.
⁽²⁾ Represents the tax impact of the adjustments above at a tax rate of 25.73%.
⁽³⁾ No tax effect.



		41

~~Table of Contents~~

Three Months Ended Nine Months Ended
September June March December September
30, 30, 31, 31, 30, September 30,
2019 2019 2019 2018 2018 2019 2018
(Dollars in thousands)
Non-GAAP core operating return on average assets:
Non-GAAP core operating income $ 10,384
$ 9,754
$ 7,989
$ 6,600
$ 6,481
$ 28,127
$ 13,340
Average assets 4,610,958
4,402,002
4,168,243
3,884,642
3,588,876
4,395,356
3,363,230
Return on average assets 0.89 % 0.86 % 0.91 % 1.06 % 0.70 % 0.89 % 0.37 %
Non-GAAP core operating return on average assets 0.89 % 0.89 % 0.78 % 0.67 % 0.72 % 0.86 % 0.53 %
Non-GAAP core operating return on average equity:
Non-GAAP core operating income $ 10,384
$ 9,754
$ 7,989
$ 6,600
$ 6,481
$ 28,127
$ 13,340
Less: preferred dividends —
—
175
525
525
175
1,575
Non-GAAP core operating income available to common stockholders 10,384
9,754
7,814
6,075
5,956
27,952
11,765
Average common equity $ 543,827
$ 486,880
$ 466,506
$ 430,881
$ 346,025
$ 499,354
$ 292,589
Return on average equity 7.58 % 7.78 % 7.98 % 9.03 % 6.68 % 7.76 % 3.51 %
Non-GAAP core operating return on average equity 7.58 % 8.04 % 6.79 % 5.59 % 6.83 % 7.48 % 5.38 %

Non-GAAP core operating efficiency ratio
Non-interest expense $ 21,172
$ 21,960
$ 22,631
$ 20,166
$ 19,875
$ 65,763
$ 65,589
Less: restructuring charges —
—
—
(815 ) —
—
5,548
Non-GAAP non-interest expense (numerator) 21,172
21,960
22,631
20,981
19,875
65,763
60,041
Net interest income 35,786
34,874
33,605
32,315
28,968
104,265
78,053
Non-interest income 3,212
1,672
1,645
1,195
1,185
6,529
4,888
Add: fixed asset impairments —
424
—
—
171
424
171
Non-GAAP operating revenue (denominator) $ 38,998
$ 36,970
$ 35,250
$ 33,510
$ 30,324
$ 111,218
$ 83,112
Efficiency ratio 54.29 % 60.09 % 64.20 % 60.18 % 65.91 % 59.36 % 79.08 %
Non-GAAP core operating efficiency ratio 54.29 % 59.40 % 64.20 % 62.61 % 65.54 % 59.13 % 72.24 %

We calculate ‘‘tangible common stockholders’ equity’’ as total stockholders’ equity less goodwill and other intangible assets and preferred stock. The most directly comparable GAAP financial measure is total stockholders’ equity.

We calculate ‘‘tangible book value per share’’ as tangible common stockholders’ equity (as defined above) divided by the number of shares of our common stock outstanding at the end of the relevant period. The most directly comparable GAAP financial measure is book value per share.

Management believes that tangible stockholders’ equity and tangible book value per share are important to many investors in the marketplace who are interested in changes from period to period in our stockholders’ equity, exclusive of changes in intangible assets. The following table reconciles, as of the dates set forth below, total stockholders’ equity to tangible stockholders’ equity and presents tangible book value per share compared to book value per share:



		42

~~Table of Contents~~

Period Ended
September June March December September
30, 30, 31, 31, 30,
2019 2019 2019 2018 2018
(Dollars in thousands except per share data)
Tangible common stockholders’ equity:
Stockholders’ equity $ 602,435
$ 499,195
$ 480,514
$ 490,336
$ 409,780
Less: goodwill and other intangible assets 7,720
7,745
7,770
7,796
7,821
Less: preferred stock —
—
—
30,000
30,000
Tangible common stockholders’ equity $ 594,715
$ 491,450
$ 472,744
$ 452,540
$ 371,959
Tangible book value per share:
Tangible common stockholders’ equity $ 594,715
$ 491,450
$ 472,744
$ 452,540
$ 371,959
Shares outstanding at end of period 51,969,203
45,367,641
45,202,370
45,074,322
40,261,480
Book value per share $ 11.59
$ 11.00
$ 10.63
$ 10.21
$ 9.43
Tangible book value per share $ 11.44
$ 10.83
$ 10.46
$ 10.04
$ 9.24

We calculate ‘‘Non-GAAP tax equivalent efficiency ratio’’ as non-interest expense divided by the sum of net interest income on a tax equivalent basis and non-interest income. Management believes the tax equivalent efficiency ratio provides a better understanding of our efficiency ratio because it gives effect for our tax-exempt security strategy.

~~The following table reconciles, as of the dates set forth below, the efficiency ratio compared to the tax-equivalent efficiency ratio:~~

Three Months Ended Nine Months Ended
September June March December September
30, 30, 31, 31, 30, September 30,
2019 2019 2019 2018 2018 2019 2018
(Dollars in thousands)
Non-GAAP Tax Equivalent Efficiency Ratio:
Non-interest expense (Numerator) $ 21,172
$ 21,960
$ 22,631
$ 20,166
$ 19,875
$ 65,763
$ 65,589
Net interest income 35,786
34,874
33,605
32,315
28,968
104,265
78,053
Tax equivalent interest income 624
612
616
658
753
1,852
2,440
Net interest income - tax equivalent 36,410
35,486
34,221
32,973
29,721
106,117
80,493
Non-interest income 3,212
1,672
1,645
1,195
1,185
6,529
4,888
Total tax-equivalent income (Denominator) $ 39,622
$ 37,158
$ 35,866
$ 34,168
$ 30,906
$ 112,646
$ 85,381
Efficiency Ratio 54.29 % 60.09 % 64.20 % 60.18 % 65.91 % 59.36 % 79.08 %
Non-GAAP Tax Equivalent Efficiency Ratio 53.43 % 59.10 % 63.10 % 59.02 % 64.31 % 58.38 % 76.82 %



		43

~~Table of Contents~~

Results of Operations

~~Summary~~

The Company’s results of operations depend substantially on net interest income and non-interest income. Other factors contributing to the Company’s results of operations include its non-interest expense, such as salaries and employee benefits, occupancy and equipment and other miscellaneous operating expenses. The components of the Company’s results of operations were as follows for the periods shown:

Three Months Ended Nine Months Ended
September 30, September 30,
2019 2018 % Change 2019 2018 % Change
(Dollars in thousands)
Net interest income $ 35,786
$ 28,968
23.5 % $ 104,265
$ 78,053
33.6 %
Provision for loan losses 4,850
3,000
61.7
10,550
9,000
17.2
Non-interest income 3,212
1,185
171.1
6,529
4,888
33.6
Non-interest expense 21,172
19,875
6.5
65,763
65,589
0.3
Income taxes 2,592
924
180.5
5,308
(904 ) (687.2 )
Net income $ 10,384
$ 6,354
63.4 % $ 29,173
$ 9,256
215.2 %
Preferred dividends —
525
(100.0 ) 175
1,575
(88.9 )
Net income available to common shareholders $ 10,384
$ 5,829
78.1 % $ 28,998
$ 7,681
277.5 %
Non-GAAP core operating income⁽¹⁾
$ 10,384
$ 6,481
60.2 % $ 28,127
$ 13,340
110.8 %

⁽¹⁾ Non-GAAP core operating income is a non-GAAP financial measure. The most directly comparable measure under GAAP is net income. See ‘‘GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures’’ for a reconciliation of this measure.



		44



~~Table of Contents~~	~~Notes to Unaudited Consolidated Financial Statements~~

Net Interest Income

~~We present and discuss net~~Net interest income is presented on a tax-equivalent basis below. A tax-equivalent basis makes all income taxable at the same rate. For example, $100 of tax-exempt income would be presented as $126.58, an amount that, if taxed at the statutory federal income tax rate of 21% would yield $100. We believe a tax-equivalent basis provides for improved comparability between the various earning assets. The following ~~table presents,~~tables present, for the ~~period~~periods indicated, average balance sheet information, interest income, interest expense and the corresponding average yield and rates paid:


	Three Months Ended
	September 30,
	2020						2019
	Average Balance		Interest Income / Expense		Average Yield / Rate(4)		Average Balance		Interest Income / Expense		Average Yield / Rate(4)
	(Dollars in thousands)
Interest-earning assets:
Securities - taxable	$	257,637	$	1,290	1.99	%	$	335,045	$	2,263	2.68	%
Securities - tax-exempt(1)	440,669		3,855		3.48		392,644		3,592		3.63
Federal funds sold	—		—		—		16,315		89		2.16
Interest-bearing deposits in other banks	166,423		47		0.11		171,913		881		2.03
Gross loans, net of unearned income(2)(3)	4,477,211		43,929		3.90		3,540,707		49,327		5.53
Total interest-earning assets(1)	5,341,940		$	49,121	3.66	%	4,456,624		$	56,152	5.00	%
Allowance for loan losses	(75,970)						(43,327)
Other non-interest-earning assets	220,282						197,661
Total assets	$	5,486,252					$	4,610,958
Interest-bearing liabilities
Transaction deposits	$	460,420	$	260	0.22	%	$	134,987	$	386	1.13	%
Savings and money market deposits	1,995,307		2,301		0.46		1,743,575		9,553		2.17
Time deposits	1,174,555		4,737		1.60		1,276,571		8,064		2.51
Total interest-bearing deposits	3,630,282		7,298		0.80		3,155,133		18,003		2.26
FHLB and short-term borrowings	479,475		1,803		1.50		345,794		1,703		1.95
Trust preferred securities, net of fair value adjustments	944		24		10.19		904		37		16.06
Non-interest-bearing deposits	714,337		—		—		535,467		—		—
Cost of funds	4,825,038		$	9,125	0.75	%	4,037,298		$	19,743	1.94	%
Other liabilities	47,304						29,833
Stockholders’ equity	613,910						543,827
Total liabilities and stockholders’ equity	$	5,486,252					$	4,610,958
Net interest income(1)			$	39,996					$	36,409
Net interest spread(1)					2.91	%					3.06	%
Net interest margin(1)					2.98	%					3.24	%

(1) Tax exempt income is calculated on a tax equivalent basis. Tax-free municipal securities are exempt from Federal income taxes. The incremental tax rate used is 21.0%.
(2) Loans, net of unearned income includes non-accrual loans of $76 million and $44 million as of September 30, 2020 and 2019, respectively.
(3) Loan interest income includes loan fees of $3 million and $2 million for the three months ended September 30, 2020 and 2019, respectively.
(4) Actual unrounded values are used to calculate the reported yield or rate disclosed. Accordingly, recalculations using the amounts in thousands as disclosed in this report may not produce the same amounts.

Three Months Ended
September 30,
2019 2018
Average Balance Interest Income / Expense
Average Yield / Rate⁽⁴⁾
Average Balance Interest Income / Expense
Average Yield / Rate⁽⁴⁾
(Dollars in thousands)
Interest-earning assets:
Securities - taxable $ 335,045
$ 2,263
2.68 % $ 304,937
$ 2,454
3.19 %
Securities - tax-exempt⁽¹⁾
392,644
3,592
3.63
447,333
4,338
3.85
Federal funds sold 16,315
89
2.16
20,674
110
2.10
Interest-bearing deposits in other banks 171,913
881
2.03
132,585
613
1.84
Gross loans, net of unearned income⁽²⁾⁽³⁾
3,540,707
49,327
5.53
2,523,107
34,012
5.35
Total interest-earning assets⁽¹⁾
4,456,624
$ 56,152
5.00 % 3,428,636
$ 41,527
4.81 %
Allowance for loan losses (43,327 ) (31,716 )
Other non-interest-earning assets 197,661
191,956

Total assets $ 4,610,958
$ 3,588,876

Interest-bearing liabilities
Transaction deposits $ 134,987
$ 386
1.13 % $ 56,072
$ 33
0.24 %
Savings and money market deposits 1,743,575
9,553
2.17
1,450,397
6,139
1.68
Time deposits 1,276,571
8,064
2.51
801,416
3,827
1.89
Total interest-bearing deposits 3,155,133
18,003
2.26
2,307,885
9,999
1.72
FHLB and short-term borrowings 345,794
1,703
1.95
397,252
1,772
1.77
Trust preferred securities, net of fair value adjustments 904
37
16.06
868
36
16.21
Non-interest-bearing deposits 535,467
—
—
491,942
—
—
Cost of funds 4,037,298
$ 19,743
1.94 % 3,197,947
$ 11,807
1.46 %
Other liabilities 29,833
14,904

Stockholders’ equity 543,827
376,025

Total liabilities and stockholders’ equity $ 4,610,958
$ 3,588,876

Net interest income⁽¹⁾
$ 36,409
$ 29,720

Net interest spread⁽¹⁾
3.06 % 3.35 %
Net interest margin⁽¹⁾
3.24 % 3.44 %
⁽¹⁾ Tax exempt income is calculated on a tax equivalent basis. Tax-free municipal securities are exempt from Federal taxes. The incremental tax rate used is 21.0%.
⁽²⁾ Loans, net of unearned income includes non-accrual loans of $43.6 million and $12.5 million as of September 30, 2019 and 2018, respectively.
⁽³⁾ Loan interest income includes loan fees of $2.4 million and $1.8 million for the three months ended September 30, 2019 and 2018, respectively.
⁽⁴⁾Actual unrounded values are used to calculate the reported yield or rate disclosed. Accordingly, recalculations using the amounts in thousands as disclosed in this report may not produce the same amounts.

Nine Months Ended
September 30,
2019 2018
Average Balance Interest Income / Expense
Average Yield / Rate⁽⁴⁾
Average Balance Interest Income / Expense
Average Yield / Rate⁽⁴⁾
(Dollars in thousands)
Interest-earning assets:
Securities - taxable $ 334,272
$ 7,447
2.98 % $ 273,525
$ 6,447
3.15 %
Securities - tax-exempt⁽¹⁾
378,651
10,672
3.77
484,090
14,062
3.88
Federal funds sold 18,714
345
2.46
18,782
281
2.00
Interest-bearing deposits in other banks 135,030
2,107
2.09
174,740
2,200
1.68
Gross loans, net of unearned income⁽²⁾⁽³⁾
3,373,118
142,319
5.64
2,275,039
89,262
5.25
Total interest-earning assets⁽¹⁾
4,239,785
$ 162,890
5.14 % 3,226,176
$ 112,252
4.65 %
Allowance for loan losses (41,329 ) (29,607 )
Other non-interest-earning assets 196,900
166,661

Total assets $ 4,395,356
$ 3,363,230

Interest-bearing liabilities
Transaction deposits $ 127,785
$ 1,139
1.19 % $ 53,995
$ 101
0.25 %
Savings and money market deposits 1,616,558
27,326
2.26
1,381,291
15,658
1.52
Time deposits 1,249,219
22,956
2.46
809,550
10,880
1.80
Total interest-bearing deposits 2,993,562
51,421
2.30
2,244,836
26,639
1.59
FHLB and short-term borrowings 366,708
5,240
1.91
381,166
5,020
1.76
Trust preferred securities, net of fair value adjustments 895
112
16.74
860
100
15.47
Non-interest-bearing deposits 508,888
—
—
402,850
—
—
Cost of funds 3,870,053
$ 56,773
1.96 % 3,029,712
$ 31,759
1.40 %
Other liabilities 22,762
10,929

Stockholders’ equity 502,541
322,589

Total liabilities and stockholders’ equity $ 4,395,356
$ 3,363,230

Net interest income⁽¹⁾
$ 106,117
$ 80,493

Net interest spread⁽¹⁾
3.18 % 3.25 %
Net interest margin⁽¹⁾
3.35 % 3.34 %
⁽¹⁾ Tax exempt income is calculated on a tax equivalent basis. Tax-free municipal securities are exempt from Federal taxes. The incremental tax rate used is 21.0%.
⁽²⁾Loans, net of unearned income includes non-accrual loans of $43.6 million and $12.5 million as of September 30, 2019 and 2018, respectively.
⁽³⁾ Loan interest income includes loan fees of $6.6 million and $5.1 million for the nine months ended September 30, 2019 and 2018, respectively.
⁽⁴⁾Actual unrounded values are used to calculate the reported yield or rate disclosed. Accordingly, recalculations using the amounts in thousands as disclosed in this report may not produce the same amounts.



		45

Table of Contents


	Nine Months Ended
	September 30,
	2020						2019
	Average Balance		Interest Income / Expense		Average Yield / Rate(4)		Average Balance		Interest Income / Expense		Average Yield / Rate(4)
	(Dollars in thousands)
Interest-earning assets:
Securities - taxable	$	285,363	$	4,982	2.33	%	$	334,272	$	7,447	2.98	%
Securities - tax-exempt(1)	443,506		11,807		3.56		378,651		10,672		3.77
Federal funds sold	1,364		18		1.73		18,714		345		2.46
Interest-bearing deposits in other banks	170,316		566		0.44		135,030		2,107		2.09
Gross loans, net of unearned income(2)(3)	4,248,520		138,591		4.36		3,373,118		142,319		5.64
Total interest-earning assets(1)	5,149,069		$	155,964	4.05	%	4,239,785		$	162,890	5.14	%
Allowance for loan losses	(64,896)						(41,329)
Other non-interest-earning assets	218,797						196,900
Total assets	$	5,302,970					$	4,395,356
Interest-bearing liabilities
Transaction deposits	$	404,967	$	1,391	0.46	%	$	127,785	$	1,139	1.19	%
Savings and money market deposits	1,938,669		11,689		0.81		1,616,558		27,326		2.26
Time deposits	1,178,632		16,895		1.91		1,249,219		22,956		2.46
Total interest-bearing deposits	3,522,268		29,975		1.14		2,993,562		51,421		2.30
FHLB and short-term borrowings	456,048		5,145		1.51		366,708		5,240		1.91
Trust preferred securities, net of fair value adjustments	933		82		11.81		895		112		16.74
Non-interest-bearing deposits	668,208		—		—		508,888		—		—
Cost of funds	4,647,457		$	35,202	1.01	%	3,870,053		$	56,773	1.96	%
Other liabilities	42,731						22,762
Stockholders’ equity	612,782						502,541
Total liabilities and stockholders’ equity	$	5,302,970					$	4,395,356
Net interest income(1)			$	120,762					$	106,117
Net interest spread(1)					3.04	%					3.18	%
Net interest margin(1)					3.13	%					3.35	%
(1) Tax exempt income is calculated on a tax equivalent basis. Tax-free municipal securities are exempt from Federal income taxes. The incremental tax rate used is 21.0%.
(2) Loans, net of unearned income includes non-accrual loans of $76 million and $44 million as of September 30, 2020 and 2019, respectively.
(3) Loan interest income includes loan fees of $10 million and $7 million for the nine-months ended September 30, 2020 and 2019, respectively.
(4) Actual unrounded values are used to calculate the reported yield or rate disclosed. Accordingly, recalculations using the amounts in thousands as disclosed in this report may not produce the same amounts.

Table of Contents

Changes in interest income and interest expense result from changes in average balances (volume) of interest earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following table sets forth the effects of changing rates and volumes on our net interest income during the ~~period~~periods shown. Information is provided with respect to: (i) changes in volume (change in volume times old rate); (ii) changes in rates (change in rate times old volume); and (iii) changes in rate/volume (change in rate times the change in volume).


	Three Months Ended						Nine Months Ended
	September 30, 2020 over 2019						September 30, 2020 over 2019
	Average Volume		Yield/Rate		Net Change(2)		Average Volume		Yield/Rate		Net Change(2)
	(Dollars in thousands)
Interest Income
Securities - taxable	$	(460)	$	(513)	$	(973)	$	(993)	$	(1,472)	$	(2,465)
Securities - tax-exempt(1)	418		(155)		263		1,759		(624)		1,135
Federal funds sold	(44)		(45)		(89)		(247)		(80)		(327)
Interest-bearing deposits in other banks	(28)		(806)		(834)		443		(1,984)		(1,541)
Gross loans, net of unearned income	11,169		(16,567)		(5,398)		32,557		(36,285)		(3,728)
Total interest income(1)	11,055		(18,086)		(7,031)		33,519		(40,445)		(6,926)
Interest Expense
Transaction deposits	373		(499)		(126)		1,287		(1,035)		252
Savings and money market deposits	1,198		(8,450)		(7,252)		4,632		(20,269)		(15,637)
Time deposits	(601)		(2,726)		(3,327)		(1,236)		(4,825)		(6,061)
Total interest-bearing deposits	970		(11,675)		(10,705)		4,683		(26,129)		(21,446)
FHLB and short-term borrowings	553		(453)		100		1,135		(1,230)		(95)
Trust preferred securities, net of fair value adjustments	1		(14)		(13)		4		(34)		(30)
Total interest expense	1,524		(12,142)		(10,618)		5,822		(27,393)		(21,571)
Net interest income(1)	$	9,531	$	(5,944)	$	3,587	$	27,697	$	(13,052)	$	14,645

(1) Tax exempt income is calculated on a tax equivalent basis. Tax-free municipal securities are exempt from Federal income taxes. The incremental tax rate used is 21.0%.
(2) The change in interest not due solely to volume or rate has been allocated in proportion to the respective absolute dollar amounts of the change in volume or rate.

Three Months Ended Nine Months Ended
September 30, 2019 over 2018 September 30, 2019 over 2018
Average Volume Yield/Rate
Net Change⁽²⁾
Average Volume Yield/Rate
Net Change⁽²⁾
(Dollars in thousands)
Interest Income
Securities - taxable $ 227
$ (418 ) $ (191 ) $ 1,364
$ (364 ) $ 1,000
Securities - tax-exempt⁽¹⁾
(509 ) (237 ) (746 ) (3,000 ) (390 ) (3,390 )
Federal funds sold (24 ) 3
(21 ) (1 ) 65
64
Interest-bearing deposits in other banks 199
69
268
(562 ) 469
(93 )
Gross loans, net of unearned income 14,136
1,179
15,315
45,980
7,077
53,057
Total interest income⁽¹⁾
14,029
596
14,625
43,781
6,857
50,638
Interest Expense
Transaction deposits 97
256
353
277
761
1,038
Savings and money market deposits 1,397
2,017
3,414
3,024
8,644
11,668
Time deposits 2,728
1,509
4,237
7,209
4,867
12,076
Total interest-bearing deposits 4,222

3,782
8,004
10,510
14,272
24,782
FHLB and short-term borrowings (241 ) 172
(69 ) (195 ) 415
220
Trust preferred securities, net of fair value adjustments 1
—
1
4
8
12
Total interest expense 3,982
3,954
7,936
10,319
14,695
25,014
Net interest income⁽¹⁾
$ 10,047
$ (3,358 ) $ 6,689
$ 33,462
$ (7,838 ) $ 25,624

⁽¹⁾ Tax exempt income is calculated on a tax equivalent basis. Tax-free municipal securities are exempt from Federal taxes. The incremental tax rate used is 21.0%.
⁽²⁾ The change in interest not due solely to volume or rate has been allocated in proportion to the respective absolute dollar amounts of the change in volume or rate.

~~Three~~Interest income - Interest income declined for the three and nine months ended September 30, ~~2019 over 2018~~2020 compared to the same periods in 2019. Lower yields on earning assets were the result of a lower interest rate environment, PPP loan funding during the second quarter of 2020, and changes in nonaccrual loans. The decline in asset yields was partially offset by year-over-year loan growth. We anticipate our fourth quarter yield on earning assets to remain flat or increase slightly when compared to the quarter ended September 30, 2020.

~~For~~Interest expense - Interest expense declined for the three and nine months ended September 30, ~~2019, net interest income increased $6.7 million or 22.5% from~~2020 compared to the same ~~period~~periods in ~~the prior year. Net interest income improved as a result~~2019. The cost of ~~a $1.0 billion or 30.0% increase in average interest-earning assets offset by a 20 basis point decline~~interest-bearing deposits declined due to strategic rate changes in our ~~net interest margin (‘‘NIM’’).~~

~~For~~deposit products driven by the ~~three months ended September 30, 2019, NIM was 3.24%~~declining rate environment. The cost of FHLB and other borrowings declined due to shorter term funding in 2020 compared to ~~3.44% in 2018.~~2019 and the declining rate environment. The declining margin was attributable to a rising interest rate environment in the third quarter of 2018 compared to two rate cuts by the Federal Open Market Committee (‘‘FOMC’’) in the third quarter of 2019. As a result, we experienced higher cost of funds as interest-bearing deposits repriced slower than our loan portfolio. The marginrates on gross loans, net of unearned income increased 18 basis points from 5.35% to 5.53% while the Company’s cost of funds increased 48 basis points from 1.46% to 1.94%. Changes in the yield and rate of interest-earning assets and interest-bearing liabilities ~~decreased net interest income by $3.4 million.~~

~~Average volume for the three months ended September 30, 2019 compared to 2018 improved net interest income by $10.0 million. Average interest-earning assets~~ were driven by a $1.0 billion or 40.3% increase in average loans. The growth in loans was primarily supported by a $847.2 million or 36.7% increase in interest-bearing deposits and a $43.5 million or 8.8% increase in non-interest-bearing deposits.



		46

~~Table of Contents~~

~~Nine months ended September 30, 2019 over 2018~~

For the nine-months ended September 30, 2019, net interest income increased $25.6 million or 31.8% from the same period in the prior year. Net interest income was driven by a $1.0 billion or 31.4% increase in average interest-earning assets. NIM increased 1 basis point as a result of four rate increases by the FOMC from March 2018 to December 2018, offset by two rate declines by the FOMC in July and September of 2019.

For the nine-months ended September 30, 2019, NIM was 3.35% compared to 3.34% in 2018. The yield on loans, net of unearned income increased 39 basis points to 5.64%, increasing interest income by $7.1 million offset by an increase in ~~the~~average volume to support our asset growth. We anticipate our fourth quarter cost of ~~interest-bearing~~funds to remain flat or slightly decline as time deposits ~~of 71 basis points resulting in a $14.3 million increase in~~and other borrowings mature.

Net interest ~~expense. While our margin improved, the overall impact of interest rates decreased net~~income - Net interest income ~~by $7.8 million. Average volume~~increased for the ~~nine-months~~three and nine months ended September 30, ~~2019~~2020 compared to ~~2018 improved~~the same periods in 2019. The increase was driven by growth in average earning assets, offset by compression in net interest ~~income~~margin as earning assets repriced quicker than interest-bearing liabilities. During the quarter, a nonaccrual loan impacted the net interest margin by $33.5 million. Average loans increased $1.1 billion or 48.3%, while average interest-bearing deposits increased $748.7 million or 33.4%. Net interest income reflects the Company’s strong balance sheet growth and maintenance of NIM.

~~As of September 30, 2019, approximately $223.8 million of time deposits mature~~7 basis points. This nonaccrual loan was restructured in the fourth quarter ~~at an average~~of 2020 and placed back on accrual. We anticipate net interest ~~rate of 2.51%. An additional $331.2 million of time deposits mature~~margin to improve to around 3.05% during the ~~first~~fourth quarter of 2020 ~~at an average interest~~if we can maintain our nonaccrual loans and reduce our cost of ~~2.67%.~~funds.

Impact of Transition Away from LIBOR

~~The Company has loans, derivative contracts,~~Refer to Note 1: Nature of Operations and ~~other financial instruments that directly or indirectly depend on LIBOR~~Summary of Significant Accounting Policies under the Recent Accounting Pronouncements within the Unaudited Notes to ~~establish an interest rate and/or value. This included $1.1 billion in loans tied to LIBOR as of September 30, 2019. LIBOR is expected to cease on December 31, 2021. The~~the Consolidated Financial Statements for information regarding the impact of ~~alternatives to~~the LIBOR transition on the valuations, pricing and operation of our financial instruments is not yet known; however, loans, securities, and derivatives indexed to LIBOR that mature after December 31, 2021 may be impacted. As a result, the Company established an internal committee to evaluate potential substitutions and the related financial impact to the Company.

~~Provision for Loan Losses~~

The provision for loan losses is a charge to earnings to maintain the allowance for loan losses at a level that reflects management’s assessment of the collectability of the loan portfolio. Net charge-offs (recoveries) represent a reduction (addition) to the allowance for loan losses for loans we believe are no longer collectible. The provision for loan losses was as follows for the periods shown:

Three Months Ended Nine Months Ended
September 30, September 30,
2019 2018 $ Change % Change 2019 2018 $ Change % Change
(Dollars in thousands)
Provision for loan losses $ 4,850
$ 3,000
$ 1,850
61.7 % $ 10,550
$ 9,000
$ 1,550
17.2 %

The allowance for loan losses as of September 30, 2019 was $43.0 million compared to $33.5 million as of September 30, 2018. The increase of $9.5 million or 28.2% was primarily due to an increase in our loan portfolio as well as an increase in non-performing loans, partially offset by a reduction in the energy portfolio’s qualitative factors. The allowance as a percentage of loans was 1.18% at September 30, 2019 compared to 1.22% at September 30, 2018.



		47

Table of Contents

Non-Interest Income

The components of non-interest income were as follows for the periods shown:

Three Months Ended Nine Months Ended
September 30, September 30,
Change Change
2019 2018 $ % 2019 2018 $ %
(Dollars in thousands)
Service charges and fees (rebates) on customer accounts $ 72
$ (100 ) $ 172
NA
$ 441
$ 506
$ (65 ) (12.8 )%
Gain on sale of available for sale securities 34
195
(161 ) (82.6 )% 467
608
(141 ) (23.2 )
Impairment of premises and equipment held for sale —
(171 ) 171
(100.0 ) (424 ) (171 ) (253 ) NA
Gain on sale of loans 49
25
24
96.0
207
618
(411 ) (66.5 )
Income from bank-owned life insurance 476
513
(37 ) (7.2 ) 1,416
1,511
(95 ) (6.3 )
Swap fee income, net 1,879
253
1,626
642.7
2,415
299
2,116
707.7
ATM and credit card interchange income 476
301
175
58.1
1,312
827
485
58.6
Other non-interest income 226
169
57
33.7
695
690
5
0.7
Total non-interest income $ 3,212
$ 1,185
$ 2,027
171.1 % $ 6,529
$ 4,888
$ 1,641
33.6 %


	Three Months Ended								Nine Months Ended
	September 30,								September 30,
					Change								Change
	2020		2019		$		%		2020		2019		$		%
	(Dollars in thousands)
Service charges and fees on customer accounts	$	792	$	72	$	720	1,000	%	$	1,947	$	441	$	1,506	341	%
Gain on sale of available-for-sale debt securities	1,012		34		978		2,876		1,725		467		1,258		269
Impairment of premises and equipment held-for-sale	—		—		—		—		—		(424)		424		(100)
Gain on sale of loans	—		49		(49)		(100)		—		207		(207)		(100)
Income from bank-owned life insurance	464		476		(12)		(3)		1,373		1,416		(43)		(3)
Swap fee income, net	121		1,879		(1,758)		(94)		80		2,415		(2,335)		(97)
ATM and credit card interchange income	1,482		476		1,006		211		2,863		1,312		1,551		118
Other non-interest income	192		226		(34)		(15)		804		695		109		16
Total non-interest income	$	4,063	$	3,212	$	851	26	%	$	8,792	$	6,529	$	2,263	35	%

The changes in non-interest income were driven by the following:

Service Charges and Fees on Customer Accounts - This category includes a rebate program that attracted additional funding for the Bank and account analysis fees that continue to grow with our customer base, including their outstanding balances. The increase for both the three and nine month periods ended September 30, 2020 compared to the same corresponding periods in 2019 was driven by customer growth that resulted in increased analysis fees and reduction in the costs associated with the rebate program.

Gain on Sale of Available-for-Sale Securities - The increase in the gain for both the three and nine month periods ended September 30, 2020 was primarily due to the declining rate environment, which increased the value of the Company’s securities sold in 2020 compared to the same periods in 2019. The 2020 sales were a strategic decision by management to capitalize on attractive market conditions and improve credit quality.

Impairment of Premises and Equipment Held-for-Sale - The Company sold an administration building during the second quarter of 2019 as our service and support members relocated to our new corporate headquarters.

Swap Fee Income, Net

- Swap fee income, net includes both swap fees from the execution of new swaps and the credit valuation adjustment ~~(‘‘CVA’’~~(“CVA”). ~~During~~The decline in swap fee income for both the three and nine month periods ended September 30, 2020 compared to the same corresponding periods in 2019 was driven by: (i) a change in the default methodology during the quarter ~~the Company added several large swaps, resulting~~ended September 30, 2019 that resulted in ~~$1.1 million of swap fees compared to $272.7~~approximately $800 thousand of ~~fees from several, smaller swaps in the third~~additional income during that quarter, ~~of 2018. Year-to-date 2019 swap fee activity totaled $2.4 million compared to $335.9 thousand in the prior year. The back-to-back swap program increased in activity during 2019~~(ii) management’s loan and pricing strategy and (iii) lower loan originations, excluding PPP loans, as a result of ~~attractive market conditions.~~the COVID-19 pandemic.

In addition, the increase included a change in the CVA methodology during the third quarter of 2019. Prior to the third quarter, a more conservative default methodology was used to account for non-performance risk. The Company moved to a review of historical defaults and internal credit analysis performed by the Company. The result was an increase to non-interest income of approximately $800 thousand related to swaps entered in previous quarters.

ATM and Credit Card Interchange Income

~~Increased~~ - The increase in ATM and credit card interchange income for the three and nine month periods ended September 30, 2020 compared to the same corresponding periods in 2019 was ~~driven~~primarily the result of customers that mobilized their workforce directly impacted by the ~~expansion of our~~COVID-19 pandemic. The Company anticipates the credit card ~~program to our new and existing customers.~~activity will decline slightly in connection with a decline in COVID-19 cases.

~~Service Charges and Fees on Customer Accounts~~

~~This category includes a rebate program implemented in the second quarter of 2018 that attracted additional funding for the Bank and account analysis fees that continue to grow with our customer base.~~

~~Gain on Sale of Available for Sale Securities~~

The Company sold $63.5 million and $149.3 million of securities for the nine months ended 2019 and 2018, respectively. The sales were a strategic decision by management to capitalize on attractive market conditions, balance taxable and tax-free municipal securities, and redeploy the proceeds into higher yielding loans.

~~Impairment of Premises and Equipment Held for Sale~~

~~During the second quarter of 2019, the Company sold its remaining assets held-for-sale. The assets sold for approximately $2.9 million resulting in an additional impairment of $424.4 thousand.~~



		48

Table of Contents

Non-Interest Expense

The components of non-interest expense were as follows for the periods indicated:

Three Months Ended Nine Months Ended
September 30, September 30,
Change Change
2019 2018 $ % 2019 2018 $ %
(Dollars in thousands)
Salary and employee benefits $ 14,256
$ 12,652
$ 1,604
12.7 % $ 43,296
$ 43,689
(393 ) (0.9 )%
Occupancy 2,080
2,132
(52 ) (2.4 ) 6,301
6,199
102
1.6
Professional fees 427
766
(339 ) (44.3 ) 1,923
2,421
(498 ) (20.6 )
Deposit insurance premiums 302
823
(521 ) (63.3 ) 2,020
2,411
(391 ) (16.2 )
Data processing 649
528
121
22.9
1,868
1,470
398
27.1
Advertising 580
527
53
10.1
1,770
1,982
(212 ) (10.7 )
Software and communication 900
630
270
42.9
2,407
1,958
449
22.9
Depreciation and amortization 413
516
(103 ) (20.0 ) 1,320
1,306
14
1.1
Other non-interest expense 1,565
1,301
264
20.3
4,858
4,153
705
17.0
Total non-interest expense $ 21,172
$ 19,875
$ 1,297
6.5 % $ 65,763
$ 65,589
$ 174
0.3 %


	Three Months Ended								Nine Months Ended
	September 30,								September 30,
					Change								Change
	2020		2019		$		%		2020		2019		$		%
	(Dollars in thousands)
Salary and employee benefits	$	14,628	$	14,256	$	372	3	%	$	43,022	$	43,296	(274)		(1)	%
Occupancy	2,144		2,080		64		3		6,274		6,301		(27)		—
Professional fees	1,132		427		705		165		3,098		1,923		1,175		61
Deposit insurance premiums	1,096		302		794		263		3,151		2,020		1,131		56
Data processing	652		649		3		—		2,065		1,868		197		11
Advertising	147		580		(433)		(75)		870		1,770		(900)		(51)
Software and communication	959		900		59		7		2,772		2,407		365		15

Foreclosed assets, net	20		8		12		150		1,174		33		1,141		3,458
Goodwill impairment	—		—		—		—		7,397		—		7,397		—
Other non-interest expense	2,233		1,970		263		13		6,421		6,145		276		4
Total non-interest expense	$	23,011	$	21,172	$	1,839	9	%	$	76,244	$	65,763	$	10,481	16	%

The changes in non-interest ~~income~~expenses were driven by the following:

Salary and Employee Benefits

~~Quarterly salary~~ - Salary and employee benefit costs increased as a result of a rise in headcount in 2019 and a $758.2 thousand increase in equity-based compensation expense. Year-to-Date salary and employee benefit costs decline was driven by a $5.5 million management restructuring charge due to for the ~~transition of our former CEO in 2018, partially offset by a net increase of 15 employees between~~three months ended September 30, ~~2018 and 2019 to support our growth strategy.~~

~~Deposit Insurance Premiums~~

During 2018, the Deposit Insurance Fund Reserve Ratio exceeded the statutorily required minimum reserve ratio. As a result, the Company received a $664.1 thousand assessment credit. The credit resulted in lower costs on both a quarter-to-date and year-to-date basis from the prior year. Credits will be applied until the excess is exhausted. Excluding the credit, the deposit insurance premium increased approximately $143.0 thousand during the third quarter of 20192020 compared to the same period in ~~2018.~~2019 primarily due to the overall increase in employee count. Salary and employee benefit costs decreased slightly for the nine month periods ended September 30, 2020 compared to the same corresponding period in 2019 primarily due to lower incentive compensation expenses. The reduction was partially offset by a slight increase in full-time equivalent employees. As a result of the COVID-19 pandemic, the Company focused on optimizing staffing levels. As a result, the Company anticipates salary costs will decrease slightly during the remainder of the year.

Professional Fees - Professional fees increased for both the three and nine month periods ended September 30, 2020 compared to the same corresponding periods in 2019 primarily from an increase in legal fees as a result of PPP loans and loan workouts. In addition, the Company incurred fees related to the CEO transition that increased the expense for the three and nine month periods ended September 30, 2020. The Company’s accounting fees increased in 2020 compared to 2019 due to asset growth and the transition from private to a public company.

Deposit Insurance Premiums - The FDIC uses a risk-based premium system to calculate the quarterly fee. ~~Between 2018~~Our premiums increased for both the three and ~~2019 our rate was impacted by our strong asset growth and changes~~nine month periods ended September 30, 2020 compared to ~~our loan mix.~~

~~Professional Fees~~

~~The professional fees decrease was driven by a reduction~~the same corresponding periods in recruitment costs from the prior year as a result of management’s strategic initiative to reduce the use of consultants. In addition, the Company saw a reduction in external consulting fees as we finalized our IPO plans.

~~Software and Communication~~

~~Software and communication costs increased during~~ 2019 as a result of strong asset growth, changes to loan mix, and changes in capital ratios, all of which increased our ~~continued strategy to invest~~quarterly fee.

Advertising - The decline in ~~technologies that are expected to increase operating efficiency in the short and long-term.~~

~~Data Processing~~

Data processing includes our core system provided by a third-party and other operational support systems. Our customer base, transaction volume and asset size increased, resulting in higher data processing costs.



		49

~~Table of Contents~~

~~Advertising~~

~~Quarterly~~ advertising costs ~~increased~~for the three and nine month periods ended September 30, 2020 primarily resulted from the previous year as the Company continued its rebranding process. Year-to-date advertising costs declined as a result of management’s strategic initiative to improve the efficiency and effectiveness of the Company’s targeted advertising.

~~Other non-interest expense~~

~~Other non-interest expense included an increase in commercial card costs that continue to increase as we grow our customer base.~~COVID-19 pandemic. In addition, the ~~Company had an~~year-to-date decline resulted from the Company’s completion of its rebranding campaign that increased the 2019 expense by approximately $184 thousand.

Foreclosed Assets, Net - The increase in ~~operational loan costs due~~foreclosed assets, net for the three and nine month periods ended September 30, 2020 compared to ~~increased loan volume, types~~the same corresponding periods in 2019 primarily resulted from new appraisals obtained that resulted in a $1 million valuation adjustment during the second quarter of ~~loans originated or renewed~~2020.

Goodwill Impairment - The Company performed an interim review for goodwill impairment at June 30, 2020. A quantitative review was performed on the Tulsa market reporting unit, using a combination of income and ~~events related~~market based approaches. The capitalization of earnings, an income approach, used a single period of cash flows, adjusted for growth and a capitalization rate. The market approach used price-to-book multiples of peer banks and included a control premium. The reporting unit’s fair value was less than its book value and resulted in a $7 million impairment, representing the total value of goodwill previously reported during the quarter ended June 30, 2020. See “Note 6: Goodwill and Core Deposit Intangible” within the Unaudited Notes to ~~foreclosed assets. Other non-interest expense also saw an increase in insurance costs due to our transition from a private to public company.~~the Financial Statements for more information.

Table of Contents

Income Taxes

~~Income tax expense (benefit) was as follows:~~

Three Months Ended Nine Months Ended
September 30, September 30,
2019 2018 $ Change % Change 2019 2018 $ Change % Change
(Dollars in thousands)
Income tax expense (benefit) $ 2,592
$ 924
$ 1,668
180.5 % $ 5,308
$ (904 ) $ 6,212
NA
Effective tax rate 20.0 % 12.7 % 15.4 % (10.8 )%

Our income tax expense (benefit) differs from the amount that would be calculated using the federal statutory tax rate, primarily from investments in tax advantaged assets, ~~such as~~including bank-owned life insurance, ~~and~~ tax-exempt municipal securities and tax credit bonds; state tax ~~credits,~~credits; and permanent tax differences from goodwill impairment and equity-based compensation. Refer to Note 11: Income Tax within the Notes to the Unaudited Financial Statements for more information.

The $6.2 million increase between year-to-date September 30, 2018 and 2019 primarily relates to our $26.1 million increase in income before income taxes and a $334.0 thousand decline in permanent benefits associated with equity-based compensation that was partially offset by a $1.4 million state tax credit recorded in the first quarter of 2019. The state tax credit related to our purchase and improvement of our corporate headquarters.

Analysis of Financial Condition

~~Balance Sheet Summary~~

Securities Portfolio

The ~~following table summarizes select components of the Company’s Balance Sheet:~~

As of Change
September 30, 2019 December 31, 2018 $ %
(Dollars in thousands)
Total assets $ 4,651,313
$ 4,107,215
$ 544,098
13.2 %
Cash and cash equivalents 128,126
216,541
(88,415 ) (40.8 )
Available-for-sale securities 733,093
663,678
69,415
10.5
Gross loans, net of unearned income 3,629,792
3,060,747
569,045
18.6
Total deposits 3,658,108
3,208,097
450,011
14.0
Federal funds purchased and repurchase agreements 49,810
75,406
(25,596 ) (33.9 )
Federal Home Loan Bank advances 307,804
312,985
(5,181 ) (1.7 )
Total stockholders’ equity $ 602,435
$ 490,336
$ 112,099
22.9 %

Assets grew primarily from loan growth, as well as, an increase in available-for-sale securities. Loan growth was driven by increases in commercial, commercial real estate, and residential real estate loans. During 2019, the Company



		50

~~Table of Contents~~

~~purchased $157.5 million of~~ securities primarily made up of mortgage backed securities and tax-exempt municipal securities, which was offset by $112.2 million of sales, maturities, and pay downs. Purchases of available-for-sale securities during the third quarter were hampered by the current interest rate environment. The Company remains committed to identifying and purchasing high-quality securities with an appropriate yield. Increases in assets were offset by a reduction in cash and cash equivalents, which was part of a strategic decision to move assets to higher yielding areas.

Our increase in assets was funded primarily from an increase in total deposits that raised the loan to deposit ratio to 99.2% as of September 30, 2019. The increase in total deposits included a $212.1 million increase in time deposits and a $144.1 million increase in money market and savings deposits. The time deposit increase was driven by short-term, competitive rates that are expected to mature over the next two quarters. In addition to our increase in deposits, the Company successfully completed an initial public offering during the third quarter of 2019 and was the primary reason for the increase in total stockholders’ equity.

~~Security Portfolio~~

The Company’s investment portfolio is governed by the investment policy that sets objectives, limits, and liquidity requirements among other items. The investment strategy is generally updated annually in coordination with an investment advisor. The portfolio is maintained to serve as a contingent, on-balance sheet source of liquidity. The objective of the ~~Company’s~~ investment portfolio is to optimize earnings, manage credit and interest rate risk, ensure adequate liquidity, ~~manage interest rate risk,~~and meet pledging ~~requirements,~~ and ~~meet~~ regulatory capital requirements. ~~The investment portfolio is generally comprised of government sponsored entity securities and U.S. state and political subdivision securities; limits are set on all types of securities.~~

As of September 30, ~~2019,~~2020, available-for-sale investments totaled ~~$733.1~~$652 million, an $89 million decrease from December 31, 2019. Our securities portfolio declined due to the sale of securities showing signs of credit stress, faster prepayments and low reinvestment yield options. For additional information, see “Note 3: Securities” in the Notes to the Unaudited Consolidated Financial Statements.

Loan Portfolio

Refer to “Note 4: Loans and Allowance for Loan Losses (“ALLL”)” within the Unaudited Notes to the Consolidated Financial Statements for additional information regarding the Company’s loan portfolio. As of September 30, 2020 gross loans increased $631 million or 16% from December 31, 2019 and was driven by the following:

PPP - The Company funded PPP loans in the second quarter of 2020 as a ~~$69.4~~result of the COVID-19 pandemic. At September 30, 2020 PPP loans represented 58% of the net loan growth from December 31, 2019. The loans are guaranteed by the SBA, earn interest at 1.00%, and include a fee. The PPP loans will decline as the SBA forgives the loans and provides repayment to the Bank.

Residential Real Estate - The $219 million or 55% increase between December 31, 2019 and September 30, 2020 was from developing relationships with key residential and multifamily real estate developers in our markets. The increase from December 31, ~~2018 and a $28.3~~2019 included new loan funding of approximately $113 million with the remaining growth coming from existing loan relationships.

Commercial Real Estate - The $172 million or ~~4.0%~~17% increase ~~from June 30, 2019. The increase~~was driven by activity in ~~investment securities was part~~our Dallas and Kansas City markets. Approximately 75% of ~~management’s strategy to manage liquidity and optimize income. For additional information, see ‘‘Note 3 - Securities’’ in~~ the ~~notes to unaudited consolidated financial statements.~~

~~Loan Portfolio~~

~~Loans consisted of the following as of the dates indicated:~~

September 30, 2019 December 31, 2018 September 30, 2019 vs. December 31, 2018
Amount % of Gross Loans Amount % of Gross Loans
$
increase (decrease)

%
increase
(decrease)
(Dollars in thousands)
Commercial $ 1,312,647
36.1 % 1,134,414
36.9 % $ 178,233
15.7 %
Energy 396,132
10.9
358,283
11.7
37,849
10.6
Commercial real estate 993,153
27.3
846,561
27.6
146,592
17.3
Construction and land development 527,582
14.5
440,032
14.3
87,550
19.9
Residential real estate 365,435
10.0
246,275
8.0
119,160
48.4
Equity lines of credit 22,192
0.6
20,286
0.7
1,906
9.4
Consumer installment 21,552
0.6
23,528
0.8
(1,976 ) (8.4 )
Gross loans 3,638,693
100.0 % 3,069,379
100.0 % 569,314
18.5
Less: Allowance for loan losses 42,995
37,826
5,169
13.7
Less: Net deferred loan fees and costs 8,901
8,632
269
3.1
Net loans $ 3,586,797
$ 3,022,921
$ 563,876
18.7 %

As of September 30, 2019, gross loans increased $569.3 million or 18.5% from December 31, 2018 and increased $162.4 million or 4.7% on a linked quarter basis. The increase from December 31,2018 included $178.2 million in commercial loans. Our commercial portfolio remains well diversified with health care remaining our largest industry category at 12%.



		51

~~Table of Contents~~

~~Commercial real estate was the second largest segment for growth during the first nine-months of 2019. Approximately 73% of the commercial real estate~~ portfolio is located ~~within the states of~~in Kansas, Missouri, Oklahoma, and ~~Texas, with~~Texas. Texas, our largest state concentration, ~~representing 40%~~represented approximately 29% of the portfolio as of September 30, ~~2019.~~2020. The ~~commercial real estate~~ portfolio remains well ~~diversified. Retail is~~diversified with growth in the ~~largest segment in our real estate loan portfolio, representing 15% of the portfolio.~~office space, industrial, and senior living sectors, among others.

Energy - Our energy portfolio ~~increased~~declined $24 million or 6% from ~~year-end 2018 but declined as a percentage of our total portfolio from 11.7% at~~ December 31, ~~2018~~2019 to ~~10.9% at~~ September 30, ~~2019.~~2020. The Company ~~continues~~expects the energy portfolio to ~~identify~~decline further as part of management’s strategy to lower our oil and ~~attract strong energy credits, but currently expects to see less activity in the fourth quarter of 2019.~~gas loan concentrations.

~~Residential real estate growth was driven by developing relationships within our markets.~~Commercial - Declines resulted from increased pay downs and charge-offs.

Provision and Allowance for Loan Losses ~~(‘‘ALLL’’~~(“ALLL”)

~~The ALLL is an amount required~~There are significant uncertainties regarding the ultimate effects of the COVID-19 pandemic. Depending upon the extent and duration of the future impact of the COVID-19 pandemic, we may need to ~~cover net loan charge-offs plus the amount considered necessary by the Bank’s management~~make additional increases to ~~maintain the balance in the allowance at a level adequate to absorb expected~~our provision for loan losses in future periods. To the ~~existing~~extent the pandemic continues to cause a recession or decrease economic activity for an extended time period, we expect our business and operations will be negatively impacted. Customers may seek additional loan ~~portfolio. The ALLL is evaluated on at least a quarterly basis. We use a loan grading system~~modifications or restructuring, or we may experience adverse movement in risk classifications, any of which could potentially result in the need to increase provisions and ~~portfolio segmentation to group the portfolio. Each group is evaluated and adjusted for changes in historical trends that may~~ impact the ~~segment.~~ALLL.

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Refer to “Note 4: Loans and Allowance for Loan Losses (“ALLL”)” within the Unaudited Notes to the Consolidated Financial Statements for information regarding the Company’s ALLL process. The ALLL at September 30, ~~2019,~~2020, represents our best estimate of the incurred credit losses inherent in the loan portfolio at that date.

The allocation in one portfolio segment does not preclude its availability to absorb losses in other segments. The table below presents the allocation of the allowance for loan ~~losses:~~

losses as of the dates indicated:


	September 30, 2019				December 31, 2018				September 30, 2020				December 31, 2019
	Amount		Percent of Allowance to Total Allowance		Amount	Percent of Allowance to Total Allowance			Amount		Percent of Allowance to Total Allowance		Amount		Percent of Allowance to Total Allowance
	(Dollars in thousands)								(Dollars in thousands)
Commercial	$	24,811	57.7	%	16,584	43.9	%	Commercial	$	28,203	37	%	$	35,864	63	%
Energy	5,377		12.5	%	10,262	27.1	%	Energy	19,540		26		6,565		12
Commercial real estate	7,284		16.9	%	6,755	17.9	%	Commercial real estate	17,807		23		8,085		14
Construction and land development	3,016		7.0	%	2,475	6.5	%	Construction and land development	4,489		6		3,516		6
Residential real estate	2,220		5.2	%	1,464	3.9	%	Residential real estate	5,494		7		2,546		4
Equity lines of credit	160		0.4	%	159	0.4	%
Consumer installment	$	127	0.3	%	127	0.3	%
PPP								PPP	—		—		—		—
Consumer								Consumer	502		1		320		1
Gross loans	$	42,995	100.0	%	37,826	100.0	%	Gross loans	$	76,035	100	%	$	56,896	100	%

Activity in the allowance for loan losses is presented in the following table:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
	(Dollars in thousands)
Allowance for loan losses:
Balance at beginning of period	$	71,185	$	42,852	$	56,896	$	37,826
Provision for loan losses	10,875		4,850		45,825		10,550
Charge-offs:
Commercial	(5,781)		(1,700)		(23,946)		(2,954)
Energy	—		(3,000)		(2,278)		(3,000)


Residential real estate	(256)		—		(445)		—

Consumer	—		(8)		(104)		(19)
Total charge-offs	(6,037)		(4,708)		(26,773)		(5,973)
Recoveries:
Commercial	2		1		75		15
Energy	—		—		—		576




Consumer	10		—		12		1
Total recoveries	12		1		87		592
Net (charge-offs) recoveries	(6,025)		(4,707)		(26,686)		(5,381)
Balance at end of period	$	76,035	$	42,995	$	76,035	$	42,995

Three Months Ended Nine Months Ended
September 30, September 30, 2019
2019 2018 2019 2018
(Dollars in thousands)
Allowance for loan losses:
Balance at beginning of period $ 42,852
$ 30,197
$ 37,826
$ 26,091
Provision for loan losses 4,850
3,000
10,550
9,000
Charge-offs:
Commercial (1,700 ) (97 ) (2,954 ) (681 )
Energy (3,000 ) —
(3,000 ) (1,256 )
Commercial real estate —
—
—
—
Construction and land development —
—
—
—
Residential real estate —
—
—
—
Equity lines of credit —
—
—
(25 )
Consumer installment (8 ) —
(19 ) (45 )
Total charge-offs (4,708 ) (97 ) (5,973 ) (2,007 )
Recoveries:
Commercial 1
439
15
455
Energy —
—
576
—
Commercial real estate —
—
—
—
Construction and land development —
—
—
—
Residential real estate —
—
—
—
Equity lines of credit —
—
—
—
Consumer installment —
1
1
1
Total recoveries 1
440
592
456
Net (charge-offs) recoveries (4,707 ) 343
(5,381 ) (1,551 )
Balance at end of period $ 42,995
$ 33,540
$ 42,995
$ 33,540
Allowance for loan losses to total loans 1.18 % 1.22 % 1.18 % 1.22 %
Allowance for loan losses to nonperforming loans 97.1
256.7
97.1
256.7
Net charge-offs (recoveries) to average loans⁽¹⁾
0.53 % (0.05 )% 0.21 % 0.09 %
⁽¹⁾Interim periods annualized
A discussion of the changes in the ALLL is provided below:

Charge-offs and Recoveries:

~~For~~During the quarter ended September 30, ~~2019,~~2020, the Company ~~charged off $1.7~~charged-off $6 million related to a commercial loan as part of a restructuring plan. The majority of the charge-off was not previously reserved for resulting in an increase to the quarterly provision. For the quarter ended June 30, 2020, the Company charged-off one energy loan that was classified for several years. During the quarter ended March 31, 2020, net charge-offs included an $18 million charge-off related to a previously disclosed non-performing, commercial loan. The commercial loan had a specific reserve associated with it as of December 31, 2019, resulting in a limited impact to the first quarter 2020 provision. In addition, the Company charged off ~~$3.0~~$1 million related to one oil exploration and production credit.

~~Our ALLL as~~

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For the three and nine month periods ended September 30, 2019, ~~increased $9.5~~net charge-offs primarily related to one energy relationship and one commercial loan relationship.

Substandard, Accruing Loans:

Prior to June 30, 2020, loans risk rated substandard or lower were considered impaired and evaluated on an individual basis. Subsequent to June 30, 2020 loans risk rated substandard and on accrual were evaluated collectively. The change in approach provided a better estimate of potential losses inherent in the substandard portfolio. Substandard, accruing loans totaled $200 million ~~or 28.2% from~~at June 30, 2020 and $224 million at September 30, ~~2018~~2020. The linked quarter change increased the ALLL by approximately $2 million.

Grade Migration:

The Company downgraded approximately $833 million of loans between December 31, 2019 and ~~increased $142.5 thousand or less than 1% from~~September 30, 2020, including $731 million in the second quarter of 2020, representing 17% of the June 30, ~~2019. Year-over-year, the ALLL has increased~~2020 loan portfolio. Downgrades primarily resulted from the ~~growth of our loan portfolio~~COVID-19 pandemic, lower economic activity, and anlower oil and gas prices. Loan categories significantly impacted by downgrades are discussed below.

Energy-The increase in ~~our impaired loans, offset~~supply realized during the first quarter and decrease in demand for oil and natural gas created by ~~a reduction~~the COVID-19 pandemic placed considerable pricing volatility and uncertainty in the ~~energy portfolio’s qualitative factors. On a linked~~market during the first quarter basis, our ALLL was impacted by $4.7 million in net charge-offs, a decline in our reserve required for our impaired loans, and a reduction in qualitative factors impacting our commercial and energy portfolios.of 2020. As a result, a qualitative adjustment was made on the energy portfolio that increased the ALLL by $2 million from December 31, 2019 to March 31, 2020. The Company ~~took~~monitored borrowers’ reactions to the lower oil and gas prices during the second quarter of 2020. As a ~~$4.9~~result, $239 million ~~provision~~of energy loans were downgraded, including $85 million downgraded to substandard and accruing in the second quarter of 2020. The downgrades increased the ALLL by approximately $9 million during the second quarter of 2020. The downgrades were partially offset by removing energy’s qualitative factor added in the first quarter of 2020. In the third quarter of ~~2019. Our~~2020, the Company downgraded $75 million of energy loans that increased the ALLL by $2 million.

Commercial Real Estate (“CRE”) - The decline in economic activity in the first half of 2020 impacted our CRE borrowers. During the second quarter of 2020, the Company downgraded $300 million of commercial real estate loans, including $240 million downgraded to ~~total~~watch, within our pass rated loan category, and $22 million downgraded to substandard and accruing. The downgrades increased the ALLL by approximately $4 million during the second quarter of 2020. During the third quarter of 2020, the Company downgraded $34 million of CRE loans ~~declined 6~~that had a limited impact on the ALLL. The remaining increase in the ALLL during 2020 was primarily the result of changes in impaired loan reserves and increases in quantitative and qualitative factors on pass-rated loans.

Commercial - The decline in economic activity in the first half of 2020 significantly impacted supply and demand for products and services in the commercial portfolio. As a result, $35 million of commercial loans were downgraded in the first quarter of 2020. $170 million of loans were downgraded in the second quarter of 2020, including $41 million of loans listed as substandard and accruing. The downgrades increased the ALLL by approximately $3 million from December 31, 2019 to June 30, 2020. In addition, substandard, accruing loans evaluated on an individual basis ~~points to 1.18% as our~~at March 31, 2020 that were evaluated collectively at June 30, 2020, increased the ALLL by $3 million. During the third quarter of 2020, $80 million of commercial loans were downgraded that increased the ALLL by $1 million.

Impaired Loans and Other Factors:

For the nine month period ended September 30, 2020, the impaired loan portfolio ~~continued~~increased the ALLL by $2 million after taking out the impact of the charge-offs mentioned above. For the nine months ended September 30, 2020, changes in qualitative and quantitative rates on pass rated loans increased the ALLL by $5 million due to ~~grow.~~declines in economic activity and the COVID-19 pandemic.



		52

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Nonperforming Assets and Other Asset Quality Metrics

Nonperforming assets include: (i) Nonperforming loans - includes non-accrual loans, loans past due 90 days or more and still accruing interest, and loans modified under troubled debt restructurings (“TDRs”) that are not performing in accordance with their modified terms; (ii) foreclosed assets held for sale; (iii) repossessed assets; and (iv) impaired securities.

Nonaccrual loans increased $38 million during the quarter ended September 30, 2020. The increase included a commercial loan participation restructured in the fourth quarter of 2020, a commercial real estate loan impacted by the COVID-19 pandemic, and an energy loan impacted by low oil prices. As part of the commercial loan restructured in the fourth quarter of 2020, the Company took an ownership position in the borrower that reduced the overall loan balance. The reduction in the loan balance should allow the borrower to pay all principal and interest when due and was placed back on accrual status during the fourth quarter of 2020. During the second quarter of 2020, nonaccrual loans increased primarily from energy loans that did not meet the criteria to be modified under the CARES Act. The $4 million increase in loans past due 90 days or more and still accruing primarily related to a residential real estate loan that was in the process of refinancing.


i.	Nonperforming loans - includes non-accrual loans, loans past due 90 days or more and still accruing interest, and loans modified under troubled debt restructurings (‘‘TDRs’’) that are not performing in accordance with their modified terms;


~~ii.~~	~~Foreclosed assets held for sale;~~


~~iii.~~	~~Repossessed assets~~


~~iv.~~	~~Impaired securities~~

Our nonperforming assets at September 30, 2020 increased by $35 million, as compared to September 30, 2019 primarily related to the nonaccrual loan changes mentioned above, offset by an $18 million charge-off on a commercial loan that occurred in the first quarter of 2020.

The table below summarizes our nonperforming assets and related ratios as of the dates indicated:


	September 30, 2020			June 30, 2020			March 31, 2020			December 31, 2019			September 30, 2019
	(Dollars in thousands)









Nonaccrual loans	$	75,560		$	37,534		$	26,255		$	39,675		$	43,626









Loans past due 90 days or more and still accruing	4,324			220			—			4,591			642










Total nonperforming loans	79,884			37,754			26,255			44,266			44,268
Foreclosed assets held for sale	2,349			2,502			3,619			3,619			2,471


Total nonperforming assets	$	82,233		$	40,256		$	29,874		$	47,885		$	46,739
Nonaccrual loans to total loans	1.68		%	0.85		%	0.66		%	1.03		%	1.20		%
ALLL to nonaccrual loans	100.63		%	189.66		%	195.99		%	143.41		%	98.55		%
Nonperforming assets to total assets	1.49		%	0.74		%	0.59		%	0.97		%	1.00		%
Nonperforming loans to total loans	1.78		%	0.86		%	0.66		%	1.15		%	1.22		%
ALLL to nonperforming loans	95.18		%	188.55		%	195.99		%	128.54		%	97.12		%

September 30,
2019 June 30,
2019 March 31,
2019 December 31,
2018 September 30,
2018
(Dollars in thousands)
Non-accrual loans $ 43,626
$ 50,044
$ 13,018
$ 17,818
$ 12,625
Loans past due 90 days or more and still accruing 642
238
—
—
443
Total nonperforming loans 44,268
50,282
13,018
17,818
13,068
Foreclosed assets held for sale 2,471
2,471
2,471
—
—
Impaired securities —
—
—
—
—
Total nonperforming assets $ 46,739
$ 52,753
$ 15,489
$ 17,818
$ 13,068
Nonperforming assets to total assets 1.00 % 1.18 % 0.36 % 0.43 % 0.35 %
Nonperforming loans to total loans 1.22 % 1.45 % 0.40 % 0.58 % 0.48 %

~~September 30, 2019 nonperforming assets to total assets increased 65 basis points from the prior year driven by one commercial loan restructured in the second quarter~~Table of ~~2019 and subsequently placed on non-accrual. On a linked quarter basis, our September 30, 2019 nonperforming assets to total assets declined from 1.18% at June 30, 2019 to 1.00%.~~Contents

Other asset quality metrics management reviews include loans past due 30 - 89 days and classified loans. The Company defines classified loans as loans categorized as substandard - performing, substandard - nonperforming, doubtful, or loss. The definitions of substandard, doubtful and loss ~~see ‘‘Note~~are provided in “Note 4 - Loans and Allowance for Loan ~~Losses’’~~Losses” in the ~~notes~~Notes to ~~unaudited consolidated financial statements.~~Unaudited Consolidated Financial Statements. The following table summarizes our loans past due 30 - 89 days, classified assets and related ~~ratios:~~ratios as of the dates indicated:

September 30,
2019 June 30,
2019 March 31,
2019 December 31,
2018 September 30,
2018
(Dollars in thousands)
Loan Past Due Detail
30 - 59 days past due $ 61,941
$ 15,967
$ 30,450
$ 3,062
$ 19,838
60 - 89 days past due 2,785
7,640
616
619
6,505
Total 30 - 89 days past due $ 64,726
$ 23,607
$ 31,066
$ 3,681
$ 26,343
Loans 30 - 89 days past due to loans 1.78 % 0.68 % 0.95 % 0.12 % 0.96 %
Classified Loans
Substandard $ 79,536
$ 79,190
$ 92,450
$ 96,247
$ 48,845
Doubtful 5,637
9,115
5,083
5,197
5,502
Loss —
—
—
—
—
Total classified loans $ 85,173

$ 88,305

$ 97,533

$ 101,444

$ 54,347
Classified Loans / (Total Capital + ALLL) 13.2 % 16.3 % 18.7 % 19.2 % 12.3 %



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~~Table of Contents~~


	September 30, 2020			June 30, 2020			March 31, 2020			December 31, 2019			September 30, 2019
	(Dollars in thousands)
Loan Past Due Detail
30 - 59 days past due	$	15,324		$	14,205		$	12,934		$	6,292		$	61,941
60 - 89 days past due	30,027			20,676			6,604			530			2,785
Total 30 - 89 days past due	$	45,351		$	34,881		$	19,538		$	6,822		$	64,726
Loans 30 - 89 days past due / gross loans	1.01		%	0.79		%	0.49		%	0.18		%	1.78		%

Classified Loans
Substandard - performing	$	224,352		$	199,595		$	80,876		$	47,221		$	41,546
Substandard - nonperforming	67,765			29,030			19,555			34,192			37,990
Doubtful	7,794			8,504			4,088			5,483			5,637
Loss	—			—			—			—			—
Total classified loans	299,911			237,129			104,519			86,896			85,173
Foreclosed assets held for sale	2,349			2,502			3,619			3,619			2,471
Total classified assets	$	302,260		$	239,631		$	108,138		$	90,515		$	87,644
Classified loans / (total capital + ALLL)	43.2		%	34.9		%	15.8		%	13.2		%	13.2		%
Classified assets / (total capital + ALLL)	43.6		%	35.3		%	16.3		%	13.7		%	13.6		%
ALLL to total loans	1.70		%	1.61		%	1.29		%	1.48		%	1.18		%
Net charge-offs to average loans(1)	0.54		%	0.12		%	2.00		%	0.58		%	0.53		%
(1) interim periods are annualized.

During the quarter ended September 30, ~~2019~~2020, past due loans between 30 to 89 days primarily included a $28 million commercial loan placed on nonaccrual. The remainder is driven by an $8 million commercial loan in the ~~Company experienced a $45.9 million~~process of renewal. For the first half of 2020, the increase in ~~loans~~ past due ~~30 to 59 days from $16.0 million to $61.9 million. The increase~~loans was driven by ~~one~~energy loans impacted by lower oil and gas prices and a commercial real estate loan.

The Company's classified assets as of September 30, 2020 increased $212 million or 234% since December 31, 2019. Grade migration as discussed above is driving the change.

Potential problem loans consist of loans that are performing in accordance with contractual terms, but for which we have concerns about the borrower’s ability to comply with repayment terms and may result in disclosure as an impaired loan ~~restructured~~next quarter. At September 30, 2020, the Company had approximately $39 million of potential problem loans that were either criticized or a performing, substandard loan. The Company monitors these loans through communication with the borrower(s) and regular performance reviews. Although these loans are generally identified as potential problem loans, they may never become nonperforming.

Deposits and Other Borrowings

At September 30, 2020, our deposits totaled $4 billion, an increase of $569 million or 14% from December 31, 2019. Of this increase, $232 million were noninterest-bearing deposits driven by proceeds from PPP loans during the second quarter of ~~2019~~2020. In addition, customers transitioned from time deposits to savings and ~~subsequently placed on non-accrual, as well as, one construction and land development loan~~interest checking deposits due to the declining interest rate environment that ~~was~~resulted in ~~the process of being renewed.~~

~~The Company's classified assets has trended down $16.3~~a $99 million ~~or 16.0% since December 31, 2018. The~~ decline in ~~classified assets is~~time deposits and a ~~combination of charge-offs, primarily from commercial~~$436 million increase in money market, NOW, and ~~energy loans, and changes to loan risk ratings due to borrower improvements.~~

~~Deposits and Other Borrowings~~

~~Deposits and other borrowings are used to support our asset growth. Our strong asset growth requires us to place a greater emphasis on both interest and non-interest-bearing~~savings deposits. ~~We attract and retain deposits by aggressively setting our deposit rates within our markets. Other borrowings supplement our core deposit strategy.~~

At September 30, 2019, our deposits totaled $3.7 billion, an increase of $450.0 million or 14.0% from December 31, 2018 and an increase of $74.0 million or 2.1% since June 30, 2019. Deposit growth was driven by competitive interest rates within our markets.

Other borrowings include repurchase agreements, fed funds purchased, FHLB ~~borrowings,~~advances, and our trust preferred security. At September 30, ~~2019,~~2020, other borrowings totaled ~~$358.5~~$351 million, a ~~$30.7~~$24 million or ~~7.9% decline~~6% decrease from December 31, ~~2018 and a $6.6 million decrease from June 30,~~ 2019. The decline ~~in other borrowings~~ was driven by ~~strong~~short-term funds maturing and borrowing payoffs due to increased Company liquidity from security sales, loan payoffs and deposit ~~growth and the successfully completed initial public offering.~~growth.

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Liquidity

The ~~objective of the~~ Company’s liquidity ~~policy~~strategy is to maintain adequate, but not excessive, liquidity to meet the daily cash flow needs of its clients while attempting to achieve adequate earnings for its stockholders. The liquidity position is monitored continuously by the Company’s finance department.

Liquidity resources can be derived from two sources: (i) on-balance sheet liquidity resources, which represent funds currently on the balance sheet and (ii) off-balance sheet liquidity resources, which represent funds available from third party sources. Our on-balance sheet and off-balance sheet liquidity resources consisted of the ~~following:~~following as of the dates indicated:


	September 30, 2020			December 31, 2019
	(Dollars in thousands)





Total on-balance sheet liquidity	$	847,706		$	888,080




Total off-balance sheet liquidity	656,602			524,332
Total liquidity	$	1,504,308		$	1,412,412
On-balance sheet liquidity as a percent of assets	15		%	18		%
Total liquidity as a percent of assets	27		%	29		%

September 30, 2019 December 31, 2018
(Dollars in thousands)
On-balance sheet
Cash and cash equivalents $ 109,961
$ 216,541
Unpledged securities available-for-sale 696,519
552,950
Total on-balance sheet liquidity 806,480
769,491
Off-balance sheet
FHLB available funds 157,302
68,704
Federal Reserve available funds 285,187
286,397
Other available funds 105,000
95,000
Total off-balance sheet liquidity 547,489
450,101
Total liquidity $ 1,353,969
$ 1,219,592
On-balance sheet liquidity as a percent of assets 17.3 % 18.8 %
Total liquidity as a percent of assets 29.1 % 29.7 %



		54



~~Table of Contents~~	~~Notes to Unaudited Consolidated Financial Statements~~

Contractual Obligations

~~The following table presents~~Refer to “Note 7: Time Deposits and Borrowings” within the Unaudited Notes to Consolidated Financial Statements for our significant contractual cash obligations to third ~~parties, debt and~~parties. In addition, our future lease ~~agreements and service~~ obligations ~~as of~~totaled $31 million at September 30, ~~2019~~2020 and ~~December 31, 2018:~~included our Frisco, Texas and Kansas City, Missouri leases established in 2020. Contractual obligations may be satisfied through our on-balance sheet and off-balance sheet liquidity discussed above.

September 30, 2019
Payments Due by Period
Less than
1 Year 1 to 2
Years 2 to 5
Years More than
5 Years Total
(Dollars in thousands)
Time deposits $ 822,439
$ 216,486
$ 182,832
$ —
$ 1,221,757
Fed funds purchased & repurchase agreements 49,810
—
—
—
49,810
FHLB borrowings and line of credit 24,000
76,500
56,204
151,100
307,804
Trust preferred security —
—
—
2,500
2,500
Operating leases 1,718
1,564
4,607
6,479
14,368
Total $ 897,967
$ 294,550
$ 243,643
$ 160,079
$ 1,596,239

December 31, 2018
Payments Due by Period
Less than
1 Year 1 to 2
Years 2 to 5
Years More than
5 Years Total
(Dollars in thousands)
Time deposits $ 444,824
$ 287,451
$ 267,856
$ 9,546
$ 1,009,677
Fed funds purchased & repurchase agreements 75,406
—
—
—
75,406
FHLB borrowings and line of credit 44,000
45,000
72,885
151,100
312,985
Trust preferred security —
—
—
2,500
2,500
Operating leases 1,876
1,633
4,812
7,450
15,771
Total $ 566,106
$ 334,084
$ 345,553
$ 170,596
$ 1,416,339

Capital Resources and Off-Balance Sheet Arrangements

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Management believes that, as of September 30, ~~2019,~~2020, the Company and the Bank ~~meet~~met all capital adequacy requirements to which they are subject. For additional information, see ‘‘“Note ~~8 -~~9: Regulatory ~~Matters’’~~Matters” in the ~~notes~~Unaudited Notes to ~~unaudited consolidated financial statements.~~Consolidated Financial Statements.

The Company aggressively stress-tested its credit and capital during the second quarter of 2020 using Federal Reserve-defined and other more stressful COVID-19 pandemic recessionary scenarios. We modeled an immediate absorption to our capital of 13 quarters of losses utilizing historical loss factors provided by the Federal Reserve for banks between $1 billion and $10 billion. The second quarter common equity tier 1 ratio stress test results showed that the Company is well-capitalized under these pandemic scenarios. The Company’s actual capital levels in future periods are subject to the uncertain impact of the pandemic and related economic conditions.

The Company is subject to off-balance sheet risk in the normal course of business to meet the needs of its clients that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. ~~These off-balance sheet arrangements include commitments~~Refer to ~~fund loans, standby letters of credit,~~“Note 13: Commitments and Credit Risk” in the Unaudited Notes to Consolidated Financial Statements for a ~~previously disclosed future lease obligation in Kansas City, Missouri.~~



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~~Table of Contents~~

~~The following is a summary~~breakout of our off-balance sheet ~~commitments as~~arrangements. As of September 30, 2020, the ~~dates presented:~~Company believes it has sufficient access to liquid assets to support the funding of these commitments.

September 30, 2019 December 31, 2018
(Dollars in thousands)
Commitments to fund C&I loans $ 507,195
$ 597,534
Other loan commitments 925,167
767,629
Standby letters of credit 35,699
32,439
Lease agreements 19,054
19,054
Total $ 1,487,115
$ 1,416,656

Critical Accounting Policies

The Company identified several accounting policies that are critical to an understanding of our financial condition and results of operations. ~~In addition, these~~These policies require difficult, subjective or complex judgments and assumptions that create potential sensitivity of our financial statements to those judgments and assumptions. These policies relate to the allowance for loan and lease losses, investment securities impairment, deferred tax assets, and the fair value of financial instruments. A discussion of these policies can be found in the section captioned ~~‘‘Critical~~“Critical Accounting ~~Policies’’~~Policies and Estimates” in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the ~~IPO Prospectus. There~~2019 Form 10-K.

During the first quarter of 2020, the Company adopted ASU 2017-04: Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The ASU simplified the methodology to calculate goodwill impairment by removing a second step required under the old method to determine if goodwill was impaired. The Company believed the updated methodology significantly reduced the complexity to calculate goodwill impairment during the second quarter of 2020 when goodwill was fully impaired.

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The CARES Act allows financial institutions to elect not to consider whether loan modifications relating to the COVID-19 pandemic that they make between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the national emergency related to the COVID-19 pandemic ends are TDRs that would require additional disclosures. The relief can be applied to modifications of loans to borrowers that were not more than 30 days past due as of December 31, 2019. The Company elected to apply the guidance during the first quarter of 2020 and for periods thereafter. The review of loans that meet the criteria is overseen by the Office of the Chief Credit Officer.

Besides the accounting policy changes mentioned above, there have been no additional changes in the Company’s application of critical accounting policies since ~~June 30,~~December 31, 2019.

Recent Accounting Pronouncements

~~The Company had the following updates~~Refer to ~~recent accounting pronouncements during the quarter. For additional information on accounting pronouncements, see~~ ~~Note 1 -~~“Note 1: Nature of Operations and Summary of Significant Accounting ~~Policies.~~ ~~A complete list of recent, applicable accounting pronouncements was provided~~Policies” included in the ~~Company’s IPO Prospectus.~~

~~ASU 2016-13, Financial Instruments - Credit Losses~~ - The Company established a committee of individuals from applicable departments to oversee the implementation process. The committee chose a third-party software solution. By the third quarter of 2019, the Company completed the software implementation phase of the transition. The software implementation phase included data capture and portfolio segmentation amongst other items. The Company completed a parallel run using 2019 data and expects to complete a second parallel run using third quarter data during the fourth quarter of 2019. At this time an estimate of the impactunaudited Notes to the ~~Company’s financial statements is not known, but the impact could be significantly affected by the composition, characteristics and quality of the underlying loan portfolio at the time of adoption.~~Consolidated Financial Statements included elsewhere in this Form 10-Q.

~~ASU 2016-02, Leases (Topic 842)~~ - The Company plans to apply the update as of the beginning of the period of adoption and is not planning to restate comparative periods. The Company expects to elect certain optional practical expedients. The Company gathered all potential lease and embedded lease agreements and is evaluating the applicability and impact to the financial statements. Current operating leases relate primarily to three branch locations. Based on these current leases, the Company anticipates recognizing a lease liability and related right-to-use asset on our balance sheet, with an immaterial impact on the income statement compared to the current lease accounting model. However, the ultimate impact of the standard will depend on the Company’s lease portfolio as of the adoption date.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

A primary component of market risk is interest rate volatility. ~~Managing interest~~Interest rate risk management is a key element of the Company’s balance sheet management. Interest rate risk is the risk that ~~net interest margin~~NIM will erode over time due to changing market conditions. Many factors can cause margins to erode: (i) lower loan demand; (ii) increased competition for funds; (iii) weak pricing policies; (iv) balance sheet ~~mismatches~~mismatches; and (v) changing liquidity demands. The objective is to maximize income while minimizing interest rate risk. The Company manages its sensitivity position using its interest rate risk policy. The management of interest rate risk is a three-step process and involves: (i) measuring the interest rate risk position; (ii) policy constraints; and (iii) strategic review and implementation.

Our exposure to interest rate risk is managed by the ~~Bank’s~~ Funds Management Committee ~~(‘‘FMC’’~~(“FMC”) ~~in accordance with policies approved by the Bank’s board of directors.~~. The FMC uses a combination of three systems to measure the



		56

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balance sheet’s interest rate risk position. ~~Because each system serves a different purpose and provides a different perspective, the~~The three systems in combination are expected to provide a better overall result than a single system alone. The three systems include: (i) gap reports; (ii) earnings simulation; and (iii) economic value of equity. The FMC’s primary tools to change the interest rate risk position are: (i) investment portfolio duration; (ii) deposit and borrowing mix; and (iii) on balance sheet derivatives.

The FMC evaluates interest rate risk using a rate shock method and rate ramp method. In a rate shock analysis, rates change immediately and the change is sustained over the time horizon. In a rate ramp analysis, rate changes occur gradually over time. The following tables summarize the simulated changes in net interest income and fair value of equity over a 12-month horizon using a rate shock and rate ramp method as of the dates indicated:


Hypothetical Change in Interest Rate - Rate Shock
	September 30, 2020				September 30, 2019
Change in Interest Rate (Basis Points)	Percent change in net interest income		Percent change in fair value of equity		Percent change in net interest income		Percent change in fair value of equity
+300	1.2	%	(7.2)	%	12.0	%	(2.6)	%
+200	1.0		(3.2)		8.6		(0.4)
+100	0.3		(0.8)		4.7		0.5
Base	—	%	—	%	—		—
-100	NA(1)		NA(1)		(5.0)		0.1
-200	NA(1)		NA(1)		(11.3)	%	1.2	%
(1) The Company decided to exclude the down rate environment from its analysis for the period ended September 30, 2020 due to the already low interest rate environment.

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Hypothetical Change in Interest Rate - Rate Shock
September 30, 2019 September 30, 2018
Change in Interest Rate
(Basis Points) Percent change in net interest income Percent change in fair value of equity Percent change in net interest income Percent change in fair value of equity
+300 12.0 % (2.6 )% 10.3 % (8.3 )%
+200 8.6
(0.4 ) 7.1
(4.6 )
+100 4.7
0.5
3.8
(0.8 )
Base —
—
—
—
-100 (5.0 ) 0.1
(4.2 ) (1.1 )
-200 (11.3 )% 1.2 % (6.2 )% 0.3 %


Hypothetical Change in Interest Rate - Rate Ramp
	September 30, 2020		September 30, 2019
Change in Interest Rate (Basis Points)	Percent change in net interest income		Percent change in net interest income
+300	1.3	%	7.4	%
+200	0.8		5.1
+100	0.3		2.6
Base	—		—
-100	NA(1)		(2.8)
-200	NA(1)		(6.2)	%
(1) The Company decided to exclude the down rate environment from its analysis for the period ended September 30, 2020 due to the already low interest rate environment.

Hypothetical Change in Interest Rate - Rate Ramp
September 30, 2019 September 30, 2018
Change in Interest Rate
(Basis Points) Percent change in net interest income Percent change in net interest income
+300 7.4 % 4.9 %
+200 5.1
3.4
+100 2.6
1.7
Base —
—
-100 (2.8 ) (1.8 )
-200 (6.2 )% (3.6 )%

The hypothetical change in net interest income as of September 30, ~~2019~~2020 in ~~a down or~~an up 100 basis point shock is mainly due to approximately ~~67%~~70% of earning assets repricing or maturing over the next 12 months. Loans remain the largest portion of our adjustable earning assets, as the mix of adjustable loans or loans maturing in one year or less to total loans was ~~71.5%~~71%. The amount of adjustable loans causes the Company to see an increase in net interest income in a rising rate ~~environment and a decline in net interest income in a declining rate~~ environment.

The models the Company uses include assumptions regarding interest rates ~~and balance changes.~~ while balances remain unchanged. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net interest income or precisely predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions, customer behavior and management strategies, among other factors.



		57



~~Table of Contents~~	~~Notes to Unaudited Consolidated Financial Statements~~

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 ~~(‘‘~~(“Exchange ~~Act’’~~Act”)) as of September 30, ~~2019.~~2020. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, ~~2019.~~2020.

Changes in Internal Control over Financial Reporting

There was no change in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred during the third quarter of ~~2019~~2020 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In the normal course of business, we are named or threatened to be named as a defendant in various lawsuits. Management, following consultation with legal counsel, does not expect the ultimate disposition of any or a combination of these matters to have a material adverse effect on our business, financial condition, results of operations, cash flows or growth prospects. However, given the nature, scope and complexity of the extensive legal and regulatory landscape applicable to our business (including laws and regulations governing consumer protection, fair lending, fair labor, privacy, information security and anti-money laundering and anti-terrorism laws), we, like all banking organizations, are subject to heightened legal and regulatory compliance and litigation risk.

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ITEM 1A. RISK FACTORS

~~There were no material changes from~~In addition to the ~~risks disclosed~~other information set forth in this report, you should carefully consider the factors discussed in Part I, "Item 1A. Risk ~~Factors section of~~Factors" in our Annual Report on Form 10-K for the ~~IPO Prospectus (File No. 333-232704), dated August 14,~~year ended December 31, 2019, ~~filed with the SEC pursuant to Rule 424(b) of the Securities Act of 1933,~~ as ~~amended,~~updated and supplemented in Part II, "Item 1A. Risk Factors" in our Quarterly Report on ~~August 15, 2019.~~

~~ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS~~

~~Unregistered Sales of Equity Securities~~

~~During~~Form 10-Q for the quarter ended ~~September 30, 2019~~March 31, 2020, which could materially affect our business, financial condition or results of operations in future periods. These risks are not the only risks facing our Company. Additional risks and ~~prior~~uncertainties not currently known to ~~September 13, 2019 (the date~~us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of the filing of our registration statement on Form S-8), we issued and sold an aggregate of 5,883 shares of our common stock to current employees at a weighted average exercise price of $17.00 per share pursuant to our partner share purchase program for aggregate cash consideration of $100.0 thousand. The shares were issued pursuant to an exemption under Rule 701 promulgated under the Securities Act. Each of the recipients of securitiesoperations in ~~these transactions had adequate access, through employment, to information about us.~~future periods.

During the quarter ended September 30, 2019 and prior to September 13, 2019 (the date of the filing of our registration statement on Form S-8), we issued 31,575 stock settled appreciation rights (‘‘SSARs’’) under our 2018 Equity Incentive Plan at a weighted average exercise price of $14.41 per unit. The SSARs vest in seven equal annual installments commencing in August 2020 and expire in August 2029.

In addition, during the quarter ended September 30, 2019 and prior to the filing of our Form S-8, we issued and sold to our employees an aggregate of 1,317 shares of common stock upon the exercise of SSARs issued under our 2018 Equity Incentive Plan at a weighted-average exercise price of $8.25 and a $17.00 price of the underlying security. The Company



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withheld an aggregate of 599 shares of common stock subject to such SSARs for payment of the exercise price and satisfaction of the aggregate tax withholding obligations in connection with the exercises of certain of those SSARs.

The SSARs and the common stock issuable upon the exercise of such SSARs were issued under the 2018 Equity Incentive Plan in reliance on the exemption provided by Rule 701 promulgated under the Securities Act. Each of the recipients of securities in these transactions had adequate access, through employment, to information about us.

~~Use of Proceeds from our Initial Public Offering of Common Stock~~

On August 19, 2019, we completed our IPO, in which we sold 6,594,362 shares of common stock, including 844,362 shares pursuant to the underwriters' overallotment option, at price to the public of $14.50 per share. We received aggregate net proceeds of $87.0 million, net of underwriting discounts and commissions of $6.2 million and offering expenses paid by us of approximately $2.4 million subject to certain cost reimbursements. The offering has terminated. We distributed $50 million of the proceeds to our wholly-owned subsidiary, CrossFirst Bank, to support its growth. The balance of the proceeds for the offering was held at the Company and used for general corporate purposes. We made no payments to our directors, officers or persons owning ten percent or more of our common stock or to their associates, or to our affiliates in connection with the issuance and sale of the securities registered. We did not receive any proceeds from the sale of shares by the selling stockholders.

All the shares issued and sold in the initial public offering were registered under the Securities Act pursuant to a Registration Statement on Form S-1 (File No. 333-232704), which was declared effective by the SEC on August 14, 2019. Pursuant to the Registration Statement, we registered an aggregate of 7,855,951 shares of our common stock, inclusive of the underwriters’ option to purchase additional shares and the shares to be offered by selling stockholders. Keefe, Bruyette & Woods, A Stifel Company, Raymond James & Associates, Inc. and Stephens Inc. acted as joint book-running managers for the offering, and Sandler O’Neill + Partners, L.P. acted as co-manager of the offering.

There has been no material change in the planned use of the proceeds of the initial public offering as described in our IPO Prospectus (File No. 333-232704) filed with the SEC on August 15, 2019, pursuant to Rule 424(b) of the Securities Act. The Company intends to use the net proceeds from the offering to support our growth, organically or through mergers and acquisitions, and for general corporate purposes. As previously disclosed, the Company is currently considering using a portion of the net proceeds for the opening of a second smaller full-service branch in the Dallas MSA, in addition to consistently evaluating other strategic opportunities.

~~ITEM 3. DEFAULTS UPON SENIOR SECURITIES~~

~~None.~~

~~ITEM 4. MINE SAFETY DISCLOSURES~~

~~Not applicable.~~

~~ITEM 5. OTHER INFORMATION~~

The Board of Directors of the Company has established May 12, 2020 as the date of the Company’s 2020 Annual Meeting of Stockholders (the “2020 Annual Meeting”). The time and location of the 2020 Annual Meeting will be specified in the Company’s 2020 proxy statement.



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~~Table of Contents~~

ITEM 6. EXHIBITS

Incorporated by Reference
Exhibit Number Exhibit Description Form Exhibit Filing Date/Period End Date
10.1

Amended Employment Agreement with George F. Jones, Jr. dated May 1, 2018†
S-1 10.1 July 18, 2019
10.2

Second Amendment to Employment Agreement with George F. Jones, Jr. dated March 20, 2019†
S-1 10.2 July 18, 2019
10.3

Third Amendment to Employment Agreement with George F. Jones, Jr. dated May 1, 2019†
S-1 10.3 July 18, 2019
10.4

Employment Agreement with David O’Toole dated May 1, 2015†
S-1 10.4 July 18, 2019
10.5

First Amendment to Employment Agreement with David O’Toole dated March 19, 2019†
S-1 10.5 July 18, 2019
10.6

Employment Agreement with Mike Maddox dated May 1, 2015†
S-1 10.6 July 18, 2019
10.7

First Amendment to Employment Agreement with Mike Maddox dated March 19, 2019†
S-1 10.7 July 18, 2019
10.8

Employment Agreement with Amy Fauss dated June 29, 2016†
S-1 10.8 July 18, 2019
10.9

First Amendment to Employment Agreement with Amy Fauss dated March 15, 2019†
S-1 10.9 July 18, 2019
10.10

Employment Agreement with Tom Robinson dated May 1, 2015†
S-1 10.10 July 18, 2019
10.11

First Amendment to Employment Agreement with Tom Robinson dated March 18, 2019†
S-1 10.11 July 18, 2019
10.12

Chairman Emeritus Agreement with Ron Baldwin dated April 26, 2018†
S-1 10.12 July 18, 2019
10.13

RSU Award Agreement with George F. Jones, Jr. dated February 28, 2019†
S-1 10.13 July 18, 2019
10.14

Performance Share Award Agreement with George F. Jones, Jr. dated February 28, 2019†
S-1 10.14 July 18, 2019
10.15

2018 Omnibus Equity Incentive Plan†
S-1 10.15 July 18, 2019
10.16

Form of Legacy RSU - New Market Founders Award†
S-1 10.16 July 18, 2019
10.17

Form of Legacy EIP 2018 RSU Award Agreement†
S-1 10.17 July 18, 2019
10.18

Form of Legacy SAR Award Agreement†
S-1 10.18 July 18, 2019
10.19

Form of EEIP Legacy RSU Award Agreement†
S-1 10.19 July 18, 2019
10.20

Form of RSU Award Agreement†
S-1 10.20 July 18, 2019
10.21

Form of 2019 RSU Award Agreement†
S-1 10.21 July 18, 2019
10.22

Form of 2019 Performance Share Award Agreement†
S-1 10.22 July 18, 2019
10.23

Form of Director Restricted Stock Award†
S-1 10.23 July 18, 2019
10.24

Form of Indemnification Agreement†
S-1 10.24 July 18, 2019
10.25

Director Deferred Fee Program†
S-1 10.25 July 18, 2019

Exhibit Number

60Exhibit Description

3.1

Articles of Incorporation of CrossFirst Bankshares, Inc. (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 as filed with the SEC on July 18, 2019, File No. 333-232704).

3.2

Amendment to Articles of Incorporation of CrossFirst Bankshares, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 as filed with the SEC on July 18, 2019, File No. 333-232704).

3.3

Bylaws of CrossFirst Bankshares, Inc. (incorporated by reference to Exhibit 3.3 to the Company's Registration Statement on Form S-1 as filed with the SEC on July 18, 2019, File No. 333-232704).

31.1*

Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*

Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1**

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS*

XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCH*

XBRL Taxonomy Extension Schema Document

101.CAL*

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*

XBRL Taxonomy Extension Label Linkbase Document

101.PRE*

XBRL Taxonomy Extension Presentation Linkbase Document

104*

Cover Page Interactive Data File (formation in Inline XBRL and contained in Exhibit 101)

~~Table of Contents~~

Incorporated by Reference
Exhibit Number Exhibit Description Form Exhibit Filing Date/Period End Date
10.26

Stock Appreciation Rights Plan†
S-1 10.26 July 18, 2019
10.27

Form of SAR Award Agreement†
S-1 10.27 July 18, 2019
10.28

Annual Incentive Plan†
S-1 10.28 July 18, 2019
12.01

Subsidiaries of CrossFirst Bankshares, Inc.
S-1 21.1 July 18, 2019
31.1*

Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*

Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1**

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002

101.INS* XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH* XBRL Taxonomy Extension Schema Document
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document
101.LAB* XBRL Taxonomy Extension Label Linkbase Document
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document

* Filed Herewith

**Furnished Herewith

~~† Indicates a management contract or compensatory plan~~



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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

CrossFirst Bankshares Inc.

~~CrossFirst Bankshares Inc.~~

November 3, 2020

~~November 12, 2019~~

/s/ David L. O’Toole

David L. O’Toole

Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)



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	Pass & Watch		Special Mention		Substandard		Doubtful		Loss		Total
	(Dollars in thousands)
September 30, 2019
Commercial	$	1,217,280	$	29,350	$	66,017	$	—	$	—	$	1,312,647
Energy	378,533		10,342		2,580		4,677		—		396,132
Commercial real estate	976,262		7,529		8,402		960		—		993,153
Construction and land development	527,582		—		—		—		—		527,582
Residential real estate	362,625		273		2,537		—		—		365,435
Equity lines of credit	22,192		—		—		—		—		22,192
Consumer installment	21,552		—		—		—		—		21,552
	$	3,506,026	$	47,494	$	79,536	$	5,637	$	—	$	3,638,693



	September 30, 2019			December 31, 2018
Product	Number of Instruments	Notional Amount		Number of Instruments	Notional Amount
	(Dollars in thousands)
Back-to-back swaps	46	$	308,960	20	$	77,709



	Asset Derivatives					Liability Derivatives
	Balance Sheet	September 30,		December 31,		Balance Sheet	September 30,		December 31,
	Location	2019		2018		Location	2019		2018
	(Dollars in thousands)
Derivatives not designated as hedging instruments
Interest rate products	Other assets	$	13,735	$	1,051	Other liabilities	$	13,782	$	1,136


	Goodwill		Core Deposit Intangible		Total Intangible Assets
	(Dollars in thousands)
Balance at December 31, 2019	$	7,397	$	297	$	7,694
Impairment	(7,397)		0		(7,397)
Amortization	—		(70)		(70)
Balance at September 30, 2020	$	0	$	227	$	227



September 30, 2019
(Dollars in thousands)
							Gross Amounts Not Offset in the Statement of Financial Position
	Gross Amounts of Recognized Assets and Liabilities		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Assets presented in the Statement of Financial Position		Financial Instruments		Cash Collateral Received		Net Amount
Offsetting of derivative assets
Derivatives	$	13,735	$	—	$	13,735	$	—	$	—	$	13,735
Offsetting of derivative liabilities
Derivatives	$	13,782	$	—	$	13,782	$	—	$	—	$	13,782


	September 30, 2019															September 30, 2020
	Within One Year		One to Two Years		Two to Three Years		Three to Four Years		Four to Five Years		After Five Years		Total			Within One Year		One to Two Years		Two to Three Years		Three to Four Years		Four to Five Years		After Five Years		Total
	(Dollars in thousands)															(Dollars in thousands)
Time deposits	$	822,439	$	216,486	$	105,559	$	52,055	$	25,215	$	—	$	1,221,754	Time deposits	$	948,251	$	115,197	$	52,074	$	24,669	$	495	$	0	$	1,140,686
Fed funds purchased & repurchase agreements	49,810		—		—		—		—		—		49,810		Fed funds purchased & repurchase agreements	13,531		—		—		—		—		—		13,531
FHLB borrowings	24,000		76,500		16,500		39,704		—		151,100		307,804		FHLB borrowings	59,500		21,500		35,000		0		5,100		215,000		336,100

Trust preferred securities⁽¹⁾	—		—		—		—		—		912		912		Trust preferred securities(1)	0		0		0		0		0		952		952
	$	896,249	$	292,986	$	122,059	$	91,759	$	25,215	$	152,012	$	1,580,280		$	1,021,282	$	136,697	$	87,074	$	24,669	$	5,595	$	215,952	$	1,491,269


~~Note 7:~~	~~Change in Accumulated Other Comprehensive Income (AOCI)~~



	Actual				Minimum Capital Required - Basel III Phase-In Schedule				Minimum Capital Required - Basel III Fully Phase-In				Required to be Considered Well Capitalized
	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
September 30, 2019
Total Capital to Risk-Weighted Assets
Consolidated	$	618,407	13.9	%	$	467,160	10.5	%	$	467,160	10.5	%	N/A		N/A
Bank	567,667		12.8		467,085		10.5		467,085		10.5		$	444,843	10.0	%
Tier I Capital to Risk-Weighted Assets
Consolidated	575,412		12.9		378,177		8.5		378,177		8.5		N/A		N/A
Bank	524,672		11.8		378,117		8.5		378,117		8.5		355,875		8.0
Common Equity Tier 1 to Risk-Weighted Assets
Consolidated	574,500		12.9		311,440		7.0		311,440		7.0		N/A		N/A
Bank	524,672		11.8		311,390		7.0		311,390		7.0		289,148		6.5
Tier I Capital to Average Assets
Consolidated	575,412		12.6		183,152		4.0		183,152		4.0		N/A		N/A
Bank	$	524,672	11.5	%	$	183,109	4.0	%	$	183,109	4.0	%	$	228,886	5.0	%
December 31, 2018
Total Capital to Risk-Weighted Assets
Consolidated	$	521,111	13.5	%	$	380,873	9.9	%	$	404,979	10.5	%	N/A		N/A
Bank	481,287		12.5		380,369		9.9		404,443		10.5		$	385,184	10.0	%
Tier I Capital to Risk-Weighted Assets
Consolidated	483,285		12.5		303,734		7.9		327,840		8.5		N/A		N/A
Bank	443,461		11.5		303,332		7.9		327,406		8.5		308,147		8.0
Common Equity Tier 1 to Risk-Weighted Assets
Consolidated	453,049		11.7		245,880		6.4		269,986		7.0		N/A		N/A
Bank	443,461		11.5		245,555		6.4		269,629		7.0		250,369		6.5
Tier I Capital to Average Assets
Consolidated	483,285		12.4		155,538		4.0		155,538		4.0		N/A		N/A
Bank	$	443,461	11.4	%	$	155,420	4.0	%	$	155,420	4.0	%	$	194,275	5.0	%


	Performance Based Stock Awards
	Number of Shares	Weighted-Average Grant Date Fair Value
Unvested, January 1, 2020	192,248	$9.88
Granted	41,283	13.55
Vested	0	0.00
Forfeited	0	0.00
Unvested, September 30, 2020	233,531	$10.53


	Restricted Stock Units and Awards
	Number of Shares	Weighted-Average Grant Date Fair Value
Unvested, January 1, 2020	340,780	$15.35
Granted	293,297	11.84
Vested	(106,146)	12.58
Forfeited	(15,086)	14.54
Unvested, September 30, 2020	512,845	$13.38


~~Note 11:~~ Table of Contents			~~Income Tax~~Notes to Consolidated Financial Statements (unaudited)


~~Note 12:~~	~~Disclosures about Fair Value of Financial Instruments~~


~~Level 1~~	~~Quoted prices in active markets for identical assets or liabilities~~


~~Level 2~~	Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.


~~Level 3~~	~~Unobservable inputs supported by little or no market activity and significant to the fair value of the assets or liabilities.~~



~~Table of Contents~~Level 3 Unobservable inputs supported by little or no market activity and significant to the fair value of the assets or liabilities.	~~Notes to Unaudited Consolidated Financial Statements~~



			September 30, 2019
			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
	(Dollars in thousands)
Available-for-sale securities
Mortgage-backed - GSE residential	$	160,714	$	—	$	160,714	$	—
Collateralized mortgage obligations - GSE residential	148,675		—		148,675		—
State and political subdivisions	420,009		—		420,009		—
Corporate bonds	1,536		—		1,536		—
Mutual funds	2,159		—		2,159		—
Derivative assets	13,735		—		13,735		—
Derivative liabilities	$	13,782	$	—	$	13,782	$	—



	September 30, 2019
	Fair Value		Valuation Techniques	Unobservable Inputs	Range (Weighted Average)
	(Dollars in thousands)
Collateral-dependent impaired loans	$	40,220	Market comparable properties	Marketability discount	10% - 15% (12%)
Foreclosed assets held for sale	$	2,471	Market comparable properties	Marketability discount	25%


	September 30, 2020
	Carrying		Fair Value Measurements
	Amount		Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Financial Assets
Cash and cash equivalents	$	223,636	$	223,636	$	0	$	0	$	223,636
Available-for-sale securities	652,146		0		652,146		0		652,146
Loans, net of allowance for loan losses	4,401,774		0		0		4,386,027		4,386,027
Restricted equity securities	20,923		0		0		20,923		20,923
Interest receivable	19,003		0		19,003		0		19,003
Derivative assets	27,873		0		27,873		0		27,873
	$	5,345,355	$	223,636	$	699,022	$	4,406,950	$	5,329,608
Financial Liabilities
Deposits	$	4,492,549	$	754,172	$	0	$	3,784,666	$	4,538,838
Federal funds purchased and repurchase agreements	13,531		0		13,531		0		13,531
Federal Home Loan Bank advances	336,100		0		353,309		0		353,309
Other borrowings	952		0		1,897		0		1,897
Interest payable	2,550		0		2,550		0		2,550
Derivative liabilities	27,949		0		27,949		0		27,949
	$	4,873,631	$	754,172	$	399,236	$	3,784,666	$	4,938,074



	Third			Second			First			Fourth			Third			Nine Months Ended
	Quarter			Quarter			Quarter			Quarter			Quarter			September 30,
	2019			2019			2019			2018			2018			2019			2018
Per Common Share Data
Basic earnings per share	$	0.22		$	0.21		$	0.20		$	0.22		$	0.15		$	0.63		$	0.23
Diluted earnings per share	0.21			0.20			0.20			0.22			0.15			0.61			0.22
Book value per share	11.59			11.00			10.63			10.21			9.43			11.59			9.43
Tangible book value per share⁽¹⁾	$	11.44		$	10.83		$	10.46		$	10.04		$	9.24		$	11.44		$	9.24
Selected Operating Ratios
Yield on securities - tax equivalent⁽²⁾	3.19		%	3.42		%	3.59		%	3.61		%	3.58		%	3.40		%	3.62		%
Yield on loans	5.53			5.66			5.75			5.56			5.35			5.64			5.25
Yield on interest-earning assets⁽²⁾	5.00			5.18			5.25			5.08			4.81			5.14			4.65
Cost of interest-bearing deposits	2.26			2.33			2.30			2.04			1.72			2.30			1.59
Cost of total deposits	1.94			1.99			1.96			1.70			1.42			1.96			1.35
Cost of funds	1.94			1.99			1.96			1.72			1.46			1.96			1.40
Net interest margin⁽²⁾	3.24			3.35			3.46			3.51			3.44			3.35			3.34
Return on average assets	0.89			0.86			0.91			1.06			0.70			0.89			0.37
Non-GAAP core operating return on average assets⁽³⁾	0.89			0.89			0.78			0.67			0.72			0.86			0.53
Return on average equity	7.58			7.78			7.98			9.03			6.68			7.76			3.51
Non-GAAP core operating return on average equity⁽⁴⁾	7.58			8.04			6.79			5.59			6.83			7.48			5.38
Non-interest expense to average assets	1.82			2.00			2.20			2.06			2.20			2.00			2.61
Efficiency ratio⁽⁵⁾	54.29			60.09			64.20			60.18			65.91			59.36			79.08
Non-GAAP core operating efficiency ratio⁽⁶⁾	54.29			59.40			64.20			62.61			65.54			59.13			72.24
Non-GAAP tax equivalent efficiency ratio⁽⁷⁾	53.43			59.10			63.10			59.02			64.31			58.38			76.82
Non-interest-bearing deposits to total deposits	14.05			14.28			14.36			15.10			17.99			14.05			17.99
Loans to deposits	99.23		%	96.74		%	96.40		%	95.41		%	97.49		%	99.23		%	97.49		%
Credit Quality Ratios
Allowance for loan losses to total loans	1.18		%	1.24		%	1.22		%	1.23		%	1.22		%	1.18		%	1.22		%
Nonperforming assets to total assets	1.00			1.18			0.36			0.43			0.35			1.00			0.35
Nonperforming loans to total loans	1.22			1.45			0.40			0.58			0.48			1.22			0.48
Allowance for loan losses to nonperforming loans	97.12			85.20			307.27			212.30			256.65			97.12			256.65
Net charge-offs (recoveries) to average loans⁽⁸⁾	0.53		%	—		%	0.09		%	0.03		%	(0.05		)%	0.21		%	0.09		%



	Three Months Ended												Nine Months Ended
	September		June		March			December			September
	30,		30,		31,			31,			30,		September 30,
	2019		2019		2019			2018			2018		2019			2018
	(Dollars in thousands)
Non-GAAP core operating income:
Net Income	$	10,384	$	9,439	$	9,350		$	10,334		$	6,354	$	29,173		$	9,256
Add: restructuring charges	—		—		—			(815		)	—		—			5,548
Less: tax effect⁽¹⁾	—		—		—			(210		)	—		—			1,591
Restructuring charges, net of tax	—		—		—			(605		)	—		—			3,957
Add: fixed asset impairments	—		424		—			—			171		424			171
Less: tax effect⁽²⁾	—		109		—			—			44		109			44
Fixed asset impairments, net of tax	—		315		—			—			127		315			127
Add: state tax credit⁽³⁾	—		—		(1,361		)	(3,129		)	—		(1,361		)	—
Non-GAAP core operating income	$	10,384	$	9,754	$	7,989		$	6,600		$	6,481	$	28,127		$	13,340
⁽¹⁾Represents the tax impact of the adjustments above at a tax rate of 25.73%, plus a permanent tax benefit associated with stock-based grants that were exercised prior to our former CEO’s departure.
⁽²⁾ Represents the tax impact of the adjustments above at a tax rate of 25.73%.
⁽³⁾ No tax effect.



	Period Ended
	September		June		March		December		September
	30,		30,		31,		31,		30,
	2019		2019		2019		2018		2018
	(Dollars in thousands except per share data)
Tangible common stockholders’ equity:
Stockholders’ equity	$	602,435	$	499,195	$	480,514	$	490,336	$	409,780
Less: goodwill and other intangible assets	7,720		7,745		7,770		7,796		7,821
Less: preferred stock	—		—		—		30,000		30,000
Tangible common stockholders’ equity	$	594,715	$	491,450	$	472,744	$	452,540	$	371,959
Tangible book value per share:
Tangible common stockholders’ equity	$	594,715	$	491,450	$	472,744	$	452,540	$	371,959
Shares outstanding at end of period	51,969,203		45,367,641		45,202,370		45,074,322		40,261,480
Book value per share	$	11.59	$	11.00	$	10.63	$	10.21	$	9.43
Tangible book value per share	$	11.44	$	10.83	$	10.46	$	10.04	$	9.24



	Three Months Ended									Nine Months Ended
	September 30, 2019 over 2018									September 30, 2019 over 2018
	Average Volume			Yield/Rate			Net Change⁽²⁾			Average Volume			Yield/Rate			Net Change⁽²⁾
	(Dollars in thousands)
Interest Income
Securities - taxable	$	227		$	(418	)	$	(191	)	$	1,364		$	(364	)	$	1,000
Securities - tax-exempt⁽¹⁾	(509		)	(237		)	(746		)	(3,000		)	(390		)	(3,390		)
Federal funds sold	(24		)	3			(21		)	(1		)	65			64
Interest-bearing deposits in other banks	199			69			268			(562		)	469			(93		)
Gross loans, net of unearned income	14,136			1,179			15,315			45,980			7,077			53,057
Total interest income⁽¹⁾	14,029			596			14,625			43,781			6,857			50,638
Interest Expense
Transaction deposits	97			256			353			277			761			1,038
Savings and money market deposits	1,397			2,017			3,414			3,024			8,644			11,668
Time deposits	2,728			1,509			4,237			7,209			4,867			12,076
Total interest-bearing deposits	4,222			3,782			8,004			10,510			14,272			24,782
FHLB and short-term borrowings	(241		)	172			(69		)	(195		)	415			220
Trust preferred securities, net of fair value adjustments	1			—			1			4			8			12
Total interest expense	3,982			3,954			7,936			10,319			14,695			25,014
Net interest income⁽¹⁾	$	10,047		$	(3,358	)	$	6,689		$	33,462		$	(7,838	)	$	25,624

⁽¹⁾ Tax exempt income is calculated on a tax equivalent basis. Tax-free municipal securities are exempt from Federal taxes. The incremental tax rate used is 21.0%.
⁽²⁾ The change in interest not due solely to volume or rate has been allocated in proportion to the respective absolute dollar amounts of the change in volume or rate.



	As of				Change
	September 30, 2019		December 31, 2018		$			%
	(Dollars in thousands)
Total assets	$	4,651,313	$	4,107,215	$	544,098		13.2	%
Cash and cash equivalents	128,126		216,541		(88,415		)	(40.8	)
Available-for-sale securities	733,093		663,678		69,415			10.5
Gross loans, net of unearned income	3,629,792		3,060,747		569,045			18.6
Total deposits	3,658,108		3,208,097		450,011			14.0
Federal funds purchased and repurchase agreements	49,810		75,406		(25,596		)	(33.9	)
Federal Home Loan Bank advances	307,804		312,985		(5,181		)	(1.7	)
Total stockholders’ equity	$	602,435	$	490,336	$	112,099		22.9	%



	September 30, 2019				December 31, 2018				September 30, 2019 vs. December 31, 2018
	Amount		% of Gross Loans		Amount		% of Gross Loans		$ increase (decrease)			% increase (decrease)
	(Dollars in thousands)
Commercial	$	1,312,647	36.1	%	1,134,414		36.9	%	$	178,233		15.7	%
Energy	396,132		10.9		358,283		11.7		37,849			10.6
Commercial real estate	993,153		27.3		846,561		27.6		146,592			17.3
Construction and land development	527,582		14.5		440,032		14.3		87,550			19.9
Residential real estate	365,435		10.0		246,275		8.0		119,160			48.4
Equity lines of credit	22,192		0.6		20,286		0.7		1,906			9.4
Consumer installment	21,552		0.6		23,528		0.8		(1,976		)	(8.4	)
Gross loans	3,638,693		100.0	%	3,069,379		100.0	%	569,314			18.5
Less: Allowance for loan losses	42,995				37,826				5,169			13.7
Less: Net deferred loan fees and costs	8,901				8,632				269			3.1
Net loans	$	3,586,797			$	3,022,921			$	563,876		18.7	%



	September 30, 2019			June 30, 2019			March 31, 2019			December 31, 2018			September 30, 2018
	(Dollars in thousands)
Non-accrual loans	$	43,626		$	50,044		$	13,018		$	17,818		$	12,625
Loans past due 90 days or more and still accruing	642			238			—			—			443
Total nonperforming loans	44,268			50,282			13,018			17,818			13,068
Foreclosed assets held for sale	2,471			2,471			2,471			—			—
Impaired securities	—			—			—			—			—
Total nonperforming assets	$	46,739		$	52,753		$	15,489		$	17,818		$	13,068
Nonperforming assets to total assets	1.00		%	1.18		%	0.36		%	0.43		%	0.35		%
Nonperforming loans to total loans	1.22		%	1.45		%	0.40		%	0.58		%	0.48		%



	September 30, 2019
	Payments Due by Period
	Less than 1 Year		1 to 2 Years		2 to 5 Years		More than 5 Years		Total
	(Dollars in thousands)
Time deposits	$	822,439	$	216,486	$	182,832	$	—	$	1,221,757
Fed funds purchased & repurchase agreements	49,810		—		—		—		49,810
FHLB borrowings and line of credit	24,000		76,500		56,204		151,100		307,804
Trust preferred security	—		—		—		2,500		2,500
Operating leases	1,718		1,564		4,607		6,479		14,368
Total	$	897,967	$	294,550	$	243,643	$	160,079	$	1,596,239



Hypothetical Change in Interest Rate - Rate Shock
	September 30, 2019				September 30, 2018
Change in Interest Rate (Basis Points)	Percent change in net interest income		Percent change in fair value of equity		Percent change in net interest income		Percent change in fair value of equity
+300	12.0	%	(2.6	)%	10.3	%	(8.3	)%
+200	8.6		(0.4	)	7.1		(4.6	)
+100	4.7		0.5		3.8		(0.8	)
Base	—		—		—		—
-100	(5.0	)	0.1		(4.2	)	(1.1	)
-200	(11.3	)%	1.2	%	(6.2	)%	0.3	%



		Incorporated by Reference
Exhibit Number	Exhibit Description	Form	Exhibit	Filing Date/Period End Date
10.1	Amended Employment Agreement with George F. Jones, Jr. dated May 1, 2018†	S-1	10.1	July 18, 2019
10.2	Second Amendment to Employment Agreement with George F. Jones, Jr. dated March 20, 2019†	S-1	10.2	July 18, 2019
10.3	Third Amendment to Employment Agreement with George F. Jones, Jr. dated May 1, 2019†	S-1	10.3	July 18, 2019
10.4	Employment Agreement with David O’Toole dated May 1, 2015†	S-1	10.4	July 18, 2019
10.5	First Amendment to Employment Agreement with David O’Toole dated March 19, 2019†	S-1	10.5	July 18, 2019
10.6	Employment Agreement with Mike Maddox dated May 1, 2015†	S-1	10.6	July 18, 2019
10.7	First Amendment to Employment Agreement with Mike Maddox dated March 19, 2019†	S-1	10.7	July 18, 2019
10.8	Employment Agreement with Amy Fauss dated June 29, 2016†	S-1	10.8	July 18, 2019
10.9	First Amendment to Employment Agreement with Amy Fauss dated March 15, 2019†	S-1	10.9	July 18, 2019
10.10	Employment Agreement with Tom Robinson dated May 1, 2015†	S-1	10.10	July 18, 2019
10.11	First Amendment to Employment Agreement with Tom Robinson dated March 18, 2019†	S-1	10.11	July 18, 2019
10.12	Chairman Emeritus Agreement with Ron Baldwin dated April 26, 2018†	S-1	10.12	July 18, 2019
10.13	RSU Award Agreement with George F. Jones, Jr. dated February 28, 2019†	S-1	10.13	July 18, 2019
10.14	Performance Share Award Agreement with George F. Jones, Jr. dated February 28, 2019†	S-1	10.14	July 18, 2019
10.15	2018 Omnibus Equity Incentive Plan†	S-1	10.15	July 18, 2019
10.16	Form of Legacy RSU - New Market Founders Award†	S-1	10.16	July 18, 2019
10.17	Form of Legacy EIP 2018 RSU Award Agreement†	S-1	10.17	July 18, 2019
10.18	Form of Legacy SAR Award Agreement†	S-1	10.18	July 18, 2019
10.19	Form of EEIP Legacy RSU Award Agreement†	S-1	10.19	July 18, 2019
10.20	Form of RSU Award Agreement†	S-1	10.20	July 18, 2019
10.21	Form of 2019 RSU Award Agreement†	S-1	10.21	July 18, 2019
10.22	Form of 2019 Performance Share Award Agreement†	S-1	10.22	July 18, 2019
10.23	Form of Director Restricted Stock Award†	S-1	10.23	July 18, 2019
10.24	Form of Indemnification Agreement†	S-1	10.24	July 18, 2019
10.25	Director Deferred Fee Program†	S-1	10.25	July 18, 2019